In this briefing:
- JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business
- Japan Post Insurance Offering – Now It Gets Real
- HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)
- OUE C-REIT, OUE H-TRUST – First Thoughts on Merger Scenario
- Last Week in GER Research: Huya, Bilibili and Qutoutiao
1. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business
* JD cut delivery men’s salary by 25% last week.
* JD ever generated cash flows by accounts payable in direct sales, but cost control is necessary when the commission business grew faster than the direct sales business.
* We believe that the overwhelming majority of delivery men will stay with JD after the salary cut, as many small delivery companies went bankrupt in 2018.
* we believe JD will be able to control costs well and keep close-to-zero net margin in 2019.
2. Japan Post Insurance Offering – Now It Gets Real
The Background
Almost 150 years ago in 1871, a modern postal service was established in Japan by the new Meiji government. The following year, a government-sponsored nationwide network of postal services was launched. Postal money orders started in 1875 and other money and payment services started in the following two decades. In the first decade of the 20th century, domestic money transfers and pension payment receipt were launched. In 1916 postal life insurance sales began. Life annuity sales began a decade later. The Japanese postal system of teigaku deposits started in 1941. In 1949, postal operations were established as the Ministry of Posts alongside the Ministry of Electric Communications (Telecommunications), and eventually both were subsumed into the Ministry of Posts & Telecommunications. In 2001, the business of the Japanese postal system was separated into the Japan Postal Agency, a short-lived entity set up under “central government restructuring” which took place that year. In 2003, the postal system was set up as the Japan Post Corporation under a law which established it as a statutory public corporation (in England, the Bank of England, the BBC, and the Civil Aviation Authority are such companies).
The issue of privatisation – i.e. making it responsible for its own accounts, which would take things one step further rather than being a government budget item – had long been mooted but constantly rejected because it might cost jobs and reduce services. Finally after several Lower House LDP politicians voted against Koizumi’s proposal to split the Japan Post Corporation into four parts in summer 2005 and the Upper House knocked it down, Koizumi dissolved both houses of the Diet and called a snap election saying that it was a referendum on postal privatization. He won easily and the bill was passed a month later. Things were iffy as a privatized company for a few years until after the 2011 Tohoku Earthquake, after which the government needed to find sources of extra funds to finance reconstruction. In 2012, the government announced it would sell shares to the public within three years.
Three years ago and change, the government of Japan launched the promised public offering for Japan Post Holdings (6178 JP) (“JPH”), which acted as a holding company for Japan Post Bank (7182 JP) (“JPB”), and affiliated insurance arm Japan Post Insurance (7181 JP) (“JPI”). At the time, the triple-IPO at ¥1.4 trillion was the largest one-day offering in almost two decades, and the situation created some significant and interesting short-term trading opportunities.
In the end, there was always going to be “overhang” because the explicit goal of the privatization policy was to get JPH’s ownership of JPB and JPI below 50%. In doing so, the bank and insurance operations could then go out and compete with other banks and insurers; currently they are to a large extent restricted from offering new products and entering new markets.
Japan Post Insurance announced on April 4th after the close that JPH would offer 168.1mm shares of Japan Post Insurance to the public, with another 16.9mm shares offered in an over-allotment. This is big news as it is almost 31% of the shares outstanding of Japan Post Insurance and will dramatically increase its float.
One can say it is a big deal – ¥450bn (~US$4bn) of stock and at announcement it was equivalent to the last 477 days of traded volume. More importantly, this ALMOST like an IPO in that the placement is almost 3x the original IPO size (66mm shares) and will get a lot of foreign investor attention.
In addition, JPI announced it would conduct a buyback for up to 50 million shares (with a spending limit of ¥100 billion) on the ToSTNeT-3 off-hours auction-like trading system on days between April 8th and April 12th.
JPH announced in its “Intention To Sell shares” announcement (end of section 1 on p2) that if it sold shares in the ToSTNeT-3 trade, it would likely reduce the number of shares it offered.
The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%.
After the close Friday, the company announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That was 6.2% of shares outstanding.
The dynamics of this ToSTNeT-3 buyback were discussed in Japan Post Insurance – The ToSTNeT-3 Buyback. The ToSTNeT-3 buyback was, at its basest, an interesting garbitrage trade for a limited number of traders but the resulting dynamics are important. They influence the supply in the Offering, the dynamics of demand, and may influence trading patterns into pricing.
There are several things going on here. There is a huge offering, a buyback, earnings accretion, a float change, substantial sale to foreigners this time, and index changes. Sooner and later, it will mean a substantial move towards getting closer to 50%, and the fact that this is now investable for lots of institutional investors.
It is worth looking at these aspects independently to better understand demand for the offering as a whole.
Read on for more.
3. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this insight, we will highlight Air China and Great Wall Motor.
4. OUE C-REIT, OUE H-TRUST – First Thoughts on Merger Scenario
Last evening, Wall Street Journal reported that Oue Commercial Real Estate Investment Tr (OUECT SP) and Oue Hospitality Trust (OUEHT SP) are in discussions to merge in a cash and stock deal. OUE Commercial will offer to buy OUE Hospitality to create a single entity that will remain listed on the SGX.
The enlarged entity will have a combined portfolio value of S$6.7 bil, propelling the enlarged entity to become one of the biggest REITs in Singapore in terms of portfolio size.
Based on last traded prices, the combined entity will have an enlarged market capitalization of S$2.83 bil, making it the 11th biggest S-REIT in terms of market capitalization.
For OUE C-REIT, it enjoys fewer benefits from enlarged portfolio but a merger will alleviate concern on the CPPU timebomb.
For OUE H-TRUST, unitholders benefit more from an improve asset/sector diversification and also a potential cash payout.
For sponsor OUE LTD, it will find it easier to recycle assets in an enlarged REIT.
OUE C-REIT and OUE H-TRUST have announced trading halts this morning pending release of announcements. A clarification announcement on the merger is likely to be issued.
5. Last Week in GER Research: Huya, Bilibili and Qutoutiao
Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below
In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below.
Best of luck for the new week – Arun, Venkat and Rickin
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
