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Most Read: Showa Denko K.K., West Japan Railway Co, SK Bioscience, Tyro Payments, China Gas Holdings and more

In today’s briefing:

  • Showa Denko (4004 JP) Offering – Supply, Passive Demand, and Opportunity
  • JR West (9021 JP) Offering – Supply Vs Yutai+Passive Demand
  • ETF Arbitrage Using KRX BBIG New Deal Is on the Rise
  • Index Rebalance & ETF Flow Recap: FTSE China50/A50/TW50, UKX, ASX200, KOSPI2, EPRA Nareit, JR West
  • HSI Index Rebalance Preview: Potential Inclusions in December

Showa Denko (4004 JP) Offering – Supply, Passive Demand, and Opportunity

By Travis Lundy

When Showa Denko K.K. (4004 JP) presented their H1 results on 10 August 2021, and later held their analyst call, it seemed quite bullish. The company was a year ahead of its internal integration efforts after having purchased Hitachi Chemical (renaming it Showa Denko Materials) in a HUGE debt-financed deal in 2020. The company noted that all businesses were operating well and that residual negative numbers coming from restructuring costs and other weaknesses were simply a matter of time to overcome.

The company showed an OP forecast which even it admitted was light, and for the year the forecast at ¥85bn remains significantly impacted by the amortisation of goodwill due to the purchase of the Hitachi Chemicals business (¥17.6bn this year). This is to say that OP would be 20% higher if Showa Denko had used US-GAAP or IFRS to account for the purchase of Hitachi Chem.

Net Income forecasts out years from now are impacted by this cost to amortise the purchase goodwill. 

The call was interesting in that it talked about efforts to reduce interest-bearing debt, and also talked about aggressive investment measures. That probably should have been a hint. 

The shares fell hard from the 17th to the 20th as crude oil did too. 

And 13 days after the earnings release the company announced an equity sale where they would sell 35.1mm shares (including greenshoe) to investors. That is a big number, at roughly a quarter of the pre-existing share count. 

It is even bigger when you consider shareholder structure. 

Pricing is likely on 6 September. 

Below the fold we look at shareholder structure, offer structure, and index demand.


JR West (9021 JP) Offering – Supply Vs Yutai+Passive Demand

By Travis Lundy

West Japan Railway Co (9021 JP)  is one of the first three listed JR companies (along with East Japan Railway Co (9020 JP) and Central Japan Railway Co (9022 JP)) and was always the smallest, in size and investor interest, until Kyushu Railway Company (9142 JP) came along. 

JR West has “always” traded at a lower EV/EBITDA, EV/EBIT, and PER than a basket of its peers. For a long time that was due to lower ROAs and higher debt/EBITDA. Now ROAs have basically matched the basket of peers and so pre and post-covid, ROEs looked OK. 

Covid hit hard. Inbound tourism fell, business travel fell, commuting use fell, costs didn’t. Gross margins which had been 22-27% for most of the last 20 years fell below zero. Revenues fell by 40%. Four Zero Percent. That is huge for a transport utility.  This is the same story for all the rails, but more for some than others.   

The stock is down 50% from late 2019 highs. The question is whether that is enough. 

Last week on 1 September, the company announced an offering of 51+mm shares including greenshoe, split 40/60 international/domestic. That is about 40 days volume and after the stock fell 15%, is worth about ¥260bn. 

The company has a large number of retail shareholders, and a very heavy passive and cross-holding ownership. It has a relatively low active institutional ownership – domestic or foreign. 

With the dividend down 40+% it still yields ~2% because of where the stock has fallen. Even better for some potential holders, the kabunushi yutai yield is 5+%, and up to 9% if one optimises (and rides the shinkansen, stays in hotels, and eats at restaurants in hotels). That may make it a selling point to some, but institutional investors don’t get that benefit, so that aspect alone may not get all of the deal sold.

There is an interesting story of Historical Cheapness vs Supply vs Benefits along with large passive ownership and decent-to-large passive demand for the offering. 

More below the fold. 


ETF Arbitrage Using KRX BBIG New Deal Is on the Rise

By Sanghyun Park

As shown below, KRX BBIG consists of one mother index and four sub-indices. That is, a total of five individual indices each have their own ETF.

Index calculationsBBIG (the mother index)
Four sub-indices
: Secondary Battery, Bio, Internet, & Game
Number of constituents1210
Index weight
Equal-weighted at 8.33%
Top 3 (by full market cap): Equal-weighted at 25%
The remaining 7: float-adjusted market-cap-weighted totaling 25%
Source: KRX & WISE Index

It is important to note that these indices consist of only 10 to 12 stocks. In addition, futures of the KRX BBIG mother index and two sub-indices (Secondary Battery and Bio) have been listed and operated since July of this year.

Hence, these indices provide relatively suitable conditions for ETF arbitrage.

  • In other words, we can aim for arbitrage using an ETF/NAV disparity. In particular, in Korea, we get tax-free benefits (no transaction tax) when selling ETFs.
  • For this reason, if a disparity rises above -0.25% (equivalent to transaction tax rate), we can consider a classic ETF arb setup.
  • We buy underlying securities and undergo ETF creation and redemption in the primary and then sell ETFs in the secondary market.

Index Rebalance & ETF Flow Recap: FTSE China50/A50/TW50, UKX, ASX200, KOSPI2, EPRA Nareit, JR West

By Brian Freitas

In this weeks recap, we look at:

Inflows to the KraneShares CSI China Internet Fund (KWEB US) ETF continue for yet another week. Assets now are at US$7.2bn and the ETF has taken in around US$4.7bn this year, most of the inflows starting mid-July.

Events This Week

Click on the link under Detail to go to the Insight

Date

Index

Detail

6 September (e)
NKY
9 September
KOSPI200
9 September
KRX BBIG
10 September
STAR50

HSI Index Rebalance Preview: Potential Inclusions in December

By Brian Freitas

The September rebalance of the Hong Kong Hang Seng Index (HSI INDEX) was implemented at the close of trading on 3 September. Hang Seng Indexes 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 have at least 3 month of trading history by the review meeting date are eligible for inclusion in the Hong Kong Hang Seng Index (HSI INDEX).

There were 3 inclusions at the June rebalance and 3 inclusions and 1 exclusion at the September rebalance to take the number of index constituents to 60.

With Hang Seng Indexes looking to get up to 80 Hong Kong Hang Seng Index (HSI INDEX) members by mid-2022, there could be 20 inclusions over the next 3 index rebalances.

Stocks that are ranked towards the top of their Industry group and are potential inclusions are Smoore International (6969 HK), Nongfu Spring (9633 HK), China Resources Beer Holdings (291 HK), China Resources Mixc Lifestyle Services (1209 HK), Sunac China Holdings (1918 HK), China Gas Holdings (384 HK), JD Health (6618 HK), Hansoh Pharmaceutical (3692 HK)China Hongqiao (1378 HK) and Fosun International (656 HK).

Given that the index committee consciously avoided including stocks from sectors that were targeted by tightening regulations in China, this list will be revised closer to the index committee meeting in November. Another factor that will determine the number of inclusions is the turnover at the rebalance – while it is less than 4% now with the 10 inclusions, that number will move higher as stocks move around and there are capping changes on the largest constituents.


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