Most Read: Ant Financial, Fujitsu Frontech, Hang Seng China Enterprises Index, Li Auto Inc., Alibaba Group and more

In today’s briefing:

  • Ant Group IPO First Look: Swarming to Market
  • Fujitsu TOB For Fujitsu Frontech At a Discount?
  • HSCEI Dividends – Skewed to the Downside
  • Li Auto (理想汽车) Trading Update – No Mention of Hillhouse’s Investment
  • Alibaba: Where Is FCF Spent? – FY03/20 Update

Ant Group IPO First Look: Swarming to Market

By Arun George

Ant Financial (1051260D CH)/Ant Group is a technology company that provides digital payment services and digital financial services to consumers and small and micro businesses (SMBs) in China and across the world. Ant said last week it would pursue a simultaneous dual-listing in Hong Kong and on the Shanghai stock exchange’s STAR board. The Hong Kong share sale alone could raise about $10 billion at a $200 billion valuation, according to press reports. 

In this note, we take a first look at Ant and run through its history, industry and operating segments. We then take a closer look at the rumoured $200 billion valuation in the context of Ant’s financial performance. Based on available disclosure, our estimates and peer group multiples, the $200 billion valuation is justifiable, in our view.  

Fujitsu TOB For Fujitsu Frontech At a Discount?

By Travis Lundy

The recent past has seen some MBOs and Parent Company takeouts of companies (where incumbent shareholders and management own a large stake) and the takeout prices have been at insufficient premia, well below investor-perceived fair value, and generally opportunistic.

Current ‘live’ situations include Itochu (8001)’s takeover of Familymart (8028) (discussed here, here, and here (accompanied by a great piece by Michael Causton)), Bain’s MBO for Nichii Gakkan Co (9792 JP) which is currently also trading at a premium (discussed in a series here, here, and here; with public activist commentary linked here), and now on Naver/Softbank Corp’s takeout of LINE (discussed here, here, and here (with an earnings-related add-on here). 

Fujitsu Ltd (6702 JP) has today one-upped those pikers. 

Today, Fujitsu announced a Tender Offer for its subsidiary Fujitsu Frontech (6945 JP) at a DISCOUNT to the last traded market price, which itself was trading at a discount to book value.

Of course, the stock had experienced a nice run-up in high volume (the three highest volume days ever) in the last few days, most likely on speculation that a deal could be announced when earnings were released. There is reference in the document to the idea that the Tender Offer was “announced” or information “distributed” on 27 July, which caused the stock to go up unnaturally – attributed to “distribution of information by some information distribution companies which indicated the restructuring the group resulting to speculation buying”. I have not found that information and the document does not clarify.

source:, Quiddity

This is going to upset some people.

Based on the lowest trailing 12-month EBITDA figure in 20 years, with management forecast EBITDA expected to rise sharply in coming years, and a lot of non-cash assets which are effectively cash-equivalent for Fujitsu group, the forward EV/EBITDA of the takeout price is probably the wrong level. 

Using the 20yr low EBITDA, and assuming net receivables are factored and the PP&E is sold for a 20% discount to book and leased back would bring Enterprise Value close to zero. That is probably too low a price given management forecasts of respectable free cash flow ahead.

I’ve got popcorn.

Given the propensity for shareholders of Japanese companies to make noise when it is in their interests to do so, I might wish for a pillow instead, but hope springs eternal.

Investors need to understand that the “fairness opinions” of the “independent” valuation agents are based on conflicted target management forecasts, and the “reasonable” price has zero financial logic applied to it. If one can claim a premium is being paid to the market price, it’s probably “reasonable” to most target boards even if the price of the target and its “comparable companies” have been low precisely because of a lack of trust in the governance of the target company.

As always, there is more below the fold.

For more on the rules regulations, practices, and foibles in the M&A world in Japan, please refer to the Quiddity Japan M&A Guide 2019. For more about situations where minority investors should look at their options, please see Japan Needs More Cowbell

HSCEI Dividends – Skewed to the Downside

By Brian Freitas

The 2021 HSCEI dividend futures have been on a roller coaster ride since January this year when the HSIL published a consultation paper on the inclusion eligibility of WVR securities and secondary listings in the Hang Seng China Enterprises Index (HSCEI INDEX).

The spread between the 2020/21 dividend futures dropped from -10 to -110 and is currently trading at -74 using mid-market prices.

We see a much higher probability of the 2020/21 dividend spread dropping towards its earlier lows due to:

  • The HSIL decision to allow WVR securities and secondary listings in the index and the removal of extra eligibility criteria on P-chips and Red chips that will result in a LOT of changes to the index constituents in the September and December reviews where the expected inclusions have a much higher weight and much lower dividend yield as compared to the expected exclusions;
  • The potential index inclusion of new large cap listings in Hong Kong like Ant Financial (1051260D CH) and secondary listings of Chinese companies listed in the US where the dividend yield will be lower than that on the excluded stocks;
  • Possible increase in the index weight cap on WVR securities and secondary listings from 5% to 10% next year;
  • Possible cuts to bank dividends following the Government asking them to ‘sacrifice’ profits to bolster their balance sheets and lend to SMEs;
  • Company results – companies will start announcing interim results in the next few weeks and the impact of the Coronavirus on their revenues/profits will be known.

The risks to this thesis are:

Alibaba: Where Is FCF Spent? – FY03/20 Update

By Supun Walpola

Strong FCF generation is one of the key positives for Alibaba Group (BABA US). However, as we have noticed in the past, Alibaba has invested around 30% of its FCF in private companies, that most of the time, are undisclosed to Alibaba’s shareholders (refer our note, Alibaba: Where Is FCF Spent?).

However, in FY03/20, Alibaba’s investments in private companies was only 10% of its FCF, its lowest for the past five years. Instead, investments were directed towards listed equities, short term investments, and equity investees. We believe this provides better transparency of the money flow to Alibaba’s shareholders. We consider this to be a step in the right direction by Alibaba towards better corporate governance in the post-Jack Ma era.

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