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Most Read: Soho China Ltd, SK Telecom, F&F, Afterpay Touch and more

In today’s briefing:

  • Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW
  • Global Capital Spending: Recovering After Resilience During Pandemic, but Nuances Persist
  • Did Passive Rebalancing Trading on SKT Start Last Friday?
  • KOSPI200 Index Rebalance Preview: Two Changes in September; Five in December
  • Afterpay (APT AU) – Square Is Buying Now in an All Stock Deal

Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW

By David Blennerhassett

Last Week in Event SPACE …

  •  SOHO China Ltd (410 HK)‘s shares were utterly cremated, ostensibly in response to a media report the pre-conditional Offer from the Blackstone Group faces regulatory obstacles. Yet that media article was vague in context, and ultimately stopped short of saying the deal would be blocked. 
  • The Invesco Office J Reit (3298 JP) deal is done. The bidders have 65.07%. This is close enough to win an EGM to consolidate. The bidders could buy more shares on market to get to just under two-thirds, or perhaps even go much higher. There will be index sells first though.
  • The bidding for Australia’s tech companies continues as Iress Ltd (IRE AU) receives an indicative proposal from EQT Fund Management.
  • The Seven Group Holdings (SVW AU) Offer for Boral Ltd (BLD AU) closed late this past week with Seven gaining 69.6%. This prompted some movement on the Board and the close of the Offer will lead to index changes.  
  • The MBO for Sakai Ovex (3408 JP) launched in February and failed in March has now been re-launched, with the activist who effectively blocked the old deal at ¥3000/share now participating in the buyout at ¥3810. It was far from fair the first time around and it is far from fair this time (the activist isn’t selling).
  • WH Group (288 HK)‘s Offer Doc is out. There are things to do here for hedge funds and arbitrageurs. There are things to do here for long-only funds who love the stock. 
  • PCCW Ltd (8 HK) further slims down after entering into a SPA with DigitalBridge Group (DBRG US) to sell its Hong Kong and Malaysian data center businesses for US$750mn. 
  • The Allcargo Logistics (AGLL IN) Delisting Proposal is now “re-initiated” after a SEBI Delistings Regulation change which went into effect last month, not grandfathering in the promoters’ pre-existing Delisting Proposal process. The stock has rallied hard on that news.
  • 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)

M&A – ASIA

Soho China Ltd (410 HK) (Mkt Cap: $2.0bn; Liquidity: $7mn)

Following a media article, shares were down 31% at one stage, or 48% adrift of the $5.00/share offer price, and 13% below the undisturbed price, before recovering to close at $3.02/share. The article mentions the SOHO China/Blackstone deal has the attention of the Chinese government and is unlikely to face a smooth regulatory approval process in China. In addition, “the deal is expected to face obstacles in obtaining approval, but the issues relate more to the founders, than the deal itself.” The source of the article is understood to be “familiar with the situation”, not working on the deal. For context, I’m familiar with the situation.

  • Apparently, according to the article, Zhang Xin and Pan Shiyi are in the US. We don’t know for how long, or whether this is a recent development. Moreover, there is a question as to whether they need to be in China to be “interviewed” for the deal to complete. One interpretation of this article is the founders need to offer up “something” to get this deal over the line.
  • The current environment is unquestionably one of general risk aversion given all that has happened with Chinese regulators and internet names. SOHO China is a crowded trade and short-term investors are being stopped out, further exacerbating a difficult situation. And being month-end, this is awful timing for many players.
  • Short interest is my biggest concern on the deal. Aggregate short interest on the 9th July was 98.5m shares, with Bloomberg, implying at the time, an additional ~35m short sold since then, or an increase of 35% in the last 2 weeks.  Short sell volume, as a % of total volume, appeared to be ~20-40%. You don’t short something which could be 30% (before yesterday’s move) in your face instantly unless you are certain. Or know something. 
  • This is adding up to one of those “circumstantial evidence” issues. The whole lot could be a circular reference – rumour begets rumour etc. But on balance, this deal should get up. There was clear adding/buying on the big fall day on the pretext this article was weak. The downside to a deal break is now less hairy. If this deal was blocked, for whatever reason, the downside is unlikely to be the undisturbed price, but probably closer to $2.30-ish or 24% down, compared to 66% up to the Offer price. That suggests a 2.75 upside:downside ratio, though where “downside” is can be tricky.

(link to my insight: SOHO China (410 HK): In For a Penny …. )

Invesco Office J Reit (3298 JP) (Mkt Cap: $1.8bn; Liquidity: $24mn)

The bid by the Invesco parent company (Invesco Real Estate and affiliates) for Invesco Office turned out successful, and the bidders gained 5,727,676 units out of the 8,802,650 units out in the float. They now own 65.07% (having started with 6%) so this will end up going to an EGM. Travis Lundy expect cash-out will be received sometime between early December 2021 and late January 2022 but there are weird things which happen. There could be a short squeeze. 

  • There will be index deletions of MSCI, FTSE, and S&P DJI Global in the next several trading days. That should mean a sale of say $180-250mm of stock, though some of it will already be sold in the tender. Some announcements may show up tonight.  There will be a TSEREIT Index deletion which could be US$350-500mm which will happen at the close of the third business day after the EGM decides to consolidate units and delist. 
  • When the deletions happen, there will be buying of the other names in their respective indices.  For the international indices, it is diverse, and non-impactful. For the TSEREIT Index, it should be $350-500mm to buy at the close, which is about 0.7-1.0x ADV of the collective constituents. 
  • Now that this is done, Travis expects the “right” trade is to buy the shares at a decent spread expecting to be able to get one’s JPY 22,750/unit by end of year or early January.  I would want to see a wider spread than where we closed, because there are lots of very wide spreads right now in Asia and risk capital can be better allocated elsewhere.
  • UPDATE:  the TSE announced a hybrid treatment whereby the weight in the TSE REIT Index would be lowered as the FFW dropped from 1.0 to 0.35, effective 31 August 2021. This means a likely index tracking sell of 1.1-1.4mm units at the close of 30 August 2021. The FTSE released their treatment of the downweight which is for unchanged shares in issue total of 8,802,650 and a decreased investability weighting from 97.52559% to 32.4579569576774%. That is a float reduction of 5.73mm shares. That selldown will take place 2 August at the close.

(link to Ttavis insight: Invesco Real Estate Deal for Invesco Office (3298) Successful – Now For the Aftermath)

Iress Ltd (IRE AU) (Mkt Cap: $2.0bn; Liquidity: $6mn)

Trading and wealth management software provider Iress announced it had received a confidential, unsolicited, non-binding, and indicative proposal from Swedish PE outfit EQT Fund Management via a Scheme of Arrangement at a price range of between A$15.30 and A$15.50 cash per share. EQT had previously fielded an Offer of A$14.80/share on the 18 June. Iress’ board unanimously concluded that the Proposal was “conditional and did not represent compelling value for Iress shareholders”. But the board was “prepared to provide it with access to limited non-public information so EQT can develop a proposal that is capable of being recommended to shareholders.”

  • After announcing on the 10 June it had not received any direct approaches, the following day Iress (unprompted it appeared at the time) announced a strategic review, including the divestment of its British mortgage and sales origination business, or MSO; accelerating earnings through M&A, and taking on more debt to buy back shares.  The forward target. In a more detailed strategic review announced today, Iress forecasts an NPAT of ~A$120mn by FY25, up from A$59.1mn in FY20, via “building scale in large addressable market with a focus on the UK, superannuation and investment infrastructure”. 
  • The offer is pitched at a forward EV/EBITDA of 22.4x. This compares to Iress’ five-year forward EV/EBITDA average of 17x. The five-year opener average is 11x, and Iress has traded at a 54% premium to peers over the past five years. 
  • Although the board concluded EQT’s offer did not represent compelling value, it remains engaged with EQT and has provided limited DD.  What price? Roger Sharp took over as Chairman in February and he is known to be a canny dealmaker and wants to leave behind a legacy, and he and the board have a clear intention to building out the business. But a A$17/share bid – 10% above the high-end of EQT’s range – probably garners board support. Even 5% – ~A$16.30 – may get the job done. As it is, EQT’s proposal is already at a life-time high. 

(link to my insight: Iress (ASX AU) Bats Away EQT – For Now)

WH Group (288 HK) (Mkt Cap: $11.8bn; Liquidity: $34mn)

On 6 June 2021, WH Group (288 HK) announced a proposal for a Voluntary Buyback Offer. The company decided it had enough cash and excess capital given its investment requirements and decided to return the excess to shareholders by buying up to 13% of shares outstanding. Then peers fell. DRAMATICALLY. The 7 names in a HK- or China-listed basket of peers have fallen 23% as live hog prices have fallen and the hog/feed ratio has also fallen, indicating hog producers are making even less than before (or, according to the NDRC, losing more than before).

  • WH Group has now released its Offer Document whereby it launches the Conditional Voluntary Cash Offer for 13% of its own shares at HK$7.80/share.  This will need to be approved by Shareholders – both the Offer and the Whitewash Waiver.  The Record Date for the EGM is 19 August 2021, the EGM is 16 August, and if approved, the Offer will become Unconditional on 16 August and will close on 30 August. Cheques will be sent no later than 8 Sep. Shares not bought back will be returned no later than 9 Sep.  The minimum pro-ration is 19.7%. This remains an interesting situation. 
  • Travis is bullish, but too strong a jump post the Offer doc would be a good reason to unwind unless you are VERY bullish the back end vs Peers. 10% higher and the stock is still reasonable to peers on an accretion-adjusted basis, but Peers have fallen a LONG way and they are volatile.  If you are short Peers against WH and hog prices start to go up, then watch out! The Peers came down faster, they can go up faster.  Long-Only investors who like WH Group at the current level should buy 25-30% “extra” of their position using cash and own 125-130% of their position size. At yesterday’s close, that extra 25% position will earn 26%.
  • At the then current price (HK$6.21) Travis liked it outright long and against a Global Basket of Peers. He would shrink the size of the hedge against HK/CH-listed Peers. He would track the Implied Participation Rate levels.  If you are LONG ONLY and you like the stock, there is a great trade to do here. If you are a delta-neutral ARB with no borrow, there is another 5-8% in outperformance before this starts becoming substantially less interesting. If you are a delta-neutral ARB who has oodles of GTNA borrow, you should already be in this with both feet, and you should not get out until the stock goes up a lot.

(link to Travis’ insight: WH Group Offer Doc Out – This Little Piggy Went To Market)

Spark Infrastructure (SKI AU)  (Mkt Cap: $3.5bn; Liquidity: $7mn)

After rejecting two take-private proposals from PR outfit firm KKR and Ontario Teachers’ Pension Plan Board (OTPPB), Aussie poles and wires company Spark has ostensibly supported the Consortium’s improved tilt of $2.95/share. The Consortium (KKR/OTPPB)’s latest proposal, up from the initial Offer of $2.70/share, was considered by Spark’s board to be in the interest of its shareholders to engage further. As such, Spark has provided the Consortium with due diligence on a non-exclusive basis. This Offer remains pre-conditional, and is subject to satisfactory DD, together with board approval from both KKR and OTPPB. A firm Offer, should one unfold, would be subject to FIRB approval, and the approval from Spark’s shareholders at a Scheme Meeting. Yet this looks like a full (er) Offer than the one rejected on the 15 July.

  • The assets held by Spark are regulated. You could go further and say Spark simply collects dividends from its minority stakes. Electricity assets are designated critical assets by the FIRB-affiliate Critical Infrastructure Center. But these minority holdings should help facilitate the FIRB application. The trickier aspect of the application is that 100% of SA Power/Victoria Power Networks would be controlled by foreign investors if this deal get up.
  •  The Offer is pitched at ~1.6x regulatory asset base. The RAB multiple for the failed APA Group (APA AU) tilt from CK Infrastructure Holdings (1038 HK) was also estimated at 1.6x. DUET Group (DUE AU) was taken out by CKI in 2017 at ~1.4x.
  • An interloper is possible. . APA remains close with CKI, despite the failed bid in 2018. Plus, this would keep the minority interest stakes in Australian hands.  But again, given Spark’s minority stakes, any successful suitor will not have unfettered control over these utilities.

Sakai Ovex (3408 JP)  (Mkt Cap: $0.2bn; Liquidity: $1mn)

In early February 2021, the CEO of Sakai Ovex (3408 JP), who owned very few shares, and an activist investor decided to launch an MBO for the company at ¥2,850/share.  The stock had been trading cheap, and the price was “high” but the price was wrong. It needed to be 40% higher – at a minimum – in my opinion. Not long after that, the bidders offered a very weak bump to ¥3,000/share, discussed in Savai Ovex MBO – A Very Weak Bump. This was not enough. The shares traded above terms and revised terms, only falling below when the Tender Offer went ex-. 

  • The Bidders are back. And now City Index Eleventh is joining them. It pays to be the fulcrum investor.  And now they are bidding ¥3,810. Which is still cheap.  The president, who holds almost no shares, and a value/activist investor have proposed to take the company private at a discount to book, with considerable non-operating assets and earnings.  There is a lot of value hidden in the details.  This deal was short by probably ¥1,200/share the first time which would have taken it to ¥4,000/share. I personally think it is still short. Perhaps another ¥800-1000/share would be better. 
  • The insiders have about 50% of the shares locked up with Murakami-san. They need about a third of the rest.  This will be incrementally tougher to block, but those who do more digging and decide they too would like to become an equity partner in the takeout, there is actually a possible role for you.
  • Travis would buy at or just below tender offer price. He thinks this gets done. If someone shows up BIGLY there could still be a small bump.

(link to Travis’ insight: Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap)

After wood flooring manufacturer Nature Home Holding Company (2083 HK) was suspended on the 19 July, in Nature Home (2083 HK): Possible Takeover Target I concluded if an Offer was to be tabled, it would likely be via a Scheme and at ~HK$1.70/share. And this is exactly what transpired. Nature Home announced an Offer from its founding shareholders, by way of a Scheme, at HK$1.70/share. The Offer Price will not be increased. Dehua Tb New Decoration A (002043 CH) has given an irrevocable rollover undertaking for its 19.6% stake. Standard Scheme conditions apply. On account of the Rollover Agreement, Dehua does not form part of the independent shareholders who will vote on the merits of the Scheme. This Offer looks done. Link to my insight: Nature Home (2083 HK)’s Full Offer.

Advantest Corp (6857 JP) had a good Q1 and revised up its full year. The company also announced a buyback of up to 10mm shares and up to ¥70bn through March next year. Given the current share price, that would only get ~7 million shares bought back but while that is only 3.5% of shares out ex-Treasury, it is 10+% of Real World Float. In Breaking Down Advantest’s Big Buyback, Travis expects that this buyback will contribute to positive/better/high-quality momentum (price and outperformance) on a stock which already has decent momentum both on stock price and fundamentals. 

On the 30 April, aged-care Australian listed operator Japara Healthcare (JHC AU) announced it had received an unsolicited, indicative, conditional, and non-binding Offer from Little Company of Mary Health Care – otherwise known as Calvary – by way of a Scheme, at A$1.04/share. On the 5 June, Calvary increased the indicative Offer price to A$1.20/share.  On the 15 June, the Bolton Clarke Group made a conditional, non-binding indicative proposal by way of a Scheme, at A$1.22/share. JHC has now announced that it has entered into a Scheme Implementation Deed (SID) with Calvary, by way of a Scheme at A$1.40/share. The consideration will be reduced by any dividends paid.  JHC’s board of directors have unanimously recommended the Scheme, in the absence of a superior proposal and subject to an independent expert concluding the Scheme is fair & reasonable. This looks done. Link to my insight: Japara Healthcare (JHC): Calvary Takes Charge.

India-based integrated logistics company Allcargo Logistics (AGLL IN) received a “Delisting Proposal” from its Promoter Group (Shashi Kiran Shetty and Talentos Entertainment Private Limited) in August 2020. Since then, the stock has gained more than 70%. Despite the rally since the Initial Delisting Proposal, Allcargo is not too expensive strictly from a fundamental angle. Going by LTM numbers, Allcargo is trading at a EV/EBITDA of 9.5x which looks cheap when considering that EBITDA CAGR for FY21A-FY23E is ~26% according to Capital IQ consensus.  In Allcargo (AGLL IN): Process Reinitiated! 70%+ Up Now. Should You Still Chase?. Read more: https://skr.ma/xDxmq, Janaghan Jeyakumar expects the Deal to complete. He would be cautious about chasing. However, he would expect dips are good to be bought.  

On the 18 May, Yue Xiu (the investment arm of the Guangzhou municipal government) made an Offer, by way of a Scheme, for Chong Hing Bank (1111 HK) shares not owned, at HK$20.80/share, a 51.2% premium to last close, and a 97% premium to the day preceding the last trading day. The Cancellation Price, which was a 10.1% discount to the NAV, would NOT be increased. Standard Scheme conditions apply. Chong Hing is Hong Kong incorporated, therefore there is no headcount test. The Scheme Document is now out.  The Scheme Meeting will be held on the 30 August with expected payment (assuming the Scheme resolutions are approved by independent shareholders) on the 7 October. The IFA considers the Offer to be fair and reasonable, although that report covered the bare minimum. Link to my insight: Chong Hing Bank (1111 HK): Scheme Doc Out. IFA Says Fair.

STUBS

PCCW Ltd (8 HK) / HKT Ltd (6823 HK) 

At the time of my insight, I had the discount to NAV at ~23%, compared to the 12-month average of 17%. The implied stub of (HK$1.20/share) compares to the (HK$1.05/share) average since PCCW reduced its take in HKT back in February 2017.  The simple ratio (PCCW/HKT) of 0.4x compares to the 0.42x average since the February 2017 reduction. 

  • PCCW Solutions operates 9 data center locations in Hong Kong, China, and Malaysia. The portfolio comprises ~75+ megawatts of power capacity, across 1.3mn sqft of GFA.  This portfolio of data centers made a net profit of US$2.6mn in FY20, up from US$0.02mn in FY19. Net assets are ~US$258.3mn, therefore DigitalBridge is paying  288x trailing earnings, and 2.9x book. PCCW appears to have paid 1.9x P/B for the Malaysian ops last year.
  • I think one of two events will ultimately transpire from hereon – either HKT is taken over – not by PCCW – but by a PRC telecommunication company such as China United Network A (600050 CH), which already holds 18.5% – HK media assets have gradually been snapped up by PRC buyers; or Richard Li attempts another privatisation of PCCW.
  • That’s not to say Richard wants to continue in his dad’s footsteps by holding or acquiring telco assets. I think he wants the cash from the sale of PCCW’s stake in HKT. Following the sale of the data centers, PCCW would be net cash, or thereabouts, at the parent level. Richard has been in the news lately concerning Southeast Asian online realty company PropertyGuru agreeing to go public through a merger with a blank-check firm backed by Richard and Peter Thiel. But Richard’s passion in recent years appears to evolve around insurance, especially the soon (expected)-to-be listed FWD.
  • I would be inclined to be invested where Richard is – and therefore be Long PCCW, short HKT here. I expect the NAV discount to narrow towards its one-year average. 

(link to my insight: StubWorld: The Trimming Of PCCW

Zhen Zhou, Toh is not particularly excited about Del Monte Philippines (1575316D PM)’s business because revenue growth will likely taper off as COVID-19 situation eases and further margin expansion too seems unlikely. In Del Monte Pacific HoldCo Trade Update – A Better Play for Del Monte PH IPO, he thinks that the better way to trade the IPO is to buy DMPL with the expectation that the IPO will go through. And even though liquidity isn’t great, which could mean that Del Monte Pacific (DELM SP) will trade at a deeper holdco discount, there is still potential upside to be realized at those levels.

EVENTS

JAPAN PASSIVE: Who Owns What 2021?

Passive holdings in Japan are approximately equal to 30-34% of the “float” as calculated by index providers such as MSCI, FTSE, and the TSE float calculations (which are generally smaller than MSCI and FTSE) PLUS 28-31,000 baskets worth of Nikkei 225 holdings. Longer-term, this fluctuates in the range of 26-30 million shares. This really matters with names with low share count. But among TOPIX 1000 names which are members, it is a weighted average of just over 4%.

  • That puts Fanuc Corp (6954 JP) and Tokyo Electron Ltd (8035 JP) in the 38-45% range of float, if not a little higher. TDK Corp (6762 JP)Cyberagent Inc (4751 JP)Nissan Chemical Industries (4021 JP), and Kikkoman Corp (2801 JP) are in the 42-50+% range. Konami Holdings Corp (9766 JP) and Hitachi Construction Machinery (6305 JP) are close to or above 50%. Fast Retailing Co Ltd (9983 JP) is likely well above 70%.
  • Last year Travis said “The BOJ may change its ETF allocations.” It did. It stopped buying Nikkei 225 and JPX Nikkei 400 ETFs.
  • As the world moves more and more to passive, expect float to decrease. As companies continue buying back stock, pay attention as to whether it is being repurchased from the market or from designated non-float sellers.
  • Changes to the TSE Market Structure may introduce significant changes to index constituency impact on smallcap shares within the TSE First Section. It will likely not mean much at all for large cap shares.  Many companies are looking at optimising their shareholding structure to make it possible for them to be TSE Prime members.
  • In many cases, there are efforts to reduce cross-holdings because of increased emphasis on that factor exercised by the revised Corporate Governance Code and by new voting policies implemented this year by Glass Lewis and ISS which will recommend votes against directors where more than 10% or 20% of equity value is locked up in cross-holdings. 

(link to Travis’ insight: JAPAN PASSIVE: Who Owns What 2021?)

In China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?, Travis reckons the operating businesses for after-school edcuati0n stocks are likely to be worth almost nothing. The only way they survive as economic entities is to pivot to other training, or to pivot to supporting the national cause. Spin off the teachers and the organizational structure of what they do into an Opinion-compliant construct. Provide it with a little seed capital. Then keep whatever online tech one has and make the tech a fee-earning business.  If it were him, in their shoes, he would be making plans to pivot today.  If any of these tycoons end up with any remaining wealth, that is good for them. He thinks the stocks are a really, really tough thing to own other than for break-up value. Osbert Tang also discussed this situation in China Private Education: How to Position After the Regulatory Crackdown? 

Full Circulation Of H-Shares: July 2021 Update was latest update in a series dating back to Legend’s Conversion of Domestic Shares in June 2018.

  • To date, 28 companies have sought approval to convert their domestic shares and/or unlisted foreign shares into H shares, which would then be eligible to be listed and traded on Hong Kong’s stock exchange.
  • 16 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Five of those have seen various degrees of movement in the converted shares.
  • Sichuan Languang Justbon Service Group (2606 HK) received approval late last year but did not convert – and was subsequently subject to an Offer.
  • To date, two companies have withdrawn their application to convert their domestic shares.  Both of these companies –  Beijing Capital Land Ltd H (2868 HK) and Zhejiang Cangnan Instrument (1743 HK) have now been subject to Offers.

TOPIX INCLUSIONS!

In TOPIX Inclusion Trade Summary: July 2021, Janaghan took a look at the monthly performance of the trading opportunities surrounding TOPIX Index Rebalance events. During the month, we witnessed the Inclusion Events of cloud-based business accounting software company Money Forward (3994 JP), water treatment technology company Nomura Micro Science (6254 JP), and printed circuit board manufacturer Meiko Electronics (6787 JP).  Furthermore, as discussed by Travis in July TOPIX FFW Rebalancing Trade (see above), there were quarterly float adjustments for some constituents of the TOPIX Index which opened up a few trading opportunities. 

M&A – EUROPE

Naturgy Energy Group SA (NTGY SM) is awaiting the decision to be made by the Government on the partial takeover launched by the Australian fund IFM for 22.7% of the capital. The success of IFM’s partial takeover attempt is becoming increasingly difficult due to a delay in the approval of the takeover by the Spanish Government; and Criteria Caixa’s intentions to strengthen its shareholding in Naturgy. Criteria Caixa already holds 25.997%. Assuming it will still purchase up to 29.9%, that is a 3.903% stake pending, some 37.84 mn shares, i.e. approximately €826 mn (at the closing price of 29 July) almost worth the volume of 50 trading sessions (at the last three months average daily volume). Link to Jesus Rodriguez Aguilar‘s insight: IFM/Naturgy: New Developments.
Unicaja Banco SA (UNI SM) and Liberbank SA (LBK SM) will soon finalize their merger after receiving all the authorisations. On 19 July, the Spanish Government gave the green-light to the integration, which is expected to close on 30 July. Liberbank’s shares are trading at a 0.8% discount (adjusted for the merger ratio). Although liquidity is thin, in Unicaja/Liberbank: Final Stretch Jesus recommends a short UNI SM/long LBK SM. The effective merger is highly likely to happen on 30 July.
On 21 July, Bloomberg reported that Canadian Brookfield Asset Management-Cl A (BAM/A CN) was working with advisers as it considers a potential bid for alstria office reit-ag (AOX GR). In Brookfield/Alstria Office REIT: Potential Takeover, Jesus reckons a takeout price could come in at €18.68, a 10% premium over the last reported EPRA NTA and 6.4% premium to the closing price on 23 July. 

M&A – US

In SpinTalk: More Value To Be Had In Now Imminent XPO Logistics Break-Up, Robert Sassoon revisited the proposed break-up of Xpo Logistics (XPO US). This corporate event is now just a few days away and will be executed via  the tax-free spin-off of the logistics business GXO Logistics (GXO US) on August 2, 2021, effected through a 1-for-1 distribution of new GXO shares to XPO shareholders

PAIRS

Roland Corp (7944 JP) Has been shifting production away from China and Japan to concentrate most of the production activities to the Malaysian plant established in 2014 as a part of the business turnaround process that followed a vicious downward spiral in the post-global financial crisis environment. While demand for musical instruments soars across the world, COVID-19 lockdowns in Malaysia continues to affect Roland’s production capabilities. In Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages, Oshadhi Kumarasiri believes Roland may fail to meet demand amidst disruptions to the main production facility in Malaysia while Yamaha Corp (7951 JP) seems to be well placed to outperform the market through capturing Roland’s lost demand.

INDEX REBALS

With Gulf Energy Development Public Company (GULF TB)‘s Offer for Intouch Holdings (INTUCH TB) closing next week, in GULF/INTUCH: Nearing The End of the Offer Period; Passive Selling to Come, Brian Freitas expects FTSE and MSCI to lower Intouch’s investability weight/ FIF over the next week due to a drop in the free float and this will necessitate passive selling on the stock.

In Kakao Bank: Allocations, Lock Ups and Index Fast Entry, Brian sees KakaoBank (1349010D KS) as a high probability inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) with the implementation at the close of trading on 9 September.

At the IPO price, Krafton Inc (259960 KS) should get MSCI Fast Entry if less than 30% of the institutional allocation is locked up, while the stock should get FTSE Fast Entry even with 50% of the institutional allocation locked up. If a higher percentage of shares is locked up, the stock will need to close higher on listing day to get index Fast Entry. Link to Brian’s insight: Krafton IPO: Bookbuilding Results & Index Fast Entry.

STAR50 Index Rebalance Preview. With only 2 trading days left in the review period, Brian sees Shanghai Shen Lian Biomedical (688098 CH)Piesat Information Technology (688066 CH)Guangzhou Fang Bang Electr-A (688020 CH)Shenzhen Lifotronic Techno-A (688389 CH), and Appotronics Corp Ltd (688007 CH) as high probability deletions from the index. Link to Brian’s insight: STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market.

In Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower Brian expects Li Auto Inc. (LI US) to get Fast Entry to the Hang Seng Composite Index (HSCI) though, as a WVR security, the stock will only be eligible for Stock Connect once it has completed 6 months of listing plus 20 trading days. Li Auto could also be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December review. This will lead to a further drop in the HSCEI 2022 dividend futures since we do not expect Li Auto Inc. (LI US) to pay dividends in the near future, while the potential deletion is a higher dividend-yielding stock.

LQ45 Index Rebalance. The IDX has announced the changes to the LQ45 Index as a part of the August review. Barito Pacific (BRPT IJ) and Timah Persero (TINS IJ) have been added to the index while Bank BTPN Syariah (BTPS IJ) and Ciputra Development (CTRA IJ) have been deleted from the index. In  LQ45 Index Rebalance: BRPT, TINS In; BTPS, CTRA Out, Brian expects the impact of passive funds (and active funds) will be quite high on Barito, Bit Digital (BTBT US), and Ciputra and significantly lower on Timah.

MSCI Aug 2021 Index Rebalance Preview. MSCI is scheduled to announce the results of the August 2021 Quarterly Index Review (QIR) on 11 August (early morning of 12 August Asia time) with the changes implemented after the close of trading on 31 August. In  MSCI Aug 2021 Index Rebalance Preview: Potential Changes After Week 1; Positioning at Work, Brian reckons potential inclusions to the MSCI Standard Index are SITC International (1308 HK)Huabao International Holdings (336 HK)Momo.Com Inc (8454 TT)Chinasoft International (354 HK)China United Network A (600050 CH)Ecopro BM Co Ltd (247540 KS)SK IE Technology (361610 KS)CRRC Corp Ltd A (601766 CH),  Beijing Wantai Biological-A (603392 CH)Beijing Kingsoft Office Software-A (688111 CH)Beijing Roborock Technology-A (688169 CH)Imeik Technology Development (300896 CH)StarPower Semiconductor Ltd (603290 CH)Advanced Micro-Fabrication Equipment-A (688012 CH)Ginlong Technologies Co Ltd (300763 CH) and China Baoan (000009 CH). Potential exclusions are Bangkok Bank PCL (BBL/F TB)Bank of East Asia (23 HK)Taiwan Business Bank (2834 TT)KMW Co Ltd (032500 KS)Perennial Energy Holdings Ltd (2798 HK)Douyu International Holdings (DOYU US) and Gaotu Techedu (GOTU US).

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

Zioncom (8287 HK)30.00%LegoOutside CCASS
Sun King Power Electronics (580 HK) 12.22%CLSAOutside CCASS
China Ecotourism (1371 HK) 19.98%HSBCOutside CCASS
Sheng Ye Capital (6069 HK) 12.78%UBSSinomax
Suncity Group (1383 HK) 74.86%MortonHaitong
Weiye (1570 HK)42.95%HSBCGlory Sun
Niraku Gc Holdings (1245 HK) 31.33%ShenwanOutside CCASS
Source: HKEx

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


Global Capital Spending: Recovering After Resilience During Pandemic, but Nuances Persist

By Said Desaque

The mainstream financial media mistakenly uses the term of animal spirits to encapsulate all forms of capital spending. While the COVID-19 pandemic temporarily crushed animal spirits, projects receiving prior approval simply had their start dates delayed. Non-commodity capital spending has remained resilient during the pandemic and will register robust gains in 2021.

China’s rise as an economic power means that Asia Pacific corporates are the main contributors to global capital spending, while Europe and North America’s share has declined significantly. Improved commodity prices means that Latin America should register strong capital spending in 2021, while Europe should make its significant improvement since 2006.

Structural factors forcing companies to invest in digital technology and environmentally-friendly production techniques will persist and help to underpin capital spending in the aftermath of the COVID-19 pandemic. Higher capital spending in the semiconductor sector will alleviate product shortages across various end users, but there are fears that higher investment will come on stream after demand rolls over producing another supply glut similar to 2018.

The pandemic has created great hype about the need for companies to invest in intangible assets, thereby further casting doubt on the relevance of the Q-ratio as a measure of equity valuation. US data indicates that equipment and structures still dominate aggregate capital spending and even technology companies need to undertake sizeable investment in tangible assets to conduct business.

Cyclical forces, notably in the US, will also determine the outlook for capital spending, particularly if there are risks of policy mistakes to counter higher inflation. High corporate cash levels have traditionally been supportive for capital spending, but difficulty in finding worthwhile long-term projects since the financial crisis has raised the ante on companies to deploy cash in merger & acquisitions, as well as share buybacks.


Did Passive Rebalancing Trading on SKT Start Last Friday?

By Sanghyun Park

As of last Friday’s closing price, SK Telecom’s foreign ownership burnout rate was 94.93%.

So, the foreign room is 5.07%, a level where the MSCI foreign inclusion factor should be reduced from the current 1.0 to 0.25. It is now almost certain that SKT’s index weight will decrease by 75% in this August QIR.

Post review adjustment factorForeign room (1-FOL burnout)
Current adjustment factor≥ 25%15~25%7.5~15%3.75~7.5%< 3.75%
1.001.001.000.500.250.00
0.501.000.500.500.250.00
0.251.000.500.250.250.00
Source: MSCI

Now, the key question is when will SKT’s passive rebalancing trading start reflecting this situation. In this regard, a fairly significant trade movement was detected last Friday.

Of course, the stock market overall was down last Friday. The KOSPI 200 fell 1.15%. However, SK Telecom declined more significantly than KOSPI 200, and its decline was also visibly larger than its direct peers, KT and LG U+.

What we need to pay more attention to here is the selling trend of foreign investors.

Considering that most of the passive funds that follow MSCI Standard Korea are foreign institutions, the most reasonable indicator that can determine whether rebalancing trading occurs should be overseas investors’ trading patterns.

Then last Friday, net foreign trade became negative for the first time in almost a month, and in particular, this level of net foreign trade (-83,058 shares representing 0.12% of the SO) is the highest since December 10 of last year.


KOSPI200 Index Rebalance Preview: Two Changes in September; Five in December

By Brian Freitas

There could be two changes to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the September index futures expiry with KakaoBank (1349010D KS) and Krafton Inc (259960 KS) getting Fast Entry and replacing Lock&Lock (115390 KS) and Jw Pharmaceutical (001060 KS) at the close of trading on 9 September.

Then, the Korea Exchange (KRX) will announce the results of the December 2021 review of the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) in November. The constituent changes will be effective after the close of trading on 9 December.

We see 5 potential changes at the December rebalance with F&F (383220 KS), SL Corp (005850 KS), GeneOne Life Science Inc. (011000 KS), Myoung Shin Industrial Co.,Ltd (009900 KS) and Hyosung Chemical Corp (298000 KS) replacing F&F Co Ltd (007700 KS), Samyang Foods (003230 KS), Ilyang Pharmaceutical Co., (007570 KS), LX Holdings (383800 KS) and Dongwon F&B (049770 KS).

The potential inclusions have been outperforming the potential exclusions and this could continue as short selling is only permitted on index constituents and as active funds position for the rebalance following excellent returns at the June rebalance.


Afterpay (APT AU) – Square Is Buying Now in an All Stock Deal

By Brian Freitas

The Afterpay Touch (APT AU) stock has taken a beating recently following a lot of negative press about the Buy Now Pay Later (BNPL) industry. This included a Rebel Wilson ad pulled from Australian TV after complaints from consumer protection groups for playing down the risks of taking on debt. Here in New Zealand, there have been calls for greater regulation of BNPL with families struggling to afford basics while paying off the BNPL loans.

Now, Square Inc (SQ US) has announced that it plans to acquire Afterpay Touch (APT AU) in an all-stock deal that values Afterpay at a 30% premium to its last close. Afterpay Touch (APT AU) shareholders will receive 0.375 shares of Square Inc (SQ US) Class A common stock for each Afterpay share they hold on the record date. Square Inc (SQ US) may elect to pay 1% of total consideration in cash. The transaction values Afterpay Touch (APT AU) at A$39bn.

The transaction is expected to close in the first quarter of 2022 subject to shareholder approval, receipt of regulatory approvals and no material adverse effect in relation to Afterpay Touch (APT AU) or Square Inc (SQ US).

Square Inc (SQ US) intends to establish a secondary listing on the ASX to allow Afterpay Touch (APT AU) shareholders to trade Square Inc (SQ US) shares via CHESS Depositary Interests (CDIs) on the ASX. We expect the Square CDIs to be included in the S&P/ASX 200 (AS51 INDEX) replacing Afterpay Touch (APT AU), though the free float on the CDIs will be lower. 


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