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Evergrande

Last Week in Event SPACE: Evergrande, Spark Infra, Naspers/Prosus, Boral, China Conch Ventures

344 Views18 Jul 2021 07:25
SUMMARY

Last Week in Event SPACE ...

  • 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)

EVENTS

Evergrande Real Estate Group (3333 HK) (Mkt Cap: $16.7bn; Liquidity: $41mn)

The company announced a board meeting for 27 July where the Board would consider a special dividend. Travis Lundy's first reaction was, he admits, one of surprise, but on second thought it should not be THAT surprising. The immediate public comments has seen suggested an attempt to squeeze shorts. Yes, according to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.

The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus.... [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China - not the PBOC, CSRC, or CBIRC - above them - urging him to Do Something - sell assets, lower debt, raise equity - deciding to pay a special dividend to its equity holders?

  • A special dividend is not meant to provide value to long-suffering public shareholders. It is not meant to exercise good capital management. It appears aimed at getting cash out of the parent company while it is still possible - perhaps to pay down debt against the shares, or perhaps just to get cash out. It does not seem particularly subtle. The company is under significant financial and regulatory pressure, bonds are trading super wide, and I expect lenders and regulators would much rather see spare cash at the parent company delivered back to creditors rather than Hui Ka Yan.
  • A special dividend like the last major special dividend in January 2020 would be to take HK$22bn of cash out of the company - HK$19bn of that would go to Hui Ka Yan and Chinese Estates and its owners. The company can't spend the cash on buybacks - it has about 150mm shares of room to buy back stock and at HK$10/share, that is only HK$1.5bn - about 6% of the last special div.
  • When the outcome is political AND where the party being saved has been previously greedy, it does not seem to be the zeitgeist that the private owner gets wealthy at the expense of the Chinese state. A political outcome therefore would likely hurt Hui Ka Yan. This idea of a "special dividend" therefore smacks of getting cash out while still possible. This is not positive for the stock. It is, instead, a step closer to restructuring which could involve public and private entities buying, and could involve long-term suspension of the stock, or a takeunder.

(link to Travis' insight: Evergrande's Very Special... Special Dividend?)

Singamas Container Holdings (716 HK) (Mkt Cap: $0.3bn; Liquidity: $1mn)

The conflation of a global pandemic, marginal air freight capacity, the Suez Canal blockage, Chinese port productivity curtailment due to Covid restrictions, a ten-fold increase in freight rates, and skyrocketing steel prices, has culminated in the mother-of-all sub-optimisation recipes.
  • Singamas is the only listed pure-play container manufacturer. The company announced a positive profit alert on the 12 March for FY20, followed by a further profit positive alert on the 30 June for its first half financials. The most recent announcement flagged net profit not less than US$50mn compared to Singamas' then market cap of ~US$180mn. Shares are up 35% in the last month and 169% in the past twelve months.
  • This week I had a chat with the Singamas' CFO to get a better understand of the dynamics currently at work, and what to expect going forward. I think Singamas is a buy here.

(link to Mio's insight: Singamas (716 HK): Q&A With The CFO)

RLX Technology Inc (RLX US) raised around US$1.4bn in its US listing in Jan 2021. RLX was the largest branded e-vapor company in China with a market share of closed-system e-vapor products in terms of retail sales value. RLX only sells its e-vapor products in China. While the company didn’t have cornerstone investors in the deal, it did have a lot of pre-IPO investors. The lock-up will expire over the next few days. Link to Sumeet Singh's insight: RLX Lock-Up Expiry- Stung by Regulation, What Early Investors Do Will Be Telling, >US$1bn Comes Free.

Reuters and other news media outlets reported that the State Administration of Market Regulation (SAMR) in China is likely to order Tencent Music (TME US) to give up exclusive rights to music labels and at the same time, impose a fine of RMB500,000 (US$30,912) for failing to appropriately report the acquisitions of Kugou and Kuwo in 2016. It was speculated earlier that Tencent Music would be asked to sell Kuwo and Kugou for not promptly reporting the two acquisitions. Link to Shifara Samsudeen's insight: TME: May Have to Giveup Exclusive Rights to Music Labels but Unlikely to Be Ordered to Sell Key Apps.

STUBS

Naspers (NPN SJ)/ Prosus (PRX NA) / Tencent (700 HK)

The Prosus EGM to consider and approve the transaction and cross-shareholding which comes from Prosus launching a Proposed Voluntary Exchange Offer to shareholders of Naspers) was held. Voter turnout - ex-Naspers - was ~73%. If the deal had been an overwhelming loss in terms of minority shareholder support, they might have thought about reconsidering their support for the project. It was not an overwhelming defeat, but it was not overwhelming support either. It is 52.83% of minorities FOR, 46.51% AGAINST. Based on this nominally being a majority of the minority, one should expect this to go ahead. The Prospectus is now out. The Exchange Offer ends on 13 August 2021. The new shares of Prosus will start trading on the 16th of August on the JSE, A2X, and Euronext Amsterdam.

  • Prosus holders uniformly want Prosus management to DO MORE for them to shrink the discount of Prosus shares to its NAV which is nearing 40%. They do not want complexity (ISS and Glass Lewis recommended a vote against). They want value realisation. So they vote against to show their displeasure. And Prosus board will, because they got a majority of the minority, probably just say "Thank you for your considered opinion. But we're right and you're wrong."
  • There is a quirk explained on p96 of the Prospectus. The interesting thing about this partial offer is that investors can effectively tailor their sale. The minimum pro-ration from a standard partial offer would be 47.59%. That is the minimum pro-ration here. But it appears that if you, the investor, now own 1,000,000 shares of Naspers and you want to guarantee that you will sell exactly 300,000 shares, you can do so.
  • For Travis, the obvious trade has been at 7+% to own the borrow for a buy-stock-and-short-tender-excess-borrow trade. He could see some people abstaining, but expect this gets done with a surprisingly low pro-ration. The professionalism of the index community and the domestic broker community is paramount. High throughput of excess borrow means lower pro-ration. Inefficiency means higher pro-ration.
  • Does this go through? For now, it probably gets past reasonably easily.

(link to Travis' insight: Prosus EGM Approves Partial Offer for Naspers - Next Steps Interesting, Part I)

I estimate CCV is trading at a ~12% discount to NAV compared to a one-year average of ~19%. Anhui Conch looks pretty beaten up here, as shares roll over without a corresponding reduction in street consensus. That decline is largely one of sentiment.

  • Turn, not a u-turn. Beijing appears to be fine-tuning its policy direction, leading to a clampdown on excess debt - in areas such as the unprofitable rail sector - that ballooned as a result of Covid stimulus measures.
  • In contrast, CCV's stub ops appear to be coming into their own, which is largely reflected in the implied stub. I would not be surprised to see CCV spin out this business at some later stage.
  • On balance, if you had set up a long CCV, short Anhui, I'd continue to track that trade here. I think it's too early to reverse the stub here, in light of the index deletion, and uncertainty as to China's medium-term construction growth outlook.

M&A - ASIA

Spark Infrastructure (SKI AU) (Mkt Cap: $3.4bn; Liquidity: $5mn)

Aussie poles and wires company Spark has rejected two take-private proposals from PR outfit firm KKR and Ontario Teachers’ Pension Plan Board (OTPPB). KKR/OTPPB's first proposal was A$2.70/share, by way of a Scheme, which would be reduced by the 1H21 dividend of A$0.0625/share. KKR/OTPPB subsequently reloaded with A$2.80/share - paltry 12.9% to last close - which was also summarily rejected on the grounds it undervalued Spark.

  • Spark's investments primarily comprise minority stakes in electricity assets that are controlled by the Li family's CK Infrastructure Holdings (1038 HK) and affiliate Power Assets Holdings (6 HK). You can find those holdings here. Any suitor taking out Spark will know they will play second fiddle to the Cheung Kong group.
  • The Critical Infrastructure Center facilitates FIRB's decision-making. Electricity assets are designated critical assets. Yet Spark does not hold a majority stake in its investments. This may help smooth over the application - but ultimately, the asset would be 100%-controlled by foreign investors. I think such an approval is still likely to get up.
  • KKR/OTTB have deep pockets. They can pay up. But I'm disinclined to chase it. Plus there is still the question mark over FIRB approval. The Offer is pitched at ~1.4x regulatory asset base. That's approximately where DUET Group (DUE AU) was taken out by CKI in 2017. The RAB multiple for the failed APA Group (APA AU) tilt was estimated at 1.6x.

(link to my insight: Spark Infra (SKI AU): KKR & OTPPB's Tilts Falls Short)

Boral Ltd (BLD AU) (Mkt Cap: $6.1bn; Liquidity: $44mn)

Boral's board rejected the Seven Offer in its Target Statement of 9 June. The Independent Expert Grant Samuel came out with a fair value range of A$8.25-A$9.13/share, and concluded the Offer was not fair or reasonable. In an ASX release on the 21 June, Boral said it would sell its North American Building Products business for US$2.15bn (~A$2.9bn). That figure was above expectations, but Seven criticized them for selling at a loss. About a week later, Seven bumped its Offer, saying it would pay $7.30 cash if they get to 29.5%. Or $7.40 cash if they get to 34.5%. Seven has now cleared 50% and the Offer is "scheduled" to close in 14 days. Seven now control Boral, unequivocally, through control of the Board of Directors, and would consolidate Boral into its own economics. Yet Boral continues to reject Seven's Offer.

  • What happens post-Offer completion. The stock looks on the expensive side, but there may be mitigating circumstances. This spring, Boral sold its 50% stake in USG Boral to Knauf Gips KG. And on 21 June, as part of a planned review and potential sale of targeted assets, Boral announced the sale of its North American Building Products business to Westlake for US$2.15bn. Seven, of course, objected to this, but based on the new pro-forma company EBITDA profile and the Board's targeted A$1.3bn of net debt, that meant a resulting surplus of A$3.4bn or about A$3/share.
  • It is not a good idea to short the shares expecting the price to fall until one gets close to the end of the Offer period and one can see how much is left over. If Seven gets to 75%, Travis would walk away from the situation completely. If Seven only gets to 55%, there will be a kind of air pocket. Everyone who WANTED to sell, could have sold (in the market, or to Seven). That could mean a dearth of new sellers at any price significantly below A$7.40/share. INDEX FUNDS would be sellers shortly after completion of the Offer. Active funds may not be - many of them who liked it sold. Those who liked it and still like it and did not sell may not see the need to increase their stake if Boral falls to A$7.00/share, or even A$6.50/share.
  • Very near-term, Travis would buy A$7.35 and tender. Slightly longer-term, he'd be inclined to short sell into the offer and buy back into the index downweight events. Longer-term, the airpocket means that there may be little way to discern on an ex-ante basis what the flows may hold. A great deal of that will be in the hands of Boral's board under Seven, and under Seven itself.

Australian Pharmaceutical Industries (API AU) (Mkt Cap: $0.5bn; Liquidity: $1mn)

Back on the 14 December 2018, wholesale and retail pharmacy health/beauty and lifestyle products operator API made public it had made an indicative non-binding proposal to key competitor Sigma Healthcare Ltd (SIG AU) through a Scheme of Arrangement whereby Sigma shareholders would receive 0.31 shares of API and A$0.23 in cash for each share of Sigma held. Travis Lundy discussed the Offer in API Tilts at Sigma Healthcare: Expect More and Sigma Healthcare Market Update: Strategic Review Expects More, concluding the Offer was light. Sigma thought so too and summarily rejected the Offer on the 13 March 2019 and terminated discussions. API subsequently sold its stake in Sigma on the 16 December 2019.

  • API has now announced an indicative, non-binding Offer from Wesfarmers Ltd (WES AU) by way of a Scheme at $1.38/share, a 20.5% premium to last close.
  • Separately, Wesfarmers has entered into an agreement with API's largest shareholder Washington H. Soul Pattinson and Co. Ltd (SOL AU) (WHSP), such that WHSP will vote its 19.3% interest in favour of Wesfarmers' proposal, in the absence of a superior Offer.
  • This is a non-binding proposal. Still, with WHSP's backing, you realistically have a $1.38/share floor, with the possibility of another bidder emerging. You could position yourself around the Offer Price (as it was trading at the time of the insight), but it's not a super liquid arb situation.

(link to my insight: API AU: The Hunter Turns The Hunted As Wesfarmers Makes A Move)

Youfoodz Holdings (YFZ AU) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

Australia-based ready-made meal delivery company Youfoodz announced they had entered into a Scheme Implementation Deed with multinational meal-kit delivery company HelloFresh AG (HFG GR) which will see them get acquired in an all-cash transaction that valued the company at a market cap of A$125mn. The Offer Price is A$0.93/share in cash. The transaction will be conditional on the receipt of regulatory approvals and Target shareholder approval. This is a friendly all-cash Deal. More precisely, this is a Rescue Offer.

  • However, the Offer Price seems light. The Offer Price A$0.93/share is 38% lower than the IPO Price of A$1.50/share in December 2020 (when e-commerce businesses were still trading at high valuations with the support of pandemic-driven demand). In less than 8 months of being listed, the shares had lost nearly two-thirds in value prior to the launch of this Deal.
  • In the absence of other proposals, this Deal will complete. The Scheme Booklet is expected to be sent to Youfoodz shareholders in September 2021 and the Scheme meeting is anticipated to be held in October 2021 with Deal completion expected in October or November 2021.

(link to Janaghan Jeyakumar's insight: Youfoodz (YFZ AU): HelloFresh's Lowball Takeover Offer Difficult to Block But Not UnBumbable)

iCar Asia Ltd (ICQ AU) (Mkt Cap: $0.2bn; Liquidity: <$1mn)

Back on the 30 October 2020, iCar, owner and operator of automotive portals in Malaysia, Indonesia, and Thailand, announced it had received a non-binding proposal from China-based Autohome (2518 HK), another auto internet platform, to acquire 100% of iCar's shares for A$0.50/share by way of a Scheme of Arrangement. A trading update on the 26 February said discussions were still ongoing regarding Autohome's proposal, with similar wording in the 30 April update, and the 2020 annual report (page 34). iCar has now announced it has received a non-binding proposal from privately-held Carsome Group to acquire 100% of iCar's shares for A$0.55/share by way of a Scheme.

  • Separately Malaysian-based Carsome has entered into an agreement with Catcha Group, iCar's largest shareholder, to acquire 19.9% of shares out in iCar via the issuance of shares in Carsome. That side agreement and the proposal are conditional on ASIC relief. Provided the agreement completes, Carsome and Catcha will jointly acquire the remaining shares not owned in iCar. This agreement/proposal appears an initial step towards listing Carsome/Catcha.
  • Pushback? An 83% premium to last close and a five-year high? I can't think of one, although it is not clear what was holding up the discussions with Autohome. Reportedly, negotiations broke down on account of the deteriorating relationship between China and Australia - yet the majority of iCar's assets are outside of Australia.
  • This looks like a knock-out bid. I suspect it is trading wide to terms given the downside to a deal break, and the low liquidity. But I expect this deal to get up. And Autohome? The relationship between Catcha and Carsome appears tight. And there is a lot overlap in the customer base for both companies. iCar is small beer to Autohome, but they appear to be shut out of discussions.

M&A - US

In Mio Kato's previous insight, he suggested that despite the fall in Douyu International Holdings (DOYU US) following the initial leak regarding the merger being rejected, Douyu's stock still had more downside. His ballpark target of $3.95 is still 20.6% lower than the last close and could perhaps even be somewhat generous. That is a pure fundamental perspective based on Douyu's struggles to remain profitable however and does not factor in event risk from a Tencent (700 HK) stake sale which we feel is higher for Douyu than for Huya. Link to Mio's insight: Huya Vs. Douyu - Will Tencent Sell Its Douyu Stake?

M&A - EUROPE

On 9 July, Philip Morris International (PM US) agreed to acquire Vectura (VEC LN) for 150p/share, approximately £918 mn via a scheme of arrangement. This is a 10.3% increase over Carlyle's offer. The market expects a raised offer by Carlyle, which seeks to scale Vectura's business. At the same time, Vectura is strategic in the new quest of Philip Morris. Link to Jesus Rodriguez Aguilar's insight: Philip Morris Outbids Carlyle in Healthcare Push.

The bid of MásMóvil for Euskaltel SA (EKT SM) makes strategic sense because it both reinforces the position of the enlarged group as the fourth largest national operator and the obtention of synergies through network sharing. The offered price assumes 24.3x Fwd P/E (vs. 14.2x median of European comparables) and 9.7x EV/EBITDA (vs 6.9x for comps). The deal should close by mid-August. Gross spread is 0.4%. Link to Jesus' insight: MásMóvil/Euskaltel: Deal Progress.

On 12 July 2021, Daily Mail & General Trust (DMGT LN) announced that its controlling shareholder, Rothermere Continuation Limited (RCL), had notified it of a possible offer for the entire share capital of DMGT not already owned by RCL. Considering that the Rothermere's own all the voting shares, it is highly unlikely that there will be any interloper risk. It also seems difficult that the family will abuse its power to rip off minority shareholders. In Many Moving Parts in Rothermere's Bid to Take DMGT Private, Jesus reckons that the initial figures may be sweetened.

On 14 July, Nordax Group AB (NDX SS), through Nordax Bank, further raised its offer to acquire Norwegian Finans Holding (NOFI NO) to NOK 105/share, cum dividend, from NOK 100/share, for a total consideration of c. NOK 19.6 bn. Link to Jesus' insight: Nordax/NOFI: Best and Final Offer.

INDEX REBALS

TOPIX is constructed differently than other major indices. It has no fixed number of constituents like S&P500, and it has reasonably loose rules on membership, which will soon get tighter as the TOPIX spends a few years matching the TSE Prime market section which launches 1 April 2022, but it probably will still not be tight enough to be a legitimate blue chip index. There is a slew of TOPIX rebalance trades every year. There are monthly "company data" changes. Then there are quarterly changes for FFW. And there is an annual liquidity factor adjustment rebalance. On the 7th last week, the TSE announced the July FFW changes. They are bigger than many expected. And more numerous (15 dozen changes). In July TOPIX FFW Rebalancing Trade, Travis sees a bit over US$2.5bn to sell on the down-weights.

Brian Freitas does not expect Bukalapak (BUKA IJ) to get Fast Entry to any of the major indices. The LQ45 index does not have a Fast Entry rule while stocks that are listed on the IDX's Development Board are ineligible for FTSE index inclusion. Bukalapak does not meet the free float market cap threshold for the MSCI Standard index and would need to close 25% higher on each of its first two trading days plus need the IDR (USDIDR CURNCY) to strengthen to have a chance as Fast Entry. Brian sees see Bukalapak being included in the LQ45 Index in February 2022 and in the MSCI Indonesia index in November 2021. If Bukalapak lists on the IDX Main Board, it could be included in the FTSE All-World index in December 2021. Link to Brian's insight: Bukalapak IPO: Offering Details & Index Inclusion.

MSCI Aug 2021 Index Rebalance Preview. Stocks that could be added to the MSCI Standard index are Huabao International Holdings (336 HK), Chinasoft International (354 HK), Xtep International (1368 HK), Imeik Technology Development (300896 CH), China United Network A (600050 CH), CRRC Corp Ltd A (601766 CH), Dawning Information Industry-A (603019 CH), Beijing Wantai Biological-A (603392 CH), Advanced Micro-Fabrication Equipment-A (688012 CH), Shenzhen Transsion Holding-A (688036 CH), Beijing Kingsoft Office Software-A (688111 CH), Beijing Roborock Technology-A (688169 CH), SITC International (1308 HK) and Momo.Com Inc (8454 TT). Stocks that could be deleted from the MSCI Standard index are Perennial Energy Holdings Ltd (2798 HK), Bank of East Asia (23 HK), Taiwan Business Bank (2834 TT) and Bangkok Bank PCL (BBL/F TB). Link to Brian's insight: MSCI Aug 2021 Index Rebalance Preview: Early Look Before We Enter the Review Period.

SD Biosensor (137310 KS) needs to have an average price of KRW 71,700 over the first 15 trading days to be included in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the September futures expiry. That is around a 38% jump, which is possible but could be undone by the large percentage of shares that are not locked-up.

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

Pan Asia (1561 HK)33.49%Golden EagleFirst Shanghai
A.Plus (1841 HK)29.14%UBSOutside CCASS
Jiayuan International (2768 HK) 16.78%ValuableOutside CCASS
Newborn (9911 HK)15.02%CLSAMS
Jiashili (1285 HK) 14.46%BOCIOutside CCASS
Universal Star (2346 HK)26.79%China SecOutside CCASS
WT Group Holdings Ltd (8422 HK) 20.00%SuncorpOutside CCASS
Tibet Water Resources Ltd. (1115 HK) 10.35%Chong HingChow Sang
Source: HKEx

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

Name

% chg

Into

Out of

YesAsia (2209 HK) 41.72%UOBOutside CCASS
Sciclone Pharmaceuticals (6600 HK) 15.28%HSBCOutside CCASS
Weihai City Commercial Bank (9677 HK) 13.76%CMBCCB
Kuaishou Technology (1024 HK) 16.62%JPMOutside CCASS
Pangaea (1473 HK)30.00%St ChartOutside CCASS
Kangqiao (2205 HK)16.70%EasyOutside CCASS
Source: HKEx
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