Event-Driven Archives | Page 155 of 187 | Smartkarma

In this briefing:

1. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?
2. DHICO Rights Offer: Arb Yields for Early Arb Traders & Trade Approach for Late Arb Traders
3. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
4. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)
5. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

1. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”

The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP). 

There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.

Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan. 

Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot. 

There are clear patches in the fog. Two things shine through immediately. 

1. Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
2. The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.

There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July. 

The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.

More below.

2. DHICO Rights Offer: Arb Yields for Early Arb Traders & Trade Approach for Late Arb Traders

• As well expected, DHICO was heavily shorted yesterday, ex-rights day. We had a heavy buying movement by short-term arb traders at both local and foreign on DHICO right before ex-rights. As shown in the second table, yesterday’s shorting was mostly done by short-term traders again both local and foreign alike.
• These early arb traders had presumably bought DHICO shares at ₩8,076 on Mar 25~26. They then disposed shares at ₩6,974 yesterday. They then shorted the same amount of shares additionally at ₩6,983. As a result, at ceiling price ₩5,550 their yield is virtually fixed at 4.10%. If the offering price goes down to the bottom of ₩5,000 which is a very high possibility at this point, their yield will go up as high as 10.91%.
• For those who haven’t made early moves, there are now two options to play this event. You can either trade now and hope that subscription right price won’t hit breaking price level or wait until Apr 19~25 subscription rights period for a perfectly risk-free entry point. At the current price ₩6,800, breaking price for subscription rights is still at a comfortable level. That is, I’d make trades right now by shorting DHICO shares.

→ DHICO price just got down nearly 3%. At this reduced price, below are updated numbers for late arb traders’ arb yield. To me, it still seems we won’t be in a losing position if we make trades now. But we’d better hurry up.

3. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger

Today Nissan Motor (7201 JP) released its report from the Special Committee for Improving Governance. The FT also reported that Renault SA (RNO FP) (i.e. the French government) was keen to restart merger talks within twelve months with an eye towards then acquiring Fiat Chrysler Automobiles Nv (FCAU US).

The details of the former are unsurprising but disappointing, while Renault’s M&A ambitions just seem delusional at this point.

4. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.

5. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps. 

Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions. 

You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:

• finish the historical overview of the Li family and PCCW
• present my trade idea and rationale
• give a detailed overview of the business units of PCCW and the associated performance of each
• recap ALL of my stub trades on Smartkarma and the performance of each  

In this briefing:

1. Panalpina To Have EGM to Approve One Share One Vote
2. Golden Land: Less An Offer, More A Consolidation Of Interests

1. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

2. Golden Land: Less An Offer, More A Consolidation Of Interests

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for Golden Land Prop Dvlp (GOLD TB) at Bt8.50/share, ~2.4% premium to last close.

Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. There were no specific minimum acceptance conditions attached to the tender offer mentioned in the announcement.

Should FPP secure 90% of GOLD in the tender offer, it may proceed with its delisting. A voluntary delisting is still achievable with ~80% in the bag, but that is conditional on <10% of shareholders not voting against.

Preconditions to the commencement of the tender offer include the approval from disinterested shareholders in FPP, approval from “relevant contractual parties of GOLD and GOLD’s subsidiaries” and the approval from the Office of Trade Competition Commission.

The fact the Sirivadhanabhakdi family already holds, directly/indirectly ~80% in GOLD, such regulatory approvals should be forthcoming.

This appears a done deal. The only apparent risk is the expected shareholder vote of Univentures wherein Panote will likely need to abstain.

Currently trading at a gross/annualized spread of 1.8%/4.3% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

In this briefing:

1. Panalpina To Have EGM to Approve One Share One Vote
2. Golden Land: Less An Offer, More A Consolidation Of Interests
3. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

1. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

2. Golden Land: Less An Offer, More A Consolidation Of Interests

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for Golden Land Prop Dvlp (GOLD TB) at Bt8.50/share, ~2.4% premium to last close.

Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. There were no specific minimum acceptance conditions attached to the tender offer mentioned in the announcement.

Should FPP secure 90% of GOLD in the tender offer, it may proceed with its delisting. A voluntary delisting is still achievable with ~80% in the bag, but that is conditional on <10% of shareholders not voting against.

Preconditions to the commencement of the tender offer include the approval from disinterested shareholders in FPP, approval from “relevant contractual parties of GOLD and GOLD’s subsidiaries” and the approval from the Office of Trade Competition Commission.

The fact the Sirivadhanabhakdi family already holds, directly/indirectly ~80% in GOLD, such regulatory approvals should be forthcoming.

This appears a done deal. The only apparent risk is the expected shareholder vote of Univentures wherein Panote will likely need to abstain.

Currently trading at a gross/annualized spread of 1.8%/4.3% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

3. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

• DSME has this ₩2.3tril worth of CBs that carry a 30 year maturity. Korea Eximbank is the holder. HHI wants no change. Eximbank wants out as soon as possible. Current price of ₩32,600 is nearly a 20% discount to the conversion price of ₩40,350. It’d be still better for Eximbank to do conversion/sale even at this price. This is 27.54%. It will create huge overhang.
• HHI should be given much higher priority than DSME even when they are under the same roof. DSME acquisition is supposed to help HHI first, not the other way around. HHI shouldn’t be much incentivized to help turn around DSME in the short-term. Not only that, pressing down DSME price would probably be the only way for HHI to prevent Eximbank’s stake dumping.
• In a longer time horizon, things would depend on the outlook of the entire shipbuilding sector. To minimize risks, I’d go for long/short with HHI. What should be at least clear at this point is that HHI should be outperforming DSME in whatever fundamentals situations we are dealing with.

In this briefing:

1. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
2. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)
3. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On
4. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
5. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

1. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger

Today Nissan Motor (7201 JP) released its report from the Special Committee for Improving Governance. The FT also reported that Renault SA (RNO FP) (i.e. the French government) was keen to restart merger talks within twelve months with an eye towards then acquiring Fiat Chrysler Automobiles Nv (FCAU US).

The details of the former are unsurprising but disappointing, while Renault’s M&A ambitions just seem delusional at this point.

2. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.

3. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps. 

Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions. 

You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:

• finish the historical overview of the Li family and PCCW
• present my trade idea and rationale
• give a detailed overview of the business units of PCCW and the associated performance of each
• recap ALL of my stub trades on Smartkarma and the performance of each  

4. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

5. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.

In this briefing:

1. Golden Land: Less An Offer, More A Consolidation Of Interests
2. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

1. Golden Land: Less An Offer, More A Consolidation Of Interests

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for Golden Land Prop Dvlp (GOLD TB) at Bt8.50/share, ~2.4% premium to last close.

Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. There were no specific minimum acceptance conditions attached to the tender offer mentioned in the announcement.

Should FPP secure 90% of GOLD in the tender offer, it may proceed with its delisting. A voluntary delisting is still achievable with ~80% in the bag, but that is conditional on <10% of shareholders not voting against.

Preconditions to the commencement of the tender offer include the approval from disinterested shareholders in FPP, approval from “relevant contractual parties of GOLD and GOLD’s subsidiaries” and the approval from the Office of Trade Competition Commission.

The fact the Sirivadhanabhakdi family already holds, directly/indirectly ~80% in GOLD, such regulatory approvals should be forthcoming.

This appears a done deal. The only apparent risk is the expected shareholder vote of Univentures wherein Panote will likely need to abstain.

Currently trading at a gross/annualized spread of 1.8%/4.3% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

2. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

• DSME has this ₩2.3tril worth of CBs that carry a 30 year maturity. Korea Eximbank is the holder. HHI wants no change. Eximbank wants out as soon as possible. Current price of ₩32,600 is nearly a 20% discount to the conversion price of ₩40,350. It’d be still better for Eximbank to do conversion/sale even at this price. This is 27.54%. It will create huge overhang.
• HHI should be given much higher priority than DSME even when they are under the same roof. DSME acquisition is supposed to help HHI first, not the other way around. HHI shouldn’t be much incentivized to help turn around DSME in the short-term. Not only that, pressing down DSME price would probably be the only way for HHI to prevent Eximbank’s stake dumping.
• In a longer time horizon, things would depend on the outlook of the entire shipbuilding sector. To minimize risks, I’d go for long/short with HHI. What should be at least clear at this point is that HHI should be outperforming DSME in whatever fundamentals situations we are dealing with.

In this briefing:

1. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)
2. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On
3. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
4. Lynas (LYC AU): Wesfarmers’ Unattractive Bid
5. StubWorld: Naspers Embeds Another Layer Into Tencent

1. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.

2. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps. 

Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions. 

You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:

• finish the historical overview of the Li family and PCCW
• present my trade idea and rationale
• give a detailed overview of the business units of PCCW and the associated performance of each
• recap ALL of my stub trades on Smartkarma and the performance of each  

3. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

4. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.

5. StubWorld: Naspers Embeds Another Layer Into Tencent

This week in StubWorld …

• There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.

Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

In this briefing:

1. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

1. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

• DSME has this ₩2.3tril worth of CBs that carry a 30 year maturity. Korea Eximbank is the holder. HHI wants no change. Eximbank wants out as soon as possible. Current price of ₩32,600 is nearly a 20% discount to the conversion price of ₩40,350. It’d be still better for Eximbank to do conversion/sale even at this price. This is 27.54%. It will create huge overhang.
• HHI should be given much higher priority than DSME even when they are under the same roof. DSME acquisition is supposed to help HHI first, not the other way around. HHI shouldn’t be much incentivized to help turn around DSME in the short-term. Not only that, pressing down DSME price would probably be the only way for HHI to prevent Eximbank’s stake dumping.
• In a longer time horizon, things would depend on the outlook of the entire shipbuilding sector. To minimize risks, I’d go for long/short with HHI. What should be at least clear at this point is that HHI should be outperforming DSME in whatever fundamentals situations we are dealing with.

In this briefing:

1. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach
2. Hopewell’s Egregiously Bad Offer, But What Can You Do?

1. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

• DSME has this ₩2.3tril worth of CBs that carry a 30 year maturity. Korea Eximbank is the holder. HHI wants no change. Eximbank wants out as soon as possible. Current price of ₩32,600 is nearly a 20% discount to the conversion price of ₩40,350. It’d be still better for Eximbank to do conversion/sale even at this price. This is 27.54%. It will create huge overhang.
• HHI should be given much higher priority than DSME even when they are under the same roof. DSME acquisition is supposed to help HHI first, not the other way around. HHI shouldn’t be much incentivized to help turn around DSME in the short-term. Not only that, pressing down DSME price would probably be the only way for HHI to prevent Eximbank’s stake dumping.
• In a longer time horizon, things would depend on the outlook of the entire shipbuilding sector. To minimize risks, I’d go for long/short with HHI. What should be at least clear at this point is that HHI should be outperforming DSME in whatever fundamentals situations we are dealing with.

2. Hopewell’s Egregiously Bad Offer, But What Can You Do?

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  The IFA (China Tonghai Capital) considers the $38.80/share Offer to be fair & reasonable. The Scheme is conditional on ≥75% for, ≤10% against from disinterested shareholders. As Hopewell is HK-incorporated, there is no “head count ” test.  The full timetable is as follows:

After hearing conflicting opinions on what constitutes a blocking stake, a chat with the banker confirmed the blocking stake, as per the Companies Ordinance, is tied to 63.07% of shares out (i.e. Scheme shareholders – see page 95); whereas the Takeovers Code is tied to 59.42% of shares out. Effectively there are two assessments on the blocking stake and the more stringent (the 59.42% out in this case) prevails. 

With the Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years (the Glorious Property (845 HK) offer, which incidentally was voted down), the IFA creatively argues that extenuating factors such as the premium to historical price needs to also be taken into account. Hardly original, but that is where investors must decide whether this is as good as it’s going to get – given the Wu family’s control, there will not be a competing offer – or to hold out for a superior price longer term. This is a final offer and it will not be increased.

What the IFA fails to discuss is that the widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.

Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. And that is the disingenuous conclusion from the IFA that the premium to last close and with reference to historical pricing, is in effect the overriding reason to conclude the Offer is reasonable. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.

A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ).

Trading at a wide gross/annualised return of 7%/37.5%, reflecting the risk to completion, and the significant downside should the scheme be voted down. Tough one – the premium to last close and with reference to the 10-year price performance, should be sufficient to get it over the line, and the basis for this “bullish” insight. But only for the brave.

In this briefing:

1. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On
2. The Final Countdown Between NPS Vs Korea Air Chairman Cho Yang-Ho
3. Lynas (LYC AU): Wesfarmers’ Unattractive Bid
4. StubWorld: Naspers Embeds Another Layer Into Tencent
5. Wesfarmers Puts Out A Bid for Lynas

1. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps. 

Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions. 

You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:

• finish the historical overview of the Li family and PCCW
• present my trade idea and rationale
• give a detailed overview of the business units of PCCW and the associated performance of each
• recap ALL of my stub trades on Smartkarma and the performance of each  

2. The Final Countdown Between NPS Vs Korea Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

3. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.

4. StubWorld: Naspers Embeds Another Layer Into Tencent

This week in StubWorld …

• There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.

Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

5. Wesfarmers Puts Out A Bid for Lynas

This morning, Wesfarmers Ltd (WES AU) announced an indicative, non-binding proposal to the Board of Directors of Lynas Corp Ltd (LYC AU) to acquire Lynas at A$2.25/share, payable in cash in the form of a Scheme of Arrangement.  

This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price.

It is, however, a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian Minister for Energy, Science, Technology, Environment and Climate imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. On December 5th, the shares fell to A$1.65 and they have not recovered.

David Blennerhassett gave an overview of the license renewal issues and timeline in Lynas: Between a Hard Place and Just Rock just a few weeks ago. It is definitely worth a read as background for those not up to speed on the situation. 

This is very early, non-binding, conditional in the extreme, and conditional non-binding offers are a graveyard of Australian arbitrageurs. The Offer is not all that attractive to boot. But I expect the stock will go up anyway, and that may make for some interesting trading opportunities.

In this briefing:

1. Hopewell’s Egregiously Bad Offer, But What Can You Do?

1. Hopewell’s Egregiously Bad Offer, But What Can You Do?

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  The IFA (China Tonghai Capital) considers the $38.80/share Offer to be fair & reasonable. The Scheme is conditional on ≥75% for, ≤10% against from disinterested shareholders. As Hopewell is HK-incorporated, there is no “head count ” test.  The full timetable is as follows:

After hearing conflicting opinions on what constitutes a blocking stake, a chat with the banker confirmed the blocking stake, as per the Companies Ordinance, is tied to 63.07% of shares out (i.e. Scheme shareholders – see page 95); whereas the Takeovers Code is tied to 59.42% of shares out. Effectively there are two assessments on the blocking stake and the more stringent (the 59.42% out in this case) prevails. 

With the Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years (the Glorious Property (845 HK) offer, which incidentally was voted down), the IFA creatively argues that extenuating factors such as the premium to historical price needs to also be taken into account. Hardly original, but that is where investors must decide whether this is as good as it’s going to get – given the Wu family’s control, there will not be a competing offer – or to hold out for a superior price longer term. This is a final offer and it will not be increased.

What the IFA fails to discuss is that the widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.

Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. And that is the disingenuous conclusion from the IFA that the premium to last close and with reference to historical pricing, is in effect the overriding reason to conclude the Offer is reasonable. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.

A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ).

Trading at a wide gross/annualised return of 7%/37.5%, reflecting the risk to completion, and the significant downside should the scheme be voted down. Tough one – the premium to last close and with reference to the 10-year price performance, should be sufficient to get it over the line, and the basis for this “bullish” insight. But only for the brave.