Daily BriefsMost Read

Most Read: Imugene Ltd, Evergrande Real Estate Group, L&F Co Ltd, Sandfire Resources Limited and more

In today’s briefing:

  • ASX100/​200 Index Rebalance Preview: Potential December Changes With Large Impact
  • Evergrande (3333 HK) – Understanding Its Off-Balance Sheet Financing
  • Evergrande/ Xi/ Coal/ USA/ Hong Kong
  • MSCI Korea November SAIR Additions: L&F, F&F, Krafton, & Kakao Games
  • Sandfire Resources (SFR AU): Acquisition, ANREO and ASX200 Inclusion

ASX100/​200 Index Rebalance Preview: Potential December Changes With Large Impact

By Brian Freitas

S&P Dow Jones Indices will announce changes to the S&P/ASX 100 and S&P/ASX 200 (AS51 INDEX) as part of the December index review on 3 December and the changes will be effective after the close of trading on 17 December.

The review period for the rebalance ends on 19 November, so we are exactly two-thirds of the way through the review period.

As of the close on 20 September, we see Pilbara Minerals (PLS AU) as a potential inclusion to the S&P/ASX100 and Link Administration Holdings (LNK AU) as a potential deletion.

For the S&P/ASX 200 (AS51 INDEX), potential inclusions are Imugene Ltd (IMU AU), Paladin Energy (PDN AU), Event Hospitality and Entertainment (EVT AU), Liontown Resources (LTR AU) and Arena Reit (ARF AU), while potential deletions are Kogan.com (KGN AU), Redbubble Ltd (RBL AU), Monadelphous (MND AU), Imf Bentham Ltd (OBL AU) and Spark New Zealand (SPK AU).

With multiple M&A deal pending, including Afterpay Touch (APT AU), Sydney Airport (SYD AU), Ausnet Services (AST AU), Oil Search Ltd (OSH AU) and Spark Infrastructure (SKI AU), there could be more additions to the index if deals are completed or highly likely to be completed by end November.

Short interest on most potential inclusions is quite low, while the short interest on many potential exclusions is quite high.

Evergrande (3333 HK) – Understanding Its Off-Balance Sheet Financing

By Jason Yap, CFA

As at H1 2021, Evergrande Real Estate Group (3333 HK) had total assets of RMB2.37 trillion and total liabilities of nearly RMB2 trillion. Current liabilities (i.e. due and payable within the next 12 months) sum up to RMB1.57 billion (approximately 78% of total liabilities). 

For context, China’s real estate industry contributes approximately 29% of total GDP, which is in turn a shade under RMB100 trillion. As China’s 2nd largest property developer, Evergrande’s liabilities account for 7% and 2% of the real estate sector and GDP output respectively. 

Yet, the above reported financial figures still do not represent the economic reality and true financial obligations of the company. It is widely reported that real estate companies companies such as Evergrande usually have large off-balance sheet liabilities.

In this article, we delve into the following topics:

  • Overview of Off Balance Sheet (“OBS”) Financing and Why do Companies do it?
  • How did Evergrande debts grow so fast and so large?  What are its OBS liabilities?

We will conclude with a brief commentary on what investors can expect as the Evergrande situation continues to unfold. 

Evergrande/ Xi/ Coal/ USA/ Hong Kong

By Diana Choyleva

China News That Matters

  • Teetering and headline-making
  • Xi keeps eyes on party prize
  • Last call for coal? Xi won’t dig more overseas 
  • US steps to counter China
  • Hong Kong feels the squeeze
  • In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

MSCI Korea November SAIR Additions: L&F, F&F, Krafton, & Kakao Games

By Sanghyun Park

The review period for MSCI November SAIR (semi-annual index review) is the last ten business days of October. The announcement date is November 11, and December 1 is the effective date.

(Source: MSCI)

Below are the inclusion requirements to be applied in this SAIR.

Requirements (× Interim cutoff)Semi-annualNote
Interim cutoff (estimate)₩3.00T
Full market cap requirementInterim cutoff x 1.50
For both outside IMI & Small-Cap→Std
Full market cap hurdle₩4.50T
Float market cap requirementInterim cutoff x 0.50 x 1.50
For outside IMI
Float-adjusted market cap hurdle₩2.25T
Float market cap requirementInterim cutoff x 0.50
For Small-Cap→Std
Float-adjusted market cap hurdle₩1.50T
Source: MSCI & Clepsydra Capital

The following five stocks are highly likely to be included in the Standard Index in this IR. They are currently above the full market cap threshold, which is estimated at ₩4.50T.

NameFull market capNote
Krafton Inc (259960 KS)₩24.13T Recent IPO (outside IMI)
SD Biosensor (137310 KS) ₩5.10T Recent IPO (outside IMI)
L&F Co Ltd (066970 KS) ₩6.58T Small-Cap→Std
F&F (383220 KS) ₩5.60T Small-Cap→Std
Kakao Games Corp (293490 KS) ₩5.10T
Source: KRX

Below are the recent major Korean IPOs. SD Biosensor, Krafton, and Hyundai Heavy Industries exceed the full market cap threshold for this IR. But Hyundai Heavy Industries fails to meet the minimum trading period of 3 months based on the effective date (December 1).

Recent major IPOsTickerListingMarket cap
SD Biosensor Inc13731007. 16₩5.10T
HK Inno.N Corp19594008. 09₩1.64T
Krafton Inc25996008. 10₩24.13T
Lotte Rental Co Ltd08986008. 19₩1.57T
Ajusteel Co Ltd13999008. 20₩0.55T
Iljin HySolus Co Ltd27194009. 01₩2.71T
Hyundai Heavy Industries Co Ltd32918009. 17₩8.81T
Source: KRX & DART

Among the top-cap stocks in the Korea Small Cap Index, only L&F and F&F meet the full market cap threshold based on the current share prices.

(Source: MSCI)

Then, we have Kakao Games, which was again dropped in the final step in the previous IR. This is because MSCI kept lowering the float rate of Kakao Games to an illogical level in the last IR. Currently, Kakao Games’ full market cap meets the requirement. So, again, the key is whether MSCI raises the float rate to 45%, the actual level.

Sandfire Resources (SFR AU): Acquisition, ANREO and ASX200 Inclusion

By Brian Freitas

On 23 September pre-market open, Sandfire Resources Limited (SFR AU) requested for a trading halt. A short time later, the company announced the acquisition of the MATSA mining complex from Mubadala and Trafigura for US$1.865bn (A$2.572bn).

The acquisition is expected to be completed in the March 2022 quarter and is subject to Spanish Foreign Direct Investment Approval and anti-trust merger control approval.

The acquisition will be funded by an A$120m strategic placement to AustralianSuper, a A$165m institutional placement, a A$963m fully underwritten 1 for 1 accelerated non-renounceable entitlement offer (ANREO), debt and cash on hand.

Just over 231m shares will be issued at A$5.40/share, a 13.2% discount to the last close of A$6.22/share, and a 6.2% discount to TERP.

The increase in market cap as a result of the placement and entitlement offer will result in Sandfire Resources Limited (SFR AU) becoming a high probability inclusion to the S&P/ASX 200 (AS51 INDEX) at the December rebalance.

With a number of M&A deals targeting S&P/ASX 200 (AS51 INDEX) constituents, there will be more changes to the index over the next couple of regular rebalances (and in the interim as well).

Before it’s here, it’s on Smartkarma