Daily BriefsJapan

Japan: NTT Docomo Inc, Imasen Electric Industrial and more

In today’s briefing:

  • Last Week in Event SPACE: NTT Docomo, Car, Sunac Services, Evergrande, Jardine Cycle, PRC Antitrust
  • Imasen Electric Partial Tender – Set Governance to Ludicrous Mode

Last Week in Event SPACE: NTT Docomo, Car, Sunac Services, Evergrande, Jardine Cycle, PRC Antitrust

By David Blennerhassett

Last Week in Event SPACE …

  • KDDI Corp (9433 JP) argues NTT (Nippon Telegraph & Telephone) (9432 JP)’s planned takeover of NTT Docomo Inc (9437 JP) could inhibit fair competition. But Docomo’s price action was surprising given the  JFTC and MIC’s purview on the transaction, and what must have been explicit “approval” to get the NTT deal for Docomo done in the first place. There was zero chance the complaint could block anything. KDDI came out later and said it was just an effort to open lines of communication.
  • Assuming Car Inc (699 HK)‘s Offer gets up, this effectively cleans house, injecting confidence back into the company. Pre-conditions to the Offer could be forthcoming in 2-3 months. No doubt the regulators want to put this mess behind them.
  • Sunac Services (1516 HK)  is not cheap, regardless of its top four market cap status in this space. The recent share price performance of recent listings – and the property services sector as a whole – does not inspire outright involvement. And there are more property service companies lining up for listings. 
  • Evergrande Real Estate Group (3333 HK) terminates the backdoor listing of Hengda Real Estate. This closes the door on one angle, but it leaves a question to be asked about what might happen going forward. And then there’s a whole discussion on those buybacks. One has to wonder whether selling shares at HK$16.32 then buying back shares at HK$17+ 3 weeks later was not the mark of rational capital decision-making.
  • As widely anticipated, Jardine Cycle & Carriage (JCNC SP) is shown the exit in the MSCI review. At around its all-time low discount to NAV and multi-year implied stub, time to set up the stub.
  • Chinese tech companies take a bath as the State Administration for Market Regulation – China’s competition watchdog –  issues a raft of new rules to prevent anti-competitive behaviour among online platforms.
  • The lame duck Donald Trump issues an Executive Order prohibiting US investment into “China Military Companies” which are listed as “Qualifying Entities. I expect it means Americans sell.
  • Plus, other events, CCASS movements, and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events – or SPACE – in the past week)

M&A – ASIA

NTT Docomo Inc (9437 JP) (Mkt Cap: $119bn; Liquidity: $270mn)

There were reports across the newswires of KDDI Corp (9433 JP) and other companies (including both Softbank Corp (9434 JP) and Rakuten Mobile) sending a letter to the Ministry of Internal Affairs and Communications), calling on Japan’s Telecommunications Ministry “to ensure a fair market environment amid NTT’s planned takeover of Docomo, arguing the deal could inhibit fair competition and development of the telecom market. In practical terms, the complaint is that NTT is too big, and that its size and infrastructure advantage, particularly in wireline and fibre optic capacity, would allow the new entity to be more competitive in business services, and more competitive in providing high volume low-latency 5G/IoT services across a broad base. 

  • The letter suggests at the beginning that NTT East and NTT West have a “bottleneck” or what might be better terms a super-dominant position in optic fibre and rail-infra right of way. The complaint suggests that the value of all the old real estate which made NTT stodgy in the earlier era make it more competitive now.  The fact that NTT is going to take NTT Docomo completely under its control will give it a “strengthened” capital relationship to NTT East and NTT West vs now. This is likely true, but probably overstated. 
  • The letter doesn’t point out that all wireless and fibre optic services in Japan already operate under heavy regulation. Under the Telecommunications Business Act and the NTT Act, NTT as a group is already required to provide wired telephony service (analog, or IP over optical fibre), payphone service, emergency call service across Japan, and telephony service to rural and depopulated areas.  The MIC and JFTC already have the explicit ability to regulate anti-competitive practices for providers with a high market share in wireless and fibre markets and access, in almost every sub-domain you could find.
  • Travis Lundy expects more money to flow into telecoms and low PER stocks. There is $40bn of stock to buy as investors sell their NTT Docomo. And of course, investors should be long NTT because of the transformation this transaction effects on NTT’s capital structure. See NTT – Go Big Or Go Home for more.

(link to Travis’ insight: NTT/Docomo – The KDDI Quibble and NTT – Go Big Or Go Home)

Car Inc (699 HK) (Mkt Cap: $0.9bn; Liquidity: $4mn)

On the 10 November, Car announced the SPA between UCAR and BAIC had terminated. Separately, MBK Partners had entered into a SPA to acquire ~20.86% of shares in Car for HK$1.77bn ($4.00/share) from UCAR. MBK has now tabled a pre-conditional general cash Offer of $4.00/share, a 17.99% premium to last close. There are no outstanding dividends and no dividends are expected to be declared or paid during the Offer.

  • Pre-conditions include anti-trust approval, no default on any bonds or debt; and the Offer not triggering a “change of control” in the bond/debt instruments. Interestingly, all pre-conditions can be waived by MBK.
  • The Offer is conditional on MBK holding 50% of the voting rights in Car. Irrevocables (namely Legend Holdings) holding 26.55% have agreed to tender into the Offer. Together with the 20.86% from the SPA with UCAR, MBK will hold a minimum of 47.41% of shares out. Clearing the 50% looks like a lock.
  • This transaction appears all wrapped up. Timing is the only real unknown. This may trade tight, if not through terms now that a clean slate is put in motion, and $4.00/share is below where shares traded before the Luckin Coffee (LK US)-scandal unfolded.

(link to my insight: Car Inc (699 HK): MBK’s Firm Offer)

Shimachu Co Ltd (8184 JP) (Mkt Cap: $2bn; Liquidity: $30mn)

It became clear in a Nikkei article that Shimachu was going to succumb to the charms of bidder Nitori Holdings (9843 JP) and accept its proposal of a takeover at ¥5500. Shimachu had heretofore officially supported a bid by DCM Holdings (3050 JP) at ¥4200/share, but acceptance of Nitori means that its bid will not be officially “hostile.” Shimachu and Nitori have now defined that support in a set of documents and the comment in the media from Shimachu was that DCM had not responded. DCM’s Tender Offer expires on 16 November. It could extend as a free option. 

  • Nitori’s acquisition plan has not received the OK from the JFTC but that would be due 26 November and Travis does not expect that there will be significant pushback but we will see.
  • There is not a lot of downside at  ¥5500, but Travis does not expect a high likelihood of significant upside. If there are ructions, it would be JFTC approval and DCM overbidding by themselves or with a partner. We will know the answer to the first in 8 business days’ time. DCM has plenty of time for the second. They could come in and bid in mid-late December if they were to overbid. 
  • Tactically speaking, if Covid-19 gets worse suddenly, extending within the Nitori bid timeline but below Nitori’s bid would give DCM plenty of optionality. Since they bid, they have seen September numbers, October numbers, part of November and will by the end of the Nitori bid see all of November and part of December. There is plenty of information out there left for a bid, and plenty of time to find a partner. 

(link to Travis insight: Nitori’s Bid for Shimachu Goes Friendly as Shimachu Dumps DCM)

Kansai Mirai Financial (7321 JP) (Mkt Cap: $1.9bn; Liquidity: $1mn)

The Nikkei carried an article suggesting that Resona Holdings (8308 JP) would seek to take private Kansai. In his first insight, Travis suggested that the Tender Offer could end up being quite low compared to Tangible Book Value. And it is. ¥500/share is just over 0.4x tangible book value per share. The alternative is 1.42 shares of Resona. That is worth ¥524 per share of Kansai, which is a bit better. Travis can imagine that minority investors would be upset by this, but there appears not much they can do. 

  • The trade is to buy KMFG at terms or a discount to Resona shares or as a replacement to Resona shares.  For the very short term, if Resona shares were to go down by 5% or more (to below ¥352/share), you would be able to sell your KMFG shares at ¥500/share.
  • Longer-term, through the merger, you may be able to object to the merger and get paid ¥500/share if you ask for the company to buy back your shares. THIS IS UNCERTAIN but it is worth looking into. This would give you a longer-term put option.
  • Even longer-term, there is an interesting possibility of exercising appraisal rights here. The DDM average “fair value” share price is over ¥1,000/share. The Special Committee has decided to approve a deal where despite the DDM value of ¥1,000/share, investors either get cash of ¥500/share or shares worth roughly ¥500/share. 

links to Travis’ insight:
Resona To Take Kansai Mirai Private?
Resona To Take Kansai Mirai Private!

Vitalharvest Freehold Trust (VTH AU) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

VTH, owner of one of Australia’s largest aggregations of citrus and berry farms, has received an all-cash cash Offer of $1.00/unit (27.4% premium to last close) from Macquarie Infrastructure and Real Assets (MIRA), by way of a Scheme. Should the Scheme not be approved by unitholders, MIRA is offering to buy all of VTH’s assets for A$300mn in cash, which requires a reduced shareholder approval threshold (simple majority). The headline Offer Price is in line with VTH’s IPO price, which was listed on the 1 August 2018. VTH has closed above $1.00 once since listing  – $1.01/share to be exact.

  • There are currently seven farms leased by VTH to Costa Group Holdings (CGC AU) – from which VTH was spun-out. These are considered legacy leases, which are due to expire in 2026. Costa has an existing production relationship with MIRA. Given this existing relationship, should MIRA be successful with its acquisition of VTH, Costa is confident these VTH leases will be restructured, with the aim they be converted to fixed asset rentals arrangements. Costa supports the Offer. 
  • VTH has net debt of ~A$108mn as at 30 June 2020. It would appear the Responsible Entity (Perpetual) would have roughly a similar amount of net proceeds after the sale, netting-off liabilities, to distribute to unitholders, as that under the Scheme. But given the exact headline figure under the Scheme, one that would be more straightforward and fast-tracked, the Scheme appears a more attractive alternative. 
  • On the 19 June, Primewest Group Ltd (PWG AU) acquired 100% ownership in the manager (goFARM) and also an 11.8% interest in VTH.  At the time, Primewest also acquired a right of first refusal over a further 6.2% interest in VTH. It is intended that VTH will be renamed the Primewest Agri-chain Fund. The average price paid for the 11.8% was A$0.88/share. As per the last ASX announcement on the 13 July, Primewest holds 19.99%. Primewest needs to be on board for the Scheme – and the asset sale – to get up. 

 GS Retail (007070 KS) / Gs Home Shopping (028150 KS)

GS Retail and GS Home are to merge –  4.2236834 common shares of GS Retail will be issued for 1 share of GS Home. Gs Holdings (078930 KS)has a 65.75% stake in GS Retail and a 36.1% stake in GS Home. Upon completion of the merger, GS Holdings will have a 57.9% stake in the combined GS Retail. Foreigners currently own 53.6% of GS Retail and 15.3% of GS Home Shopping. The ex-rights falls on April 16 next year, followed by the dissenting opinion notice on May 13~27. The shareholder meeting is on May 28. The new shares will be listed on July 16. Trading tight to terms.

  • Douglas Kim believes this merger is positive. Both companies have been negatively impacted by heavy competition, especially among e-commerce driven companies such as Coupang, Naver, and Kurly in the past several years. This move to merge the two GS companies is essentially a matter of survival for them in this highly competitive environment in the Korean CVS, supermarkets, home shopping, and online e-commerce businesses.

links to:
Douglas’ insight: Korea M&A Spotlight: A Merger Between GS Retail and GS Home Shopping
Sanghyun Park‘s insight: GS Retail/Home Shopping Merger Swap: Currently at 3.4% Div-Adj. Spread

Imasen Electric Industrial (7266 JP) (Mkt Cap: $0.2bn; Liquidity: <$1mn)

Ts Tech Co Ltd (7313 JP) announced a friendly deal to buy a 25% stake through a 41% premium partial tender offer and another stake via a third party allotment/placement at the same price to get to a 34.0% stake after the two-step transaction is complete.

The Board of Imasen apparently decided that giving negative control to another company at just over 0.4x book and 1.1x 5-year EBITDA (or zero EV if you consider cross-holdings and net receivables) was an appropriate thing to do. They were aided by two major Japanese investment banks who also thought that within “fair” value range.

It is not fair. Shareholders should be outraged.

And if it completes as planned, crossholders and insiders will own 66% of shares out, making an eventual squeezeout trade easy.

(link to Travis’ insight:  Imasen Electric Partial Tender – Set Governance to Ludicrous Mode)

Tohto Suisan (8038 JP) (Mkt Cap: $0.2bn; Liquidity: <$1mn)

Aso Corp announced a Partial Tender Offer to buy 1,329,180 shares of Tohto Suisan (8038 JP) or up to 3,979,580 shares.  This partial offer is slightly confusing. The premium is low at +9% or so. There is a kind of “shareholder agreement” between the Board of Tohto Suisan and Aso Corp which appears to include setting a threshold for voting rights at either 33.4% or 50.1% but not a different level (unless “appropriate”).  This LOOKS easy. It is not. And if it gets done, it will not be clear why it would remain listed. 

  • This is an odd tender. The Target Company is offering effective control of the company to Aso Corp without requiring 50.1% control. 
  • The stock is illiquid. It will not get better after the Tender Offer. If the Tender Offer is successful, the stock will become far less liquid. And if one believes the plan, there is no hope for a squeezeout. If the Tender Offer is not successful,  Aso Corp could raise its bid and asks cross-holders to tender, or asks Tohto Suisan to ask cross holders to tender. Or Aso Corp goes away and those who bought shares hoping for some kind of future or bump will then need to sell the shares.
  • The stock does not meet the TSE 1 Listing Requirements which are in effect as of November 1. It is unlikely it will meet the market cap requirements and the trade-able shares requirement is still a question mark. At some point, it would be demoted, which would mean – if TOPIX funds sell – that the shares would see incremental liquidity. Even though it looks like free money below terms, Travis would avoid this trade.

(link to Travis’ insight: Tohto Suisan Partial Tender Offer – A Weird Tender Which Leads To Listed Zombie-Ism)

Honshu Chemical Industry (4115 JP) (Mkt Cap: $0.2bn; Liquidity: <$1mn)

On 11 November 2020, Mitsui & Co Ltd (8031 JP) and Mitsui Chemicals (4183 JP) announced a transaction to take out minorities in jointly-held subsidiary Honshu. The result is a governance embarrassment for the two major acquirers, and the target company itself.  And the Tender Offer is long-dated. It is announced today, but it is expected to start in May 2021 after receiving anti-trust approvals both in and outside Japan. But a situation with such an embarrassing valuation contains possibilities. 

  • This is the obvious endgame. The two buyers – Mitsui Bussan and Mitsui Chemical own the company already to the tune of 54%.  HOWEVER, it is the wrong price. The price is 2.5x EBITDA and that includes a lot of short-term net assets (net receivables and inventory). Take those out and it is 1x Adjusted EV/EBITDA. 
  • SOMEONE should get upset for the principle of the thing. I cannot imagine that Fidelity will be happy about this. 
  • But it is long-dated. And it is TSE2, so the independent ownership is mostly Fidelity and individuals.  Travis still thinks this gets done.

(link to Travis’ insight: Honshu Chemical (4115) – An Embarrassment of Riches)

3P Learning (3PL AU) (Mkt Cap: $0.15bn; Liquidity: <$1mn)

In August 2020 when IXL made a friendly bid for 3PL, it was clear that not all shareholders who could have agreed did agree. Not a single large shareholder was signed up beforehand. One large shareholder later showed they were upset and bought more.

Now Indian sector giant BYJU has stepped in with a higher bid at A$1.45/share. IXL has a matching right but BYJU’s bid is not official yet so they may not have to exercise it. If they do, the matching date is Monday. Expect this to trade tight or through the new terms.

(link to Janaghan Jeyakumar, CFA‘s insight:  3P Learning (3PL AU) : Indian Ed-Tech Giant BYJU’s Competitive Bid)

In Leyou Tech (1089 HK): Offer Doc Despatched, I discussed the despatch of Leyou Technologies (1089 HK)‘s Scheme Document, the IFA review, and the fact the deal is effectively a lock, with a tight gross/annualised spread.

In Growing Investor Opposition to CCEP’s Take Over Offer: Will There Be a Bump?, Oshadhi Kumarasiri discusses an increasing number of disgruntled shareholders of Coca Cola Amatil (CCL AU) with respect to the Offer from Coca-Cola European Partners plc (CCEP).

In Korea M&A Spotlight: Hyundai Motor In Talks to Acquire Boston Dynamics from Softbank, Douglas discusses the media reports that Hyundai Motor Co (005380 KS) is in discussions to purchase Boston Dynamics.

EVENTS

Sunac China Holdings (1918 HK) / Sunac Services (1516 HK) (SSH)

The IPO for SSH, the latest property management service company to seek listing, is open for applications. The Offer Price is expected to be announced on the 18 November, with the commencement of trading in the shares on the 19 November. SSH is the spin-off of Sunac China, who will own 72% in SSH after the IPO, down from 100% prior to a recent capitalisation.

  • As with KWG Living Group (3913 HK), and Shimao Services Holdings (873 HK), SSH’s punchy implied PER is, to some degree, supported by its strong growth (and absolute size), although on an FY20E (LTM) metric, SSH’s valuation is only surpassed by Ever Sunshine Lifestyle Services (1995 HK). Despite its impressive top-line growth, SSH’s gross margins are towards the low-end of the sector range.
  • Both KWG Living and Shimao Services’ were priced towards the upper end of the IPO range. Shimao is 2% below its IPO price and KWG is down 21% (at the time of the insight). The presence of Tencent as a cornerstone investor in SSH is curious, but it has invested in property management companies in the past. The IPO for Excellence (was priced at the top end of the range at $10.68/share, and is currently right at the IPO price. Shimao, as mentioned above, is trading marginally down. 
  • For Sunac China, its P/B is at a premium to peers; and well above peers on a de-consolidated, implied stub basis. The only apparent support at this level is that historically Sunac has traded at an even higher premium to peers.

(link to my insight: Sunac Services (1516 HK): Lofty Metrics In A Congested Space)

Evergrande Real Estate Group (3333 HK) (Mkt Cap: $29bn; Liquidity: $54mn)

Evergrande released a statement to the Hong Kong Exchange noting that it had terminated a restructuring plan with Shenzhen Special Economic Zone Real Estate & Properties – what was meant to be a backdoor listing of the largest part of Evergrande’s business through an injection of its Hengda Real Estate unit. 

  • In this insight, Travis provides an abridged backdrop to where we are, starting with the profit warning in mid-August; the “invitation” to Beijing to receive an explanation regarding their non-voluntary participation in a “pilot programme” called the Three Red Lines where companies which did not meet certain thresholds would not be allowed to increase interest-bearing debt; Evergrande’s main subsidiary Hengda Real Estate to the Guangdong provincial government reportedly asking for help, and the fizzled equity raising last month.
  • Neither Reason Number One – that Hengda investors had no choice – nor Reason Number Two – that Hengda will find a way to list – strikes Travis as great reasons to expect Evergrande will be a great stock to own.  “It’s going through an orderly deleveraging” is the best way to look at this and that was never a selling point on a stock unless the stock and its owners are in real distress. 
  • Then there is the recent share buybacks, which taken together is not the sign of a company which is conducting its capital actions on the stock market with an eye to fundamental value creation. On 9 November, Evergrande spent HK$288,531,940 buying back 17.265mm shares up to HK$16.80/share. The average price was HK$16.712/share. This is more than 2% higher than where they sold shares 3 weeks ago.  Travis expects the reason for the offering was to be able to buy back shares. 

(link to Travis’ insight: Evergrande Terminates Hengda Backdoor Listing)

Trump’s Executive Order on Chinese Military Companies

There is, as of Thursday night, an Executive Order by the White House blocking US ‘persons’ investment in any of the names mentioned – a list now 31 names long, targeting PRC military companies. Travis would expect some significant selldowns within private indices such as MSCI, FTSE, TSE-related indices, S&P indices, etc. relatively quickly. He would expect some effort by the Chinese “national team” to buy stocks cheaply to show that it is not a problem.  The treatment of index derivatives where the indices contain some of these stocks will be a problem.  There is a POSSIBILITY that if this includes HSI and HSCEI and similar, that there will be a request to delay implementation, and that would mean the commencement would end up in a Biden administration’s hands.  However, for the single stocks, the big impact will come sooner rather than later he expects. 

(link to Travis’ insight: Trump’s Executive Order on Chinese Military Companies)

In JREIT Offering: Itochu Advance Logistics (3493 JP) – Take It, Janaghan Jeyakumar discussed Itochu Advance Logistics Inv (3493 JP) (“IAL”) announcement of a follow-on equity offering on 9th November 2020 in order to fund their recent acquisition of four logistics real-estate properties.  The size of this offering could be approximately ¥15.6bn (~US$150mn) and the domestic and foreign allocations are expected to be around 95% and 5% respectively.  The Issue price will be decided between the 16th and 18th November (typically it has been the first day of this window for most JREITs) and the application period will be the next business days immediately after the pricing date. 

In ANA – Significant Downside Remains, Mio Kato reckons after JAL’s aggressive move, Ana Holdings (9202 JP) needs more capital to reinvest and modernise the future or it will be stuck with larger, less fuel-efficient aircraft and a bloated balance sheet that could leave the company in a vicious cycle of weakening profitability and deteriorating finances.

STUBS

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

Astra is up ~47% in the past six months, against (~5%) for JCNC, resulting in the discount to NAV at ~36%, around its all-time low. The current implied stub of negative S$8.76/share  – marginally above its five and half year low of S$9.24/share – compares to the long-term average of negative S$2.96/share. There is a tendency for shares to bounce off this level over the past eight years. 

  • Astra accounts for 92%/77% of JCNC’s NAV/GAV. This recent move is not sustainable – the market has assigned S$2.04bn LESS to the stub ops – net of Astra – since the beginning of October. I would look to set up the stub – long JCNC, Short ASII, with a view to mean reversion. Or at the very least, it should go on the watchlist as something to put on once the momentum stops/reverses, especially now the MSCI deletion has been confirmed.

(link to my insight: Jardine Cycle & Carriage: “Buy The Fact” On MSCI Deletion

Encouraging data about a potential coronavirus vaccine from Pfizer Inc (PFE US) gives a boost to Nevada-gaming stocks, which now trade “rich” to their Macau gaming holdings. Conversely, Melco is trading cheap to MLCO – a discount to NAV at ~46%, compared with the 12-month average of ~38% – as Lawrence Ho continues to add to his holding. After a 2.5 month break, Lawrence continued buying shares in Melco in mid-October, albeit in small size. Lawrence has added 2.89% in Melco or 43.09mn shares year-to-date, taking his direct stake in Melco to 58.67% according to the HKEx (59.7% if using CapIQ numbers), and elevating his look-thru stake in MLCO to 33.9%.

  • This is very little reason for Melco to exist as a separately listed company. Melco’s stub ops are immaterial, including “perpetual” trademarks and goodwill (after Melco gained control of MLCO), the Jumbo restaurant in Aberdeen (previously est. at $370mn for its 86.678% stake, but probably less now that the restaurant is closed), and slot machines and a social gaming developer Entertainment Gaming Asia (implied value of HK$265mn).
  • Would Lawrence consider collapsing the Holdco structure? Unlikely. I would expect him to continue to chip away at minorities, especially at these levels. An-specie distribution of MLCO is plausible – but I see no reason to give up his effective majority stake in this Macau gaming play.
  • At the current, levels, I would follow Lawrence’s lead, who has been buying when the implied stub has been more expensive. Go Long the stub with a view to mean revision.  

(link to my insight: StubWorld: A Shot In The Arm For Gaming Stocks

NEW ANTI-MONOPOLISTIC RULES IN CHINA 

SAMR, China’s antitrust regulator, announced it is publicly soliciting opinions as to preventing anti-competitive behaviour among online platforms. This extends to collaborating on customer data, eliminating smaller payers, and implementing loss-making measures/operations to squeeze out competition. There is also mention of greater regulatory oversight of variable interest entities (VIE). This development follows the proposals discussed back in January this year, in which the regulators included the internet industry in its anti-monopoly laws, which heralded a renewed focus on the internet, and internet platforms specifically.

  • In essence, the regulator is seeking to monitor what impact internet companies have on the online sector, and their ability to manipulate products and services. But it is a delicate dance to promote home-grown tech companies while keeping existing market forces in check. “Internet platforms are not outside the reach of antitrust laws, nor are they the breeding ground for unfair competition,” the regulators are quoted as saying.
  • No doubt Naspers (NPN SJ) can’t wait unit the lock-up expires on selling its stake in Tencent Holdings (700 HK) – this could be even more stress on Tencent’s shares. The three-year anniversary of the sale of shares of Tencent is coming up in four months. Refer to Travis Lundy‘s insight last week Naspers & Prosus – A $5bn Catalyst Arrives

(link to my insight: Party Poopers: Reining In China’s Internet)

M&A – US

In Huya – As We Suspected, Huya Shareholders Probably Got a Raw Deal, Mio reckons the recent set of results for both companies reinforces the fact Huya was a noticeably superior company and that a merger of near equals situation seemed a poor deal for Huya shareholders.

M&A – UK

Rsa Insurance (RSA LN) (Mkt Cap: $9bn; Liquidity: $33mn)

UK insurer RSA soared 45% on 5 November on rumours of takeover. RSA later published a statement regarding the proposal and a further statement. Under the proposal, Intact would pay c. £3.0 bn and Tryg would pay c. £4.2 bn. RSA said that its Board “would be minded to recommend the proposal”. The consideration of 685p/share is a 48% premium to last close.  A dividend of 8p per share will be added.

  • The proposed consideration represents 15.9x P/Forward EPS, 1.75x on RSA’s H1 reported BVPS, 1.74x P/Next FY BVPS, 2.1x RSA’s net tangible asset value. 
  • At the time of Jesus Rodriguez Aguilar‘s insight, it was trading at a wide gross spread of 6.3%, reflecting regulatory issues.

(link to Jesus’ insight: RSA – Intact Financial & Tryg: Generous Break-Up Takeover ProposalXn)

INDEX REBALS

In MSCI Korea Nov IR: Latest Checking Before Posting Tomorrow, Sanghyun Park expected SK Biopharmaceuticals (326030 KS) and Sk Chemicals Co Ltd/New (285130 KS) to make the MSCI Korean November interim review. As discussed by Brian Freitas in MSCI Korea Index Rebalance Nov20: Big Impact on the Deletions as Inclusions Outperform, the inclusions were Doosan Heavy Industries & Construction (034020 KS)Sk Chemicals Co Ltd/New (285130 KS) and SK Biopharmaceuticals (326030 KS), while the deletions were Bnk Financial Group (138930 KS)Posco International Corporation (047050 KS) and Amorepacific Corp (Preferred) (090435 KS).

In KOSPI 200 Reshuffle Final Update: Incoming/Outgoing (8 Each) & Passive In/Outflow Estimates, Sanghyun Park looks at the KOSPI 200 December rebalancing. 

MSCI Singapore Index Rebalance. There are just 2 deletions to the MSCI Singapore Free Index (SIMSCI INDEX) as Jardine Cycle & Carriage (JCNC SP) and Yangzijiang Shipbuilding (YZJSGD SP) make their exit, taking the number of index constituents to 19. Link to Brian’s insight: MSCI Singapore Index Rebalance Nov20: Shrinking Number of Constituents

Separately, in MSCI Singapore: SEA Change Coming in May 2021 and MSCI Singapore Index: Impact of SEA Inclusion, Brian discussed MSCI’s announcement that foreign listings would become eligible for the MSCI Singapore indices starting from the May 2021 Semi-Annual Index Review. This means that Sea Ltd (SE US) will be eligible for inclusion in the MSCI Singapore indices at the May 2021 SAIR. 

JPX Nikkei 400 Index Rebalance. here are 32 inclusions and 27 deletions to bring the number of constituents back to 400 and the changes will be effective after the close of trading on 27 November. Link to Brian’s insight: JPX Nikkei 400 Index Rebalance: Better Late Than Never (32 Adds; 27 Deletes)

In The 2020 JPX Nikkei 400 Rebalance: Another Messy Year, Travis also delved into JPX Nikkei 400 Index Rebalance. In summary, he views the index as being pretty awful. Every year, since the guidelines were ann9ned in January 2013, he reckons the index is designed to fail. The index has the inherent ability to sell low and buy high.  The construction methodology suggested a significant number of changes every year, and was designed to kick out companies after a bad year or two, when the stock price was low, then let them back in a couple of years later after results had rebounded.

MSCI Japan Index Rebalance. The inclusions are Capcom Co Ltd (9697 JP)Koei Tecmo Holdings (3635 JP)Harmonic Drive Systems (6324 JP)Azbil Corp (6845 JP) and Ibiden Co Ltd (4062 JP). The deletions are Maruichi Steel Tube (5463 JP)Yokohama Rubber (5101 JP)Daicel Corp (4202 JP)Kamigumi Co Ltd (9364 JP)Sumitomo Rubber Industries (5110 JP)Jgc Corp (1963 JP)Mebuki Financial Group (7167 JP)Nikon Corp (7731 JP), Park24 Co Ltd (4666 JP)Mitsubishi Materials (5711 JP)Benesse Holdings (9783 JP)Electric Power Development C (9513 JP)JTEKT Corp (6473 JP)Showa Denko K.K. (4004 JP)Sumitomo Heavy Industries (6302 JP)Seven Bank Ltd (8410 JP)Japan Prime Realty Investment (8955 JP)Mitsubishi Motors (7211 JP)Kawasaki Heavy Industries (7012 JP)Aozora Bank Ltd (8304 JP) and Isetan Mitsukoshi Holdings Ltd (3099 JP). Links to Brian’s insight: MSCI Japan Index Rebalance Nov20: No Surprises with 5 Adds, 21 Deletes, and Travis’ insight: MSCI Japan November 2020 Rebalance.

MSCI Taiwan Index Rebalance. The inclusions are Unimicron Technology (3037 TT) and Oneness Biotech (4743 TT), while the deletions are Eva Airways (2618 TT) and Formosa Taffeta Co (1434 TT). Link to Brian’s insight: MSCI Taiwan Index Rebalance Nov20: Momentum Plays Underperforming

MSCI ASEAN Index Rebalance. There are 2 additions and 2 deletions in Thailand, 2 deletions in Malaysia, 1 deletion in the Philippines, and 2 additions and 2 deletions in Indonesia. The inclusions are Delta Electronics Thai (DELTA TB)Sri Trang Gloves (STGT TB)Sarana Menara Nusantara (TOWR IJ) and Merdeka Copper Gold Tbk PT (MDKA IJ), while stocks that have been deleted from the indices are IRPC PCL (IRPC TB)TMB Bank PCL (TMB TB)Carlsberg Brewery Malaysia (CAB MK)Ytl Corp Bhd (YTL MK)Robinsons Land Co (RLC PM)HM Sampoerna (HMSP IJ) and XL Axiata (EXCL IJ). Link to Brian’s insight: MSCI ASEAN Index Rebalance Nov20: Huge Impact of Passive Selling Expected

MSCI India Index Rebalance. The inclusions are ACC Ltd (ACC IN)Adani Green Energy (ADANIGR IN)Apollo Hospitals Enterprise (APHS IN)Balkrishna Industries (BIL IN)Ipca Laboratories (IPCA IN)Kotak Mahindra Bank (KMB IN)Larsen & Toubro Infotech (LTI IN)Mrf Ltd (MRF IN)Muthoot Finance (MUTH IN)Pi Industries (PI IN)Trent Ltd (TRENT IN) and Yes Bank (YES IN), while the 2 deletions are Bosch Ltd (BOS IN) and LIC Housing Finance (LICHF IN). Link to Brian’s insight: MSCI India Index Rebalance Nov20: FOL Changes See 12 Inclusions

In Adani Green Energy – Will It Be Included In the MSCI Standard Indices?, Brian saw a high probability of the stock NOT being included in the MSCI Standard indices. 

OTHER M&A & EVENT UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

18.77%
Sino Wealth
Outside CCASS
11.70%
UBS
GS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

New Oriental (9901 HK)
83.39%
DB
Outside CCASS
Remegen (9995 HK)
15.61%
HSBC
Outside CCASS
Kintor (9939 HK)
13.80%
MS
Outside CCASS
Tailam (6193 HK)
20.00%
BoC
Outside CCASS
Source: HKEx

Imasen Electric Partial Tender – Set Governance to Ludicrous Mode

By Travis Lundy

On 9 November, along with Q2 earnings (which showed revenues down a sharp 35.7% in H1, with OP and NP turning sharply negative), Japanese auto parts maker (known for seat adjustment mechanisms, lamps, and various servos and relays)  Imasen Electric Industrial (7266 JP) announced that larger auto parts maker (predominantly seats) Ts Tech Co Ltd (7313 JP) would launch a partial Tender Offer and would buy shares in a third party placement if the partial Tender Offer were unsuccessful with the goal of getting to xx%.

TS Tech currently owns 638,000 shares (3.06%) and the Tender Offer to be launched would buy up to 5,209,500 shares (25.00%). Once they have achieved 25% in the Tender Offer, they would then be a Special Related Shareholder and would purchase 3.181mm shares in a third-party placement which would take them to 34.00%. This somewhat skirts the intent of the TOB Rules but I expect it will be difficult to get it struck down.  

The Tender Offer Price of PBR is ¥930/share, however, is ludicrous.

The value on the books of net cash and securities holdings is ¥677/share as of end-Sep 2020. Add net receivables to that and you get ¥1,012/share. Book Value Per Share is ¥2,255/share (45 days of inventories is ¥529/share of that).

166% of Tender Offer Market Cap is Net Cash + Securities + Inventories + Net Receivables.

It beggars belief that a company which has strong customer relationships and substantial net cash (a bit more than half the market cap at Tender Offer Price) should see the Board sell negative control of the company (34%) at 0.4x book and an Enterprise Value of 1.1x 5-year EBITDA.  Add the cross-holdings into the “cash” column and the takeover price is roughly 0.5x five-year EBITDA.

The Tender Offer Price is set at a price which is below where the shares were in January 2020, which at the time were hovering at ten-year lows.

Large and famous Japanese investment banks SMBC Nikko and Nomura Securities signed off on DCF ranges which allow the Board to consider that price fair.

As I suggested in Japan Needs More Cowbell

Independent shareholders need to speak up. If you do not, you tacitly approve.

More below the fold.


Before it’s here, it’s on Smartkarma