Last Week in Event SPACE: Beijing Jingneng, Maeda Road, Justbon, Tencent, Intouch, JCCC/​Astra

Back on the 17 November, Jingneng announced a voluntary conditional offer at HK$2.70/share. The Composite Document was despatched on the 31 December, and the EGM and H-share class meetings were held on the 19 February. All resolutions were passed. For the H-share class meeting, 97.9% of shares in attendance voted for the Offer. The vote was not seen as a risk to the deal. Yet shares are off 4.3% as I type. The low turn-out at the meeting (38.21% of H-shareholders) is likely the cause of today's move. 61.79% of shareholders didn't bother to cast a vote - does that apathy to the Offer make it harder for the bankers to rustle up the necessary 90% to tender shares?

• Does the turnout matter? Given the Harbin Electric precedent, the Offer may be extended beyond the standard 60 days, and such an option is alluded to in the Composite Doc. But the Offeror needing ~95% of all H-shares remains a thorny issue. With the IPO markets running hot, my guess is that Jingneng is siloed into the "too-hard" basket. The low turn-out at the shareholder meetings was probably a good excuse to exit. I don't think the low turnout necessarily translates to a low(er) tendering condition.

• Currently trading at a massive gross spread of 26%. Or 27% downside to the unaffected price - before any adjustment for performance over the past eight months. And all indications suggest the back-end price is now materially higher than that original undisturbed price. If it does not go through, the downside should not be significant, if at all, at these levels. And current valuations are not demanding - 7.0x PER on an LTM basis. I suggested buying Jingneng outright at $2.15/share or against a basket of peers. Unless you believe the basket will outperform Jingneng by 26% in the near-term.

• Tendering to date? In Hong Kong, shares tendered into an Offer must be done outside of CCASS. The Offer is open for tendering following the despatch of the Composite Doc. At least 33.44% of shares out have now tendered, including those held in HKSCC.

Maeda Road Construction Co (1883 JP) (Mkt Cap: $1.5bn; Liquidity: $5mn)

Maeda Corp (1824 JP), Maeda Road (1883), and Maeda Seisakusho (6281 JP) made an announcement they would merge their economic interests in the formation of a Holding Company to be effective on October 1st. The stated purpose is to combine to better take on the headwinds in the construction industry which result from ageing demographics and weaker local and national budgets by unifying the group, improving the liquidity and allocation of management resources made scarce in future by a declining working population, and to speed up management decision-making. This is a relatively easy three-way scrip deal. It looks a done deal. Then there is getting comfortable with the back end.

• This deal is a bit too cheap for Maeda Road shareholders. It is even cheaper for Maeda Seisakusho shareholders. Unfortunately, it appears there is nothing they can do about it. Maeda Corp and friendly shareholders appear to control about 63% of the votes of Maeda Road, and 70+% of the votes of Maeda Seisakusho, without counting on votes from generally go-along-to-get-along retail and passive investors. Theoretically, Maeda Corp shareholders could object but there would be no reason for them to do so. This deal suits them very well.
• Travis Lundy expects this trade can be put on in some size at a relatively tight spread. Beware the dividends. He expects it can be market-made relatively tightly. There are almost no major index implications. There is a little bit of a back-end "lookback option."
• There is a considerable back story to Maeda Corp & Maeda Road, which are tackled by Travis over several insights beginning with Not All "Parent-Sub" Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road.

(link to Travis' insight: Maeda Corp/Road/Seisakusho - 3-Way Merger 1 Year After Hostile Takeover)

(link to Travis' insight: First REIT Rights Allocations)

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

I estimate JCNC is trading at a 33% discount to NAV against a 12-month average of ~30%. Astra accounts for 85%/73% of JCNC's NAV/GAV. Yet the past year's data is skewed on account of COVID. Going back a decade, the simple ratio (JCNC/ASII) and implied stub remain off their long-term averages. The current ratio and implied stub of 40.5x and (S$5.76)/share, compares to the 10-year average of 49x and (S$1.57/share).

• The Trade: The sentiment for Indonesian autos is upbeat. But I would not go long ASII/Short JCNC here. I think a more credible NAV discount for JCNC is ~20%, where it frequently traded pre-COVID. I'd be more inclined to continue employing a set-up trade here.

On 22nd March 2018, after market close in Hong Kong one of the largest overnight placements was launched. On that day, Naspers (NPN SJ) sold US$10bn worth of Tencent. Naspers provided a three-year lock-up at the time of the deal. That lock-up will expire next month. In this note, Sumeet Singh talks about the upcoming lock-up expiry, its implications and the updates since then.

Shinoken Group (8909 JP) (Mkt Cap: $0.4bn; Liquidity: $2mn)

Shinoken has been a reasonably fast-growing real estate and related services businesses company and until 2018, everything was on the up for the previous five years. The company has been built out of growing its niche, and expanding into other niches via M&A. At the moment, the stock is cheap (~7x net profit guidance) and has an OK dividend yield of 3.6%. The company has a very high historical ROIC and would for many investors represent an almost ideal small cap investment in the space. Full year earnings reported on 12 February were OK. Guidance was weak because while revenues were guided 10% higher, OP and NP were guided basically flat.

• Shares have fallen 12-13% since then, in part due to disappointment from earnings guidance and in part due to the announcement that the company would sell nearly 3% of the company to the CEO's eponymous foundation for a nominal 1 yen per share (less than 0.1% of the current share price). This is proposed in order to support the foundation's activities by allowing the foundation to receive annual dividends to fund itself. So it will pay 1 million yen once to receive 40 million yen per year in perpetuity.
• This was taken badly. As it should be. The CEO has 20% of the company and he could gift 1 million shares to the Foundation himself. This disposition would need to be approved by a special resolution of shareholders at the 26 March AGM. I expect there are enough foreign and active economically-minded shareholders to vote against to block this.
• Because Travis expects this gets blocked, and he expects the board of directors will hear an outcry, he thinks this will mean the shares will rebound. Travis expects the current downswing is probably a buying opportunity. Longer-term, he expects both revenues and earnings to climb again off the recent post-business-transformation dip. Buy the dip. You cannot buy now and vote your shares at the AGM but the numbers do not appear to favor approval if enough investors get upset.

In late November, Travis updated my "JAPAN FLOW: Foreign Investor Flows Still Matter" series with JAPAN FLOW: Foreign Investor Flows Still Matter (Redux, Reduxed) - Playing Catchup. The series, which he has written about for years, suggests foreign investors invest in Japan pro-cyclically based on a relatively simple indicator. His conclusions in late November was that foreigners were "behind the curve" and needed to play catchup. That was despite the fact that they had purchased ¥1.5trln of stocks in the previous four weeks. Since end-November, they have net purchased more than ¥1.7 trillion worth of Japanese equities through 12 February (the data through 19 Feb is not available until 26 February).

• In terms of flow "push" (what NEEDS to be done rather than what WANTS to be done), Travis expects there is natural selling by pensions into year-end of ¥1trln give or take, and natural buying from here to fiscal year-end of about ¥800bn- ¥1trln by the BOJ and companies conducting buybacks, plus I expect more buybacks to be announced. Cross-holding selling through sales of blocks would be additional. A lot of that would be purchased by foreign funds who would hedge their purchases through the sale of other stocks or futures.
• That means that the "NEED" flows are likely reasonably evenly-balanced from here to the mid-March. Public pension transitions often continue through the last half of March when corporate buyback activity slows down, but dividend reinvestment will start in the last week of March.
• In terms of timing, Travis expects the "pressure" to be neutral near-term, with a slight break in the third week of March as corporate buybacks take a pause before fiscal year-end, then back upwards as dividend reinvestment gets done in the last week of March.

(link to Travis' insight: JAPAN FLOW: Foreign Investor Flows Catching Up ('Need' Vs 'Want' into FY-End))

On 23 February, G4S PLC (GFS LN) urged shareholders to accept Allied's offer as bid battle ends. With both bids now final, the outcome depends on G4S shareholders. The 245p offer from Allied values G4S at c. £3.8 bn, ~4.3% higher than Garda's hostile offer. Link to Jesus' insight: G4S: White Knight Prevails.

Bloomberg reported on 24 February that Mondi PLC (MNDI LN) had been "speaking with advisers" about a potential takeover offer for DS Smith PLC (SMDS LN). In DS Smith - Mondi: Potential Combination, Jesus adds his thoughts.