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Capitaland

Last Week in Event SPACE: Capitaland, Boral, Milton/WHSP, Santos/Oil Search, Education Profit Ban

335 Views25 Jul 2021 07:04
SUMMARY

Last Week in Event SPACE ...

  • For those buying Capitaland (CAPL SP) because it is cheap and you expect to sell it to someone else once others realise how awesome it is, try to understand what people will get out of it, and the pace at which they will allocate money.
  • But I wouldn't short Boral Ltd (BLD AU) here. Not until you have some visibility whether Seven Group Holdings (SVW AU) keeps extending, and/or closes in on 75%. If Seven gets to 75%, walk away - they could theoretically force-delist if they have their paperwork in order.
  • The Milton Corp Ltd (MLT AU) / Washington H. Soul Pattinson and Co. Ltd (SOL AU) merger is complicated. But it still feels like people don't get it. There's some really interesting convexity here. Still. And the supply/demand tilt is remarkable.
  • Oil Search Ltd (OSH AU)'s latest setbacks - MD Kerian Wulff departure, Mubadala's sell-down, and Rick Lee's short-term memory loss - add to past failures and staff changes, stoking shareholder frustration. It is arguable whether this loss of confidence in the board plays into Santos Ltd (STO AU)'s court or not.
  • The initial story is that PRC online education platforms would not be allowed to raise money in capital markets, sell securities, go public. The bigger picture is that they are effectively being pushed out of business. There is a possibility this kills the entire business for some platforms.
  • Not surprisingly, Intouch Holdings (INTUCH TB)'s IFA says the Offer from Gulf Energy (GULF TB) is "appropriate". Equally unsurprising, Advanced Info Service (ADVANC TB)'s IFA has the opinion that the shareholders should reject the Tender Offer from Gulf.
  • Plus, other events, CCASS movements, and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events - or SPACE - in the past week)

M&A - ASIA

Capitaland (CAPL SP) (Mkt Cap: $15.5bn; Liquidity: $25mn)

The proposed construct, as discussed in the previous Capitaland (CAPL SP) Restructuring Is Big But Still Vague. Lots of Fine Print to Read, was complicated, and difficult to value, and required reading a lot of fine print, only some of which we had available. The previous Friday, Capitaland announced it had received SGX-ST approval to list Capitaland Investment Management (CAPINVEST SP). Saturday night, Capitaland released its Scheme Document. It is 922 pages of fine print. There is an Introductory Document which is shorter. It is 744 pages. There is also a brief 8-page press release and an Announcement of the Scheme Meeting.
  • When this was announced, there was a trade to be long and buy the dip, but this is not and has not been a very high beta trade. One has had to lever the position using the short CICT hedge for the distribution, and the implied leverage from going long and taking out forward cash (i.e. borrowing S$0.951/share, shorting CICT, and then using "equity" for the remainder to fund one's Capitaland long position. Going forward, Travis Lundy expects the trade is to sell if it goes too much further.
  • The IFA's valuation of Pro-Forma CLI is a bit on the aggressive side. The same IFA would most likely suggest that if the parent wanted to buy out minorities of that same entity, paying 0.8x NAV would be quite generous. Owners of Pro-Forma CLI will get a basket of REITs, private property funds, some properties which could get sold to REITs, etc. The kicker here is uplift. If the buildings can be sold to the REITs that CLI manages at a significant premium to NAV or RNAV, that would be positive for owners of CLI. They would end up buying back 20-40% of the assets in the form of the ownership of REITs in the Listed Fund segment, they would still sell 60-80% at a decent price. The likelihood of getting a price far north of 1.0x RNAV is perhaps debatable. And this deal has already seen an uplift.
  • For those who are uber-bullish CAPL here, Travis would urge them to figure out where they expect to get out of the non-listed real estate assets. If there is another 20% vs the mark, because the "fair value" ascribed by the IFA and the independent property valuation experts is, in fact, quite light, then you could see 30% upside on Pro-Forma CLI from here, and that would be 25% upside on CAPL. But think about the timeframe. And think about the buyer of that S$14.5bn of property at 1.2x RNAV and carrying value.

Boral Ltd (BLD AU) (Mkt Cap: $6.0bn; Liquidity: $46mn)

After Boral's board rejected Seven Group Holdings (SVW AU)'s $6.50/share Offer in its Target Statement of 9 June, Seven bumped its Offer on the 25 June, stating it would pay $7.30 cash if they get to 29.5%, and up to $7.40 cash if they get to 34.5%. Seven reached 29.5% by July 1, 34.5% less than a week later, then 52.65% on the 15 July. Clearing 50% automatically extended the Offer period (pursuant to s624 of the Corporations Act) to the 29 July - i.e. a two-week extension. Travis Lundy and I have tackled this Offer here, here, and here.

  • Seven now has 59.23%. With the Offer tentatively expected to close this coming week, in Boral Ltd: Seven's Done Deal. What Happens Next?, I addressed a handful of questions I and other readers have raised on the deal, such as how the creeper rule will apply under certain circumstances, whether Boral remains listed, will Seven extend the Offer. and where will shares trade If Seven holds <75% at the close of the Offer - i.e. no further extension.
  • Boral is a constituent of the S&P/ASX 200 (AS51 INDEX), FTSE All-World and the MSCI Small Cap indices. FTSE has already reduced the investability weight for the stock earlier this month and could reduce the investability weight further at the September QIR. In Boral (BLD AU): Index Impact from Seven's Offer, Brian Freitas reckon the Boral's weight in the S&P/ASX 200 (AS51 INDEX) should also be reduced at the September QIR.

Milton Corp Ltd (MLT AU) (Mkt Cap: $3.1bn; Liquidity: $3mn)

In mid-late June, the two largest Listed Investment Corporations in Australia - Milton and Washington H. Soul Pattinson and Co. Ltd (SOL AU) - announced plans to merge, with SOL (a.k.a. "WHSP") becoming the surviving entity. Milton had been trading at a discount to NAV, where NAV was 97% or so listed stocks. WHSP had been trading at a premium to NAV. WHSP agreed to pay a premium to NAV for MLT shares, but the construct provided for some really interesting other optionality (some positive, a little negative) for MLT shareholders.

  • If you want to trade the pure arbitrage, trying to monetise the option but not caring about the tilt to be long because of the index event, then you need to hedge out all the bits. If you are not into complicated things, and you like both WHSP and index risk, AND the upside tilt of the WHSP index inclusion, and you are a LONG ONLY investor... You should replace $100 of S&P/ASX200 exposure with $100.00-108.00 of MLT. You should ride the implied call option long position in WHSP.
  • The STRAIGHT ARB value without monetizing the option, was (at the time of Travis' insight) 2.3% for about 2.0-2.5 months. That is a decent annualised rate. The TRUE ARB value where you hedge out the optionality (long and short) offers about 4.5% net for 2.0-2.5 months.
  • The SMART ARB value gets you 2.3% of spread plus some portion of the "tilt" from the convexity AND it gets you - currently - about 70% of the delta of 60-100 days of ADV to buy. However, you need to own WHSP borrow (pre-borrow or pay-to-hold) because you will need it when the event comes. If you wait, all the borrow will be gone (a large chunk of it is already gone.

(link to Travis' insight: Milton's Marvelous Arb Meanders Along... Marvelously)

Oil Search Ltd (OSH AU) (Mkt Cap: $6.5bn; Liquidity: $35mn)

When questioned by analysts at an investor briefing on the 19 July as to any takeover offers, OSH's chairman Rick Lee denied it had received a change-of control approach. That wasn't entirely incorrect. It wasn't even close. The day after that briefing, Santos Ltd (STO AU) confirmed that on 25 June 2021 it had submitted a confidential, non-binding, indicative all-scrip merger proposal to Oil Search's board. The proposal, to be implemented through a Scheme, would result in Oil Search shareholders receiving 0.589 new Santos shares for each Oil Search share held. Upon completion, Oil Search shareholders would own 37% of the merged group and Santos shareholders 63%.

  • The implied transaction price was A$4.25 per Oil Search share, based on Santos’ closing price on 24 June 2021, or a 12.3% premium to Oil Search's closing price on the same day. Oil Search agreed there was strategic logic combining with Santos, but that the terms of the combo were "demonstrably not" fair.
  • There is clearly a lot of value to be unlocked from these two companies merging, and the two should continue to work towards a proposal. Ultimately, I agree with Oil Search here - low premium mergers typically pan out when both parties believe their shares are on par with each other. Both companies recovered at roughly a similar clip post the Covid-low, yet the ratio (OSH/STO) pre-Covid was considerably higher than where the current proposal is pitched.
  • I would expect Oil Search to engage at ~0.66x ratio, or ~25% premium to last close using both share prices as 24 June. That would give a 41%/59% Oil Search/Santos split in the merged entity.

Green Cross Cell (031390 KS)("GC Cell") / Green Cross LabCell (144510 KS) (GC LabCell)

South Korean biopharmaceutical companies GC Cell and GC LabCell announced last Friday they had entered into a definitive merger agreement to combine in an all-stock transaction. Following the completion of the Merger, GC LabCell will be the surviving entity and GC Cell will be the extinct entity. The exchange ratio is set at 0.4023542 GC LabCell Shares per GC Cell Share. At present, the companies have a combined market cap of KRW1.7tn (~US$1.5bn). The Deal has been approved by the Boards of both companies. The completion of this Transaction is subject to Shareholder Approvals and Regulatory Approvals and the Transaction is expected to close in 4Q 2021.

  • Both companies are affiliates of the Green Cross Group which is the largest shareholders in both companies. They hold 38.66% in GC LabCell directly and 9.29% indirectly. They hold 23.08% in GC Cell directly and 4.64% indirectly. Post-merger, they will hold 42.26% in the merged entity.
  • Janaghan Jeyakumar feels the exchange ratio is more in favour of GC Cell shareholders than GC LabCell shareholders from a fundamental angle (as discussed below) and as a result I expect GC Cell shareholders to vote in favour of the transaction. For dissenting shareholders considering using the put rights provided under Korean M&A laws, the expected acquisition price is currently set at KRW41,163 per GC Cell share.
  • Janaghan would tend to want to get in at higher than 10% annualised and get out at low single digits. Because the option is worth more than the spread, at current price, expect GC Cell to drop when the put rights go ex-. Avoid the Arb Trade at the current spread. However, expect this to trade with some noise until completion.

(link to Janaghan's insight: GC Cell - GC LabCell: Korean Biopharma Merger Trading Tight)

Systems integrator Empired Ltd (EPD AU) has entered into a Scheme with Capgemini SE (CGEMY US) at a price of A$1.35/share, a 64.6% premium to last close, and an all-time high. The Offer has the unanimous backing of Empired's board. In addition, CEO Russell Baskerville with 5.8% of Empired's outstanding shares intends to vote in favour of the Scheme. In addition to shareholder approval, the Offer is subject to OIO approval. The Offer is not subject to due dili or financing. This looks done. Link to my insight: Empired (EPD AU): Capgemini's Full Offer.

Australian small-cap Telco company 5G Networks Ltd/Australia (5GN AU) and related company Webcentral (WCG AU) announced on Friday that they have agreed to merge in a Scrip Transaction that will see 5GN shareholders receive 2 WCG shares per 5GN share. The companies claim that the Merger will "create a larger entity with a single shareholder base propelling the company towards ASX300 status". The Deal is conditional on shareholder approvals from both companies and is expected to be completed in late-October 2021. Link to Janaghan's insight: Webcentral - 5GN Merger: A Small-Cap Merger Aimed at ASX300 Status.

Wood flooring manufacturer Nature Home Holding Company (2083 HK)is currently suspended "pursuant to the Code of Takeovers and Mergers". On the 13 July, Nature Home announced a positive profit alert, in which it expects 1H21 profit to match or exceed that of 1H19's. As discussed in Squeeze Box: The Port Congestion Contagion, after the Covid fallout entrenched itself, people stuck at home in the US and elsewhere started buying stuff. Lots of it. Nature Home's revenue is still predominantly sourced from China. But there has been a noticeable shift since FY18, with exports taking up a larger percentage. Link to my insight: Nature Home (2083 HK): Possible Takeover Target.

EVENTS

China After School Tutoring Online Education Stocks Crushed - Investors Schooled

it was reported by the 21st Century Business Herald that China was going to ban IPOs by educational companies and platforms which tutor on subjects in the public school curriculum and ban investments in such companies by those which are already listed. Reportedly Beijing might ban tutors from making a profit. This particular news sent education (especially school curriculum tutoring platforms) stocks dramatically lower in Hong Kong trading, and in the US. This comes on the back of a crackdown starting earlier this spring on after-school tutoring platforms after Xi Jinping said in March at the Two Sessions that the practice was a "social problem" affecting kids social and mental health and he urged "resolute rectification." Right there, that should have warned everyone this story was not going to have a happy ending.
  • This followed a scandal in January where four schools, including Yuanfudao, Zuoyebang, and the education unit all hired the same actress to pose as a teacher in ads for their platform, in at least one video laying the guilt on parents saying if parents didn't sign up for the streaming courses, it could have consequences, "90% of mothers make mistakes" and "it could be parents themselves who ruin their kids [chances]." In one she was an English teacher with 35 years experience. In another, she had been a math teacher all her career. It was not a good look.
  • The media followed Xi Jinping's comments with polemics on predatory practices and fear-based advertising, which had gone rampant as the VC investees aimed at growth above all. This put an immediate halt to the preparations many of the mega-tech conglomerates invested in China - Alibaba Group (BABA US), Tencent (700 HK), Softbank Group (9984 JP), and others - had made to list their education-related projects.

  • The major issues for regulators appear to be: criticisms of false advertising, where the benefits to such education are promised but not proven, where there are spurious claims using fake claims; criticisms of the structure of the offerings; A number of courses are offered at RMB 1 for the whole course, but then they come back to charge you for extras later; the "burden" placed on children; and an air of get rich quick to the entire industry which is seen to be against the national interest.

  • Evelyn Zhang recently wrote about the change in attitude towards "white collar education" in A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education. It is a good read. Her advice on 3 July was to short all Chinese online education stocks which had a K-12 offering, and go long all companies which provided vocational training. After today, that will have been a beauty of a trade.

  • There are red flags all over the sector. Impossibly fast growth through shoddy governance, dodgy hiring practices, truly abhorrent advertising practices, accompanied by numerous accusations of actual fraud, eventually hits a wall. Most of the sponsors of and investors in these companies had hoped it would take longer to get to the wall. In China After School Tutoring Online Education Stocks Crushed - Investors Schooled, Travis would be wary of anyone who has a K-12 after-school business which makes up a significant portion of revenues.

Linklogis (9959 HK) debunked the allegations of the short seller Valiant Varriors, stating that the allegations are groundless and contains various misrepresentations, false allegations, and obvious factual errors. However, in Short Seller, Valiant Varriors Says Linklogis Is a Glorified Mortgage Broker & Linklogis Responds to Valiant Varriors: Valiant Effort But Fails to Address the Elephant in the Room, Oshadhi Kumarasiri believes the company’s statement fails to address the main point laid out by the short seller’s report which states that the company is nothing but a glorified mortgage broker trading at tech multiple. Sumeet Singh's view on this situation was discussed in Linklogis Short Sheller Report - Some Merit, Some Plain Drama - Mixed Bag.

STUBS

On the 19 April, Gulf Energy Development Public Company (GULF TB) announced a Voluntary Tender Offer (VTO) for shares not held in Intouch at Bt65/share. Bt65/share was bang-in-line with Intouch's then NAV/share. The Tender Offer has no minimum acceptance condition. On the 28 May, Gulf reduced the downstream offer for AIS to Bt120.93/share from Bt122.86/share originally. Gulf would now commence a voluntary tender offer for all securities in AIS on the same business day that it launches the Tender Offer for Intouch. The offer price for AIS is a takeunder in any event. A more detailed overview of the Offer can be found in my prior insights here, here, and here.

  • The VTO doc was despatched on the 28 June, and the Offer opened on the 29 June. The Offer period closes on the 4 August, with an expected payment on the 11 August. The IFA reports for both Intouch and AIS have now been announced. There is nothing terribly surprising in either. It's more one of disappointment what is not discussed. There was only a passing reference to Intouch's InVent - this would have been a great time to flesh out more detail on these ops.
  • Without the Offer, Intouch should decline 20-25%. Therefore, if you are a long-only investor owning for fundamental purposes, sell here or into the Offer. The weight in indices will go down as float is reduced so investors will have less tracking concern.
  • Gulf has no intention to delist Intouch during the period of 12 months after the end of the Offer Period. But there is nothing to stop Gulf from sitting on the bid at or around Bt65 after the close of the current Offer, which may force short covering. Within six months after the takeover closes, Gulf cannot pay more than Bt65/share. I would still avoid Intouch here, but I would not short it, or short tender the stock. Best to wait until the close of the Offer to get a clearer idea of what Gulf's intentions will be.

(link to my insight: StubWorld: IFAs Say "Yea" For Intouch, "Nay" For AIS)

Indofood Sukses Makmur Tbk P (INDF IJ) / Indofood CBP Sukses (ICBP IJ)

INDF is trading at 8.1x PER - against a long-term average of 8.5x - compared to ICBP's current and long-term average of 13.8x and 16.8x. INDF continues to provide an inexpensive exposure to ICBP growth prospects. Consensus target prices for both companies are off ~3% YTD. Arguably, a 40% discount to NAV is wide for what is largely a single stock Holdco. Should ICBP continue to outperform here - say a further 5-10% versus INDF - I'd recommend a long/short on a dollar-neutral basis. But right now, at its 12-month average, this is not an obvious call.

TOPIX INCLUSIONS!

Money Forward (3994 JP)(Mkt Cap: $3bn; Liquidity: $24mn)

Cloud-based business accounting software company Money Forward announced on 7th June 2021 that they had received approval to move from the Mothers Section to the First Section of the Tokyo Stock Exchange which triggers inclusion into the TOPIX Index. Previously, this situation was covered in TOPIX Inclusion: Money Forward (3994 JP). On 15th July 2021, Money Forward announced earnings for the quarter ending May 2021. In TOPIX Inclusion: Money Forward (3994) Could Outperform Freee (4478) Until End of Month, Janaghan took a closer look at how the stock has traded since the TSE1 promotion was announced and the upside potential for the remainder of the event timeline.

SHARE CLASS

INDEX REBALS

FTSE EPRA Nareit launched a change in Ground Rules on 24 June. As discussed in FTSE EPRA NAREIT Ground Rule Changes - Impact on J-REITs/Developed Asia Lessors, the big change was a lowering of the hurdle rate for entry within the Asia Pacific sub-index to the global level for DM markets, and that meant a number of REITs and property companies in Asia which had been just too small to get in will now more likely get into the index in September. The announcement is due 1 September. The inclusion date is 17 September. The Quiddity basket is a total of 38 we-think-likely candidates (there are some slight oddities in the calcs). We are now exactly four weeks in. There are five weeks left. The 38-name Basket has out-performed the FTSE EPRA Nareit AsiaPac index by 6.5% since the close of 24 June and 2.7% since I wrote about it 1 July. Link to Travis' insight: FTSE EPRA NAREIT Asia ADD Basket - More To Go.

Foreign buying and a cancellation of treasury shares has caused SK Telecom (017670 KS)'s foreign room to drop from just over 20% in April to just over 5% now. This drop in foreign room will lead to MSCI slashing SK Telecom's Foreign Inclusion Factor (FIF) by three-quarters at the August QIR, while FTSE will reduce the investability weight of the stock by 5% at the September SAIR. The ADR premium on SK Telecom Co Ltd (Adr) (SKM US) has not moved much over the last few months and the headroom has stayed the same. In SK Telecom (017670 KS): Passive MSCI/FTSE Selling & Trade Ideas, Brian reckons the situation could stay that way unless the foreign room on SK Telecom is exhausted.

XPeng (9868 HK) listed in Hong Kong on 7 July was added to the Hang Seng Composite Index at the close of trading on 20 July. However, being a WVR security, the stock will not be eligible for Southbound Stock Connect till early 2022. Subject to passing the velocity test, Brian sees Xpeng as an inclusion in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December rebalance, replacing Evergrande Real Estate Group (3333 HK). The inclusion of Xpeng ( in the index will push the HSCEI 2022 dividend futures lower. With the recent changes in China to companies looking to list on a foreign exchange, the HFCAA, and other structural changes to the index, in Xpeng (9868 HK): Potential HSCEI Inclusion & Impact on 2022 Dividends, Brian prefers a short position in the HSCEI 2022 dividend futures.

MSCI is scheduled to announce the results of the August 2021 Quarterly Index Review (QIR) on 11 August with the changes implemented after the close of trading on 31 August. In MSCI Aug 2021 Index Rebalance Preview: Changes After Day 1 in the Review Period Brian sees SITC International (1308 HK), Huabao International Holdings (336 HK), Momo.Com Inc (8454 TT), Chinasoft International (354 HK), China United Network A (600050 CH), Ecopro BM Co Ltd (247540 KS), CRRC Corp Ltd A (601766 CH), SK IE Technology (361610 KS), Beijing Wantai Biological-A (603392 CH), Beijing Kingsoft Office Software-A (688111 CH), Beijing Roborock Technology-A (688169 CH), Imeik Technology Development (300896 CH), StarPower Semiconductor Ltd (603290 CH), Advanced Micro-Fabrication Equipment-A (688012 CH) and China Baoan (000009 CH) being added to the Standard index.

OTHER M&A & EVENT UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.

Often these moves can easily be explained - the placement of new shares, rights issue, movements subsequent to a takeover, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

Name

% chg

Into

Out of

Remegen Co Ltd (9995 HK) 23.42%FutuOutside CCASS
King Fook (280 HK) 17.46%HSBCOutside CCASS
Jiayuan International (2768 HK) 14.30%HaitongValuable
Starrise (1616 HK)15.03%TargetOutside CCASS
Hebei Yichen Industrial (1596 HK) 12.82%Get NiceGF
Bank Of Jiujiang (6190 HK) 11.30%ChiyuYue Xiu
China Merchants Securities Co Ltd (H) (6099 HK) 34.00%JPMCiti
Antengene (6996 HK) 22.77%St ChartOutside CCASS
China Hanking Holdings (3788 HK) 10.20%ChangjiangUBS
Source: HKEx

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

Name

% chg

Into

Out of

Sanxun (6611 HK)11.48%CCBOutside CCASS
Source: HKEx
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