CONS Archives | Page 38 of 68 | Smartkarma

In this briefing:

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
2. Tesla’s New Plan – Buy Before You Try
3. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
4. Subaru: Another Month, Another Recall
5. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

2. Tesla’s New Plan – Buy Before You Try

Buried in the lede is that Tesla also is initiating additional price cuts across the board, including for Models S and X. It’s moving to an online-only sales strategy and closing hundreds of stores which will trigger additional layoffs.

Oh, and the first quarter will not be profitable after all, according to CEO Elon Musk on the conference call today to discuss Tesla’s announcements.

So is Telsa pursuing a new, evolving strategy for the future or is it being pushed to retrench?

Read on for Bond Angle analysis.

3. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

4. Subaru: Another Month, Another Recall

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.

5. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

In this briefing:

1. Tesla’s New Plan – Buy Before You Try
2. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
3. Subaru: Another Month, Another Recall
4. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
5. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

1. Tesla’s New Plan – Buy Before You Try

Buried in the lede is that Tesla also is initiating additional price cuts across the board, including for Models S and X. It’s moving to an online-only sales strategy and closing hundreds of stores which will trigger additional layoffs.

Oh, and the first quarter will not be profitable after all, according to CEO Elon Musk on the conference call today to discuss Tesla’s announcements.

So is Telsa pursuing a new, evolving strategy for the future or is it being pushed to retrench?

Read on for Bond Angle analysis.

2. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

3. Subaru: Another Month, Another Recall

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.

4. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

5. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

In this briefing:

1. Descente Descended and Itochu Angle Is More Hostile
2. Nutrien’s Move On Ruralco Makes Agronomic Sense
3. Hargreaves Lansdown (HL/:LN) No Flow, No Go
4. S&P 500 and S&P 600 Testing Resistance
5. Diageo Proposes Another Partial Tender for Sichuan Swellfun

1. Descente Descended and Itochu Angle Is More Hostile

Descente Ltd (8114 JP) has been in the press quite a bit in recent days with management commentary about how the company and directors disagree with the Tender Offer launched by Itochu Corp (8001 JP) to raise their stake from 30% to 40% and how it could lead to conflict of interest and worsening management, lower morale for employees, and a loss of independence.

Management, former management, and former employees have all joined the party. Wednesday saw a significant sell-down of shares to a post-Tender Offer low, but it was not clear why.

Descente had, on the 26th, noted in a puff piece in the Nikkei that it would move up the release of its next Mid-Term (Three Year) Plan (normally due in May this year), and it would focus on growing direct sales in China through more stores, growing sales in the US through adding products to the list (currently the major product in North America is skiwear), selling LeCoq Sportif in Indonesia and Munsingwear in Vietnam. WHEN is unknown, but the explicit goal is to encourage shareholders to keep their shares rather than tender them to Itochu.

Today saw a new filing from Itochu in which it amended its original announcement, claimed Descente’s activity in the media was additional and additive to the Target Company Position Statement filed on 7 February, and for that reason, their activity had not been appropriately disclosed to shareholders. Furthermore, Itochu noted that while the jibber-jabber had been going on the last two-plus weeks, Descente had asked Itochu to negotiate post-Tender management structure plans, and Itochu had agreed. Itochu and Descente talked for 9 days from 11-20 Feb but Descente was bad-mouthing Itochu in the press at the same time. That induced Itochu to stop talks. And late today, the Nikkei has released a 27 February interview with the CEO of ANTA, Itochu’s longtime textile partner in China and a 6.86% holder of Descente shares, where he says that he supports Itochu’s tender offer, will not sell their shares in Descente, and would support Itochu efforts to restructure management. 

These three new developments change things in interesting ways, in my opinion pushing Descente’s own plans closer to Itochu’s, and introducing the possibility of significantly more hostility to come, with a much higher likelihood Itochu can win the proxy wars to come. 

In-depth analysis below the fold.

Previous insights on the situation and its runup are listed below.

2. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

3. Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  

Hargreaves Lansdown: What does it do ?

Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK’s largest direct to investor platform administering £86bn of investments for more than 1.1m active clients

Why is it in the Short portfolio ?

Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

4. S&P 500 and S&P 600 Testing Resistance

We believe the market is at short-term overbought extremes and is contending with resistance. Resistance levels we are monitoring include 2,810-2,817 on the S&P 500 and the 200-day moving average on the S&P 600 Small Cap index… see charts below. We would welcome some consolidation or a mild pullback which would be a healthy correction of the current extended market conditions.

In today’s report we highlight attractive Groups and stocks within Manufacturing and Technology: Construction Equipment, Industrial Rental Equipment, Data Storage Solutions & Devices, Small-Cap, and Software, Financial Mgmt. Solutions.

5. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

In this briefing:

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
2. Subaru: Another Month, Another Recall
3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
4. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
5. Tesla – Truth and Consequences

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

2. Subaru: Another Month, Another Recall

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.

3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

4. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

5. Tesla – Truth and Consequences

Tesla’s problems aren’t going away, they’re escalating:

• Elon Musk is in trouble again with the SEC;
• Tesla’s brand-new general counsel is leaving after just two months on the job;

• Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked  with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).

• The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
• Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
• Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
• Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).

The common theme here is that all these problems were preventable, avoidable, and unnecessary. 

That’s not going away any time soon–as long as Musk remains in complete control.

How long will that be? 

Good question–Read on as Bond Angle analysis continues.

In this briefing:

1. Subaru: Another Month, Another Recall
2. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
3. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
4. Tesla – Truth and Consequences
5. Descente Descended and Itochu Angle Is More Hostile

1. Subaru: Another Month, Another Recall

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.

2. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

3. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

4. Tesla – Truth and Consequences

Tesla’s problems aren’t going away, they’re escalating:

• Elon Musk is in trouble again with the SEC;
• Tesla’s brand-new general counsel is leaving after just two months on the job;

• Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked  with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).

• The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
• Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
• Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
• Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).

The common theme here is that all these problems were preventable, avoidable, and unnecessary. 

That’s not going away any time soon–as long as Musk remains in complete control.

How long will that be? 

Good question–Read on as Bond Angle analysis continues.

5. Descente Descended and Itochu Angle Is More Hostile

Descente Ltd (8114 JP) has been in the press quite a bit in recent days with management commentary about how the company and directors disagree with the Tender Offer launched by Itochu Corp (8001 JP) to raise their stake from 30% to 40% and how it could lead to conflict of interest and worsening management, lower morale for employees, and a loss of independence.

Management, former management, and former employees have all joined the party. Wednesday saw a significant sell-down of shares to a post-Tender Offer low, but it was not clear why.

Descente had, on the 26th, noted in a puff piece in the Nikkei that it would move up the release of its next Mid-Term (Three Year) Plan (normally due in May this year), and it would focus on growing direct sales in China through more stores, growing sales in the US through adding products to the list (currently the major product in North America is skiwear), selling LeCoq Sportif in Indonesia and Munsingwear in Vietnam. WHEN is unknown, but the explicit goal is to encourage shareholders to keep their shares rather than tender them to Itochu.

Today saw a new filing from Itochu in which it amended its original announcement, claimed Descente’s activity in the media was additional and additive to the Target Company Position Statement filed on 7 February, and for that reason, their activity had not been appropriately disclosed to shareholders. Furthermore, Itochu noted that while the jibber-jabber had been going on the last two-plus weeks, Descente had asked Itochu to negotiate post-Tender management structure plans, and Itochu had agreed. Itochu and Descente talked for 9 days from 11-20 Feb but Descente was bad-mouthing Itochu in the press at the same time. That induced Itochu to stop talks. And late today, the Nikkei has released a 27 February interview with the CEO of ANTA, Itochu’s longtime textile partner in China and a 6.86% holder of Descente shares, where he says that he supports Itochu’s tender offer, will not sell their shares in Descente, and would support Itochu efforts to restructure management. 

These three new developments change things in interesting ways, in my opinion pushing Descente’s own plans closer to Itochu’s, and introducing the possibility of significantly more hostility to come, with a much higher likelihood Itochu can win the proxy wars to come. 

In-depth analysis below the fold.

Previous insights on the situation and its runup are listed below.

In this briefing:

1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
2. Tesla – Truth and Consequences
3. Descente Descended and Itochu Angle Is More Hostile
4. Nutrien’s Move On Ruralco Makes Agronomic Sense
5. Hargreaves Lansdown (HL/:LN) No Flow, No Go

1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

2. Tesla – Truth and Consequences

Tesla’s problems aren’t going away, they’re escalating:

• Elon Musk is in trouble again with the SEC;
• Tesla’s brand-new general counsel is leaving after just two months on the job;

• Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked  with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).

• The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
• Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
• Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
• Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).

The common theme here is that all these problems were preventable, avoidable, and unnecessary. 

That’s not going away any time soon–as long as Musk remains in complete control.

How long will that be? 

Good question–Read on as Bond Angle analysis continues.

3. Descente Descended and Itochu Angle Is More Hostile

Descente Ltd (8114 JP) has been in the press quite a bit in recent days with management commentary about how the company and directors disagree with the Tender Offer launched by Itochu Corp (8001 JP) to raise their stake from 30% to 40% and how it could lead to conflict of interest and worsening management, lower morale for employees, and a loss of independence.

Management, former management, and former employees have all joined the party. Wednesday saw a significant sell-down of shares to a post-Tender Offer low, but it was not clear why.

Descente had, on the 26th, noted in a puff piece in the Nikkei that it would move up the release of its next Mid-Term (Three Year) Plan (normally due in May this year), and it would focus on growing direct sales in China through more stores, growing sales in the US through adding products to the list (currently the major product in North America is skiwear), selling LeCoq Sportif in Indonesia and Munsingwear in Vietnam. WHEN is unknown, but the explicit goal is to encourage shareholders to keep their shares rather than tender them to Itochu.

Today saw a new filing from Itochu in which it amended its original announcement, claimed Descente’s activity in the media was additional and additive to the Target Company Position Statement filed on 7 February, and for that reason, their activity had not been appropriately disclosed to shareholders. Furthermore, Itochu noted that while the jibber-jabber had been going on the last two-plus weeks, Descente had asked Itochu to negotiate post-Tender management structure plans, and Itochu had agreed. Itochu and Descente talked for 9 days from 11-20 Feb but Descente was bad-mouthing Itochu in the press at the same time. That induced Itochu to stop talks. And late today, the Nikkei has released a 27 February interview with the CEO of ANTA, Itochu’s longtime textile partner in China and a 6.86% holder of Descente shares, where he says that he supports Itochu’s tender offer, will not sell their shares in Descente, and would support Itochu efforts to restructure management. 

These three new developments change things in interesting ways, in my opinion pushing Descente’s own plans closer to Itochu’s, and introducing the possibility of significantly more hostility to come, with a much higher likelihood Itochu can win the proxy wars to come. 

In-depth analysis below the fold.

Previous insights on the situation and its runup are listed below.

4. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

5. Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  

Hargreaves Lansdown: What does it do ?

Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK’s largest direct to investor platform administering £86bn of investments for more than 1.1m active clients

Why is it in the Short portfolio ?

Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

In this briefing:

1. Tesla – Truth and Consequences
2. Descente Descended and Itochu Angle Is More Hostile
3. Nutrien’s Move On Ruralco Makes Agronomic Sense
4. Hargreaves Lansdown (HL/:LN) No Flow, No Go
5. S&P 500 and S&P 600 Testing Resistance

1. Tesla – Truth and Consequences

Tesla’s problems aren’t going away, they’re escalating:

• Elon Musk is in trouble again with the SEC;
• Tesla’s brand-new general counsel is leaving after just two months on the job;

• Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked  with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).

• The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
• Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
• Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
• Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).

The common theme here is that all these problems were preventable, avoidable, and unnecessary. 

That’s not going away any time soon–as long as Musk remains in complete control.

How long will that be? 

Good question–Read on as Bond Angle analysis continues.

2. Descente Descended and Itochu Angle Is More Hostile

Descente Ltd (8114 JP) has been in the press quite a bit in recent days with management commentary about how the company and directors disagree with the Tender Offer launched by Itochu Corp (8001 JP) to raise their stake from 30% to 40% and how it could lead to conflict of interest and worsening management, lower morale for employees, and a loss of independence.

Management, former management, and former employees have all joined the party. Wednesday saw a significant sell-down of shares to a post-Tender Offer low, but it was not clear why.

Descente had, on the 26th, noted in a puff piece in the Nikkei that it would move up the release of its next Mid-Term (Three Year) Plan (normally due in May this year), and it would focus on growing direct sales in China through more stores, growing sales in the US through adding products to the list (currently the major product in North America is skiwear), selling LeCoq Sportif in Indonesia and Munsingwear in Vietnam. WHEN is unknown, but the explicit goal is to encourage shareholders to keep their shares rather than tender them to Itochu.

Today saw a new filing from Itochu in which it amended its original announcement, claimed Descente’s activity in the media was additional and additive to the Target Company Position Statement filed on 7 February, and for that reason, their activity had not been appropriately disclosed to shareholders. Furthermore, Itochu noted that while the jibber-jabber had been going on the last two-plus weeks, Descente had asked Itochu to negotiate post-Tender management structure plans, and Itochu had agreed. Itochu and Descente talked for 9 days from 11-20 Feb but Descente was bad-mouthing Itochu in the press at the same time. That induced Itochu to stop talks. And late today, the Nikkei has released a 27 February interview with the CEO of ANTA, Itochu’s longtime textile partner in China and a 6.86% holder of Descente shares, where he says that he supports Itochu’s tender offer, will not sell their shares in Descente, and would support Itochu efforts to restructure management. 

These three new developments change things in interesting ways, in my opinion pushing Descente’s own plans closer to Itochu’s, and introducing the possibility of significantly more hostility to come, with a much higher likelihood Itochu can win the proxy wars to come. 

In-depth analysis below the fold.

Previous insights on the situation and its runup are listed below.

3. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

4. Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  

Hargreaves Lansdown: What does it do ?

Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK’s largest direct to investor platform administering £86bn of investments for more than 1.1m active clients

Why is it in the Short portfolio ?

Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

5. S&P 500 and S&P 600 Testing Resistance

We believe the market is at short-term overbought extremes and is contending with resistance. Resistance levels we are monitoring include 2,810-2,817 on the S&P 500 and the 200-day moving average on the S&P 600 Small Cap index… see charts below. We would welcome some consolidation or a mild pullback which would be a healthy correction of the current extended market conditions.

In today’s report we highlight attractive Groups and stocks within Manufacturing and Technology: Construction Equipment, Industrial Rental Equipment, Data Storage Solutions & Devices, Small-Cap, and Software, Financial Mgmt. Solutions.

In this briefing:

1. Nutrien’s Move On Ruralco Makes Agronomic Sense
2. Hargreaves Lansdown (HL/:LN) No Flow, No Go
3. S&P 500 and S&P 600 Testing Resistance
4. Diageo Proposes Another Partial Tender for Sichuan Swellfun
5. Hyundai Motor Share Class: Time to Short Common & Long Pref

1. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

2. Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  

Hargreaves Lansdown: What does it do ?

Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK’s largest direct to investor platform administering £86bn of investments for more than 1.1m active clients

Why is it in the Short portfolio ?

Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

3. S&P 500 and S&P 600 Testing Resistance

We believe the market is at short-term overbought extremes and is contending with resistance. Resistance levels we are monitoring include 2,810-2,817 on the S&P 500 and the 200-day moving average on the S&P 600 Small Cap index… see charts below. We would welcome some consolidation or a mild pullback which would be a healthy correction of the current extended market conditions.

In today’s report we highlight attractive Groups and stocks within Manufacturing and Technology: Construction Equipment, Industrial Rental Equipment, Data Storage Solutions & Devices, Small-Cap, and Software, Financial Mgmt. Solutions.

4. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

5. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.

In this briefing:

1. Hargreaves Lansdown (HL/:LN) No Flow, No Go
2. S&P 500 and S&P 600 Testing Resistance
3. Diageo Proposes Another Partial Tender for Sichuan Swellfun
4. Hyundai Motor Share Class: Time to Short Common & Long Pref
5. China Tobacco Intl (HK) IPO: Proxy For the Chinese Cigarette Consumption

1. Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  

Hargreaves Lansdown: What does it do ?

Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK’s largest direct to investor platform administering £86bn of investments for more than 1.1m active clients

Why is it in the Short portfolio ?

Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

2. S&P 500 and S&P 600 Testing Resistance

We believe the market is at short-term overbought extremes and is contending with resistance. Resistance levels we are monitoring include 2,810-2,817 on the S&P 500 and the 200-day moving average on the S&P 600 Small Cap index… see charts below. We would welcome some consolidation or a mild pullback which would be a healthy correction of the current extended market conditions.

In today’s report we highlight attractive Groups and stocks within Manufacturing and Technology: Construction Equipment, Industrial Rental Equipment, Data Storage Solutions & Devices, Small-Cap, and Software, Financial Mgmt. Solutions.

3. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

4. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.

5. China Tobacco Intl (HK) IPO: Proxy For the Chinese Cigarette Consumption

China Tobacco International (Hong Kong), a subsidiary of the China Tobacco International, is seeking a listing in Hong Kong. Per media reports, the company plans to raise USD 100 million. In this insight, we will discuss the following topics: 

• What does China Tobacco International do?
• What is its relationship with China Tobacco?
• How did its different segments perform?
• The industrial backdrop

In this briefing:

1. S&P 500 and S&P 600 Testing Resistance
2. Diageo Proposes Another Partial Tender for Sichuan Swellfun
3. Hyundai Motor Share Class: Time to Short Common & Long Pref
4. China Tobacco Intl (HK) IPO: Proxy For the Chinese Cigarette Consumption
5. New Century Hotel (浙江開元酒店) IPO Review – Higher ADR and RevPAR than Peers but Margins Fall Short

1. S&P 500 and S&P 600 Testing Resistance

We believe the market is at short-term overbought extremes and is contending with resistance. Resistance levels we are monitoring include 2,810-2,817 on the S&P 500 and the 200-day moving average on the S&P 600 Small Cap index… see charts below. We would welcome some consolidation or a mild pullback which would be a healthy correction of the current extended market conditions.

In today’s report we highlight attractive Groups and stocks within Manufacturing and Technology: Construction Equipment, Industrial Rental Equipment, Data Storage Solutions & Devices, Small-Cap, and Software, Financial Mgmt. Solutions.

2. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

3. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.

4. China Tobacco Intl (HK) IPO: Proxy For the Chinese Cigarette Consumption

China Tobacco International (Hong Kong), a subsidiary of the China Tobacco International, is seeking a listing in Hong Kong. Per media reports, the company plans to raise USD 100 million. In this insight, we will discuss the following topics: 

• What does China Tobacco International do?
• What is its relationship with China Tobacco?
• How did its different segments perform?
• The industrial backdrop

5. New Century Hotel (浙江開元酒店) IPO Review – Higher ADR and RevPAR than Peers but Margins Fall Short

Zhejiang New Century Hotel Management Group (1158 HK) (NCH) is looking to raise up to US$179m in its upcoming IPO.

NCH is riddled with related party transactions, from the sales of consumer goods, carpets and wine to having 24% of its hotel management revenue come from related parties. There had been a handful of small acquisitions and disposals but it all seemed to be just reshuffling of assets between NCH and the controlling shareholder with no clear strategy. 

Key metrics show that even though NCH is operating at higher ADR and RevPAR compared to peers, it ultimately falls short in terms of EBITDA and net margins. It also has the lowest occupancy rate.

In this insight, we will focus on corporate governance issues, peer metric comparison, and relative valuation with listed hotel operators.