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Most Read: Hitachi Metals, Sea Ltd, Fuji Kosan Company, Zhaoke Ophthalmology Pharmaceutical, Monde Nissin Corp and more

In today’s briefing:

  • Bain Bids Up BIG For Hitachi Metals (5486) – Now We Wait
  • MSCI Singapore Index – Upcoming Changes
  • Aslead Capital Hostile Offer for Fuji Kosan (5009)
  • Zhaoke Ophthalmic (兆科眼科) IPO Trading: Strong Cornerstone Doesn’t Save the Deal
  • Monde Nissin Pre-IPO – Thoughts on Valuation

Bain Bids Up BIG For Hitachi Metals (5486) – Now We Wait

By Travis Lundy

Hitachi Ltd (6501 JP) has, for over a decade, been restructuring itself by selling subsidiaries here and buying them in there. There are two remaining after the somewhat recent sale of Hitachi Chemical (4217 JP), de-consolidation of Hitachi Capital (8586 JP), and buy-in of Hitachi High-Tech (8036 JP) (after a flurry of other deals to sell out stakes in Hitachi Kokusai Electric (6756 JP), Hitachi Koki (6581 JP), Hitachi Maxell and Clarion in the previous few years).

In October last year, I addressed the issue of the selldown of the last two Hitachi Metals (5486 JP) and Hitachi Construction Machinery (6305 JP) in The Right Trade May Be Hitachi, which argued that Hitachi itself was probably the better deal than the subs. Since then, Hitachi is up 39.3%, Hitachi Construction Machinery (6305 JP) is up 3.6%, and Hitachi Metals (5486 JP) is up 23%. 

Mio Kato has written a few times about Hitachi Metals and about how one might not be able to expect a very high takeout price through the sale process that Hitachi was running. I wholly agreed with Mio, because I think it is not an easy asset to sell later, but I couldn’t come up with a reason to sell the stock because I expect funding is available, costs can be cut, Hitachi might keep 20% and sell a call option to help with funding, and if a company needs a lot of work to restructure, I am sure that Bain Consulting could be prevailed upon to provide their consulting services for a price (one of the dirty little secrets of private equity is that GPs get management and incentive fees on assets and sales, but profits in the interim come with costs, and some of those costs can be allocated to the GP as well).

Hitachi took in bids earlier this spring after running an auction process and three weeks ago an article in the FT hit the tape saying “Bain nears $8bn deal to buy Hitachi Metals.” That was around current market price give or take net debt so people were thinking there might not be a premium.

Today, we got a deal announcement. Indeed, Bain is paying near US$8bn, but it is structured in such a way that Bain pays ¥1675/share to Hitachi and ¥2181/share to minorities, which produces a combined price just over ¥1900/share.

This approximates a decent result for everyone involved.  

More below the fold. 

MSCI Singapore Index – Upcoming Changes

By Brian Freitas

MSCI is scheduled to announce the results of the May 2021 Semi Annual Index Review (SAIR) on 11 May with the changes implemented after the close of trading on 28 May.

For Singapore, we see a high probability of Sea Ltd (SE US) being included in the index and Suntec REIT (SUN SP) being excluded. This will keep the number of index constituents at 19.

Since the inclusion of Sea Ltd (SE US) at its full index weight would result in large turnover, MSCI has announced a tranched inclusion starting with an Index Inclusion Factor (IIF) of 0.05 at the May 2021 SAIR and concluding at the February 2022 Quarterly Index Review (QIR) with an IIF of 1.

We expect liquidity on the MSCI Singapore Free Index (SIMSCI INDEX) futures to drop in the short term as traders look for appropriate hedges for the unhedged Sea Ltd (SE US) position due to their trading activity on the index futures.

There could also be a migration from passive products on the MSCI Singapore Free Index (SIMSCI INDEX) to the FTSE Straits Times Index (STI) (STI INDEX) due to a drop in the dividend yield on the SIMSCI from 3.02% to 2.15%. The drop in dividend yield will take place as the IIF on Sea Ltd (SE US) increases.

Grab (0967655D SP) is expected to list in the US in July and the stock could be included in the MSCI Singapore Free Index (SIMSCI INDEX) later in the year. There have also been media reports that Grab could secondary list in Singapore. MSCI is likely to include Grab (0967655D SP) in the index in a tranched manner as well to reduce index turnover at a single review. Inclusion of Grab (0967655D SP) will reduce the dividend yield on the index even further.

Aslead Capital Hostile Offer for Fuji Kosan (5009)

By Travis Lundy

Last night, Singapore-based fund Aslead Capital Pte announced that it would launch a Tender Offer on Fuji Kosan Company (5009 JP) to take at least a 40% stake and possibly full control after ownership and approaches did not lead to “satisfactory” measures to improve corporate value. 

The shareholder had been acquiring shares since last year. It first went above 5% in August 2020 and until yesterday had most recently reported a 14.83% stake on 4 February. 

The stock has an interesting set of investors, and was for many years in the early to mid-2010s a poster child for tiny cap deep value investment targets. 

As of the announcement, Aslead states that it owns 16.8% which means to get to 40.0%, it needs only 23.2% of shares out – of the 83.2% it does not own. 

The company has been building an ‘interesting’ set of shareholders and relationships. One activist sold last year to be replaced by another. There is someone infamous from the tabloids. This could be fun to watch. It will certainly trade through terms early. The question then is what next?

There is a behind-the-scenes link to the family office responsible for the single most fun family office website ever made (after you press enter, check on the left side to see the sound is on and if you need to read the text more smoothly switch from angled to vertical just above the sound on/off section). 

Zhaoke Ophthalmic (兆科眼科) IPO Trading: Strong Cornerstone Doesn’t Save the Deal

By Ke Yan, CFA, FRM

Zhaoke Ophtalmic raised HKD 1,942 million (USD 250m) from its global offering and will list on the Hong Kong Stock Exchange on Thursday, April 28th.

In our previous note, we looked at the company’s two products, namely CsA gel and ZKY001. We are of the view that CsA gel does provide advantage over Restasis, the top-selling eye gel for the DED, but the forecast of market growth is too aggressive for the DED market. For another core product ZKY001 which will be indicated for CED, while there is no data on the efficacy from Phase I clinical trial, we do note that the licensing parnter’s product which uses the same technology but on a different indication did not meet the primary end point in Phase III clinical trial according to a recent announcement, which raises our concern on the potential of the product candidate. In addition, the company also had a long list of generic referencing top selling glaucoma drugs. The company has an OK management team but strong backing of institutional investors.  We think the company provides aggressive guidance that lacks evidence to support the forecast and valuation. We think the IPO valuation is rich at the high end and the cornerstone investors’ commitment left a large portion of the deal to be sold on debut. 

In this note, we look at the updates since our last note. We were bearish with the deal and would be taking profit if there’s pop on debut.

Our previous coverage on Zhaoke Ophthalmic

Monde Nissin Pre-IPO – Thoughts on Valuation

By Sumeet Singh

Monde Nissin (MNC), a food manufacturer in the Philippines, aims to raise around US$1bn in its Philippines IPO.

It has two main businesses: Asia-Pacific Branded Food and Beverage Business (BFB), which sells instant noodles, biscuits and other products, and meat alternative (MA) business which includes Quorn and Cauldron meat alternatives brands.

MNC has a high market share in the Philippines in the instant noodles and biscuits segment along with a few other categories as well. Quorn as well has a strong lead over its next largest peers in the Chicken alternative meat segment in the grocery channel. 

In this note, we’ll talk about earnings forecast and valuations.

Before it’s here, it’s on Smartkarma