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Last Week in Event SPACE: Japan Post, JD.com, Toyota, NTT, Jardines, Indices/Exec. Orders, Tianneng

389 Views20 Dec 2020 07:51
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)

M&A - ASIA

Japan Post Insurance (7181 JP) (Mkt Cap: $11.5bn; Liquidity: $22mn)

The news in the Bloomberg article titled "Japan Post Insurer Plans $2.9 Billion Buyback to Cut Owner Stake" was a surprise, and a welcome one at that. This stated goal is to allow the insurer more freedom to expand its business. An already cheap insurer would a) see EPS rise because of a large share buyback, b) see Embedded Value rise in future from greater policy sales, c) get higher ROE from lower equity and lower solvency margin. A low-growth insurer would suddenly become one of the few domestic insurers with the capacity to grow domestically.

  • This is an Unalloyed Good Thing for Japan Post Insurance, and if there is any truth to it, Japan Post Insurance is a Very Good Stock To Own Here. In that case JPI is, in my opinion, a Stock That Goes Up (STGU), and would attract significant foreign investor interest. Given that foreign investors only own 11% as of last March and given that
  • A selldown to below 50% would mean additional TOPIX buying in future (not necessarily immediately though the change in FFW would be so dramatic as to warrant an ad hoc change near-term.
  • When will this happen? Travis Lundy doesn't know. It is in JPH's interest to stoke the fires of the story to get the shares up before selling. But JPI is still completing the latter stages of its Business Improvement Plan following the sales scandal unearthed in 2019. Note that JPH could still consolidate (with JPI's agreement) even at 49.9% ownership. THE TRADE: Be long Japan Post Insurance.
  • Separately, this insight provides a thorough big picture background for those seeking the full story, and which was originally discussed in Japan Post Insurance Offering - Now It Gets Real.

(link to Travis' insight: Huge Japan Post Insurance Buyback Mooted - Decks Cleared. Time To Buy)

Hi P International (HIP SP) (Mkt Cap: $1.1bn; Liquidity: $3mn)

Yao Hsiao Tung and his wife Wong Huey Fang, 83.5% shareholders in integrated contract manufacturer Hi-P, have tabled an Unconditional Offer to acquire all remaining shares at $2.00/share, a 13.6% premium to last close, and a 42.3% premium to the 3-month VWAP. The Offer price is Final. The Offeror is YHT Venture Pte. Ltd., in which Yao/Wong hold 100%. Should the Offeror acquire more than 90% of shares out, it will be entitled to compulsory acquisition. Yao/Wong have given an irrevocable to accept the Offer. Therefore this deal needs an additional 6.5% of shares out to be taken private.

  • If Yao/Wong had made the Offer, to be afforded compulsory acquisition, they would need 14.85% of shares out (90% x (100%-83.5%)). As it is, this deal requires just 6.5%. This strikes me as a loophole in the Takeovers Code, but I've confirmed with DBS this is the way it will be (according to them). This looks wrong. I cannot believe a Court would allow this if it were challenged because it completely breaks the spirit of the Takeovers Code.
  • The Offer represents a trailing PER and P/B of 20.1x and 2.7x, compared to its three year-average of 11.4x and 1.9x. It is the highest level since April 2018, following which Hi-P negatively revised guidance amid the US/China trade war. Valuations under the Offer exceed peers, including Singaporean listed EMS players. There's probably enough to here to garner the extra 6.5% - but the upward revision in profit guidance for FY20E suggests this not a slam dunk Offer.
  • This is an unconditional Offer, so it will trade around terms. If you can get in a spread or two below terms, expect to be paid around the 19 January - around one month out.

(link to my insight: Hi-P International: Unconditional Offer)

NTT (Nippon Telegraph & Telephone) (9432 JP) (Mkt Cap: $95.9bn; Liquidity: $201mn)

The NTT buyback is underway. It is big. KDDI and Softbank Corp also have buybacks underway but the NTT buyback is likely to be almost twice as impactful in terms of ADV as KDDI's and nearly 4x as impactful as Softbank Corp's.

  • Consensus forecasts for NTT earnings to March 2022 are still "stale" as most do not incorporate the accretion from having bought out JPY 200bn of forecast NTT Docomo Net Income in that year using JPY 4 trillion in debt. None seem to incorporate any potential synergies/benefit from doing this, despite the speed with which NTT replaced the Docomo CEO (he was gone before the Tender Offer was even done.
  • NTT is still cheaper than KDDI or Softbank Corp on a PER basis and has a clear plan outlined to reduce assets to pay down debt, but thereafter maintain internal leverage to improve shareholder returns. NTT/Docomo are now ahead of comps in terms of aligning future pricing simplicity with Suga Admin aims. The key now is executing on lower cost administration of these plans and customers.
  • There is still 20% upside to get to KDDI valuations (which are not high) without synergies. And there is ongoing impact from NTT buying. NTT is still an absolute and relative buy.

(link to Travis' insight: NTT - Still Going Big, Not Going Home)

Soilbuild Business Space REIT (SBREIT SP) (Mkt Cap: $0.5bn; Liquidity: $1mn)

Soilbuild has announced a proposal from executive chairman Lim Chap Huat (LCH) and Blackstone Real Estate to take the company private at S$0.55/unit, a 34.5%, 34.8%, 53.2%, and 29.1% premium over the one-month, three-month, six-month, and 12-month VWAP. The Offer price implies a price to adjusted NAV of 0.98x-1.00x, above Soilbuild's historical averages. In tandem with the Scheme, Soilbuild has also entered into an agreement with Blackstone affiliates to dispose of its Australian assets. The disposal is inter-conditional with the Scheme.

  • The Scheme Offer consideration will be reduced by any dividends paid after the announcement. However, if the Scheme becomes effective after 31 March, any dividend declared and paid afterward will be added to the Scheme Offer consideration.
  • Soilbuild portfolio was valued down by 2.7 to 4.0 Singapore cents to S$0.55 to S$0.563/unit by independent valuers as at 30 November, compared to 30 September. With the benefit of this downward revaluation, the Offer is pitched at a ~1x P/B. It has not traded above book since September 2018, and has traded on average of 0.78x P/B since that time.
  • Should all go to plan - and pricing looks fair - Soilbuild is expected to be delisted in early April. Trading at a gross/annualised return of 3.8%/12.6%, at the time of the insight. This Offer has not been declared final.

(link to my insight: Soilbuild REIT: Offer From Blackstone/Lim Family)

Toa Oil Co Ltd (5008 JP) (Mkt Cap: $0.3bn; Liquidity: <$1mn)

Idemitsu Kosan (5019 JP) announced that it would launch a Tender Offer for Toa Oil to take out the minorities. It comes at ¥2450/share which is a 23% premium to last, a slight premium to book, a discount to the land value under the refinery, and a tiny fraction of the replacement value of the asset, but the "fair value" assessed by the independent valuation agent based on numbers supplied by the Target Company based on its contract with the parent company shows that the price is not too far off "fair", as long as the contract with its parent is fair, and one ignores what the real world value is.

  • Normally Travis wouldn't want to spend this much time on a small takeover at the wrong price, but habits are tough to break. This situation is a clear example - yet again - of a parent company abusing its position to buy out minorities too cheaply. This one has asset value, replacement value, the significant likelihood of non-arms' length contracts with the parent company where the parent dictates the economics of the sub. And the IFAs' valuation is based off the DCF created around those dictated terms.
  • Cornwall Capital owns 18.2%. They have been buying since spring of 2018 and the latest filing (filed yesterday) shows their average in-price is JPY 1966/share. I expect nobody buys 18% of a company in the market over 2.5yrs expecting a 20% gain before exiting.
  • This situation is, unfortunately, an unpleasant example of how the touchy-feely aspect of Japan's fairness processes, the lack of expertise required by boards, the lack of liability of board members, the low thresholds of large owners being able to squeeze out minorities, and the fact that the METI M&A Fair Guidelines have no teeth, all conspire to enable large owners to abuse the public shareholder base. Travis would buy at terms, or even just through. He would not be surprised to see vocal complaints. The relatively low level of cross-holding means that Idemitsu needs most of the retail shareholders. If they only got half to tender, they might not get to 67%.

(link to Travis' insight: Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008))

amaysim Australia (AYS AU) (Mkt Cap: $0.2bn; Liquidity: $1mn)

On the 2 November, AYS entered into an Share Sale Agreement (SSA) to sell its mobile ops to Optus Mobile for A$250mn, in cash. Should the sale complete, AYS expected to distribute between A$207.2mn - A$225.7mn (A$0.67-A$0.73/share) via three tranches. The distribution will include a fully franked dividend of A$0.26/share. AYS has now announced WAM Capital Ltd (WAM AU) is offering AYS shareholders the choice of A$0.695/share in cash, or A$0.833/share in WAM scrip, or a combination of both, in an off-market takeover. The offer has limited conditionality - shareholder approval of the mobile ops to Optus, and the standard regulatory approvals. And no MACs.

  • This is a firm Offer. Under the Offer, AYS can elect either 1 WAM share for every 2.7 AYS shares; representing A$0.833/share (at the time); cash per share of A$0.695; or a combination of scrip or cash. The default option will be scrip. If WAM's Offer remains open past the record date for the major distribution (A$0.50/share) from the sale of the mobile ops - and assuming the Offer remains open - those who elect the scrip consideration will receive 1 WAM share for every 6.75 AYS share. Those who elect the cash option will get A$0.195/share (A$0.695 less A$0.50). WAM's offer is conditional on the relevant interest of at least 50.1% of AYS shares. This will be waived after the completion of the mobile sale.
  • The scrip consideration does afford a premium to the cash distribution. Moreover, shareholders wishing to take advantage of the mobile distribution may not have access to the WAM Offer - the Offer is (not so conveniently) expected to close one day prior to the record date for the distribution, although it may be extended. WAM is playing on fears AYS shares will fall below the "fair value" after the mobile distribution.

  • If you can take advantage of the franking credits under the mobile distribution, get involved here, but preferably a spread or two lower. Then look to potentially sell your AYS shares in the market - or exchange them into WAM shares if the Offer has been extended. For all other investors, the current spread to the cash terms is unattractive. Plus AYS is largely illiquid.

(link to my insight: Amaysim/WAM: A Question Of Franking Credits)

WPP AUNZ (WPP AU) (Mkt Cap: $0.5bn; Liquidity: <$1mn)

Back on the 30 November, WPP PLC (WPP LN) tabled a proposal to delist 61.5%-held subsidiary WPP AUNZ at A$0.55/share, in cash, a 34.1% premium to last close, and a 69.3% premium to the six-month VWAP. This was an unsolicited Offer and no binding implementation agreement (BIA) had been entered into. In WPP AUNZ: Mad Men At Work, I argued there was an air of opportunism to the Offer, and recommended buying at or below terms - on the expectation of a bump, as management argues the upside from its wide-ranging cost cuts.

  • WPP PLC has returned with a A$0.70/share offer, by way of Scheme, valuing WPP AUNZ at an implied enterprise value of A$717mn. It is the intention of WPP AUNZ to enter into a BIA. With that 27.3% bump, this looks done.
  • The A$0.70/share Offer will be reduced by any ordinary or special dividend paid prior to the completion of the transaction. WPP AUNZ expects to return to paying dividends in the 2021 year, commencing with a dividend to be declared in the FY20 results late Feb. WPP PLC has agreed to WPP AUNZ paying a dividend upward of A$0.15/share, subject to the WPP AUNZ's board determination. This would have the effect of delivering shareholders up to A$0.06/share in additional value depending on the individual shareholder's ability to utilise any franking credits attached to the dividends.
  • The Office price is pitched right at the level shares declined subsequent to the market guidance announcement on the 23 October 2018. Extrapolating out the 1H20 figures backs out an FY20E PER of 18.5x. CapIQ backs out a EV/EBITDA at the offer terms of 7.4x - this compares to the 8.8x three-year average prior to the October 2018 decline, and 4.3x up until the November Offer announcement. The Offer price is not final. Buy a spread or two below terms. But this is not a very liquid arb situation.
  • UPDATE: Paradice has bumped its stake to 6.14% from 5.046% in WPP AUNZ (WPP AU) on the 17 December.

(link to my insight: WPP AUNZ: More Mad Men At Work)

Lopez Holdings (LPZ PM) (Mkt Cap: $0.4bn; Liquidity: <$1mn)

On December 1, the Board of LPZ announced 51.04%-held First Philippine Holdings (FPH PM)'s tender offer to acquire a minimum of 20% and a maximum of 45.56% of shares out in LPZ, at a price of P3.85/share, a 25% premium to last close. The Lopez family, currently owning 54.44% of shares out in LPZ, will not participate in the Offer. In addition, LPZ's board authorised the filing of a petition for voluntary delisting of the company. The Tender Offer is expected to commence on the 22 January 2021 and remain open until 19 February, with an expected payment on the 8 Mar 2021. The IFA has given a fairness opinion with a convenient range of P2.34 to P3.92/share.

  • LPZ's operations were down yoy (for the 9M20), but collectively not overly so; net income from the power generation segment declined 14.6% to P13.5bn; real estate declined 61% to P923mn, and manufacturing was down 2.6% to P227mn. LPZ's largest source of income is from FPH. In turn, FPH's largest holding is in First Gen (FGEN PM) (68.7%), with smaller holdings in Manila Electric Company (MER PM) and Rockwell Land (ROCK PM). FGEN was discussed in Energy Development's Voluntary Delisting when it made a (successful) voluntary delisting for Energy Development (EDC PM).
  • The IFA is of the opinion that the fair value of LPZ's shares ranges from P2.34 to P3.92/share "as at the cut-off date of 30 September 2020". Why the cut-off date of 1 December was not used, at the time the Offer was made - and when FPH and equity affiliate ABS-CBN Corp (ABS PM) were 8.5% and 79% higher than September-end - is not clear.
  • The Offer price looks light and opportunistic, having traded through terms in late February. There is a possibility the minimum tender offer threshold is not met. This Offer appears to be being done far too cheaply. Trading at a gross/annualised spread of 2.8%/13.3% at the time of my insight. You could buy here or a spread or two lower on the expectations either this Offer does get up; or to play the back-end.

(link to my insight: Lopez Holdings (LPZ PM): Reverse Voluntary Delisting)

With the possibility of a merger break, in Huya – Increasingly Our Preferred Pick Vs. Douyu Given the Threat of the Merger Collapsing, Mio Kato reckons Douyu International Holdings (DOYU US) is probably worth about half what it is trading at, but that it may take time for that to become clear through several quarters of disappointing earnings.

In JSR Deal Tender Results for MBL (4557 JP) Imply Faster Squeeze-Out. Janaghan Jeyakumar updated the JSR Corp (4185 JP) deal in which the Acquirer now has 92.7% (4,794,756 shares), and that has important implications for the squeeze-out procedure. This is a very low risk somewhat short-dated rate-of-return trade. The principal is "riskless" as JSR will likely not default. The timing of getting the money is, however, slightly uncertain. If you get your leverage set up at term, it could be decent carry on the dip. Based on settlement this week, and expected Demand for Cash Out, I expect a cash payment in the middle of March.

In Samsung Yr-End Special Dividend Update, Sanghyun Park reckons the market is tilting towards a buyback in Samsung Electronics (005930 KS).

STUBS

JD.com Inc (ADR) (JD US) / JD Health (6618 HK)

JD Health was listed on the 8 December at an IPO price of HK$70.58, towards the top-end of its price range, and has traded up ~88% to HK$132.50/share, with a current market cap of US$52.7bn. JDH is the spin-off of JD.com, which owns 68.73% in JDH after the IPO, down from 81.04% pre-IPO. That stake is worth US$36.5bn (at the time of writing), around 30% of its current market cap, therefore this is not a super strong parent/subsidiary relationship. Yet the implied stub is trading at a not-undemanding forward PER of 34x, for a company with a three-year net profit CAGR of 44%.

  • The Positive Newsflow ball is in JDH's court - the Hang Seng Indexes will add JDH to the Hang Seng China Enterprises Index (HSCEI INDEX), the Hang Seng TECH Index, and the Hang Seng Composite Index with the inclusion becoming effective after the close of trading on 21 December. As discussed by Brian Freitas in JD Health - Fast Entry in HSCEI Puts PetroChina at Risk; Impacts Dividends, the inclusion in the HSCI will make JDH eligible for Southbound Stock Connect from the open of trading on 22 December. Passive flow and Southbound flow should keep the stock supported in the near term.
  • Designated securities for short selling are revised on a quarterly basis. The next announcement is expected in early Feb. JDH is likely to be added in the next review.
  • JD looks attractive here, down 13.5% from its recent peak this time last month. The market is assigning US$9.4bn less to the stub assets since JDH's debut, all while JD has one of the strongest upward revisions of peers to its earnings. I estimate the stub is at a forward PER and EBITDA of ~34x and 26.5x, both below the peer average. Either go outright long - upside to the street's target price is marginal at 6%. Or look to set up the stub once JDH is shortable.

(link to my insight: StubWorld: JD.com In JD Health's Shadow)

Jardine Matheson Holdings (JM SP) / Jardine Strategic Holdings (JS SP)

Back on the 23 October, JM announced an intention to invest up to US$500mn in a share buyback program through to 30 June 2021. Any shares repurchased would be canceled. Using the then-last-traded price of US$44/share, US$500mn translated to 11.4mn shares or 1.56% of shares out, or 3.8% of minorities, excluding Jardine Strategic Holdings (JS SP)'s stake. JM has repurchased 3.2mn shares at a cost of US$166mn since that announcement, at an average price of US$51.69/share. Shares acquired accounted for roughly 30% of daily volume. And that is one-third of the buyback programme. At this clip, the stated buyback program could be completed by the 1Q20, or early 2Q.

  • At ~40% discount to NAV, JS is cheap. Yet a privatistion Offer will not occur, on account of the onerous costs involved, as per above. Hypothetically, JM can theoretically make a derisory delisting Offer, on account of its UK standard listing, but it is unfathomable JM would take such a drastic measure. There is somewhat of a news vacuum for JS until its full-year results in March next year.
  • There are no restrictions keeping Matheson from loading up another buyback program. JM is also not regulatorily obligated to inform the market of any forward buyback program after moving its primary listing to London's standard board in 2014. The only restriction I see is that JM must adhere to the 25% free float requirement.
  • JMH has aggressively committed itself to the buyback program. Previously I advocated setting-up a Long JMH/Short JSH at 2.0x or below. I'd move that up to 2.10x. I see no let up near term. The newsflow remains with JM near-term. The pushback - IM imposes a 30-day blackout ahead of its full-year results, which may see a pullback in the ratio.

EVENTS

MSCI Joins the Index Crowd on Trump China Military Names and SMIC (981) Rocked

The DoD came up with a list of stocks in June, then another in August, then Donald Trump himself signed an Executive Order barring the provision of capital by "US persons" to companies named in the DoD's "Qualifying Entity" list. FTSE was first to announce (on 4 Dec), and this was discussed in FTSE Announces Measures for Trump Exec Order on Chinese Military Companies. S&P Global announced on the 9th. MSCI took their sweet time but they have announced as of earlier this morning Asia time. As expected, they named the 7 companies which are reasonably explicitly in the list.

(link to Travis' insight: MSCI Joins the Index Crowd on Trump China Military Names and SMIC (981) Rocked)

J-REIT Offering Primer: Get Ready for Offering Season 2021

In 2020, we have so far witnessed 15 follow-on JREIT offerings cumulatively raising JPY463bn (~US$4.5bn). This has been something of a weak year, understandable because of the covid-19 crisis which hit equity market and JREIT prices in March, and keeping them soft for months afterwards.

  • Historically, January and February are the busiest months for offering announcements in any given calendar year mainly because most REITs have fiscal period ending dates of 31st July and 31st Aug and they mostly time these offerings to coincide with the ends of fiscal halves. This is further augmented by 31st December candidates postponing their offerings to the month of January to avoid the holiday season where investors are digesting bonenkai and osechi excess and their winter bonuses need to be invested.
  • JREIT offerings have historically outperformed the TSEREIT Index on average in the weeks following the pricing date. The historical average TSEREIT Index-neutral return for a two-month holding period from the pricing date is +5.4% from the Offer Price which is ~33% on an annualized basis. Furthermore, going by closing prices, the historical win rate vs. TSEREIT Index for this trade has been 83% or more for any exit point in the first 3 months from the pricing date.
  • On average, the price of a REIT drops 1.4% between the Announcement date and Pricing Date. Actionability would depend on the execution costs and borrow availability. Furthermore, a lower win ratio of 65% makes this less attractive than the conventional trade. However, being able to identify candidates with likelihood of launching an offer could still prove highly valuable for tactical decisions as one could simply avoid buying the units in the secondary market until the pricing date especially when it involves candidates with high level of over-heating and potential to launch large offerings (vs own size / turnover).

(link to Janaghan's insight: J-REIT Offering Primer: Get Ready for Offering Season 2021)

Tianneng Power International (819 HK) ("TPI") (Mkt Cap: $2.3bn; Liquidity: $15mn)

On the 9 November 2018,"TPI" announced the possible spin-off and separate listing of Tianneng Battery Group ("TBG"). This is the same entity TPI attempted to list back in November 2015. Further announcements followed, culminating in a circular to shareholders on the 24 June 2019 seeking shareholder approval to list TBG on the Science and Technology Innovation Board of the Shanghai Stock Exchange - better known as the Star Market. That approval was received at an EGM on the 12 July 2019. This week, TPI announced the proposed A-share listing on the Star Board has been approved by the CSRC.

  • After the spin-off, TBG will account for ~95%+ TPI's NAV - applying the indicative price of RMB30.65 for TBG, and 10x earnings for the stub ops. Yes, it will be a cross-border parent/subsidiary relationship, but it will be a clean holding company structure. TPI may have gained 180% in the past year but it is not expensive. It's trailing PER of 9.8x compares to the five year average of 7.7x. The peer group average far exceeds the implied TBG valuation based on the indicative price from the June circular.
  • Global auto majors are increasingly seeking out EV batteries sources to ensure a steady battery supply. Other deals, in addition to Daimler/Farasis, include the RMB8.7bn transaction between Volkswagen and Gotion High-tech in May of this year. In November of last year, TPI/TBG signed a cooperation agreement with SAFT, a subsidiary of Total S.A.
  • I'd buy TPI here. The key regulatory approvals are in place. The Star Market will welcome another battery manufacturer, one that is an up & coming supplier of lithium batteries, and one that promotes and develops the light electric vehicle industry. I can see TPI re-testing its recent high, or ~29% up from here.

(link to my insight: Tianneng (819 HK): Battery Spin-Off And The Tesla Effect)

Toyota Motor (7203 JP) (Mkt Cap: $215bn; Liquidity: $382mn)

Five and a half years ago, after the close of trading just before Golden Week on Tuesday April 28, 2015, Toyota Motor announced the board had resolved to submit to shareholders a resolution to partially amend the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they called "Model AA Shares", so named as the first in a series of preferred shares named after the company's first production car released in 1936.

  • After reading all the materials a second, third, and fourth time - in both Japanese and English - given the 15+yrs' experience Travis then had of looking at the microstructure of Japanese markets, special situations, unusual security issuances, and governance, my reaction evolved to a more considered, and evolved "Huh???" They were, unfortunately, a governance disaster. Toyota made an announcement. The Company effectively seems to take credit for the development of stewardship and governance in Japan. Harumph. Not quite.

  • It is not clear what benefit the Model AA Shares had brought to Toyota, its management, its employees, its medium-to-long-term corporate value that could not have come from simple share ownership. Did Toyota grant AA Share owners extra access to information in return for their votes? Did AA Share owners advance agenda items at Annual General Meetings that other investors did not? Were AA Share owners on average more learned about the company? Were they able to teach Toyota's IR department about the business of making cars in a way that existing shareholders have been unable? Were the AA shares cheaper than a convertible bond of the same strike price?

  • If investors do not raise their voice pre-emptively or post-facto, their interests will be over-ridden by management's traditional sway with go-along-to-get-along shareholders, cross-holders, and the fact that some investors do not vote.

(link to Travis' insight: Toyota Model AA Shares - Good Riddance to Bad Governance)

TOPIX INCLUSIONS

Capital Asset Planning (3965 JP) ("CAP") (Mkt Cap: $0.7bn; Liquidity: $9mn)

Smallcap systems integrations company CAP announced (J-only) they had received approval to move from the Second Section to the First Section of the Tokyo Stock Exchange as of 23rd December 2020. TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 28th January 2021. Janaghan would be Bullish until the Inclusion Date.

  • Despite its small size, the Index Inclusion Parameters are very attractive. Janaghan estimates the Inclusion quantity to be 679,000-873,000 shares. This translates to an Inclusion Size of ¥0.66-0.85bn and an Impact of 26-33 days of volume based on 3-month ADV.
  • Fundamentals do not raise any major concerns regarding overvaluation vs. Peers. Over the next three years, the company's revenues are expected to grow at a CAGR of 9%+ with margins expected to gradually recover closer to the company's FY2019 levels according to Capital IQ Data. These projections translate to a EBIT CAGR of ~6% from 2019-2023E and the stock is currently trading at 8.8x 2019A EBIT.

(link to my insight: TOPIX Inclusion (3965 JP): Capital Asset Planning, Inc.)

SRE Holdings Corp (2980 JP) (Mkt Cap: $0.5bn; Liquidity: $3mn)

SRE announced (J-only) they had received approval to move from TSE MOTHERS to the First Section of the Tokyo Stock Exchange as of 23rd December 2020 - two trading days after the end of the above-mentioned 1-year post-IPO waiting period. TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 28th January 2021. They also announced a small offering which can be ignored.

M&A - EUROPE

In Recommended Private Equity Cash Offer, Jesus Rodriguez Aguilar discussed the 261p per share cash Offer for Calisen PLC (1779730D LN), in a £1,430.23mn deal. The offered consideration represents 7.6x EV/Fwd Revenue, 9.8x EV/Fwd EBITDA and 30.1x P/Fwd EPS. Calisen Directors holding c. 0.9% stake (and its nine members will receive upon closing about £12.5 mn) and KKR Evergreen holding c. 72.8%, all together holding approximately a 73.6% stake in Calisen, have given irrevocables. The offer represents 9.8x EV/Fwd EBITDA vs. 14.1x for Smart Metering Systems (SMS LN), which is not loss-making. Gross spread was 1.14% at the time of writing.

EQT AB (EQT SS) has announced a SEK 220 per share (a 22.9% premium) mandatory offer for Recipharm AB (RECIB SS), valuing the company at ~$2.8 bn. The offer represents 2.8x EV/Fwd Revenue, 15.9x EV/Fwd EBITDA and 24.5x P/Fwd E. ~25.7% of the shares and 74.3% of the votes have been secured. Squeeze-out afforded at 90%. Recipharm closed at a 0.8% gross spread at the time of writing, Link to Jesus' insight: Recipharm-EQT Takeout.

Electronic Arts has tabled a £945 mn cash counter-offer for Codemasters Group Holdings PLC (CDM LN), disrupting Take-Two's £759 mn accepted cash and shares offer. The deal represents 7.4x EV/Fwd Revenue, 28.5x EV/Fwd EBITDA and 31.5x P/Fwd E. The court meeting and the EGM are expected to be held on December 21, 2020. The transaction is expected to close in Q1 2021. Codemasters closed at 658p on 16 December, c. 9% above EA's terms. Link to Jesus' insight: Electronic Arts' Disruptive Counter-Offer.

H/A MONITOR

This previous week was something of a doozy. Spreads were all over the place. Momentum ruled the day. More names were added to the Trump List, but The National Team has been buying. Financials and Industrials get shellacked. Healthcare Hs all over the place. Materials H/S spreads heavily split. And utilities can't buy friends. And we have 40+ spread recommendations for next week. Watch for Travis' latest installment to be issued shortly.

INDEX REBALS

KOSPI200 Index Rebalance Preview. Currently, Brian sees Taihan Electric Wire (001440 KS) being included in the index and Taeyoung Engineering & Construction (009410 KS) being deleted, with a few stocks as close adds/ deletes. Taeyoung's expected deletion is a result of the demerger of TY Holdings (363280 KS) in September which has significantly lowered its market cap. Link to Brian's insight: KOSPI200 Index Rebalance Preview: IPO Fast Entry & End of Short Sell Ban Will Shake Things Up and Sanghyun Park's insight: KOSPI 200 Rebalancing Preview: Early Early Birds Special.

KOSDAQ150 Index Rebalance Preview. Brian sees 14 potential changes to the index in the June review and we are less than a third of the way through the review period. The end of the short sell ban in March could bring a lot more changes to the index. The potential inclusions are Tesna Inc (131970 KS), Unison Co Ltd (018000 KS), Tse Co Ltd (131290 KS), ABPro Bio (195990 KS), Icure Pharm Inc (175250 KS), Sam Kang M&T (100090 KS), SIMMTECH Co Ltd (222800 KS), Binex Co Ltd (053030 KS), Vaxcell Bio (323990 KS), Kmh Co Ltd (122450 KS), Solid Inc (050890 KS), PSK Inc (319660 KS), AJu IB Investment (027360 KS) and Kpm Tech Co Ltd (042040 KS). The potential exclusions are Stcube (052020 KS), Daea Ti Co Ltd (045390 KS), Spigen Korea (192440 KS), Jusung Engineering (036930 KS), Advanced Process Systems (265520 KS), Saraminhr (143240 KS), Gmp Co Ltd (018290 KS), Iriver Ltd (060570 KS), Innox Advanced Materials Co,Ltd. (272290 KS), Ebest Investment & Securitie (078020 KS), Sangsangin Co., Ltd. (038540 KS), Shin Heung Energy & Electronics Co (243840 KS), Neopharm Co Ltd (092730 KS) and HLSCIENCE Co. (239610 KS). Link to Brian's insight: KOSDAQ150 Index Rebalance Preview: Lots of Changes Expected Already; More to Come.

HSCEI Index Rebalance Preview. There was a medium probability of Country Garden Services Holdings (6098 HK) being included in the index. That has now become a low probability event post JD Health (6618 HK)'s inclusion in the index. If Country Garden is included in the index, then Hengan Intl Group (1044 HK) could be deleted. Link to Brian's insight: HSCEI Index Rebalance Preview: One Deletion For Sure, Could Be One More Change.

FTSE GEIS Index Rebalance Preview March 2021 - Japan. Brian sees 13 stocks being added to the FTSE All-Cap index, 8 names moving from the All-Cap Index to the All-World Index, 12 stocks moving from the All-World Index to the All-Cap Index, and 4 stocks being deleted from the All-Cap index. The March SAIR will also have the implementation of tranche 3 of the J-REIT inclusion in the index. Link to Brian's insight: FTSE GEIS Index Rebalance Preview March 2021 - Japan.

SET50 Index Rebalance. Bangkok Commercial Asset Management (BAM TB), Com7 PCL (COM7 TB) and Delta Electronics Thai (DELTA TB) have been included in the index, replacing Banpu Power PCL (BPP TB), IRPC PCL (IRPC TB) and WHA Corp Pcl (WHA TB). This was our base case scenario, though DELTA had the lowest probability of index inclusion. Link to Brian's insight: SET50 Index Rebalance: DELTA to Buy.

FTSE GEIS Index Rebalance Preview March 21 - Asia Ex Japan Ex China. Brian sees Reece Ltd (REH AU), Mayora Indah (MYOR IJ) and Honeywell Automation India (HWA IN) being included in the All-World index. KLCCP Stapled (KLCCSS MK) and Kakao Games (293490 KS) are on the cusp of being included in the All-World Index, failing which they will be included in the All-Cap index. Link to Brian's insight: FTSE GEIS Index Rebalance Preview March 21 - Asia Ex Japan Ex China.

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

Mongolian Mining (975 HK) 31.79%HSBCBNP
Meilleure Health International (2327 HK) 14.83%ShenwanHaitong
Gome Electrical Appliances (493 HK) 11.15%EnlightenOutside CCASS
Kong Sun Holdings (295 HK) 61.87%China TonghaiMason
Beaver Group Holding Co Ltd (8275 HK) 41.11%GransingGlobal Group
China Lumena New Materials (67 HK) 18.73%BocomOutside CCASS
Theme International Holdings (990 HK) 70.72%HSBCChina Ind
Source: HKEx

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

Name

% chg

Into

Out of

Raffles (1376 HK)51.00%HSBCOutside CCASS
Platt (1949 HK)75.00%OpusEasy
Source: HKEx
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