Daily BriefsMost Read

Most Read: Shinsei Bank, BYD, Evergrande Real Estate Group, Melco International Development, SK Bioscience and more

In today’s briefing:

  • Shinsei Looks To A Poison Pill, But Probably Not Really
  • Hang Seng TECH Index Rebalance Preview: Autonomous Driving Change
  • Evergrande (3333 HK): Now Homebuyers And Employees Are Revolting
  • StubWorld: Consultation Batters Macau Gaming Counters
  • Shorting Entry Timing on SK Bioscience for Sep 23 Lockup Release, Considering Chuseok Holiday

Shinsei Looks To A Poison Pill, But Probably Not Really

By Travis Lundy

On Thursday 9 September, SBI Holdings (8473 JP) announced a Tender Offer aimed at lifting its stake in Shinsei Bank (8303 JP) to 48% at a sharp premium (up 46%). It hadn’t warned Shinsei Bank of its intention to do so.

Kana Inagaki and Leo Lewis at the FT had a story early Thursday evening describing the situation – the most concise and accurate take I have seen. I followed up hours later with something wordier in SBI (8473) Launches a HOSTILE Tender Offer on Shinsei Bank (8303)! On Thursday night the ADRs rose to ¥1930/share equivalent. 

On Friday, the stock went limit up, Smartkarma held a Flash Webinar, and Mio Kato added Shinsei Bank – Valuations to the anthology. 

Over the weekend, articles were everywhere in the media, but they didn’t say much. Shinsei hadn’t told them what to say and SBI had already done the talking for its part. 

Trading resumed on Monday and the stock opened above the Tender Offer Price ¥2000/share before closing a bit lower. 

Yesterday saw articles suggesting Shinsei Bank would send SBI a list of questions to answer, would look at what they got back, and then would decide their opinion. 

But TODAY we see the real start of the game. 

The Nikkei reported in a short article a few hours ago that Shinsei’s board would meet this week to approve an “emergency” poison pill defence. 

How that would work might matter, but it might not. 

More below the fold.

Hang Seng TECH Index Rebalance Preview: Autonomous Driving Change

By Brian Freitas

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the December 2021 review of the Hang Seng Family of Indexes on 12 November. The constituent changes will be effective after the close of trading on 3 December.

The review period for the December rebalance ends on 30 September and stocks that are listed by the review cut-off date are eligible for inclusion in the Hang Seng Tech Index (HSTECH INDEX).

Along with the announcement of the changes at the September rebalance, the index universe was expanded to cover a new theme – ‘Autonomous’ and examples include self-driving, autonomous robots, internet of things, smart lifestyle etc.

The expansion to the universe could see BYD (1211 HK) added to the index while Weimob Inc. (2013 HK) could be deleted from the index.

XPeng (9868 HK) and Li Auto (2015 HK) fail the velocity test for tradable indices and should not be included in the index.

Estimated one-way turnover is 9.23% and will result in a one-way turnover of HK$3.65bn. There will be a lot of selling on the smaller index constituents due to the funding trade.

Evergrande (3333 HK): Now Homebuyers And Employees Are Revolting

By David Blennerhassett

I estimate China Evergrande Group (3333 HK) (CEG) is trading at an extraordinary discount to NAV of 93% against a one-year average of 77%. 

Source: CapIQ, my estimates. According to Shengjing Bank Co Ltd H (2066 HK)‘s 2020 annual report (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I’ve pegged those shares at the price of Shengjing’s H shares. According to HengTen Ltd (136 HK)‘s 2020 annual report (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds 26.55%.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.

The problem with the calculation is that it marks the “stub ops” – the consolidated but unlisted portions of the business, predominantly Hengda Real Estate – at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the “NAV.” That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. 

The problem above and beyond that is that when a company is in “unprecedented difficulties” as the company said yesterday, the value of the assets themselves may be in question.

Evergrande’s liquidity crunch has been discussed at length here at Smartkarma, most recently by me in StubWorld: What To Do With Evergrande?; and in greater depth by Travis Lundy, in which he said in his latest insight Evergrande as a Study of Quantum Mechanics Theory

Outside observers are looking at the situation and wondering whether Schrödinger’s Cat is dead or alive.

Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from “fire sale prices.” Given the leverage inherent in Evergrande, this should not come out well for shareholders. 

  • It need not be said, the general consensus is bearish.

The New News

  • Early yesterday morning, Evergrande announced it expects significant declines in contract sales in September.
  • Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.
  • Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: “ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group.”
  • Evergrande added it is actively exploring with potential investors the sales of part of its interests in Evergrande Auto (708 HK) and Evergrande Property Services (6666 HK) – though no material progress has been made –  plus bringing in new investors to the company and its other subsidiaries.

In view of the difficulties, challenges and uncertainties in improving its liquidity …. there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.

  • Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company’s capital structure.

Separately …

  • Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande’s property projects. 
  • This culminated in scores of people protesting outside Evergrande’s headquarters in Shenzhen earlier this week according to news reports from Reuters, The Standard, and others. 

Not the ideal welcoming party when you arrive at work in the morning  – police outside one of Evergrande’s offices. (photo source: Mingtiandi)

  • Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. 
  • Media sources are reporting what has been speculated upon for days… that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). 

The fact Evergrande’s liquidity issue has now gone fully public makes one question how it can reverse this negative trend. 

StubWorld: Consultation Batters Macau Gaming Counters

By David Blennerhassett

This week in StubWorld …

Melco Resorts & Entertainment (MLCO US) and other Macau gaming plays roll over after a 45-day public gaming consultation kicks off today.

Preceding my comments on Melco 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 in percent – of at least 20%.

Shorting Entry Timing on SK Bioscience for Sep 23 Lockup Release, Considering Chuseok Holiday

By Sanghyun Park

September 18th is the major lockup release date for SK Bioscience. Not only will all 68.43% of the shares owned by SK Chemicals, the major shareholder, be released, but also the largest amount (5.16% of the SO) among the lockup shares held by the IPO institutional shareholders will be released.

SK Chemicals recently received a shareholder letter from Metrica. In other words, the possibility of selling some of the shares held by the largest shareholder cannot be completely ruled out. But again, all attention is on the 4 million shares held by the IPO institutional investors. These are presumed to be mostly local publicly-raised funds and pension funds. Based on the current share price, their return is 330%. So, at this point, we should conclude that the probability that they will realize profits rather than holding for a longer period of time is quite high.

In both the 1-month lockup release on April 19 and the 3-month on June 18, the trading volume surged more than 3 times compared to the daily average. On the other hand, the stock price rose 6.44% on April 19th but fell 4.69% on June 18th. The reason that the stock price rose on April 19 was that it had fallen more than 20% since listing, so we may say that this 1-month lock-up release actually led to attracting bargain hunters.

But the important thing that we must note here is that both of the previous major lockup releases had led to a huge surge in the trade volume, suggesting that a significant number of the IPO institutional shareholders must have opted to dispose of their holdings.

And this time, there is no reason to believe things would be different, especially considering that even the return is incomparably higher than the previous two lockup releases.

Before it’s here, it’s on Smartkarma