Last Week in Event SPACE: Evergrande, CJ Corp, Altaba, Japan Drilling, Guoco

Last Week in Event SPACE ...

• Evergrande Real Estate Group Limited (3333 HK)'s apparent last-minute buybacks raise governance and stewardship questions
• CJ Corp (001040 KS) buys back ₩40bn of its own shares after the implied stub hits a six-year low
• Procedural issues force Altaba Inc (AABA US) to extend its tender offer
• Nippon Yusen Kk (9101 JP)'s sponsorship of Japan Drilling Co Ltd (1606 JP) is a heavy load on its balance sheet
• Guoco Group Ltd (53 HK)'s latest offer is an improvement, but by no means a knock-out

Evergrande Real Estate Group Limited (3333 HK) (Mkt Cap: $34.5bn; Liquidity: $127mn)

The arithmetic of Evergrande's buyback price, volume, VWAP - when matched against the intraday price and volume - reasonably strongly suggests the company was responsible for the last minute moves this week.

• On Tuesday and Wednesday, sudden buying lifted the stock price 6% in a matter of minutes. On both days.
• Thursday's disclosure stated it had repurchased 40.351mn shares for HK$834.7mn (HK$20.6857/share) which is a full 64bp through full-day VWAP for the day despite the fact that the company was more than half the volume. Friday's closing 10mn purchase lifted the print by ~1.7%.
• That makes a total of 82,980,000 shares or 0.629% repurchased under the current authorisation. By Travis Lundy's calculation, they have about 63.5mm shares left to buy before they run out of room under the float rules.

(link to Travis' insight: Evergrande (3333 HK) Buys Back Stock "On The Dip")

CJ Corp (001040 KS) (Mkt Cap: $3.3bn; Liquidity: $5.8mn)

• CJ Corp said it will buy back ₩40bn worth of shares (287,770 shares) @ ₩139,000/share in the market from July 6 to Oct 5.
• The buyback accounts for 0.99% of shares out and will increase treasury shares to 11.17% from 10.18%. As of 1Q18, CJ Corp, on a non-consolidated basis, had a little more than ₩100bn cash on hand.
• Last week I highlighted CJ Corp's implied stub had touched a 6-year low in my insight StubWorld: CJ Corp's Multi-Year Low Implied Stub.

(link to Sanghyun Park 's insight: CJ Corp (001040): Share Buyback Summary)

Altaba Inc (AABA US) (Mkt Cap: $58.7bn; Liquidity: $1bn)

Altaba announced that it has extended the Tender Offer to purchase up to 195,000,000 of its own shares until August 8th 5pm NYC time. The previous close was expected to be July 11th. A condition to the Offer was an exemptive order permitting participation by any stockholder of the Fund who is an "affiliated person", and Altaba did not expect to get that order in time for the original close.

• Apart from this probably leading to a slight widening in the spread, the deal is still expected to go through. Travis expects pro-ration below 100%, so one has to be willing to own the residual at a roughly 27.5% discount to adjusted NAV to trade into it from here if you assume a 50% proration.

• Alibaba Group Holding Ltd (BABA US) also said it has postponed its planned CDR offering, and that it "will come back if conditions permit." This postpones the time by which BABA might be "obliged" to buy shares in order to put them into a depository to offer the CDRs to the public.

(link to Travis' insight: Altaba Tender Extension - Waiting for SEC Exemptive Order)

Briefly ...

Japan Drilling Co Ltd (1606 JP) (Mkt Cap: $bn; Liquidity: $128mn)

Mio Kato, CFA discussed the emergence of Nippon Yusen Kk (9101 JP) as a sponsor for Japan Drilling, which follows on from a June announcement Nippon Yusen would initiate reorganizational proceedings following a tough period with low oil E&P investment leading to three consecutive years of losses. This is no trivial investment for NYK with Japan Drilling sitting on ¥31.6bn in total debt and ¥86.0bn in total liabilities. There is uncertainty surrounding this news, however, given the enormous fall in the share price, for those with the risk appetite, he believes the risk-reward is positive here.

(link to Mio's insight: Japan Drilling: Drops 95% on Reorganisation News and Rebounding 51% as NYK Emerges as Sponsor)

Jcontentree Corp (036420 KS) (Mkt Cap: $729n; Liquidity: $12mn)

Jcontentree said it will offer 30mn shares (~20.8% dilution) at a tentative offer price of ₩5,390, raising ~₩161.7bn. July 16th is the first round of price determination with Sept 3 the final price date. Subscription rights will be traded for 5 trading days from Aug 22 to Aug 29. New shares will commence trading on Sept 28. Proceeds to be applied to film/TV drama production to compete against Netflix's growing presence. So potential arb opportunities via disposing of subscription rights and selling shares after ex-rights date in the coming months.

(link to Sanghyun's insight: Jcontentree Rights Offering Summary)

Guoco Group Ltd (53 HK) (Mkt Cap: $5.3mn; Liquidity: $1.5mn)

Guoco has received a privatization offer from Guoline (again) by way of a scheme of arrangement at $135/share (which can be received in cash OR cash & scrip [into Hong Leong Financial Group (HLFG MK)]) vs. the undisturbed price of $118/share.

• Elliott has given an irrevocable for its 9.72% stake, while First Eagle, which held 7% as at 31 Dec 2017, has not. A blocking stake at the Scheme meeting is 2.517%. Guoco is incorporated in Bermuda, therefore there will also be a headcount test. No dividends will be declared and paid during the offer period. The offer has not been declared final.
• The offer is at ~30% discount to the Dec-2017 book value and my NAV. That NAV primarily comprises listcos, a portfolio of blue-chip international equity securities, and cash. This offer price looks wrong for what is a very clean Holdco structure.
• Trading at a 6.3%/27% gross/annualised spread. That's probably about the right level. There is a non-negligible chance this deal does not get up. It is not a knock-out price, while the 10% blocking stake and headcount test (Bermuda incorporated) should keep the spread wide.

(link to my insight: Guoco's Latest Offer Is Still the Wrong Price)

Taiyo Nippon Sanso Corp (4091 JP) (Mkt Cap: $6.5bn; Liquidity: $72mn)

Taiyo announced that it would acquire substantially all of the European business of Praxair Inc (PX US) as part of Praxair's efforts to divest assets to gain European approval for its merger with Linde AG (LIN GR).

• The acquisition provides Taiyo with immediate scale in the European market where it previously lacked a presence. At first glance, the 11.4x FY1 EV/EBITDA (12.5x trailing and 10% assumed growth) and 17.1x FY1 EV/OP (18.8x trailing and 10% assumed growth) acquisition multiples look quite reasonable compared to the average 10.8x EV/EBITDA and 17.3x EV/OP of the industry.
• With net debt of ¥279bn vs. an acquisition price of roughly ¥644bn, this will not be easy to digest. Net debt will rise from a relatively healthy 67.74% to 224% vs. a previous maximum of 162% since 1994. While the acquisition should help to increase margins, net-net, we have a slightly negative view of the acquisition. Still, the stock popped ~12% on the news.

(link to Mio's insight: Taiyo Nippon Sanso: Acquisition of Praxair's European Business Will Tax Balance Sheet)

Shire PLC (SHP LN) (Mkt Cap: $51.2bn; Liquidity: $130mn)

Since the deal was announced, the spread to terms has remained stubbornly wide as investors in Shire and foreign investors in Takeda Pharmaceutical Co Ltd (4502 JP) have worried about a shareholder proposal from Takeda dissidents to be dealt with at a recent AGM, which might have put the deal in jeopardy (it wasn't going to); have been wondering whether domestic investors of Takeda would vote for the deal when the time comes in calendar Q4 or early Q1 next year; and importantly, whether the deal would be accretive to investors given newfound worries over the competitiveness of the haemophilia business.

• Travis believes the Shire leg is reasonably well-supported here by both a large discount and future dividend on Takeda (and the Takeda shares represented in Shire's share price). At the moment, he expects the merger to go through and expects the discount to tighten slowly over time; but also expects the spread to remain relatively wide compared to other mergers because of structural and timing issues.

(link to Travis' insight: Takeda/Shire II: Drugs, Divvies, and AGM Votes)

Briefly ...

Sirtex Medical Ltd (SRX AU) (Mkt Cap: $1.3bn; Liquidity: $13mn)

There's 6.5% upside for less than 3 months til completion. The undertakings by the buyers, who are liable jointly and separately, plus the deposit, plus the Exclusive China Commercialisation Rights clause, the control over the financing and required votes at CGP, and the undertaking on CFIUS all suggest this gets done. Varian has walked. There is a large break fee. This should look like a reasonably safe situation. Even IF Bruce Gray were to launch a counter effort off a 5% holding to simply try to block the CDH-CGP bid just for the sake of it, it might not be well-received. Travis thinks the risk is lower than the annualised return of 25+% implies.

((link to Travis' insight: Sirtex Trading Wide: FIRB Approval Gained, Founder Buys Back In)

Fortis Healthcare Ltd (FORH IN) (Mkt Cap: $1bn; Liquidity: $0.62mn)

With the bid deadline set at 3 July, Kemp Dolliver, CFA, nicely summarised the outcome of investigation findings (pursuing the Singh brothers for recovery of 500 Cr; brand license), the financial performance (following the release of Q4 and FY2018 results) and the comprehensive turnaround plan. All in, Kemp remains bearish because he thinks that bids for the company from IHH Healthcare Bhd (IHH MK) and Manipal-TPG are unlikely to increase, while Munjal-Burmans and Radiant-KKR withdrew from the race.

(link to Kemp's insight: Fortis Healthcare: Looking Ahead)

Red Star Macalline Group Corp Ltd (1528 HK) (Mkt Cap: $4.7bn; Liquidity: $1.75mn)

The partial offer closed with 785.6mn shares tendered, 19.94% of issued shares, 73.92% of the total issued H shares and 202% of the 388.9mn H shares to be bought back. The settlement is on or before the 17 July.

(link to Travis' insight: Red Star Macalline Partial Tender - Proration Results Estimates)

Orient Overseas International Ltd (316 HK)(Mkt Cap: $6.2bn; Liquidity: $11.4mn)

Composite doc dispatched. Offer closes 27 July. Payment 7 Aug. Fair & reasonable opinion from IFA.

Henderson Land Development (12 HK)(Mkt Cap: $23bn; Liquidity: $12mn)

In my weekly stub round-up, I provided various charts showing the performance of a 40 Holdcos. Overall, the average NAV discount steadily widened in the first half of the year. Passive, property and illiquid Holdcos widened the most; while liquid and tech-related Holdcos were roughly flat during the same timeframe.

• Worst performers, year-to-date: United Co Rusal Plc (486 HK), Kingboard Chemical Holdings (148 HK) (the NAV discount has increased ever since it announced it had sold its ~9.61% stake in Cathay Pacific Airways (293 HK) last November), and Pasona Group Inc (2168 JP). Best performers year-to-date (discount narrowing): China Conch Venture Holdings Ltd (586 HK)(now trading at a premium to NAV), and Guoco Group Ltd (53 HK) (subject to a scheme which I discussed here).
• Henderson's 14% decline in the past month compares to a 7.6% for its peer group. Hong Kong-property counters have been in the cross-hairs of recent government initiatives to achieve affordable housing - and Henderson is the largest farmland owner - although arguably there is little in the way these initiatives will halt ever-increasing prices, with options tabled such as a 15-years-to-completion reclamation (as opposed to farmland and brownfield).

(link to my insight: StubWorld: A Year-To-Date Review in Charts)

En Japan Inc (4849 JP) (Mkt Cap: $2.2bn; Liquidity: $12mn)

Following its share offering discussed here: EN-Japan Offering - Big And Small At the Same Time, there is potentially a big inclusion event, absorbing a large portion of the shares sold in the Offer. By the TOPIX Index Methodology, the stock will be included in TOPIX at the close of the day before the last day of the month subsequent to listing on the TSE1. In this case that means the close of Monday 30 July. The inclusion event will likely be for 3mm+ shares, making it a US$150mm event at the current price.

• At 30x forward earnings, the stock is not "cheap" vs the market multiple of TPX Small or TOPIX as a whole. But forecast EPS growth this year is 25%, at the top end of the market, so some will want to own that growth.
• Travis expects foreigners have bought the dip and a number of the foreigners who bought the deal will not flip for the index inclusion. He expects domestic retail may flipped given the extraordinary volume on June 11th, the day of delivery. The question is: who bought?
• For the moment, Travis is biased to the stock being squeezed and remains bullish the stock vs the index. There should be another inclusion of roughly 1.1mm shares next April assuming there are no more shares liquidated (lockup is 180 days).

(link to Travis' insight: EN Japan (4849 JP) - Upcoming TOPIX Inclusion Event)

My ongoing series flags large moves in CCASS holdings over the past week or so (~10%), 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, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.