Daily BriefsMost Read

Most Read: NTT Docomo Inc, Evergrande Real Estate Group, Sri Trang Gloves, Unilever PLC, Kingboard Laminates Holdings and more

In today’s briefing:

  • NTT Docomo: The Three Arbs and the Great Re-Allocation Trade
  • Evergrande Equity Placement – Musical Shares
  • MSCI Nov20 Index Rebalance Preview – ASEAN EM Edition
  • Unilever Unification – Index Impact
  • StubWorld: Kingboards’ All-Time Low Implied Stub; PICC Trading Rich

NTT Docomo: The Three Arbs and the Great Re-Allocation Trade

By Travis Lundy

Mega buyouts for cash are rare. Mega buyouts for cash in Japan are even rarer. 

On 29 september, some 16 hours after the Nikkei published articles suggesting NTT (Nippon Telegraph & Telephone) (9432 JP) would buy out minorities in NTT Docomo Inc (9437 JP), the deal was announced. 

It is, as deals, go, a very big deal. 

It is, as deals go, generous in price, with a very low threshold for success, and an extraordinarily good quality buyer. It doesn’t get much easier than this. 

Since the announcement, the stock has traded $6.5bn in volume, with the last six days basically trading ¥3875-3877 with the last four days seeing most volume on the bid side at ¥3876.

This sounds like small potatoes but if one pays 5bp commission, buying today at ¥3876 nets you 5.16% annualised. Lever that up a bit and you get a decent return, and in you can get some size on.

This is about the easiest pure balance sheet arb trade one is going to find if you are an arbitrageur, but there are much more interesting trades afoot. 

I expect that out of the US$40bn of stock in the float, some $12-15bn is going to change hands then tender those shares, another $5-10bn will tender their shares, and then another $15+bn of shares will not tender and will instead be squeezed out. This number is surprisingly large and it means some very interesting flows will occur. 

Much more below the fold. 

Previous insights in the series are:

Evergrande Equity Placement – Musical Shares

By Travis Lundy

Media reports from Bloomberg and other sources suggest that Evergrande Real Estate Group (3333 HK) has launched an equity placement – a so-called top-up placement – for 490 million shares at a price of HK$16.50-17.20, or an 11.1-14.7% discount to the last traded price of $19.34/share. There is apparently an upsize option of an additional 120mm shares.

This offer appears scheduled to raise up to US$1.043-1.087bn in funds with US$255mm more from the upsize option if done at the lower end of the range. 

The news surrounding Evergrande recently has been less than salutary for investors. Despite highly bullish commentary around unofficial and unaudited figures in early July which appeared to have sent the shares soaring nearly 40% in 3 days to HK$28/share, several weeks later on 16 August the company released a profit warning and results came out the 31st of August. On the 13th Evergrande had sold a US$3bn stake in its property management vehicle, sold another block in Evergrande Auto (708 HK), was preparing a near-term listing of its property management entity and was looking to conduct a large offering for Evergrande Auto on the Star Board.  

Hints of further ugliness came out in the last days of August and early days of September when it was reported that a dozen real estate developers had been called into a meeting 20 August to let them know they had been chosen to participate (participation not optional) in a pilot programme which restricted lending growth to companies which did not cross Three Red Lines which were…

  1. a liability-to-asset ratio (excluding pre-sales) of 70%,
  2. a net debt-to-equity ratio of 100%, and
  3. cash holdings equal to 100% of short-term debt.

Evergrande handily beats all three and therefore would be restricted from new borrowings (including increase outstanding debt to pay the coupons on existing debt). This means that Evergrande needs to de-lever. It reportedly has started doing so since earlier this year but it is not clear what the necessary reference points are and where Evergrande stands in relation to those reference points in terms of showing that it is making progress (if it doesn’t meet the Three Red Lines thresholds, it needs to show it is making progress towards doing so in future). 

The last straw was the reported letter (which Evergrande denied existed) which had asked the Guangdong government for assistance in aligning its debt obligations and repayment schedule so that unwanted disruption and confusion in the marketplace did not occur (those tracking this story may have a slightly more blunt way of phrasing this). There was also the matter of the 3yr expiry of the Hengda equity putback coming in January 2021 if that business were not listed. This too caused consternation in the market. All of this was discussed in Evergrande May Be Facing a Funding Squeeze on 27 September.

Following the news coverage, shares dropped sharply, the bonds traded weaker, but a few days later Evergrande somehow managed to convince a large chunk of the equity financiers of Hengda to roll their ownership/funding for another year. That helped keep the wolves at bay for Jan 2021 but Evergrande still has a long way to go to be able to cross the Three Red Lines in the other direction. Asset sales and equitization are paramount, and along those lines, on 29 September Evergrande submitted its listing application to the Hong Kong Stock Exchange to list Evergrande Property Services Group. More money is on the way. 

Today’s NEW News

Evergrande has announced an equity offering to raise cash for “refinancing and working capital.” The thing is, US$1.1bn or even US$1.35bn won’t cut it. Evergrande has RMB 820+bn of short-term and long-term interest-bearing debt, extended accounts payable, and the Hengda contingent liability floating around. This is nothing. 

So why are they doing it?

That’s the thing. There IS a reason. It appears obvious to me. And it doesn’t make the stock more investible. 

More below the fold. 

MSCI Nov20 Index Rebalance Preview – ASEAN EM Edition

By Brian Freitas

MSCI is scheduled to announce the results of the November 2020 Semi Annual Index Review (SAIR) on 10 November. The changes will be effective after the close of trading on 30 November.

The November review could use price data from any of the last 10 business days of October to determine the list of inclusions to and exclusions from the index.

At the current time, we see 6 potential inclusions and 7 potential exclusions across Malaysia, Indonesia, Thailand and the Philippines. There will be a very large impact on most of the potential deletes with over 30 days of ADV to sell, while there are a few potential inclusions with over 10 days of ADV to buy.

A lot of the expected inclusions and exclusions have already moved higher/ lower but given the flows that are yet to come, there could be further moves in the stocks. We recommend hedging with stocks from the same sector or index futures.

Unilever Unification – Index Impact

By Brian Freitas

On 11 June, Unilever announced that it was looking to unify its group legal structure under a single parent company, Unilever PLC (ULVR LN), “creating a simpler company with greater strategic flexibility, that is better positioned for future success”.

The Dutch shareholders approved the unification on 21 September with 99.39% of the shares voted in favour, while the UK shareholders approved the proposal on 12 October with over 99% of the shares voted in favour.

There is still one potential hurdle to the unification in the Departure Tax (GroenLinks initiative bill) being proposed by the GreenLeft Party in the Netherlands that could cost Unilever up to €11bn if it left the Netherlands.

If the unification does go through, there will be an impact of passive fund activity on Unilever NV (UNA NA), but the bigger impact will be on Unilever PLC (ULVR LN). We estimate the net impact of the unification will see around US$3bn of passive money flow into the stock.

In this Insight, we take a look at some of the details around the unification before jumping into the impact on the stocks and the possible spread between the two lines prior to unification.

StubWorld: Kingboards’ All-Time Low Implied Stub; PICC Trading Rich

By David Blennerhassett

This week in StubWorld …

Kingboard Laminates Holdings (1888 HK)‘s announcement of a possible Chi-Next listing sends Kingboard Holdings (148 HK)‘s implied stub to an all-time low.

People’s Insurance Co (PICC) (1339 HK) trading rich – possibly as the A-share premium rallies. 

Preceding my comments on KBC and PICC are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % – of at least 20%.

Before it’s here, it’s on Smartkarma