Daily BriefsMost Read

Most Read: Evergrande Real Estate Group, SK IE Technology, Boral Ltd, KakaoBank, Bukalapak and more

In today’s briefing:

  • Evergrande’s Very Special… Special Dividend?
  • KRX BBIG Index Rebalance Preview: SK Bioscience & SK IE Tech Inclusions Add to Passive Inflow
  • Boral (BLD AU): Index Impact from Seven’s Offer
  • Kakao Bank Fast Entry Possibilities & Timeline: KOSPI 200, MSCI Standard, & FTSE All-World
  • Bukalapak IPO: Valuation Insights

Evergrande’s Very Special… Special Dividend?

By Travis Lundy

Evergrande Real Estate Group (3333 HK) shares rallied enormously sharply in 2017, moving from the mid single digits to HK$30+ by Q3 that year. That year the float in Evergrande was also sharply reduced by the purchases of shares by Chinese Estates Holdings (127 HK) and its owners. 

When the shares fell back after getting squeezed, Evergrande conducted a buyback which got them within a hair’s breadth of the residual minimum free float requirement mandated by the Hong Kong Stock Exchange. The shares stayed higher. 

Eventually, Evergrande saw more of the employee share options with low exercise prices exercised which increased the share count and float so when shares fell in 2020, the company could buy back shares, and it did so after shares fell to new 3yr lows in the covid-crash. It bought shares back from May to June, again reducing float to within a hair’s breadth of the free float limit, and in the period, shares rose ~50%. 

Then at the start of H2, with a press release about unaudited June sales results and how strong sales had been in H1, the shares popped 40% (from HK$20 to HK$28/share) in three days, then fell back over 6 weeks, going back below HK$20 when the company disclosed it was pre-selling stakes in its property management unit before the IPO, and three days later Evergrande actually issued a profit warning, just before releasing H1 results. 

Also in August, but undisclosed at the time, was the fact that several major real estate developers, including Evergrande, had been called on the carpet to discuss their participation in the so-called Three Red Lines pilot program (the three red lines are a liability-to-asset ratio excluding advanced receipts of 70%, net debt-to-equity ratio of 100%, and cash to short-term debt ratio at 1x). Companies which crossed one of three red lines could not increase interest-bearing borrowing by more than 10% in a year. Cross two of them and they were capped at 5% growth. Cross all three of them and the developer could not increase debt at all. This is tough when funding at HSD to 10+% interest rates are used to carry non-interest-earning land bank. But Evergrande “met” all three so needed to reduce debt and raise cash, discussed in Evergrande May Be Facing a Funding Squeeze

There was a story about a “letter”, later denied by the company, in September, discussing the importance of the local government helping Evergrande deal with its short-term funding issues, which included the issue of the buyback guarantee offered by Evergrande to minority shareholders of Evergrande’s major onshore operating unit Hengda. Evergrande denied the existence of the letter, but despite the fact some Hengda shareholders reportedly wanted out as listing was unlikely, somehow, with the local government’s help, Evergrande announced a new agreement meaning repayment in January 2021 wasn’t necessary. The shares popped and two weeks later Evergrande raised some capital (discussed in Evergrande Equity Placement – Musical Shares.

I had my ideas about WHY those shares were placed, and it was not to raise equity to pay down debt. The capital raised was less than expected despite the large discount and the shares quickly fell below placement price.  So just 3 weeks after raising equity, it started buying back shares, reasonably quickly raising the price above where it had sold shares. This was discussed in Evergrande Equity De-Placement: Musical Shares. Then a couple weeks later, we saw Evergrande Terminate Hengda’s Backdoor Listing so the story left was one of an optically “cheap” but heavily indebted developer, lowering selling prices to liquidate inventory, lower debt and raise cash levels, etc. There were sales of shares of recently listed subsidiaries. There were announcements of how much debt had been lowered.

But shares fell. 

There were stories in Chinese media and in social media about issues with the company’s trade acceptance bills. An article on Bloomberg.com a week ago reported that while Evergrande chairman Hui Ka Yan was in Beijing for the 100th anniversary celebrations 1 July, he met with the Financial Stability and Development Committee, which urged him to solve his company’s debt problems pronto. The article is worth reading. It suggested more worry at the top than thought, and even says FSDC officials had suggested bringing in strategic investors. Hui said he was speaking with local investors. 

Bonds have traded lower and lower and the 2024-2025 maturity bonds appear to be trading in the 60s, with shorter-dated bonds trading at 30+% yield to maturity.

Wednesday, the shares closed at HK$8.91 – lowest in four years. 

Yesterday, there was new news. 

The company announced a board meeting for 27 July where the Board would consider a special dividend. 

My first reaction was, I admit, one of surprise, but on second thought it should not be THAT surprising.

The immediate public comments I have seen suggested an attempt to squeeze shorts. Yes, according to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.

The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus…. [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China – not the PBOC, CSRC, or CBIRC – above them – urging him to Do Something – sell assets, lower debt, raise equity – deciding to pay a special dividend to its equity holders? 

I expect Hui Ka Yan has his reasons, and I expect those reasons do not include rewarding long-suffering minority shareholders. Or squeezing shorts. 

KRX BBIG Index Rebalance Preview: SK Bioscience & SK IE Tech Inclusions Add to Passive Inflow

By Brian Freitas

The KRX will announce the results of the September review of the BBIG indices in August and the changes will become effective after the close of trading on 9 September.

The review period ends on 31 July, so there are only 10 trading days left and the list of potential inclusions and exclusions will not change unless there is a big change in stock prices.

At the September review we expect the following changes:

The largest inflows will be on SK Bioscience (302440 KS), SK IE Technology (361610 KS), LG Chem Ltd (051910 KS), SK Innovation (096770 KS) and Douzone Bizon (012510 KS) while the largest outflows will be on SK Biopharmaceuticals Co Ltd (326030 KS), Kakao Corp (035720 KS), Posco Chemical Co Ltd (003670 KS), Kakao Games Corp (293490 KS) and SKC Co Ltd (011790 KS).

With Krafton Inc (259960 KS) expected to list in August, post the cutoff date of 31 July, the stock will not be eligible for index inclusion at the review and will need to wait till the following rebalance in March 2022 to join the Game and BBIG indices.

Boral (BLD AU): Index Impact from Seven’s Offer

By Brian Freitas

Seven Group Holdings (SVW AU) first disclosed a 10% interest in Boral Ltd (BLD AU) on 2 June 2020. Then, Seven Group Holdings (SVW AU) increased its holding to 19.984% on 9 September.

After taking a break for the rest of 2020, Seven Group Holdings (SVW AU) disclosed a 22.984% holding on 8 April 2021. Unable to buy any more shares in the market, Seven Group Holdings (SVW AU) announced an off-market takeover for all the shares that it did not own in Boral Ltd (BLD AU) at A$6.50/share. Since then, Seven Group Holdings (SVW AU) have increased their offer to A$7.30/share and A$7.40/share.

Seven Group Holdings (SVW AU) now hold 56.84% of Boral Ltd (BLD AU).

Boral Ltd (BLD AU) is a constituent of the S&P/ASX 200 (AS51 INDEX), FTSE All-World and the MSCI Small Cap indices. FTSE has already reduced the investability weight for the stock earlier this month and could reduce the investability weight further at the September QIR. Boral Ltd (BLD AU)‘s weight in the S&P/ASX 200 (AS51 INDEX) should also be reduced at the September QIR.

Shorts at 22m+ shares should provide some support on a drop in the stock price post the end of the offer period or on passive selling.

Kakao Bank Fast Entry Possibilities & Timeline: KOSPI 200, MSCI Standard, & FTSE All-World

By Sanghyun Park

Kakao Bank’s index Fast Entry has to go through a much more complicated equation with Krafton.

This is because it is not easy to clearly predict the float rate, which is the most important variable in estimating Fast Entry.

Below is Kakao Bank’s post-IPO shareholding structure.

Kakao27.26%129,533,7256 months
Korea Investment Value Asset23.25%110,484,0816 months
Korea Investment Financial Holdings4.01%19,049,6436 months
KB Kookmin Bank8.02%38,097,9596 months
 – Major shareholder + Special stakeholders62.55%297,165,408
IPB Ltd (Anchor Equity Partners)2.24%10,640,0006 months
Keto Holdings, L.P. (TPG)2.24%10,640,0006 months
Netmarble1.60%7,619,5923 months
Skyblue Luxury Investment Pte. Ltd. (Tencent)1.60%7,619,5923 months
ESOP (post-IPO shareholders)2.76%13,090,0001 year
– Sub-total72.99%346,774,592
Pre-IPO non-lockup minority shareholders15.99%75,965,645
IPO shareholders (institutional & retail)11.02%52,360,000
Source: DART

First, the KOSPI 200 is fairly simple and clear. Only 62.55% owned by Kakao (the major shareholder), Korea Financial Group and KB (the special stakeholders) is highly likely to be bundled as non-float. So the remaining 37.45% will be calculated as immediate float.

MSCI and FTSE are highly likely to treat all of the pre-IPO minority shareholders held by corporations and VCs as non-float regardless of lockup. In addition, voluntary lockup of institutions participating in the IPO is treated as non-float. In this case, even under the premise that the ESOP subscription rate and voluntary lockup percentage are low this time, the immediate float is highly likely to stay in the low 10% range.

Post-IPO index float scheduleKOSPI 200MSCI StandardFTSE All-World
Source: DART

However, there is one more point to consider here.

As seen in the case of HYBE, which was included in MSCI Standard in SAIR in May, MSCI does not blindly treat pre-IPO shares held by VCs as non-float. Even before the one-year grace period, MSCI decided to include some pre-IPO shareholders, including VCs, in the float. This is an example showing that MSCI flexibly interprets non-locked corporate and VC holdings according to the holding purpose.

Similar to HYBE, about 2% of Kakao Bank is owned by individual investors. In addition, if some corporate/VC holdings that are not locked up (eg, eBay Korea and Yes25) are treated as floats, and the ESOP subscription and institutional public offering lockup ratios are kept low, the float can rise to the low 20%.

In this case, MSCI float can go up to 25% with 5% roundup applied.

Pre-IPO non-lockup minority shareholdersPost-IPOShares
Netmarble (KS 251270)1.60%7,619,591
Skyblue Luxury Investment Pte.Ltd. (Tencent)1.60%7,619,591
Seoul Guarantee Insurance Company3.21%15,239,183
Korea Post3.21%15,239,183
eBay Korea3.21%15,239,183
Yes24 (KS 053280)1.20%5,681,393
Pre-IPO non-lockup minority shareholders having less than a 1% stake1.96%9,327,521
Source: DART

Bukalapak IPO: Valuation Insights

By Arun George

Bukalapak (BUKA IJ), which means ‘opening a kiosk’ in Indonesian, is a leading e-commerce player in non-Tier 1 cities in Indonesia, with a market share of 35% in 2020 based on GMV (gross merchandise value), according to Frost & Sullivan. 

Bukalapak will price its IPO at the top-end of its indicative price range of Rp750-850 per share, according to press reports. Bukalapak will raise Rp22 trillion ($1.5 billion) which will be Indonesia’s largest-ever IPO. The shares are set to list on 6 August. 

In Bukalapak IPO Initiation: Island Shopping, we noted that like its peers, Bukalapak is benefiting from the accelerating adoption of e-commerce in Indonesia. Bukalapak’s strategy of focusing on consumers in the non-Tier 1 area and the mass market in the Tier 1 area results in a relatively small overlap (less than 20%) between its customers and customers of other online marketplaces such as Sea Ltd (SE US)‘s Shopee, Tokopedia PT (1087142D IJ) and Alibaba Group (BABA US)‘s Lazada. Competitors generally target the affluent segment of the market. We concluded that Bukalapak’s fundamentals tick all the right boxes of rising monetisation, lower losses and declining cash burn, in our view. 

Our valuation analysis suggests that the IPO price range is attractive. Overall, we would participate in the IPO.

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