Last Week in Event SPACE: SingTel, Hang Lung, Vedanta, Sing Air, Leyou

Singtel (ST SP) / Bharti Airtel (BHARTI IN)

Singtel is trading around its widest ever NAV discount. The implied stub, stripping out Singtel's various listed holdings, is at an all-time low.

• FY19 results, released on the 28 May, generally performed in line with guidance issued in February 2020. For many investors, Singtel is a dividend play. Reducing the dividend to S$0.1225 was not wholly unexpected. Singtel requires the capacity to invest in 5G, and there exist uncertainties in the current/post COVID-19 operating environment. An implied yield of 4.68% is near its historical average over 15 years.
• Generally, COVID-19 makes it clear, amidst the WFH ethic for the better part of this year, that telcos are an essential service and a mainstay of the economy. There are weaknesses in Australia and Singapore. However, Bharti's turnaround (the stock is up 61% yoy) and Globe's growth help to mitigate/offset this weakness.
• I see the NAV discount at ~41%, against a one-year average of 22%, and marginally above its all-time low of 42%. I estimate the long-term average is 15-20%. Stripping out its listco holdings, the market is assigning a value of ~S$10.4bn for its Sing ops, Optus, and its 35% stake in Telkomsel, a reduction of S$16.5bn since the beginning of the year. That looks excessive. I'd get involved - either as a value play or as an inexpensive proxy to Airtel.

Hang Lung (10 HK) / Hang Lung Properties (101 HK)

HLG's discount to NAV is 63% - and that discount to NAV has never been wider. Similarly, the implied stub is at its widest ever. This is the most basic of Holdco structures, and as discussed in StubWorld: Hang Lung's Implied Stub At Extreme Levels, there is almost a total overlap in the stub ops with HLP's property investments.

• Hong Kong property, especially domestic housing prices, is nothing if not resilient, largely brushing off protests in 2019 and (to a certain degree) 2020's COVID-19, buoyed by low rates, and investors taking advantage of a drop in prices. In the current climate, this appears unenlightened. Political risks/concerns following the latest development can be expected to ratchet up Hong Kong's borrowing rates, dumbing down the purchasing power of property investors. But at 0.21x P/B., that lack of confidence in stocks like HLG (and in turn HLP), appears to be baked in. HLG has one of the lowest P/Bs versus a large basket of peers.
• I cannot envisage HLG privatising HLP given the pricing (P/B) disparity. Either HLG is privatized; in-species its 58% stake in HLP; or even a reverse takeover of HLG. The register of HLG includes long-term holders Dodge & Co (9.889%) and Silchester (8.1%). They won't surrender their shares anywhere near these levels. A 100%+ premium - where shares traded two years ago (& ~0.42x P/B) - may conjure up support. But that would cost the Chan family HK$25bn (US$3.2bn). Quite the ask.
• HLG is an extremely straightforward passive, single stock holdco structure. Moreover, what assets HLG does directly own at the stub level are intertwined with HLP's own investments - there is very little to distinguish between the two companies. Even without the benefit of a group restructuring, HLG's stark under-performance vs. HLP is disproportionate. I would go long HLG and short HLP here.

On 12 May 2020, Vedanta released an announcement that a Delisting Proposal had been made to the Board by one member of the promoter group, Vedanta Resources (VED LN). The next day, the Board announced that it had appointed a merchant banker to perform Due Diligence as the board of the target of a Delisting Offer proposal is required to do. On the 18th of May, the Board announced that it had considered the Delisting Proposal and the Due Diligence Report, which had been provided by SBI Capital Markets in the intervening four days and approved it. The Board approved a call for shareholder approval by special resolution through postal ballot and e-voting. That started the ball rolling,

• The Indicative Offer Price" of INR 87.5 was a 10% premium to then-current share price. Will that price fly? No. There are already substantial murmurings.
• Vedanta Resources owns 50.1% of Vedanta Limited. Vedanta Limited owns 64.92% of the cash-producing cow which is Hindustan Zinc Limited, which just had its worst year in recent memory on an accounting basis, is a local monopoly and at 7x ex-cash earnings on its own for a local monopoly is worth INR 123/Vedanta share. VEDL minorities own 49.9% of HZL at that implied valuation per VEDL share. Vedanta Resources would be quite happy to buy them out at zero premium to current HZL market price. That is INR 123.5 per VEDL share. That is a 40+% premium to (the then) last trade.
• Vedanta Resources would get all the rest of Vedanta Limited for free. And that earned 90% of what HZL earned for VEDL shareholders over the last 12 months. For free. If Vedanta paid 4x EPS for the non-HZL portion, and just paid current market price for the HZL stake, that would be INR 167/ Vedanta share, which is not quite double the "Indicative Offer". The risks are mostly that the stock goes up so much that Vedanta balks at buying the shares. We are NOWHERE near that price now.
• Both Travis Lundy and Brian Freitas went into detail on how the delisting Offer will unfold. Travis went one step further and issued an excellent Indian Delisting/​Exit Offers guidebook, providing invaluable reference material.

Travis discussed trades in the pre-ex-date portion (long into the ex-rights event), the post-ex-date portion (short the resulting pop and wait for the rights), the rights trading period (short and wait til the end to cover using the rights), then the end on 20 May (if you have shares, replace them with the rights; if you have no borrow, buy the rights and short Cathay Pacific Airways (293 HK). In his latest addition to this transaction, he provides a quick review, and looks at what the post-rights conversion positioning might look like.

• Travis expects ~410-510mm shares were purchased by active decision-makers (long-only investors, individuals, HNWIs, Hedge Funds) who received the rights, never sold them, and will pay S$3.00 to own the shares. They will think of their cost basis as S$3.00/share. Any unallocated Rights would be allocated to people who pay S$3.00 and that would fit the first category anyway (nobody who bought the rights outright is likely to let them lapse). He expects an additional 40-140mm shares have been purchased by net outright purchasers of Rights, which they traded between S$0.40 and S$1.00 - but more likely in the S$0.40-0.80 range - and will then spend S$3.00 to exercise. They will think of their cost basis as S$3.40-4.00/share.
• The difference in these situations is that ... IF there was little day trading of the Rights themselves, it means more active holders who received the rights sold them and it means NEW holders are slightly more present in the register, with a slightly higher basis. IF there was lots of day-trading of the Rights, it means fewer long holders sold their Rights and therefore more will exercise at S$3.00. This is still effectively a slow-motion block sale of about S$2.2-2.4bn worth of Singapore Air shares to tens of thousands of investors at S$3.00-$4.00 (plus S$360mm of short-covering). That compares to the pre-announcement (S$6.50 price) active (gross) long holding of about 500mm shares worth S$3.25bn.

• The reason why Travis has declined to be outright bullish for any significant period of time on SIA shares as of 20 May was that he thought the resulting overhang might be difficult to deal with. The March 25 Active Long was S$3.25bn. That position is now worth S$1.9bn. Those people and others will have spent S$2.4bn more cash so now the position is worth S$4.3bn. It is not clear all of those people who got the rights, then watched them fall in value every day, really wanted to buy more shares. Some may feel they had no choice. There may be nobody left who NEEDS to buy. There are some dip buyers who may feel they CAN sell, and some long-term long holders who will buy the shares at S$3.00 and sell at S$3.60 and think they made a profit.
• Travis remains positive SIA vs other regional airlines that get most of their business from international travel and which need capital. His favourite trade in that respect is long SIA vs short Cathay. Still.

The next rebalance for the FTSE Straits Times Index (STI) (STI INDEX) will be effective 22 June and the changes will be announced on 4 June. Passive funds will need to trade at the close on 19 June. As of the close of trading the previous Friday, Brian reckons (STI Rebalance Preview - An Ironic Deletion Possibility) Singapore Press Holdings (SPH SP) ranked 41st and is a likely deletion candidate, while Mapletree Industrial Trust (MINT SP) should be added to the Straits Index as the highest-ranked non-constituent. SPH is also a deletion from the MSCI Standard indices. We expect passive selling of around 78m shares (6 days of ADV) on the stock - the MSCI rebalance is effective 1 June and passive funds will be selling stock at the close on 29 May.

On 17th April 2020, Japanese supermarket chain operator Retail Partners (8167 JP) announced (J-only) it had received approval to move from the Second Section of the TSE to the First Section of the TSE as of 24th April 2020. This has been a rip-roaring TOPIX Inclusion. The shares and valuation multiples have rallied dramatically vs peers, almost solely on the inclusion event. With that event seeing its deadline at last Thursday's close, this is probably good to sell or short, as discussed by Janaghan in Retail Partners (8167 JP) - TOPIX Inclusion Achievement Unlocked. Now Sell.