Daily BriefsMost Read

Most Read: NTT (Nippon Telegraph & Telephone), Ant Group, Yomiuri Land, New Oriental Education, Beijing Kuaishou Technology Co Ltd and more

In today’s briefing:

  • NTT – Go Big Or Go Home
  • Last Week in Event SPACE: Prosus/Naspers, GMO Internet, CK Hutchison, AviChina, Ant Group, Tonly
  • Yomiuri Land (9671) Takeover – Probably The Wrong Price But Whaddya Gonna Do?
  • New Oriental Hong Kong Secondary Trading – Largest ADR/HK Listing Premium Yet
  • Kuaishou IPO Initiation: Dancing to Its Own Tune

NTT – Go Big Or Go Home

By Travis Lundy

On 29 September 2020, NTT (Nippon Telegraph & Telephone) (9432 JP) announced it would buy out minorities of NTT Docomo Inc (9437 JP) in a $40 billion buyout – the biggest Tender Offer Japan had ever seen. 

As it was financed with debt, that constituted the single biggest “stock buyback” that NTT could possibly have executed. Normally, NTT buys back ¥200-350bn of stock per year. With this buyout bought ¥200+bn of net income per year. 

This came on top of previous statements by the CEO of NTT that the company would seek to sell and securitize trillions of yen of assets and return capital to shareholders. 

Shockingly NTT shares fell on the news of the buyout. I could not fathom why. They may have overpaid what they needed to pay to get it done, but it was going to get done. They were going to pay ¥4trln of debt, and zero equity, to get ¥210-250bn in net income and ¥400bn+ of operating cashflow, presumably for a very long time, in exchange for a relatively low interest rate payment.

Several people contacted me when this was announced and asked whether I was worried about NTT being too indebted. 

My blunt answer to them was that I was not at all worried. This was, in effect, a MAMMOTH BUYBACK and NTT had real estate assets, tower assets, and any number of other hard assets which could be sold or securitized to pay down debt and there was no chance that NTT was going to issue equity. The simple reason why there would be no equity top up was and is that the NTT Law requires that the government hold one-third* of the shares outstanding of NTT and there is no chance that the government is going to be convinced to buy more shares of NTT to maintain their stake. This was pure leverage and pure net income to NTT shareholders. 

* It’s a little complicated because there is some weirdness where IPO shares are excluded from the calculation, but it comes VERY close to one-third in practical terms.

The NEW News

On Friday 6 November NTT released Q2 earnings. They will not overwhelm anyone and there wasn’t much talk about what the plans are for synergies at NTT Docomo, but I think that has to be expected because the Tender Offer, while a foregone conclusion in terms of rights, is not even over yet.

However I think people STILL do not look at NTT and its results the right way. What we knew Friday? NTT Docomo Inc (9437 JP) OP in Q2 was +8.3%yoy. NTT Data Corp (9613 JP) was up 9.5%yoy. What we did not know was that NTT ex-listed subs OP was up 4.7%yoy. That was better than expected. 

NTT ex-listed subs OP has continued to grow over the years. The rolling 4Q total is the blue bars below (the red bars are the implied quarterly OP based on consensus OP annual estimates (out to March 2023) for NTT, NTT Docomo and NTT Data backing out NTT ex-listed subs).

What was clear from the discussion that NTT led on the day of the announcement of the Tender Offer to buy in minorities of NTT Docomo was that they saw synergies, and they saw lower costs compared to what the Street was expecting. For whatever reason, as will be discussed below, Street consensus for forward years of NTT does not include all of NTT Docomo. And it seems to include no synergies.

The OTHER NEW News – A Buyback

Up to 120mm shares spending up to ¥250bn from 11 March to 31 March 2021. 

THAT was unexpected. 

This deserves a discussion.


Last Week in Event SPACE: Prosus/Naspers, GMO Internet, CK Hutchison, AviChina, Ant Group, Tonly

By David Blennerhassett

Last Week in Event SPACE …

  • Plus, other events, CCASS movements and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events – or SPACE – in the past week)

STUBS

Naspers (NPN SJ) / Prosus (PRX NA) 

On Friday 30 October in the morning, Prosus announced that it would conduct a US$5bn buyback of Prosus shares and Naspers (NPN SJ) shares (i.e. the subsidiary would buy shares in the parent to avoid passing down income from sub to parent which could be taxed). In total, Prosus will acquire up to US$5bn in shares in Naspers and Prosus on the open market, starting after interim earnings are released on 23 November 2020. Purchases will be made on a pro-rata (72.5%/27.5%) basis in line with the economic stakes of both companies in the Prosus/Naspers asset base and Prosus would not vote shares purchased and they would come out of the per-share calculations for EPS and BVPS. It isn’t a lot in the grand scheme of things, but $5bn is $5bn, and the discount is quite wide.

  • We have a catalyst. $5bn worth of buyback which is worth about 10-16% of ADV from late November to end-March.  We have a very large look-through discount on Naspers despite a Day1 pop.  Even if there is no “Real” spread tightening, the buyback itself creates a mechanical value accrual which means that at a flat 56% look-through discount, the Naspers/Tencent ratio would still likely gain. 
  • We have the possibility of additional monetisation on Tencent around the time the $5bn buyback is nearing its close. That would create expectations of further monetisation and value-realisation through further buybacks.  As we approach March, the likelihood that investors realise there could be another large offering increases, which could put slight pressure on Tencent shares. 
  • Travis believes being long Naspers vs Tencent, and if you would like, vs Trip.com and Mail.ru, is a good trade at the current look-through value. He expects that one could see 10% Naspers outperformance vs Tencent over the next 3-4 months, which would take the discount to NAV to 50%. If Naspers+Prosus decide to sell some more Tencent in late March 2021 while the Naspers discount is still 50%, I would expect that Naspers+Prosus might decide to buy more Naspers shares back rather than pay too much for something. 

(link to Travis’ insight: Naspers & Prosus – A $5bn Catalyst Arrives

GMO Internet (9449 JP) / GMO Payment Gateway (3769 JP) 

The current discount to NAV of ~49% compares to the one-year average of 34%. The long-term NAV is at levels only briefly exceeded in the past eight years. The long-term implied stub – netting off GMO Payment  – is at an all-time low.

  • Under the buyback policy, the company endeavours to return 33% of profits to shareholders via dividends, and will return the difference of 50% – 17% of profits –  via buyback. That’s around 0.7% of shares out using the current profit guidance. Not a huge deal. But not nothing.
  • With a ~49 discount to NAV against a decade-plus average of 39%, and with the implied stub at an all-time low of (¥1,020/share), this is a level to set up the stub. The holding in GMOP accounts for 137% of GMOi’s market cap. If you want to own the stub, I’d back Travis’ earlier suggestion to buy $100 and short $75 of the basket and run the $25 long. 

(link to my insight: StubWorld: GMO Internet At Set-Up Levels

EVENTS

CK Hutchison Holdings (1 HK) (Mkt Cap: $26bn; Liquidity: $53mn)

CK Hutch announced it is at an advanced stage of negotiations with Cellnex Telecom Sau (CLNX SM) for the disposals of its telecommunications infrastructure assets in Europe. Subject to the finalisation of definitive documentation, total proceeds on completion of the transactions are ~€10.0bn, including minority partners’ share. The headline transaction price mirrors that rumoured a week ago in the media, and accounts for ~24% of CKH’s NAV. The announcement follows the news last week that CKH will reduce its exposure to Husky Energy (HSE CN) in a deal with Cenovus Energy Inc (CVE CN).

  • CKH is trading cheap at a 46% discount to NAV after share price reaction to the mast sale. The implied stub, net of all listed holdings, remains near the -2STD level, based on share prices since the reorganisation of Cheung Kong in June 2015. The P/B is around the all-time low since the reorganisation.
  • Buy CKH. Mean reversion to the one-year average is ~6% upside from here. It is ~25% upside to the NAV average of ~33% since the reorganisation. The upside is 13% if taking the implied stub to the long-term average. Go Long CKH $65 and short $100 of the conglomerate peers, based on the P/B discount to peers. 

(link to my insight: CK Hutch: Here’s Your Re-Rating Catalyst)

NTT (Nippon Telegraph & Telephone) (9432 JP) (Mkt Cap: $85bn, Liquidity: $130mn)

NTT announced Q2 earnings showing 4.7%yoy growth in Q2 NTT ex-listed subs OP. It also announced a buyback.

NTT’s buyout of NTT Docomo minorities which is currently underway is effectively a giant buyback. It is a ¥4.3trln purchase of ¥200bn of earnings and additional potential synergies, and it is entirely debt-funded so it is a 5% after-tax infrastructure purchase.

Suga Shock had everyone thinking the Docomo purchase was to gain synergies and pay hommage to lower rates for consumers. Last week KDDI announced a large buyback and this week NTT did.

Now NTT is the cheapest Japanese telecom on a PER basis at 7.4x Mar 2022 pro forma against KDDI at 10x consensus 2022e EPS and Softbank Corp at 10.9x 2022e EPS.

NTT will starting on the 11th of November spend the next 4.5 months buying its own stock in the market. It will buy 8-9% of Real World Float during that period – a little less if the stock goes up a fair bit and 12-18% of volume and 17-25% of eligible volume.

(link to Travis’ insight: NTT – Go Big or Go Home)

AviChina Industry & Technology H (2357 HK) (Mkt Cap: $3.4bn; Liquidity: $13mn)

China concluded a four-day meeting, known as the fifth plenum, on the 29th October, in which the 14th five-year plan and the development goals for 2035 were discussed. One of the key goals from the communique of the plenum was to turn the People‘s Liberation Army into a modern military force (one on par with the US) by 2027 – in time to mark the centennial founding of the PLA. 

  • Concurrent with China’s “dual circularity” development – discussed in China’s Dual Circulation: Hedged Integration – wherein China will primarily depend on “domestic circulation” buttressed by external resources or “international circulation” – timing appears favourable for Chinese defense stocks.
  • One would think the “modern army” maxim would catalyse companies such as AviChina. That is positive. But why subject capex to outside scrutiny? There are 2.7bn H-shares in public hands. Assuming a 50% premium to last close, this company could be taken private for ~US$2.2bn.
  • I’d buy AviChina here, outright. You have ~12% upside to the 12-month NAV discount average, up ~15 % to be in line with the forward EV/EBITDA average over the past two years, and 24% upside to the consensus target price (a relatively static number over the past 12 months). And there exists the possibility AviChina is in play as a delisting candidate.

(link to my insight: AviChina (2357 HK): Buy The Modern Army Narrative)

In Conclusions of the Corporate WVR Consultation: Small Changes for Now, Brian Freitas discusses the Stock Exchange of Hong Kong Limited published conclusions to its consultation on the Corporate WVR beneficiaries. Respondents submissions can be found here. In the interim, the SEHK will permit Greater China issuers controlled by corporate WVR beneficiaries (as of 30 October 2020) having a primary listing on the NYSE, NASDAQ and the Premium Listing segment of the London Stock Exchange (as of 30 October 2020) to pursue a secondary listing in Hong Kong. The secondary listing applicant would need to demonstrate that it is controlled by a single corporate WVR beneficiary, or a group of corporate beneficiaries acting in concert, controlling at least 30% of the total shareholder votes. 

M&A – ASIA

Tonly Electronics Holdings (1249 HK) (Mkt Cap: $0.4bn; Liquidity: $1mn)

After shares were suspended ahead of trading on the 30 October “in relation to the Code on Takeovers and Mergers”, that evening TEH announced a proposed privatisation from T.C.L. Industries Holdings (H.K.) Limited. (TCLH), a wholly-owned subsidiary of TCL Industries (TCLI), by way of a Scheme. The Scheme consideration is HK$12/share, a 19% premium to last close and 28% above the 30-day average close. The price will NOT be increased. No dividends have been declared, nor are any expected to be declared. Conditions to the Scheme are standard – at a Court Meeting, at least 75% of Independent Shares vote FOR the Scheme & not more than 10% of ALL Independent Shares against, or 2.531% of shares out. The headcount applies.

  • The TCL group should have made a bigger show of its during the restructuring agreement,  last year, as they are now paying 2x+ the MGO price of HK$5.89/share under this Scheme. 
  • There was clear and evident leakage on the 13 August when shares spiked 55%. I see no specific information to account for the large move, and the closing price of $12/share is too coincidental. The only SEHK release was the interim report the following day. 
  • I think there is enough here to get the offer done. I would argue the Real Offer Premium to the undisturbed price is ~50% given the August price move. The blocking stake is low – just 2.531%  of shares out. No single shareholder has declared a holding >5%. Schroders sold below 5% in March 2018.

(link to my insight: Tonly Electronics (1249 HK): Fair Scheme Offer)

Keihanshin Building (8818 JP) (Mkt Cap: $1.1bn; Liquidity: $2mn)

Strategic Capital and UGS, collectively holding 9.7%,  have launched a Tender Offer to buy just under 20% of Keihanshin at ¥1900/share, a premium of just over 1%. The Offer seems particularly designed to fail UNLESS cross-holders get involved. Travis Lundy thinks if no cross-holders are willing to sell, it is not possible to get this done unless the minimum threshold is substantially reduced. There simply isn’t that much float out there. Because it seems impossible to get to the minimum, Travis suggests that the “put option” from the tender offer is not there. Yet.  Given the Day 1 move on the stock, even if there were a “put option” it would be far away. 

  • There is a possibility that this is designed to be a greenmail effort. Keihanshin has enough cash and enough cross-holdings that it could easily buy out Strategic Capital and partners.  This may ignite media discussion about why it would be beneficial to shareholders to turn it into a REIT, and doing so might provide some upside, but it would also be a taxable event and may not be as accretive to shareholders as one would think.
  • Travis would tend to want to be long here, because it is hostile and one could imagine a white knight coming to “solve” the problem. We don’t know who it would be, and we do not have a great handle on how much they would pay. Travis thinks a white knight could pay ¥2,500+/share. But at least you know where Strategic is drawing a line in the sand – ¥1,900/share.

Yomiuri Land (9671 JP) (Mkt Cap: $0.5bn; Liquidity: <$1mn)

Yomiuri Shinbun Group on Friday 6 November announced it would buy out minorities in theme park and public leisure/sports facilities operator and affiliate Yomiuri Land. Strictly speaking, Yomiuri Land is not a subsidiary because directly and indirectly it only owns 34%, but cross-holders and customers own another 26%.

This is a pretty simple buyout, even if it is likely being done at a reasonably significant discount to fair value. The deal is for a land asset which hasn’t been marked up, and is at 5.4x Adjusted 2023e EBITDA (adjusted for the equities portfolio). If the land and buildings assets were marked at fair value, the price might be higher. But it is unlikely that investors will be able to assume someone could come over the top like in thecase of Shimachu Co Ltd (8184 JP) because there is a poison pill in place at 15.0%. But someone may try.

This should be an easy-to-complete Tender Offer.

(link to insight: Yomiuri Land (9671) Takeover – Probably The Wrong Price But Whaddya Gonna Do?)

amaysim Australia (AYS AU) (Mkt Cap: $0.2bn; Liquidity: $1mn)

After the divestment of its energy ops was completed on the 30 September – with final net proceeds of A$51.9mn – AYS has now entered into an SSA to sell its mobile ops to Optus Mobile for A$250mn, in cash. As the sale comprises AYS’ core operating business, it is subject to shareholder approval. This is a simple majority vote. No further due diligence is required on Optus’ behalf.  Should the sale complete, AYS expects to distribute between A$207.2mn – A$225.7mn (A$0.67-A$0.73/share) via three tranches. The sale of the mobile ops has the unanimous backing of AYS’ board, including CEO Peter O’Connell, the founder of AYS.

  • Subject to the mobile sale, a major distribution of A$0.50/share (including a $0.26/share fully franked dividend and a return of capital of A$0.24/share) will be paid in March 2021; a minor distribution of A$0.10/share will be paid in or around April 2021; with the balance of A$0.07 -A$0.13/share in or around October 2021.
  • The “distribution” represents a distribution of profits, and is expected to be made to shareholders in the form of fully franked dividends. The remainder of the Distribution will be made by an “equal capital reduction”, which requires shareholder approval. AYS has applied to the ATO for a ruling on the tax treatment of the equal capital reduction for Aussie resident shareholders. This will be known after the EGM.
  • My back & forth with AYS suggests the initial purchase price is less compelling when the costs associated with a restructure and winding down are taken into account, and that this structure was not AYS’ preference. Perhaps the announcement flushes out an interloper. As it stands, I don’t find this a compelling arb situation.

(link to my insight: Amaysim To Be Wound-Up After Mobile Sale)

Japan Asia (3751 JP) (Mkt Cap: $0.1bn; Liquidity: $1mn)

Japan Asia announced that the management will be launching a Tender Offer for all the shares of the company with the backing of The Carlyle Group. The Offer Price will be ¥600/share in cash translating to a market cap of ¥16.5bn (~US$158mn) and an enterprise value of ¥86.2bn (~US$830mn).  The Tender Offer will commence on 6th November 2020 and is expected to close on 21st December 2020. The Transaction is subject to a minimum acceptance condition which requires the Acquirer to reach two-thirds control. 

  • The Offer Price is a ~4.5-year high for the stock and it translates to a strong premium of 70.5% to the pre-announcement closing price. It is also 82.1%, 88.8%, 94.4%, and 92.6% higher than the 1-month, 3-month, 6-month, and 1-year VWAPs respectively.  The Offer Price is around 3% above the mid-point of the DCF range suggested by the financial advisor.  The EV/EBITDA(LTM) multiple of 12.1x implied by the Offer Price is ~8% above the 5-year average multiple of 11.2x for the company.
  • Satisfying the minimum acceptance condition could still be tricky. The current largest owner (i.e. the Acquirer) controls 13.8% and has agreed to tender. This requires lots of active foreign holders to tender, and lots of individuals to tender.  Janaghan Jeyakumar would not rule out a bump.
  • Janaghan expects the Deal to complete (as-is or with a bump). However, it is worth noting that there is non-negligible Deal Break risk and the drop to undisturbed price is quite significant. In comparison to recent examples of simple rate-of-return trades in the Japanese small-cap universe, the risk-to-return is less attractive in this case. 

(link to Janaghan’s insight: Japan Asia (3751 JP) Management Buyout: Should There Be a BUMP?)

In Dai-Ichi Sankyo (4568) Buyback Dynamics, Travis discusses the buyback programme is to buy up to 60 million shares of Daiichi Sankyo (4568 JP) for up to ¥100bn from the start of November 2020 through 23 March 2021. That is 3.1% of shares outstanding.  This is non-negligible given Real World Float is roughly 52% of shares out. Dai-Ichi Sankyo may be worth buying or adding on relative dips vs comps but the impact should be relatively small at less than 2% of shares outstanding. If you have a large amount of stock to sell, there will be excess buy impact between now and end-March 2021 compared to other times.

In Sony: Crunchyroll Acquisition to Strengthen Anime Content and Take on Rivals Netflix and Hulu, Shifara Samsudeen discusses Sony Corp (6758 JP) entering into final negotiations to acquire the US-based anime-streaming service company Crunchyroll. The deal is expected to be worth around ¥100bn (US$957m) which will give Sony access to Crunchyroll’s 70m users across the world.

In New KDDI (9433 JP) Buyback Dynamics, Travis discusses the announced ¥200bn buyback for KDDI Corp (9433 JP), from 2 November 2020 to 31 May 2021. This is the first telco buyback in Japan announced since the administration changed. This continues KDDI’s trend of buying back large amounts of stock for a fifth year in a row.  ¥200bn is 11.2 days of both 1-year and 3-year ADV suggesting only 71.6mm shares to be bought back. That would mean the buyback is about 7.8% of “expected ADV” during the entire period. That is non-negligible impact.  At the current price, the 71.6mm shares to buy would be about 7.9% of the Real World Float. This is a fair bit higher than previous buybacks. 

On 30th October 2020, Shinsei Bank announced a Mandatory Share Sale Request to squeeze out minority shareholders from their 93%+-owned subsidiary, Tokyo-based non-bank consumer finance company Aplus Financial (8589 JP)in an ¥8.8bn (~US$ 84mn) all-cash squeezeout.  Shinsei Bank currently owns 93.3% of shares outstanding. There is zero risk of deal break. It is done. You just wait for your money. (link to Janaghan’s insight: Aplus Financial (8589 JP) Minority Squeeze-Out: Done Deal. Short-Term Arb)

All conditions to the Bitauto Holdings (BITA US) merger were fulfilled on the 4 November. The MGO for Yixin Group Ltd (2858 HK) is now triggered. The Composite Document is expected to be despatched on or before the 11 November. The Offeror consortium, currently holding 77.11% of shares out in Yixin, may be in contravention of its public float, should shares be tendered into the MGO. With Tencent at the helm, investors are playing the back-end. And Yixin has underperformed all peers over the past year. You effectively have a hard floor (or put) on the stock through to early December. I suggest picking up shares just through terms. However, this is not a terribly liquid arb situation. (link to my insight: Yixin (2858 HK)’s Downstream Unconditional MGO)

Sanrio Co Ltd (8136 JP) announced that its lead shareholder Sega Sammy Holdings (6460 JP) wanted to sell some of its position, dropping it from 10+% to about 7.1% by selling 3,510,000 shares. The company would conduct a ToSTNeT-3 buyback before the open on 5 November to buy up to 3,391,700 shares, spending up to JPY 6 billion, at today’s closing price of JPY 1,769/share. If one wants to long sell or short sell into the ToSTNeT-3 buyback, one should put in an agency order not a swap order. In Biggish Sanrio (8136) ToSTNeT-3 Buyback, Travis delved into details about the history of the stock price and the fundamentals along with consensus estimates by year broken into quarters based on historical revenue and OP seasonality 

M&A – EUROPE/UK

On 2 November, Alfa Laval AB (ALFA SS) published the preliminary result of the offer. It had received acceptances representing approximately 33% of the shares in Neles. Alfa Laval said that it “will confirm and announce the final result of the offer on or about 4 November”. If Alfa Laval does not achieve >50% of Neles’ shares, this could leave Valmet in a better position to pursue its Neles merger ambitions, on its own terms. (link to Jesus Rodriguez Aguilar‘s insight: Neles – Alfa Laval: Preliminary Results, Valmet)
In G4S Playing Hard-To-Get, Jesus discusses Allied Universal’s “highly conditional indicative offer” of “at least 210 pence” per share, subject to due diligence, with G4S PLC (GFS LN)‘s Board. This could be the opening salvo in a bidding war for G4S.

M&A – US

Following the resolution of the LVMH/TIF merger spat, the focus now shifts on the looming court case starting November 16 in Michigan set to hear the arguments for and against Simon Property Group (SPG US)‘s attempt to walk away from its Merger Agreement with Taubman Centers (TCO US). (link to Robert Sassoon‘s insight: MergerTalk: Simon Property Group/Taubman Centers Update – The Preferred Way To Play This Event)
China Oceanwide Holdings (715 HK) / Genworth Financial Inc Cl A (GNW US) transaction, which remains on track to close, whether it is by the end of this month or soon after. The near 30% merger spread offers tasty triple-digit IRRs. At the same time, our conservative updated value SOTP assessment of Genworth as a standalone company indicates that GNW is worth more than it is currently being valued by the market. This makes for a very good bet to be made.

TOPIX INCLUSIONS!

teno. Holdings Co Ltd (7037 JT)  (Mkt Cap: $0.1bn; Liquidity: $1mn)

Mothers-listed Teno announced on 30th October 2020 they had received approval to move to the First Section of the Tokyo Stock Exchange as of 12th November 2020. In conjunction, they also announced a tachiaigai bunbai equity offering in order to satisfy some of the Section Transfer Requirements.  TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 29th December 2020. 

  • The Index Inclusion Parameters are unattractive. Janaghan estimates the Inclusion Size to be ¥0.47-0.56bn and the Impact to be 3-4 days of volume going by 3-month ADV.  Furthermore, the 213,400 shares to be offered in the tachiaigai bunbai sale is 57%-68% of the expected Inclusion quantity. This increased supply of float shares might offset most of the demand expected from Index buyers during the Inclusion Event. 
  • The company’s business is growing but the recent increase in share price has made the stock overvalued against peers.  The long-term revenue target set by the company in its medium-term management plan translates to a 10-year CAGR of ~17% from 2020 to 2030. However, in terms of PER (LTM), the company is overvalued vs peers especially due to the increase in share price over the last few months.
  • Janaghan recommends avoiding this event. He also recommends not shorting the stock until the Inclusion Event is complete and one may never want to short this. The stock is too small to garner analyst attention, and makes too little money to be able to maintain its TSE1 listing for very long, assuming that the new TSE1 Listing Rules which went into effect on 1 November are used as demotion criteria, as promised. 
(link to Janaghan’s insight: TOPIX Inclusion (7037 JP): Teno Holdings

INDEX REBALS

Ant Group (6688 HK)

Some index providers (FTSE) count the Hs and the As together then adjust the inclusion factor. Some treat the Hs and the As as two separate stocks and they enter family (MSCI) indices separately. There are some indices which are in fixed-count indices where there is exposure above and beyond traditional float market cap indices. Then in Ant Group’s case we have had changes of plan on timing. 

The following commentary is moot – given the suspension of the listing – but may be referenced again in the future. 

  • Investors obviously should have bought as much as possible in the IPO.  Barring that, Travis thought it is interesting to look at both the fact that “real money” investors may not want to sell the shares in the after-market because they will be seen to be sellers. And once they sell, it is not clear when they get back in.
  • Travis expects there will be a race to buy secondary shares. Usually, the person in a race who gets an early start out of the blocks has an advantage vs others. He would not be surprised if that was the case here. 
  • If you buy FTSE A50 futures on the 11th of November at the close, you will have a portfolio weight of about 2.5% for Ant Group multiplied by (1+ the gain from IPO til then). If it goes up 50%, the index weight will likely be around 3.7%.  You can either buy stock, or you can buy A50 futures and hedge out some of the other stocks to get exposure. 

MSCI Index Rebalance Preview Nov20. MSCI will announce the changes to the index on 10 November US time (early morning on 11 November Asia time) and the changes will be implemented at the close of trading on 30 November (for India, the changes will be implemented at the close on 27 November). For the markets covered, we expect 25 inclusions and 46 exclusions with most of the expected changes having a high level of conviction. (link to Brian’s insight: MSCI Index Rebalance Preview Nov20: Asia Roundup)

HSCEI Dec20 Index Rebalance Preview. The suspension of the Ant Group (6688 HK) means that we are back our original expectation of 9 inclusions and 9 exclusions at the upcoming review. Brian sees a high probability of China Overseas Land & Investment Ltd (688 HK)JD.com (HK) (9618 HK)Alibaba Health Information Technology (241 HK)Haidilao (6862 HK)China Feihe (6186 HK)Semiconductor Manufacturing (981 HK) and Evergrande Real Estate Group (3333 HK) being included in the Hang Seng China Enterprises Index (HSCEI INDEX), and of China Taiping Insurance Hldgs (966 HK)China Telecom Corp Ltd (H) (728 HK)China Minsheng Banking H (1988 HK)China Vanke Co Ltd (H) (2202 HK)Fosun International (656 HK)China Citic Bank Corp Ltd H (998 HK) and China Shenhua Energy Co H (1088 HK) being deleted from the index. NetEase (9999 HK) and Hansoh Pharmaceutical (3692 HK) are very close to the buffer zone and could be included in the index, which would see Want Want (151 HK) and PICC Property & Casualty H (2328 HK) being deleted. (link to Brian’s insight: HSCEI Dec20 Index Rebalance Preview: One Week to Announcement)

PAIRS

In Japan Cosmetics Pair Trade: Long Fancl/​Short Kose, Oshadhi Kumarasiri suggested setting up a long/short pair trade between Fancl Corp (4921 JP) and Kose Corp (4922 JP) before Kose’s Q2 earnings release on 30th October 2020. Kose released its 2QFY21 results last Friday and results were underwhelming as expected. The main catalyst for our long/short trade idea was the quarterly earnings. Part one of the catalyst (Kose’s earnings) yielded 10.6% as Kose’s share price has underperformed Fancl by the same percentage since our previous insight. Oshadhi believes Part two (Fancl’s earnings) could realise an extra 5-6% in market-neutral returns and therefore suggests investors wait until Fancl’s quarterly results on 4th November 2020 before closing the trade. Long Fancl/Short Kose: Kose’s Q2 Results As Expected, Now Waiting For Fancl to Come Through

OTHER M&A & EVENT UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

15.85%
HSBC
ICBC
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Shanghai Edu (1525 HK)
10.84%
UBS
Outside CCASS
Source: HKEx

Yomiuri Land (9671) Takeover – Probably The Wrong Price But Whaddya Gonna Do?

By Travis Lundy

On Friday after the close, the Yomiuri Shinbun (Yomiuri Newspaper) Group announced that it would buy out minorities in Yomiuri Land (9671 JP) in a Tender Offer at ¥6,050/share – a 26% premium to the close. 

Yomiuri Land runs the eponymous Yomiuri Land theme park, four golf clubs, a “public sports” (sports where the business is associated with betting and is quasi-government-run) facilities business including two horse-racing tracks and a tarmac track used for organized betting races for keirin and “auto-race” (very light motorcycles around a tight track), other leisure facilities and sports-related real estate leased to group companies (minor league baseball and practice facilities leased to the Yomiuri Giants, soccer practice facilities used by the Tokyo Verde (Yomiuri-affiliated soccer team) and NTV Beleza (the Nippon TV-affiliated soccer team (NTV is a Yomiuri affiliate as well as a Yomiuri Land shareholder))).

This was not difficult to see. It is a well-known asset, reasonably closely-held (Yomiuri Group and subsidiaries own 34% and corporate and financial crossholders another 25+% of voting rights). It is illiquid-ish, and has properties which are suffering from covid-19 effects. 

It is difficult to see this not getting through. It should be easy. 


New Oriental Hong Kong Secondary Trading – Largest ADR/HK Listing Premium Yet

By Sumeet Singh

New Oriental Education (EDU US) raised around US$1.5bn in its secondary listing in Hong Kong.

I have covered the background of the deal in my earlier insight, New Oriental Hong Kong Secondary – Might Be Relatively Small.

In this note, I’ll talk about the deal dynamics and updates over the past week.


Kuaishou IPO Initiation: Dancing to Its Own Tune

By Arun George

Beijing Kuaishou Technology Co Ltd (1496219D CH) is the second-largest short video platform by average DAUs (daily active users) in 1H20, according to iResearch. Users access the platform primarily through a family of mobile apps comprising Kuaishou Flagship, Kuaishou Express and Kuaishou Concept, which is collectively referred to as the Kuaishou App. Kuaishou is backed by Tencent Holdings (700 HK) (21.57% shareholder), Morningside Venture Capital, DCM Capital (9.23%), Baidu (BIDU US) (3.78%), Sequoia Capital (3.20%), Boyu Capital (2.29%) and Temasek (0.86%). In January 2020, Kuaishou raised $3 billion through a Series F round at a valuation of $28 billion, according to press reports. Kuaishou has filed for a Hong Kong IPO to raise up to $5 billion as early as January 2021, according to Reuters. 

As a key competitor to ByteDance (1460967D CH)’s Douyin, Kuaishou offers public market investors the first opportunity to gain direct exposure to China’s short-video platform market. While Kuaishou’s performance over the track record period is distorted due to various factors, we believe that the underlying fundamentals are attractive.


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