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Most Read: Mitsui O.S.K. Lines, Sembcorp Marine, Evergrande Real Estate Group, Sohu.com Inc, Celltrion Inc and more

In today’s briefing:

  • MSCI Japan Nov SAIR Preview: Pre-Positioning Begins as Potential Adds Rally & Deletes Drop
  • Sembcorp Marine MGO – The Implied Option Tells You About the Market, And It’s The Wrong Price.
  • Evergrande (3333 HK) – Understanding Its Off-Balance Sheet Financing
  • Sohu.com (SOHU US): Cashed Up As Tencent/Sogou Merger Completes
  • Celltrion 3-Way Merger Timing & Trading Approach Aiming for Immediate Short Covering

MSCI Japan Nov SAIR Preview: Pre-Positioning Begins as Potential Adds Rally & Deletes Drop

By Brian Freitas

MSCI is scheduled to announce the results of the November 2021 Semi Annual Index Review (SAIR) on 12 November (Asia time) with the changes implemented after the close of trading on 30 November.

The review period for price cut-off will run from 18-29 October.

Based on the closing prices from 22 September, we see 6 potential inclusions and 8 exclusions for the MSCI Japan Index. Potential inclusions are Mitsui Osk Lines (9104 JP), Taiyo Yuden (6976 JP), Baycurrent Consulting (6532 JP), Benefit One Inc (2412 JP), Rakus Co Ltd (3923 JP) and Open House (3288 JP), while the potential deletions are Yamada Denki (9831 JP), Thk Co Ltd (6481 JP), Hisamitsu Pharmaceutical Co (4530 JP), Pigeon Corp (7956 JP), Tohoku Electric Power Co (9506 JP), NSK Ltd (6471 JP), Nh Foods Ltd (2282 JP) and Acom Co Ltd (8572 JP).

The largest impact of the MSCI buying will be on Taiyo Yuden (6976 JP) with passive funds needing to buy over 9% of the real float of the stock.

Among the potential inclusions, only Taiyo Yuden (6976 JP) has more than 4 days of ADV to cover, while Pigeon Corp (7956 JP) and Yamada Denki (9831 JP) have over 6 days of shorts to cover among the potential deletions.

The short interest data also shows a large fund putting on shorts on the potential deletions over the last couple of weeks of trading.


Sembcorp Marine MGO – The Implied Option Tells You About the Market, And It’s The Wrong Price.

By Travis Lundy

As expected, on 22 September 2021, Temasek announced its Mandatory General Offer for shares of Sembcorp Marine (SMM SP)

As suggested in Sembcorp Marine Rights Done – The MGO Option It Is, Temasek ended up at 46.6% which triggers an offer to remain in compliance with Rule 14.1 of the Takeover Code.  

For each Offer Share: S$0.08 in cash (the “Offer Price”).  The Offer Price is final and the Offeror will not revise the Offer Price or any other terms of the MGO.

There are conditions of which one must take note.

Pursuant to Rule 14.2 of the Code, if the Offeror Concert Party Group does not hold more than 50% of the issued Shares when the MGO is made, the MGO is required to be made conditional upon the Offeror Concert Party Group receiving such number of acceptances which would result in the Offeror Concert Party Group holding more than 50% of the voting rights attributable to the share capital of the Company.

IF the Offer garners shares which would take it above 50%, then it would become Unconditional. Until then, the offer is not unconditional, or complete, if it does not get to 50%. 

Importantly, the Offer will last 28 days and “if the MGO becomes unconditional as to acceptances before the Closing Date or even if the MGO becomes unconditional as to acceptances on the Closing Date itself, there will not be any extension of the Closing Date and Shareholders who do not accept the MGO by the Closing Date will not be able to do so after the Closing Date.

No extension. At all. 

The proposal I made on the 19th when the shares were S$0.084 the previous close was that the stock would probably fall once shares were delivered, but that once fallen, the shares would have much better upside vs downside skew if they reached S$0.079-0.081. The shares actually popped on delivery, but a day later we still closed S$0.081. 

This situation leaves us with an interesting profile. 

More details below. 


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. 


Sohu.com (SOHU US): Cashed Up As Tencent/Sogou Merger Completes

By David Blennerhassett

Around 9.5 months after Tencent (700 HK) and Chinese search-engine Sogou Inc (SOGO US) entered into a definitive agreement for a Going-Private Transaction, the Offer was granted unconditional approval by the State Administration for Market Regulation (SAMR) on the 12 July. 

Apparently, that wasn’t the final approval as the regulators continued to overhaul and tweak China’s tech sector. In its 2Q21 results (announced on the 9 August) Sogou said it expected the merger with Tencent to complete in the 2H21.

Yesterday, Sogou announced the completion of the merger and shares have been suspended. Payment will be made “as soon as practical”. 

Hong Kong’s Standard reported yesterday that Tencent’s news and content unit Tencent Kandian will absorb most of Sogou’s business and employees.  After merging with Sogou, the search engine segment will be the core business of Tencent Kandian. Tencent was permitted to take up the 60.9% in Sogou it did not already own provided it established a “special mechanism” to ensure data security.

So that’s done. This is a short-form merger – there was no vote. Dissension rights are now afforded for short-form mergers and I would expect some investors to take up those rights.  

Separately, Sohu.com Inc (SOHU US) pockets ~US$1.2bn from the merger via its 33.8% equity stake in Sogou, versus its current market cap of US$857mn. 

More below the fold.


Celltrion 3-Way Merger Timing & Trading Approach Aiming for Immediate Short Covering

By Sanghyun Park

The 3-way merger between Celltrion Holdings has been completed. Now, the market’s attention is shifting to the merger of Celltrion, Celltrion Healthcare, and Celltrion Pharm.

Perhaps the most crucial investment point in this second 3-way merger is short covering.

What short covering?

The prominent institutional investors that lend stocks for short selling in Korea are local ETF/index fund operators and pension funds. And among them, pension funds often recall shares to exercise shareholder rights in the event of a merger.

It then leads to an increase in demand for short coverings. We have often witnessed stock price overshooting immediately after the merger announcement. The most salient example was the Samsung Engineering & Samsung Heavy Industries merger back in 2016. Samsung Engineering soared 12% right after the merger announcement, presumably due to the recall of pension funds.

However, it is essential to note that the recall is not compulsory even for stocks of an extinct entity in a merger between listed companies. Stocks borrowed for short-selling are automatically transferred to newly issued stocks with only the title of an underlying share changed.

  • Nevertheless, the possibility of a short-term stock overshooting due to a recall cannot be ruled out in the event of a merger between companies with high stakes held by pension funds and high short interest.
  • Although the short interest of the three Celltrion companies has decreased a lot compared to the past, they are still maintaining a considerable level. In the case of Celltrion, short interest is 2.89% of the SO, nearly 4M shares which are 6~7x days to cover.
  • In addition, the proportion of investment in Celltrion and Celltrion Healthcare by local pension funds is relatively large.

Of course, we also have to note that the National Pension Service, the largest pension fund, has not yet resumed lending of domestic stocks, so the short-covering impact of the recall is bound to be less than in the past.


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