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Most Read: Hong Kong Hang Seng Index, Toa Oil Co Ltd, China Machinery Engineering, UG Healthcare, CEI Limited and more

In today’s briefing:

  • HSI and HSCEI: Collateral Damage of the Executive Order
  • Toa Oil (5008) Tender Offer Update – Looks Bumpity.
  • China Machinery Engineering (1829 HK): Delisting Offer From Parent
  • Smartkarma Corporate Webinar | UG Healthcare: Demand Visibility & Pricing Trends
  • CEI Limited (CEI SP): Privatization Deal by AEM Holdings (AEM SP) Trading with a View to Complete

HSI and HSCEI: Collateral Damage of the Executive Order

By Brian Freitas

Following President Trump’s ‘Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies’, FTSE, MSCI and S&P have been quick to delete Semiconductor Manufacturing International Corp (SMIC) (981 HK), China Mobile (941 HK), China Telecom Corp Ltd (H) (728 HK) and China Unicom Hong Kong (762 HK), while CNOOC Ltd (883 HK) could be deleted toward the end of January.

With these stocks included in the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX), US persons are unable to trade them or derivatives/ETFs where these stocks are a constituent. This has led to US banks, hedge funds and other asset managers not being able to put on any new positions on these stocks/products and they will be unwinding these positions over the next 10 months to divest all their holdings.

With State Street Global Advisors Asia and BlackRock Asset Management North Asia announcing that they will not make any new investments in a sanctioned entity, and a move from full index replication to representative sampling for the Hong Kong Hang Seng Index (HSI INDEX), the tracking error on these ETFs will increase. The dividend yield on the Tracker Fund of Hong Kong Ltd (2800 HK) will drop since most of these stocks have high dividend yields and could lead to large outflows from retail investors that would look to alternative ETFs that hold these stocks in the correct weight in the index.

We have also got questions on whether Hang Seng Indexes would delete these stocks from their indices and the implication of the deletions on the indices. Hang Seng Indexes has said they have no plans to delete the stocks from their indices, but they were monitoring market developments closely. We think there is a very very small probability of the stocks being deleted from the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX)


Toa Oil (5008) Tender Offer Update – Looks Bumpity.

By Travis Lundy

On 15 December, Idemitsu Kosan (5019 JP) launched a Tender Offer for subsidiary Toa Oil Co Ltd (5008 JP) at what was an extraordinarily opportunistic price – JPY 2450/share.

Some might call this price insultingly low.

It was apparently deemed “fair” because the non-arms’ length contract signed with the parent (and Tender Offeror) provides for an exceptionally low ROA, and the next few years involves some shutdowns for longer-term maintenance, which will lower FCF. 

This pricing process fairness problem was discussed in some detail in Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)

There have been a few developments since the announcement.

  • Just prior to the offer being made, large shareholder Cornwall Capital had been increasing their stake and coincidentally announced an increased stake of 18.22% on the same day as the announcement. Since the offer has been made, they have filed two more amendments to quantity to lift their stake to 20.83% as of 24 December (reported 4 January). As seen from the chart, the shares have not traded below terms since they first freely traded pre-announcement, and Cornwall increased their stake by 2.6+% from 15-Dec to 24-Dec 2020 at prices ABOVE terms.
  • Since the 25th of December, another 5% of shares out have traded at prices above terms. Nobody else has yet announced a 5+% position. 
  • Around year-end, specialty “business-politics” magazine Sentaku published an article talking about the oil refining business in Japan, JXTG/ENEOS’s leading place in it, the Idemitsu deal for Toa which was termed odd, Fuji Oil Co Ltd (5017 JP), Cosmo Energy Holdings (5021 JP), and some speculation about what might be behind the Idemitsu deal for Toa. The conclusions of the article in that regard are striking. 

In the meantime, after a single day limit up ending below terms which saw 20,400 shares trade, the next 1.46mm shares (11.8% of shares out) have all traded above terms.

If one adds the 20.8% held by Cornwall Capital (including the 2.6% purchased above terms since announcement) plus the 9.2% which have traded above terms not purchased by Cornwall, that gets one to 30.4%, which is reasonably close to a blocking stake. 

Discussion continues below.


China Machinery Engineering (1829 HK): Delisting Offer From Parent

By David Blennerhassett

After China Machinery Engineering (1829 HK)‘s (CMEC) shares were suspended ahead of trading on the 8 January  “pursuant to The Codes on Takeovers and Mergers which constitute inside information of the Company“, CMEC has now announced a pre-conditional Offer from its controlling shareholder, state-owned Chinese National Machinery Industry Corporation, also known as SINOMACH.

The Offer price is HK$3.70/share, a 45.10% premium to last close, and a 118.93% premium to the average closing price over the previous 30 trading days. The Offer price will not be increased. A concurrent Offer for CMEC’s domestic shares at RMB3.082692/share is also tabled.

CMEC has 4,125,700,000 shares out, comprising 908,270,000 H shares and 3,217,430,000 domestic shares.

SINOMACH holds 3.185bn domestic shares directly, and 32.174mn shares indirectly via China United. Together this totals 77.99% of the total voting interest in CNEC. 

SINOMACH does not hold any H  shares.

The pre-conditions, which cannot be waived, include approvals from NDRC, MoC, and SAFE.

As CMEC is PRC incorporated, this delisting proposal is by way of a Merger by Absorption, which involves a Scheme-like vote from disinterested shareholders. There is no tendering acceptance condition attached to this delisting.

This appears a relatively clean deal. The Long Stop date is the 13 January 2022, but this should be completed well before. Merger by Absorption transactions are typically wrapped up in around four months.

More below the fold.


Smartkarma Corporate Webinar | UG Healthcare: Demand Visibility & Pricing Trends

By Smartkarma Research

In this Smartkarma Corporate Webinar, we welcome Jun Yih Lee, Executive Director and Director of Finance at UG Healthcare (UGHC SP). He will share a company presentation along with some key aspects about the firm, and then engage in a fireside chat with Smartkarma Insight Provider, Nicolas Van Broekhoven, including a live Q&A session.

This Corporate Webinar will be hosted on Tuesday, 19 January 2021, 17:00 SGT/HKT.

Every week, Corporate Webinars by Smartkarma Corporate Solutions feature discussions with Corporate IROs and Executives, discussing their companies, the challenges they face, and the opportunities in their sectors and markets.


CEI Limited (CEI SP): Privatization Deal by AEM Holdings (AEM SP) Trading with a View to Complete

By Janaghan Jeyakumar, CFA

After market-close on Monday 11th January, Singapore-based electronic components manufacturer CEI Limited (CEI SP) received a Pre-conditional Voluntary Offer from a wholly-owned subsidiary of AEM Holdings (AEM SP) valuing the company at S$100mn. 

The Offer Price will be S$1.15/share and there will be a all-cash option (default choice) and two other cash and scrip combinations from which CEI shareholders will be allowed to choose. 

The making of the Offer will be subject to the satisfaction of the pre-condition which requires approval-in-principle of the SGX-ST for the listing and quotation of the New AEM Holdings Shares. 

More below the fold. 

For more information about M&A rules, regulations, and practices in Singapore, please refer to Quiddity Singapore M&A Guide 2019 


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