Daily BriefsMost Read

Most Read: China Mobile, China Telecom Corp Ltd (H), Bull Dog Sauce, Japan Post Insurance and more

In today’s briefing:

  • China Mobile (941 HK): Probably Too Cheap
  • Liquidity Needed for MSCI & FTSE Deletions TODAY – China Mobile, Telecom, Unicom
  • MSCI and FTSE Give Investors One Day To Sell The China Telcos
  • TOPIX Inclusion: Bull-Dog Sauce (2804) Is SUPER GREEN
  • Japan Post Insurance Update – Three Reasons To Buy. Any Overhang Slightly Higher

China Mobile (941 HK): Probably Too Cheap

By Travis Lundy

China Mobile (941 HK), China Telecom Corp Ltd (H) (728 HK), and China Unicom Hong Kong (762 HK) along with their ADRs (China Mobile Ltd Spon Adr (CHL US), China Telecom Corp Ltd (Adr) (CHA US), and China Unicom Hong Kong (Adr) (CHU US)) present a very strange problem. 

The Trump Executive Order (Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies) is something of nuisance. It doesn’t sanction most of the names on the Defense Department Qualifying Entity list but it makes it so that US Persons and those that invest US Person money cannot invest in the securities of these companies and in certain subsidiaries. But the list of Communist Chinese Military Companies includes the parent companies of the three Chinese mobile telephony companies, and those three companies, along with many Chinese companies, have underperformed peers in other markets since the Executive Order was announced.

The new FAQs published by the Treasury Department OFAC (discussed in OFAC Makes a Longer List of Trump Names of China Military Cos) suggest all 50% subsidiaries or ‘entities determined to be controlled by one or more Communist Chinese military company(ies) identified in or pursuant to EO 13959’ will be covered under the Executive Order but also says that the deadline for not transacting in such names would be 60 days after the OFAC adds the specific name to the list. 

The initial prohibitions pursuant to section 1(a)(ii) of E.O. 13959 would go into effect beginning 9:30 a.m. eastern time on the date that is 60 days after such subsidiary is added to OFAC’s new list to further implement E.O. 13959. FAQ 857

The three HK-listed telecom stocks are subsidiaries of QEs but they have yet to be listed, and the US-listed ADRs have also yet to be listed on the OFAC list. That means the NYSE decision to delist the stocks was somewhat precipitous, and I expect there may have been political pressure to delist prior to the 11th when the deadline for the first set of stocks arrives at their initial 60-day deadline.

Saturday, China’s Commerce Ministry warned of “necessary countermeasures to resolutely safeguard the legitimate rights and interests of Chinese companies” in response to the NYSE announcement but there were no details, and in announcing the criticism, saying that the NYSE’s actions would “greatly weaken all parties’ confidence in the US capital markets”, the Chinese Commerce Ministry was effectively saying that retaliation would greatly weaken all parties’ confidence in Chinese capital markets. One can’t have it both ways, and it must be noted that given the SEC’s guidance at end-November on Chinese ADRs in the US is really a matter of time given China’s Securities Law. 

Yesterday, the CSRC responded with a measured comment, and today, in what has to be seen as an embarrassing walk-back, the NYSE has walked back their decision to delist the three ADRs. This was accompanied by further clarification from OFAC in the form of FAQ 862, which notes that nothing requires that US Persons actually sell their holdings, just that they might be restricted from doing so if they do not do so in the period between the 60 day deadline and the subsequent exemption period end.

The three names have popped sharply in Hong Kong, more than making up for yesterday’s smaller fall in price.

That leaves investors with another issue.

Discussion ensues below.

Liquidity Needed for MSCI & FTSE Deletions TODAY – China Mobile, Telecom, Unicom

By Brian Freitas

FTSE Russell has announced the deletion of China Mobile (941 HK), China Telecom Corp Ltd (H) (728 HK) and China Unicom Hong Kong (762 HK) from the FTSE Global Equity Index Series (GEIS) and the FTSE Global China A Inclusion Indexes, while MSCI has announced the deletion of the same three names from the MSCI All Country World Indexes (ACWI) and the MSCI China All Share Indexes.

China Mobile (941 HK) and China Telecom Corp Ltd (H) (728 HK) will also be deleted from the FTSE China 50 Index and replaced by China Resources Beer Holdings (291 HK) and Geely Auto (175 HK)

All changes are effective after the close of trading on 8 January, today – this does not give investors a lot of time to sell down their positions before the passive funds have to sell their stock. The deleted stocks should open lower due to arb activity between the ADRs and the local shares, and continue to stay under pressure over the day with a final spurt in volume at the closing auction, while the inclusion in the FTSE China 50 index should trend higher.

With the closing auction in HK at +/-5% of the Reference Price, there could be issues with getting liquidity at the close. Investors that need to exit positions would be better off selling while they can, not when they have to.

Short interest on the stocks in small compared to the expected passive selling and will not be a source of support to the stocks. Expect some support from the National Team on a big drop in prices.

MSCI and FTSE Give Investors One Day To Sell The China Telcos

By Travis Lundy

As noted in yesterday’s OFAC Clarifies The Clarifications of Its Clarifications, MSCI and FTSE were almost certain to imminently announce the deletion of China Mobile (941 HK), China Telecom Corp Ltd (H) (728 HK), and China Unicom Hong Kong (762 HK) after OFAC clarified in FAQ864 that these companies had names similar to names which were on the list despite not being listed themselves so they would be considered to be Communist Chinese military companies. 

The rule is that US Persons cannot transact after 9:30am 11 January, which would mean selling on Monday 11 January Hong Kong time would be within the rules, but it appears MSCI and FTSE have decided to play it safe and delete them at Friday’s close. 

The “problem”, of course, as with the other names on the lists MSCI and FTSE have created before for the index deletions on 5 January 2021 and 18 December 2020, respectively, is that a lot of people who would normally buy the dip are themselves US Persons or adjacent to them in some way which would make them ineligible to transact. Those who do may find themselves less able to find counterparts to buy from them later after they have bought the dip. 

More detail below the fold. 

TOPIX Inclusion: Bull-Dog Sauce (2804) Is SUPER GREEN

By Travis Lundy

A long time ago in a land far, far away, there was a small company which made sauce, which was the subject of a Tender Offer by an activist who had developed something of a reputation for being hostile. To defend itself, the company asked its shareholders to allow it to execute a poison pill and indeed it executed the poison pill which said that all investors other than the activist would get the opportunity to buy three new shares for every one share owned, for 1 yen each, while the activist was given a market price-based cash equivalent for three quarters of the new position. 

The activist, Steel Partners, took it to court trying to get an injunction on the issuance of the warrants. The District Court allowed the issuance to go forward, Steel appealed, and the Tokyo High Court (the middle one in this case) decided Steel Partners was an “abusive acquirer.” In August of 2007, the Supreme Court agreed with the lower courts and decided that the issuance could proceed.

It is generally thought amongst Tokyo legal experts that the case was a triumph for shareholder supremacy because shareholders had voted to create such a warrant system to dilute acquirers which an independent committee had determined to be detrimental or abusive. The conclusion by the company’s board to go ahead with the issuance was at the behest of a process pre-agreed by shareholders. 

The precedents which were seen to have been set in this case were that… 

  • a company could defend itself against a hostile bidder (or perhaps shareholder) if that shareholder’s actions were deemed to be detrimental to the corporate value of the company or to other shareholders. 
  • But that such a defense had to be fair. In this case, Bulldog provided compensation for the share warrants issued to other shareholders.

In hindsight, the result was far better for Steel Partners than for the other shareholders.

On a split-adjusted basis, 13+ years later, the shares have not recouped one-quarter of their price prior to when Steel Partners raised their bid. The fall in share price in the chart below was because of the massive new issuance. The shares should have fallen in price by three quarters to account for the new issuance. Instead, they fell by three quarters then fell by half again to account for the fact there was no more takeover premium. 

At ¥1590 at today’s close, that is ¥6360 pre-dilution. 

So now, some 13 years later, we have a smidgen of good news. 

The Good News

Today, after the close, the company announced (Japanese only) that it had been accepted to move its shares from TSE2 to the TSE’s First Section on 14 January. That means it will be included in TOPIX some 6 weeks later. 

For those who follow the Quiddity TOPIX Inclusion Framework, this inclusion is GREEN.

It is, indeed… 

And as always after that kind of introduction, there is more below the fold.

Japan Post Insurance Update – Three Reasons To Buy. Any Overhang Slightly Higher

By Travis Lundy

In December, it was reported that Japan Post Insurance (7181 JP) was considering an enormous buyback of its own shares from Japan Post Holdings (6178 JP) so that JPI can get JPH under 50% ownership.

I wrote about it VERY bullishly in Huge Japan Post Insurance Buyback Mooted – Decks Cleared. Time To Buy.

A couple of days later on the 25th of December, news emerged that the JPI Board of Directors had decided to postpone the consideration/decision of buying back shares from “by year end” to a later date because of the market reaction to the news leak. 

The key here is that apparently, if the stake held by Japan Post Holdings drops below 50%, new product launches move from an “Approval System” to an “Advance Notification System” under the complex rules which govern the Japan Post Insurance product offering suite, the Japan Post Holding post-privatisation management by regulators, and the insurance business in general. 

The shares, which had popped 10% on the original news, fell back somewhat. Those who contacted me about this situation know that I have continued to be bullish. The shares are up 6.2% from the close of that first day’s news.

I think it was a mistake for JPI to not decide to buy back the shares as of their 23 December board meeting. 

There are other dynamics at play.

Before it’s here, it’s on Smartkarma