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Most Read: Anta Sports Products, Hansoh Pharmaceutical, Hangzhou Tigermed Consulting (H), Imasen Electric Industrial, Yatsen Holding and more

In today’s briefing:

  • Hang Seng Index Rebalance: Three Adds, One Delete, High Turnover, and More Changes to Come
  • HSCEI Index Rebalance: 9 Adds, 9 Deletes, BIG Turnover
  • FTSE GEIS Index Rebalance Preview: IPOs and J-REITs
  • Imasen Electric Partial Tender – Set Governance to Ludicrous Mode
  • Yatsen IPO: Valuation Insights

Hang Seng Index Rebalance: Three Adds, One Delete, High Turnover, and More Changes to Come

By Brian Freitas

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 13 November. The constituent changes will be effective after the close of trading on 4 December.

For the Hong Kong Hang Seng Index (HSI INDEX), there are 3 inclusions and 1 deletion, taking the number of index constituents up to 52.

The inclusions are Budweiser Brewing Company APAC (1876 HK), Anta Sports Products (2020 HK) and Meituan (3690 HK), while the sole deletion is Swire Pacific (A) (19 HK)

One-way turnover is estimated at 7.38%. That is very high and will result in big turnover at the closing auction on 4 December. We estimate 5 days of ADV to sell on Swire Pacific (A) (19 HK) from passive funds, while Budweiser Brewing Company APAC (1876 HK) and Anta Sports Products (2020 HK) have over 4 days and 3 days of ADV to buy respectively. The impact of passive buying on Meituan (3690 HK) is lower at 1.6 days of ADV.

Following HSIL’s announcement at the previous index review, we had expected there would be more additions than deletions in this review. All the 3 stocks added to the index were our highest probability inclusion candidates – the ‘surprise’ for the market would have to be Anta Sports Products (2020 HK) followed by Budweiser Brewing Company APAC (1876 HK). Meituan (3690 HK) was probably on everyone’s list for inclusion.

We had picked Swire Pacific (A) (19 HK) as the most likely deletion candidate, though we did not think that HSIL would actually delete the stock since it derives most of its revenue from Hong Kong and helps reduce the overlap with the Hang Seng China Enterprises Index (HSCEI INDEX).

HSIL announced that they had submitted a study on the composition of the Hong Kong Hang Seng Index (HSI INDEX) to the Advisory Committee and plan to conduct a market consultation this year with the conclusions announced in February 2021. The implementation of the changes will most likely commence at the March 2021/ June 2021 index review. 


HSCEI Index Rebalance: 9 Adds, 9 Deletes, BIG Turnover

By Brian Freitas

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 13 November. The constituent changes will be effective after the close of trading on 4 December.

For the Hang Seng China Enterprises Index (HSCEI INDEX), there are 9 inclusions and 9 deletions.

The inclusions are Alibaba Health Information Technology (241 HK), China Overseas Land & Investment Ltd (688 HK), Semiconductor Manufacturing International Corp (SMIC) (981 HK), Evergrande Real Estate Group (3333 HK), Hansoh Pharmaceutical (3692 HK), China Feihe (6186 HK), Haidilao (6862 HK), JD.com (HK) (9618 HK) and NetEase (9999 HK)

The deletions are Want Want (151 HK), Fosun International (656 HK), China Telecom Corp Ltd (H) (728 HK), China Taiping Insurance Hldgs (966 HK), China Citic Bank Corp Ltd H (998 HK), China Shenhua Energy Co H (1088 HK), China Minsheng Banking H (1988 HK), China Vanke Co Ltd (H) (2202 HK) and PICC Property & Casualty H (2328 HK)

One-way turnover is estimated at 10.21% and volumes at the closing auction on 4 December are going to be HUGE. Passive funds will need to trade between 1.5-4.5 days of ADV on the deletions and between 0.5-4 days of ADV on the inclusions.

We had picked all 9 inclusions and exclusions, so there are no surprises in the review. That said, the probability of Hansoh Pharmaceutical (3692 HK) being included was the lowest since it was right at the cusp of inclusion, so there could be a pop at the open on Monday. Hansoh, at almost 4 days of ADV, has the biggest impact to buy from passive funds. The corresponding deletion was PICC Property & Casualty H (2328 HK) and the stock could start trading lower on Monday.


FTSE GEIS Index Rebalance Preview: IPOs and J-REITs

By Brian Freitas

FTSE Russell will announce the changes to the Global Equity Index Series (GEIS) as a part of the quarterly review on 20 November and the changes will be effective after the close of trading on 18 December.

The quarterly review is used to include IPOs which did not qualify as an immediate fast entrant to the indices at the time of listing and were not listed for at least 3 months by the following semi-annual review to be included in the indices.

There will be passive buying on the J-REIT’s as part of the tranched inclusion in the GEIS – the inclusion commenced at the September 2020 semi-annual index review and this will be the second tranche.

Stocks that listed recently and could be included in the index are Hangzhou Tigermed Consulting (H) (3347 HK), Smoore International (6969 HK), Yeahka Limited (9923 HK), Dada Nexus Ltd (DADA US), Kingsoft Cloud (KC US), Li Auto Inc. (LI US), Agora Inc. (API US), Burning Rock Biotech (BNR US), Legend Biotech Corp (LEGN US), Mindspace Business Parks REIT (MBP IN), SK Biopharmaceuticals (326030 KS), Sri Trang Gloves (STGT TB) and Modalis Therapeutics (4883 JP).

Hangzhou Tigermed Consulting (H) (3347 HK), Smoore International (6969 HK) and Kingsoft Cloud (KC US) are also inclusions in the MSCI China index and passive funds tracking the MSCI Standard indices will need to buy the stocks at the close of trading on 30 November.


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.


Yatsen IPO: Valuation Insights

By Arun George

Yatsen Holding (YSG US) is the largest and only domestic company among the top ten beauty companies in China as measured by colour cosmetics retail sales value, according to CIC. 

Yatsen has launched its IPO at a price range of $8.50-10.50 per ADS. Indications of interest have been received for up to $300 million of the offer shares. Existing shareholders, Hillhouse Capital and Tiger Global will subscribe for $120 million and $80 million of the offer shares, respectively. Tencent Holdings (700 HK) and Yunfeng Financial Group will subscribe for $50 million and $50 million of the offer shares, respectively. Yatsen will raise net proceeds of $521.5 million at the mid-point of the IPO price range. 

In Yatsen IPO Initiation: Face the Facts, we stated that while Yasten is seemingly another new economy company with a winning proposition, the fundamentals are less than ideal which suggests that caution is warranted. In Yatsen IPO: Comparison with Leading Domestic Brands we noted that in comparison to peers, Yatsen offers investors a trade-off between high growth and margin/cash generation. Our valuation analysis suggests that IPO price is unattractive and we would be inclined to give the IPO a pass. 


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