Last Week in Event SPACE: Tokyo Dome, ESR/Sabana, NTT Docomo, Evergrande, LG Corp, China Resources

The Nikkei Asia reported Friday 27 November that Mitsui Fudosan (8801 JP) intended to partner with someone to launch a Tender Offer to take private Tokyo Dome, spending "more than ¥100bn" (vs the ¥85.9bn of yesterday's close) based on the idea that there would be a premium to market price. The Tender Offer "could start before 2020 ends." The bigger story here, of course, is that hedge fund Oasis has been on the case, urging Tokyo Dome management to do more to improve value for shareholders. Oasis said earlier this month they had been trying to engage with Tokyo Dome since 2018. They went over 5% in December 2019 and according to filings lifted their stake to 9.71% in January 2020. They put a big presentation out in the public eye in January 2020. Covid-19 later hit Japan and as a result, the number of events and therefore visitor count at the various features and venues within Tokyo Dome have slowed, and the company is on its back foot.

Back in November last year, Quarz Capital Management, one of Sabana's top 5 unitholders (at the time), proposed a merger by way of a Trust Scheme between ESR and Sabana. This made perfect sense given the potential conflict of interest within the organisational structure. Nearly nine months after Quarz's proposal, ESR and Sabana jointly announced a merger, whereby each Sabana Unitholder will receive 94 consideration units (new units in ESR) for every 100 Sabana units held. But Quarz (along with Crane capital, together holding 10% of units out, or 5% each, at the time, now up collectively 11%) issued an open letter to Sabana that they intend to reject the proposal at the current terms. The key issue is the discount to book value under the share swap ratio.

• ESR Cayman paid S$ 0.48 cents (in cash) for 1 Sabana REIT unit almost 1 year ago. Now they offering unitholders S$ 0.376 cents with no cash, in ESR units at a steep discount to Sabana NAV. This was considered an "unprecedented and substantial discount .... irrespective of COVID".
• Scale is clearly important for REITs. But of most importance is improving the underlying performance of assets first. Then scale. There is a need to get things done in the right order. Improvements in the 3Q is already evident - utilisation is improving. The cost of debt has fallen to 3.2% from 3.8%. All of which should improve DPU in the 2H20, further casting doubt on the merger ratio..
• Would Sabana be cast adrift - in the medium-term - if the vote fails? Crane argues that apart from sticky investors such as themselves, there is interest in Sabana's assets, which could emerge if the merger fails. (Arguing suitors may not want to wade into a hostile situation). Singapore remains a strong property market where it is difficult to acquire attractive investments.
• The downside appears limited if you buy here, even without the "benefit" of the merger. I'd buy here - if the deal goes through I expect both stocks to rise vs other S-REITs, and if the deal does not go through, the spotlight will be on Sabana's cheapness and that could lead it to better terms in the next deal.

(link to my insight: ESR-REIT/Sabana: Furphys And Fear-Mongering)

NTT Docomo Inc (9437 JP) (Mkt Cap: $120bn; Liquidity: $377mn)

(link to Travis' insight: The Other Docomo Selldown and TOPIX Buy and with more analytics see Messy End-Nov Rebals (JPX Nikkei 400, MSCI, TOPIX) - Analysis and Lessons Learned

Ghanaian firm Engineers & Planners Company formally launched a A$1.05/share all-cash offer. At 4.24pm the same day, Nordgold released a statement that E&P's Offer is not an "offer" nor a "competing offer", therefore it does not free either Nordgold or Shandong from their Best and Final Statements. Unfazed, Shandong bumped its Offer to A$1.05/share 43 minutes later.

• It's refreshing that E&P has thrown its hat into the ring, breaking the minutiae deadlock - even if Nordgold believes (clutching at straws), E&P's Offer is actually not an Offer. Either Nordgold continues to pepper the TP with what it sees as a contravention of the takeovers code, or it also bumps.
• E&P is no stranger to Nordgold, having made a binding Offer of $0.66/share on the 3 June. This current Offer is conditional on 50.1% acceptances, FIRB, and no MACs. Nordgold believes this is not a real competing offer as it is conditional - both Nordgold and Shandong's Offers are unconditional - requires FIRB approval, plus Nordgold calls into question E&P's ability to fund the Offer. Personally, if I was on the TP, I would decline to conduct or implement any measure as to Nordgold's claims.
• Cardinal is currently trading A$0.03/share through Shandong/E&P's Offers, on the expectation Nordgold, then Shandong/E&P reloads. My IRR calcs indicate there may be more upside from here however $1.05/share is already a 320% premium to the undisturbed price - and gold prices are now at a four-month low. If you are already in, then continue to ride out the end game as this competitive bidding situation just became even more competitive. Otherwise, buy at terms or spread or two above terms on the expectation one of the competing players reloads. Shandong is the expected winner here as it can probably accept a lower IRR than either Nordgold or E&P.

Village Roadshow (VRL AU) (Mkt Cap: $0.5bn; Liquidity: $1mn)

On the 23 November, VRL announced it had agreed with BGH that the terms are now A$3.00 under the Structure A Scheme and A$2.95/share under the Structure B Scheme, as had been rumoured last Friday. Spheria now intends to vote in favour of both A and B. No word from Mittleman as yet.
The Scheme Meeting will be held on the 7 December. The updated Offer does away with the uplift vagaries. This is a vastly cleaner structure, although Structure A is still 25% below the $4.00/share indicative Offer in January this year.

(link to my insight: Village Roadshow: Rollercoaster Economics)

The IPO for EPS, joins the ever-expanding listing of property management service company to seek a listing. The Offer Price is expected to be announced on the 1 December, with the commencement of trading in the shares on the 2 December. EPS is the spin-off of Evergrande, which will own 59.04% in EPS after the IPO, down from 71.939% currently, before over-allotment. Both EPS and Evergrande will raise $7.4bn if using HK$9.13/share, the mid-point of the indicative Offer Price range.

LG Corp announced the formation of another Holdco (tentatively named 'LG NewCo') and the split of 4 companies (out of 13 affiliates) from LG Corp including LG International (001120 KS), LG Hausys Ltd (108670 KS), Silicon Works (108320 KS), and LG MMA. In addition, Pantos will become an affiliate of LG International.

• The LG NewCo will be operated separately from LG Corp and the former company will have its own separate BOD and senior professional managers who will oversee the company. The new BOD will be headed up by Koo Bon Joon, the uncle of the current LG Chairman Koo Kwang Mo.
• Douglas Kim believes this creation of the LG NewCo will have a positive impact on LG Corp. However, the impact is likely to be much greater for LG NewCo than LG Corp.

(link to Douglas' insight: LG Group Announces the Formation of LG NewCo & Split of 4 Companies from LG Corp)

CRM is the spin-off of CR Land, which will own 75% in CRM after the IPO, down from 100% currently, before over-allotment. CRM intends to raise HK$11.2bn (US$1.4bn) if using HK$20.45/share, the mid-point of the indicative Offer Price range. Even at the bottom end of its IPO range, CRM's FY20(L) PER surpasses all peers. It also has below-average revenue growth and gross margins.

The BOJ's buying of ETFs continues but the pace has slowed in recent months. This does not mean we don't get ETF news, comments, etc. BOJ Governor Kuroda was in front of parliament a week ago and talked about the BOJ's ETF-buying programmes. Mr Kuroda was quite clear with his answer. From a Reuters note last week, "The BOJ already buys ETFs “quite flexibly” and can reduce purchases when the market risk premium is not rising, Kuroda told parliament. “If inflation hits our 2% target and an exit from our massive stimulus programme comes into sight, there will certainly be debate on how to end our ETF buying. But it’s premature to do so at this stage.” As Travis puts it, the proof is in the pudding.

• Kuroda-san says the BOJ isn't stopping ETF buys but the evidence is that they are slowing purchases when they feel they do not need to dampen downside volatility. They now have considerable buffer to buy more heavily should indices fall.
• Very Serious People are worried about how the BOJ will get rid of its ETFs. Some people suggest selling them to individuals. I think that unlikely to be successful in any reasonable time frame. There are solutions, and the risk is not impossible to deal with
• In the meantime, the BOJ will continue to buy, and will continue to absorb float. This year, at a pace of ¥4-5trln if it continues indefinitely, that is another 1% of TOPIX Index Float and closer to 1.35% of Real World Float. The impact is still real.

(link to Travis' insight: JAPAN FLOW: BOJ ETF Exit Fretting Is A Thing But Shouldn't Be. BOJ Buys Slower But Still Bigly)

Japanese internet services firm GMO Pepabo announced (J-only) they had received approval to move from the Second Section to the First Section of the Tokyo Stock Exchange as of 11th 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. In conjunction with the TSE1-reassignment announcement, the company also announced (J-only) a share sale for a total quantity of 331,800 shares including an over-allotment quantity.

• The Index Inclusion parameters are not very attractive. Janaghan estimates the Inclusion Quantity to be around 274,000-329,000 shares. This translates to an Inclusion Size of ¥1.43 - 1.71bn and an Impact of ~2 days of volume.
• Fundamentals do not seem particularly encouraging either. On a growth-adjusted basis, GMO Pepabo is overvalued against peers. The stock is currently trading at an EV/EBITDA (FY19) multiple of 23.5x which is slightly lower than our estimated peer-average of 24.5x. However, for the period FY19A-FY22E, Capital IQ consensus projections translate to an EBITDA CAGR of 1.6% for GMO Pepabo which is significantly lower than the average of 25.6% expected for peers.
• Avoid the "Buy-and-Hold until Inclusion Date" Trade: The estimated Impact of 2 days of volume is very small and the sale of shares makes the situation even more uninteresting. Look for range-trading opportunities instead.

• Since July, the Index Inclusion Parameters have evolved to become much less attractive. Based on the share price and volume history up to July 2020, the estimated impact of a TOPIX Inclusion event was ~15 days. However, the increased trading volumes in recent months means that the actual impact could be much smaller in terms of "days of volume". Janaghan estimated the Inclusion quantity to be 1,285,000-1,542,000 shares. This translates to an estimated Inclusion Size of ¥4.27 - 5.13bn and an estimated Impact of 7 - 8 days of volume going by 3-month ADV.
• The fundamentals do not raise any serious concerns of overvaluation. On an LTM basis, Shinnihonseiyaku's EV/Revenue, EV/EBITDA, and PER multiples of 1.8x, 15.8x, and 34.0x are significantly lower than the peer-averages of 3.1x, 23.3x, and 48.4x respectively.
• Janaghan recommends range-trading after the completion of the share sale. The stock could pop on day 1 post-announcement and later slightly correct itself in the run-up to the share sale pricing date. He recommends waiting for the share sale to be completed and buying on any weakness against the Issue Price post-delivery (after 15th December 2020) to Inclusion (28th January 2021). This is effectively a momentum trade. Be prepared to bail when the momentum dissipates.