Xiaomi Corp (1810 HK) is unlikely to be bothered by the fact that it sold shares “for capital optimization purposes” at HK$23.70 just three months ago, and will continue buying until they have bought back HK$10bn.
AGL Energy Ltd (AGL AU)‘s proposed demerger is a pragmatic development in response to a rapidly changing environment.
The most straight-forward trade would be to wait for TSE’s announcement at the close of the 5th business day of April (7th April 2021) and get long the stocks who are about to have the 0.75x factor removed. It is also worth considering building a “high conviction” basket.
Last month as Xiaomi shares were getting pummelled in the selloff prior to the Trump Executive Order securities ban going into effect, with FTSE and S&P selling, and MSCI expected to delete the stock at the last minute, the company made an unusual Voluntary Announcement to the effect that the company intended to buy back shares in the market due to the sharp fall in price since earlier in the year, prior to being named on the DoD list. There should be questions about the entire thing. This was discussed in Will Xiaomi Get the National Team Bounce? They placed shares at HK$23.70 in December to “optimize the capital structure of the Company” and support a healthy and sustainable development. The shares had, in three months, fallen all the way back down to where the company placed shares. That did not suggest urgency or dramatic share price weakness vs the previous capital action. But this week, the company started buying back shares on market.
This buyback may help absorb any eventual selling by the Seller of the original subscription shares (Lei Jun) who was locked up for three months after the original placement, should he want to sell, but it would also clear out loose shares prior to the FTSE re-inclusion which would be expected in June.
Travis Lundy expects that most active US Person holders would have sold prior to the last date just to avoid getting crowded out in the rush. He expects US Persons have had a chance to load up on Chinese ADRs and shares in the past week or so with the demise of Archegos Capital so do not need to buy stocks which didn’t get crushed for the same reasons.
Travis expects the drive here now to be the buyback and the EV story, even though there is not a lot to it yet. Eventually, it will be the spinout-of-subs story. He expects that traders can buy the dips in Xiaomi as Xiaomi management will be willing to buy them too. But this buyback will clear out only 2.0-2.5% of float. It clears out some loose hands. It does not create major impetus find a new class of buyer.
AGL announced it was splitting into two separate companies: a thermal coal generation business and a separate zero-carbon energy retailer. The split follows a raft of new initiatives/developments recently including an agreement with suppliers for grid-scale battery plans, the renewal of the Portland smelter contract, and the participation in PowAR’s acquisition of Tilt Renewables Ltd (TLT NZ) (Tilt Renewables: Mercury/PowAr’s Big Blow). Speculation of a demerger has been running hot since Australia’s oldest energy unity grappled with softening power prices, and a A$2.29bn loss in the 1H21, exacerbated by A$2.7bn in impairment charges. The share price reaction to the split was largely muted.
New AGL will be Australia’s largest “multi-product” energy retailer in terms of the number of services provided to customers. New AGL would have a 2.1GW portfolio of flexible generation and storage, covering renewables (such as access to wind power through AGL’s stake in the PowAR fund), gas power, and batteries. New AGL would be carbon neutral for direct emissions from day one. PrimeCo would be Australia’s largest electricity generator (and largest emitter of greenhouse gases), encompassing the large coal power plants. AGL expects PrimeCo to see a step-down-change in emissions reductions as plants close, including a 20% reduction in 2023; a 50% decline by 2035; and net zero in 2050.
There is a rapidly expanding investment community focusing on environmental, social, and corporate governance. The demerger provides investors with a choice on their carbon investment exposure, and for those investors who reject AGL given its coal-reliant operations.
AGL appears pretty beaten up here. Yet the demerger announcement provides shareholders with a much-needed choice with respect to their carbon exposure. Arguably, the split should be positive for forward growth for both entities – the carbon and non-carbon businesses.
On 25 March after the close, it was announced that the MBO/Takeover/Tender Offer for Sakai which had been bumped in price from ¥2850 to ¥3000 had, in fact failed. The company announced that it was reinstating the March-end dividend that it had previously. From the beginning, the takeover was too cheap. The Tender Offer ended up getting ~63+% of the shares out, which was less than the 66.67% necessary to complete successfully. That the tender offer got to that level and was not extended on a technicality is somewhat telling. That 37% of shareholders did NOT tender is quite interesting. Then on Friday, after the stock dipped hard and bounced back decently, we got new news of an activist having bought 6.2% of the shares out.
Travis expects because of the news that Murakami-san has bought, the assumption is that he will try to oblige management to offer better value to all shareholders. He would want to be long here.
On the 29 March, Mortgage broker MOC announced it had entered into a Scheme Implementation Agreement with REA Group Ltd (REA AU). The Offer consideration of $1.95/share is a 66% premium to last close. An interim dividend of A$0.04/share announced on the 18 February and to be paid on the 15 April will also be added. The ex-date was the 25 February. MOC’s directors unanimously recommend the Scheme. In addition, directors holding an aggregate of 12.7% out have confirmed they will vote in favour of the Scheme. Save for standard Scheme conditions and FIRB approval, the Scheme is not subject to due diligence or financing conditions.
That directors’ aggregate holding of 12.7% will include Rodney Higgins’ (co-founder and NED) 12.4% stake. Spheria is MOC’s largest shareholder with 19.9%. Spheria ramped up its shareholding in the 4Q18-1H19. The consideration price under the Scheme appears to be well above Spheria’s average in-price. Commonwealth Bank of Australia (CBA AU) – MOC’s second-largest shareholder with 17.5% – increased its holding in November 2011 by ~17.2% to 25.2% after acquiring Count Financial (by way of a Scheme), which in turn held 17.2% in MOC.
This has the support of the founder and in-the-money Spheria will arguably support the Scheme. I think the likelihood this Scheme necessitates a bump is slim. Trade the spread – which is tight at a 1.8%/7.5% gross/annualised. But this is not a super liquid arb situation.
Functional chemicals trading house Shoko’s parent Showa Denko K.K. (4004 JP) announced earlier this month that it was going to support a Tender Offer whereby a third party would launch a tender offer with the aim to buy 85% of the subsidiary. Showa Denko would retain 15%. The price came in below the average of the high and the low of the DCF range. The deal is at an EV of 3.3x the 5-year average EBITDA. That masks the fact that the company runs about 4.0x average EBITDA in net receivables (2.5x) and securities holdings (1.5x – not included as assets in the DCF). Procedural adherence to the METI Fair M&A Guidelines? Minimal at best.
There is a shareholder agreement in place between the two future shareholders and the deal was that the new buyer would agree to keep all employees on for 3 years. For that, Showa Denko is supporting the sale of minorities’ shareholdings to the new buyer at a substantial discount to book value. The market so far has not appreciated this and the shares are only in the last couple of days trading down to the Tender Offer level.
In his original insight Travis suggested that it would take about 3.3mm shares to block this and that if 11-12% of the shares held by retail tendered, that might get it over the line. At this point, he expects it is more like 900,000-1,000,000 shares or about 8-9% of the company. This deal is not done yet. It could still be bumped. Travis would want to be long this at terms, still.
I estimated CEG was trading at a discount to NAV of 77% (at the time of my report) against a one-year average of ~62%. China Evergrande Auto (CEA) shares declined 6.98% this past Monday after state-owned media outlet, Xinhua, targeted the company for creating a share price bubble without having produced any electric cars. The media arm singled out issues in the NEV industry – but not specifically targeting CEA – of false advertising and safety concerns, resulting in over 33,000 EVs being recalled due to safety concerns, according to SAMR. Additionally, the vehicles’ claimed range was rarely achieved in practice. NEV is how China refers to low- or zero-emission vehicles.
This industry is red-hot. According to Barron’s, EV production in China has increased nearly 400% year to date. Sales are up more than 300%. Government incentives, including tax credits, and licensing and driving benefits, make EVs a very attractive option for Chinese new-car buyers. NIO, XPeng, and Li are expected to grow sales by more than 100% year over year in 2021. NIO did announce on the 26 March, that first-quarter sales and production would fall short of management’s original guidance, cited the global automotive semiconductor shortage.
The market is assigning negative P/B for CEG’s property ops, net of CEA. The holding in CEA is now worth 183% of CEG’s market cap. CEA’s share price appears unsustainable, irrespective of the company’s intention to be the world’s largest EV producer. Xinhua’s commentary is stating the obvious. CEG is a set-up here versus CEA. As with CEA, CEG is tightly held. It would not be a big undertaking to lift shares higher.
The Tokyo Stock Exchange (TSE) calculates Free-Float Weight (FFW) for each listed company and uses this value as a key component of TOPIX Index Calculation. For companies with “low liquidity” the FFW will be multiplied by a fixed liquidity factor of 0.75 to derive the final FFW used for index calculation. This affects both TSE-1 incumbents and new entrants (depending on the date of entry). Every April, the application of this liquidity factor is reviewed by the TSE for all TSE1 constituents. Last April, 71 constituents saw their liquidity factors removed causing an increase in their respective FFWs used for index calculation resulting in a TOPIX upweight. This situation opens up interesting opportunities for a basket trade.
In January and February we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented. In contrast, not a single TSE1 Section Transfer was announced in the month of March 2021. However, this is only the calm before the storm.
In April 2021, we are expecting dozens of companies to enjoy TOPIX Index upweights as a result of the annual liquidity factor review (and this will mean dozens of downweights too). On the other hand, although fewer companies will qualify under the new rules, small-cap companies could use M&A as an alternative route to Section Transfers to meet criteria.
The average premium for the new deals announced (or first discussed) in March was ~33%, with a year-to-date average of ~32% (58 deals). This compares to the average premium for all deals in 2020 (158 deals) and 2019 (145 deals) of 31% and 31.5% respectively.
MSCI Malaysia May SAIR Preview. Using data from the close on 26 March, Brian Freitas see 9 potential deletions from the MSCI Malaysia index. That is a big number since the index has 38 constituents at present. Given the large AUM tracking the MSCI Standard index and the not so great liquidity in Malaysia, there will be a large impact on the stocks that are deleted from the index. Link to Brian’s insight: MSCI Malaysia May SAIR Preview: Plenty of Potential Deletions with Large Impact.
The JPX-Nikkei 400 is composed of common stocks listed in the First Section, Second Section, MOTHERS Market, and the JASDAQ Market of the Tokyo Stock Exchange. This is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents that are selected based on several factors including market capitalization, trading value, operating profits, and ROE. A periodic review will be conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. This review will be conducted using the final business day of June as the base date. In JPX-Nikkei 400 Rebalance: Pre-Event Basket Adjustments for March-End, Janaghan Jeyakumar discusses the latest adjustments required for the basket portfolio based on March-end data.
This revised guide – Quiddity M&A Guide 2021: Hong Kong – is part of a series of M&A guides that our Quiddity team are publishing to aid investors in understanding the rules, parameters, possibilities, and processes when companies conduct mergers and acquisitions.
The initial guide – Quiddity Hong Kong M&A Guide 2019 – was published in April 2019. Since that time, there have been various new developments, many of which relate to PRC-incorporated companies being taken private. This is an update.
This week, the Hong Kong government released a press statement concerning the implementation of the inspection arrangements for the Companies Registry. This will limit the disclosure of identification numbers and residential addresses of company directors filed with the registry. Criticism from shareholders, journalists, and the private sector will fall on deaf ears this time around, unlike in 2013.
The controlling shareholders of Kerry Logistics Network (636 HK) (KLN), including Kerry Properties (683 HK), plus shares held by executive directors, comprise 63.1% of shares out. These shareholders have given an irrevocable to tender 575.545mn shares or 32% of shares out. Those irrevocables have now been fulfilled – this forms part of the pre-conditions. Elsewhere, KLN/ SF Holdings transaction is understood to be under a SAMR simple case review.
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.