Brief Hong Kong: China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success and more

In this briefing:

1. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success
2. NTT DoCoMo: Sale of HTHK Mobile Stake Is the End of an Era (Thankfully)
3. Guotai Junan Securities Placement Quick Take – Might Be Too Big to Sail
4. Studio City – Thoughts on Lock-Up Expiry
5. OUE Commercial REIT & Hospitality Trust Merger Proposed

1. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success

China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities.  This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.

This second part of the series explains how China chose commodity semiconductors (DRAM and NAND flash memory chips) as the best technology to pursue.

2. NTT DoCoMo: Sale of HTHK Mobile Stake Is the End of an Era (Thankfully)

NTT Docomo Inc (9437 JP) recently announced it would sell its 25% stake in Hutchinson Telecom Hong Kong’s ( Hutchison Telecommunications Hk Hld (215 HK)  mobile unit for US$60mn with closing expected at the end of May. This ends a 20-year association with Hutchinson forged in the initial excitement over 3G in 1999 but it hasn’t been a good ride for DoCoMo which lost close to 90% on its Hutchison investments and its other international forays were not much better.  On a related note, the HK mobile sale follows soon after DoCoMo’s exit from its credit card joint venture with Sumitomo Mitsui but we would not read anything into this beyond a rationalization of its non-core investments.

3. Guotai Junan Securities Placement Quick Take – Might Be Too Big to Sail

Guotai Junan Securities (H) (2611 HK) plans to raise around US$350m via placing new H-Shares. We had earlier covered the IPO, you can find our coverage below:

• Guotai Junan Securities IPO: Second, if Not the Largest, China Security Broker, A-H Premium Examined
• Guotai Junan IPO: A Big Player but Relatively Less Liquid, How A-H Premium Plays

This is a large deal to digest and the shares seem to be trading at a relatively tighter A-H spread versus peers.

4. Studio City – Thoughts on Lock-Up Expiry

Studio City, a spin-off by MLCO US, was listed on October 18th, 2018 and its lock-up will expire next week on April 16th. The company raised USD 359 million in its IPO with the majority of the shares taken up by its shareholders.

In this insight, we will review the company’s operation, shares subject to lock-up expiry and its valuation vs peers. 

Our previous insights on Studio City

• Studio City (新濠影汇) IPO: A Melco Spin-Off Turning Profitable
• Studio City (新濠影汇) IPO: Attractive Valuation with Options for Long-Term Upside (Part 2)
• Studio City (新濠影汇) IPO Trading Update: Performance Within Expectations, Near-Term Upside Capped

5. OUE Commercial REIT & Hospitality Trust Merger Proposed

After a WSJ article on Sunday suggesting as much, Monday morning 8 April 2018 saw the announcement of a Proposed Merger between OUE Commercial Real Estate Investment Tr (OUECT SP) and OUE Hospitality Trust (OUEHT SP) whereby OUEHT unitholders would receive a combination of cash and OUECT shares (S$0.04075 + 1.3853 shares of OUECT) for every share of OUEHT held. Investors in each would receive any “permitted distributions” (dividends, etc) declared by the respective managers in respect of the period from 1 Jan 2019 up to the day immediately before the date on which Trust Scheme becomes effective.

This would create a REIT with S$6.8bn of assets, a pro-forma market cap of ~S$2.9bn, and a free-float of S$1.1bn (up by 57%). OUE Group would continue to own 48.3% of the total. 

The benefits to investors would be increased scale (2.2mm square feet of commercial net lettable area, + 1,640 hotel rooms), more borrowing capacity, increased diversification as asset concentration would be lowered, and because the scope of NewREIT would be broader, it would allow REIT managers more flexibility. The above-mentioned points are advertised as being the fodder for a re-rating. The idea of possible index inclusion is mooted as well. 

The OUECT presentation says that the merger is “DPU accretive to unitholders” (+2.1% on a 2018 pro-forma basis) while the OUEHT presentation says that the merger is “value accretive to stapled securityholders” (+18.7% NAV uplift per stapled security). 

Details of how this all works below.

Separately, two other Singapore deals announced at the end of last week include:

• Kingboard Laminates Hldgs (1888 HK) buying out Kingboard Copper Foil (KCF SP) discussed in Kingboard Starts Voluntary Unconditional Offer for 88% Held Sub Kingboard Copper Foil

• China Everbright (165 HK) announces an MGO for Ying Li International Real Estate Ltd (YINGLI SP) as discussed in Everbright Mandatory Offer for Ying Li Intl Real Estate – Going Cheap

• To accompany these, there is a Quiddity Singapore M&A Guide 2019.