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Last Week in Event SPACE:Toshiba, Wilmar, Vedanta, Haier, Softbank, Genting, 51job, Appraisal Rights

387 Views20 Sep 2020 07:52
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

Toshiba Corp (6502 JP) (Mkt Cap: $12.8bn; Liquidity: $52mn)

On 17 September it was reported that the Kioxia Holdings' IPO Price Range would be set at ¥2800-3500/share making the new offering size top out at ¥334.3bn and the market cap at IPO price be ¥1.88trln. That is a drop of 11.6-29.3%, which is a bit more aggressive than expected. It means the immediate uplift to Toshiba is considerably smaller compared to their in-price. As a backdrop, the future buybacks from selling Kioxia will not move the needle as much as investors would like, but that is a long-term condition. The short-term condition is that a lower price on Kioxia's IPO does not have as much permanent negative impact on the Adjusted EV of Toshiba as sentiment would suggest.

  • Generally, restructuring situations have less beta than "regular" stocks. There is an expectation of improvement against a bad history which will lead to a better future. There is more "good restructuring effect" applied to what might be a wandering business segment line which will dampen the deviations from the path. It is like an eddy current brake.
  • The recent story of the interference in the AGM re-election of Kurumatani-san by former GPIF CIO Mizuno-san is a truly telling example of why governance need to change. It is an enlightening article. While not directly impacting the ability of the company to make money, the fact that METI and Mizuno-san (not covering himself in governance glory - joining the board of Tesla and doing this - since leaving the GPIF where governance was his sword and shield) were involved cannot be considered positive for multiples.
  • Normally, Travis Lundy would be inclined to cover on this latest news. He would recommend covering half one's short or underweight today or mid next week as pricing for the Kioxia IPO solidifies (Monday and Tuesday are holidays). Given how USDJPY is trading lower and Toshiba is still somewhat yen sensitive in its core business, he is inclined to let a piece of the short drift on a little bit longer, but we are now in the frame of looking for opportunities to cover the short rather than press it harder. Another 6-10% lower and Toshiba is a good long-term long position again. This doesn't sound like a lot, but given how levered Toshiba is on a forward basis (after it liquidates Kioxia and buys back stock), this is not an expensive stock.

(link to Travis' insight: Toshiba Is A Range Trade. Still.)

Wilmar International (WIL SP) (Mkt Cap: $20.4bn; Liquidity: $46mn)

Assuming PERs of 25x YKA and 14x the rump, I see Wilmar at a 12% discount; i.e. having 14% upside. That comes before incorporating any holding company discount. For a cross-border, possibly-difficult-to-short subsidiary, holdco situation, that looks too tight.

  • That's not a lot of upside, if any, but it is still very much an unknown where YKA will trade. To provide some perspective, the current PER average for ChiNext is 58.5x. At that average, there is 120% upside for Wilmar from here to a "fair value". At 30x PER, you are getting the "rump" for free. Wilmar said in a briefing that the average PER valuation for listed peers on the ChiNext was 38x.

  • Wilmar's shares are trading 7% below where shares exchanged hands before the ADM placement. No doubt the placement overhang (~18.9 days of ADV), why ADM was selling in the first place, and the ongoing delays with respect to YKA's listing weighed on the shares price. At a ~16x trailing/forward PER, against a five-year average of 14x for each, Wilmar doesn't appear overly mis-priced ahead of an IPO which will separately list >50% of its net profit.
  • I think the PER afforded YKA will surprise on the upside. There is already strong interest from investors with ~30% of the IPO placed to strong hands. And my grid assumptions assume the low-end of the earnings guidance. I can see Wilmar clearing $5 near-term, assuming the IPO remains on track for listing next month.
  • UPDATE: Wilmar has provided a more detailed timeline for the listing of YKA - the issue price may be determined by the 23 Sept.

(link to my insight: Wilmar: China Ops IPO One Step Closer)

Vedanta Ltd (VEDL IN) (Mkt Cap: $6.7bn; Liquidity: $31mn)

Travis Lundy again writes about Vedanta. Several days ago it was noted in the media that VEDL affiliates were looking to borrow an additional US$600 million in order to finance the take-private of VED. That sum would be added to the US$1.75bn of short-term loan facility set up in July, and the US$1.4bn borrowed in a bond issue in late August. That brings the prima facie total to be raised to US$3.75bn or roughly ₹275bn. Considering the public holding of 1.85358bn shares, that comes to ₹148 per Vedanta Ltd. share. That would be a low price for the Reverse Book Build. A very low price. VEDL just won a court case against the government - that will bring in an additional slug of cash.

  • Even if VEDR raises another couple of billion dollars this week, there is risk that the Reverse Book Build cannot get to 90%. The ADR shares cannot participate and the truly enormous number of small shareholders out there may not participate. HOWEVER... even if it doesn't get done, compared to peers, VEDL is not expensive. Expect the Reverse Book Build launch to be announced within a week.
  • Note there was news out late in the week that Hindustan Zinc (HZ IN) was looking to raise an additional INR 40bn through an issuance of debentures. All told, that leaves at least INR 190bn of newly-raised cash at VEDL and another INR 195bn of cash and new cash at HZL (of which 65% could be pushed downstream to VEDL. There is PLENTY of cash within the subsdiary chain to deliver back to Vedanta Resources for a strong bid.
  • Also, the shares themselves still trade at a sharp discount to the average or median price path or fundamental ratio when compared to a basket of peers. If the deal were to fail and the shares to fall sharply, buying the dip might be worthwhile. Q1 earnings were better than expected. HZ appears to be on track, and if it fails, VEDL might make a play to buy out HZ which would solidify the value at VEDL.
  • The real question is not the financing (as the PTI "article" would have you think but the willingness of Mr. Agarwal to pay up.

(link to Travis' insight: Vedanta : More Fuel For The Fire)

Haier Electronics Group Co (1169 HK) (Mkt Cap: $9.7bn; Liquidity: $16mn)

The 632-page Application Proof for the listing of Haier Smart Home (600690 CH)'s H-shares has now been lodged. This will be a listing by introduction. The question at the time of the Scheme announcement, as it is now - is where will the HSH (as yet unlisted) H-shares trade with respect to the HSH A-shares?

  • But what discount for the Hs? The independent valuer's 7.3% discount (H to the A) appears overly optimistic, considering the average A/H premium for the Hang Seng Stock Connect China AH Premium Index is currently ~30%. Listed-peer Hisense Home Appliances Group Co., Ltd. H (921 HK) is trading at a 34% discount to Hisense Kelon Electrical-A (000921 CH). An analysis of a basket of liquid H shares averages out to a discount of 39% versus the As.
  • HSH was trading (at the time of my insight) at HK$24.13/share. Applying a 35% discount takes this to HK$15.68. Multiply by 1.6x to arrive at HK$25.10. HEG is at HK$25.70/shares. Deduct $1.95/share to get $23.75/share. Therefore the HEG is trading at a ~5% discount ($23.75 vs HK$25.10) to its estimated (discounted) H share price.
  • I think a 35% discount (Hs vs As) is fair for HEG. And the market is assigning a small discount to that discount. This looks like an OK level to get involved. This is essentially an unwind trade vs its parent. The implied stub has pulled back, but remains highly elevated.

(link to my insight: Haier (1169 HK): Back To Entry Levels)

Hexaware Technologies (HEXW IN) (Mkt Cap: $1.9bn; Liquidity: $7mn)

Hexaware took it down to the wire. The Reverse Book Build got to the 90.0% threshold. The Discovered Price is clearly going to be INR 475/share.

  • Is There A Trade Here? Yes. If Baring takes the Discovered Price, then there is a classic risk arb situation on the roughly 10% residual. It may trade tight, but sometimes they trade a few percent wide. Travis would want to own this at a price at least 3-4% below the Discovered Price. At 6% he would buy quite a lot.
  • If the deal fails completely and falls quite sharply, he would buy the dip. Hexaware is a quality company with quality management. Baring still own 62%. They will either want to sell it to someone else for a high price, or grow it to improve profits and positioning. And if it were to fall sharply it would be quite a bit cheaper than peers.
  • No Counter Offer was announced by the Friday night deadline so the new deadline to announce Acceptance or Rejection of the Discovered Price is 23 Sep.

(link to Travis' insight: Hexaware Exit Offer Reverse Book Build Gets 90% & Discovered Price - Now We Wait)

Softbank Group (9984 JP) (Mkt Cap: $125bn; Liquidity: $1.3bn)

Softbank announced NVIDIA Corp (NVDA US) will take over ARM in a US$40bn deal, comprising US$12bn in cash, 44.3 mn NVDA (~US$21.5bn), a US$5 billion earn-out based on Arm’s financial performance in the Mar-22 fiscal year, and up to $1.5bn in restricted stock units for Arm employees. The deal requires regulatory approval in the US, UK, Europe and China. That last approval could prove interesting.

  • $2bn will be paid to Arm in cash at signing. At the same time Nvidia will get “a license agreement under which Arm grants Nvidia a license for all existing and future Arm products, services, tools, and other commercial offerings of Arm’s IP Products Group (IPG) business”. Are these two things related? If so, did Nvidia just get the chance to go after the very attractive server market by combining Arm’s processors with its GPUs?
  • The release seems to want to imply that the $2bn is a break fee or guarantee of sorts but is it really? Regardless of what things state contractually, since Arm does not manufacture anything it is the IP which is important, and since the part about the licence does not mention a defined licence period we have to wonder if Arm just handed over an extremely attractive growth market to Nvidia for peanuts (and for how long?) when there is significant risk of this deal being delayed or stopped outright. Why do this? Does Nvidia actually even want this deal to go through?
  • So Softbank is billing this as a $40bn sale, but actually it smells more like a $2bn licencing agreement to Arm with Nvidia paying its future employees $1.5bn in stock, up to $5bn of earn out on undisclosed targets and $33.5bn as the initial purchase price, 64% of which is paid in stock at nosebleed valuations. That looks a lot less attractive than the headline. Nvidia MAY have just gotten a fantastic deal.

(link to Mio Kato's insight: Softbank – Interpreting the Arm Sale)

Oriental Watch (398 HK) (Mkt Cap: $0.2bn; Liquidity: <$1mn)

OWH has announced a partial buyback from the company - 14.55% of shares out or 83mn shares, at HK$3.00/share, a 53.85% premium to last close. This will cost the company HK$0.25bn (US$32mn). OWH had net cash on hand of ~HK$0.65bn as at Mar 2020. Yeung Ming Biu & concert parties hold 30.85% of shares out and will not tender. That leaves 69.15% of the register subject to the buyback, implying a minimum pro-ration of 21.04%.

  • Should the partial buyback complete (i.e. fully exercised) Yeung & concert parties will hold 36.10% of shares out, before the exercise of any outstanding share options. That step-up in %-held oversteps Hong Kong's "creeper rule", and therefore Independent Shareholders are required, by way of a special resolution (75% vote), to approve a whitewash waiver such that Wong is not obligated to make a general offer for shares not held.
  • I think the minimum pro-ration will more like 31% (simply factoring in 23% of the register who are unlikely to tender). At 30%, that takes you to a theoretical breakeven price of ~HK$1.97 using the current price.
  • At $2.28/share (where it was at the time of writing) and below, this was a buy. At HK$2.28, minimum pro-ration is a back end at HK$2.09/share. And with 17.3% accretion of EPS and 3% accretion of BVPS, the back end should trade at perhaps 3%-17.3% above where it was trading. HK$2.00 at the close adjusted by the BVPS accretion is HK$2.06. HK$2.00 adjusted by EPS accretion of 17.3% is HK$2.35.

(link to my insight: Oriental Watch (398 HK): Conditional Partial Offer)

COL PCL (COL TB)(Mkt Cap: $0.4bn; Liquidity: $1mn)

Stationery and office equipment retailer COL announced they agreed to be acquired by Central Retail (CRC TB) in a Deal that valued the company at a market cap of ~US$390mn. CRC intends to delist the shares of COL following the completion of the Deal and this will require approvals from COL shareholders and the Stock Exchange of Thailand. Once approvals have been granted, a tender offer will be launched for 100% of the shares in COL. The transaction is expected to close in 1Q 2021. The Offer price will be THB19.00 per share in cash. Both the Acquirer and Target are controlled by Thailand’s billionaire Chirathivat family.

  • Approval must be given at the COL shareholders’ meeting with no less than three-fourths of the total issued shares (≥ 480mn out of 640mn shares), and also no more than 10% objection of the total issued shares (≤ 64mn out of the 640mn shares). The meeting is likely to be held by the end of November 2020. Shareholders collectively holding 295,281,600 shares representing 46.14% of total shares (Hold COL + Mr. Worawoot Ounjai + Others) have agreed to the Deal.
  • The Offer seems light. On both LTM and NTM bases, the EV/EBITDA and PER multiples implied by the Offer are far below our estimated means and medians for peers. The Acquirer has opportunistically timed the bid when COL's discount to peer-median EV/EBITDA (LTM) is almost at its widest in 7 years.
  • The spread does not seem attractive and the likelihood of a bump seems low. There is also a non-negligible risk that many long-term shareholders could be underwater and be unwilling to accept the Deal and could vote against. It is tough to know how flat the ownership profile is how far down the register. If it is 75-80% owned by family members, it might be very difficult to find enough holders to block, but in companies like this one does not know.

(link to Janaghan Jeyakumar's insight: COL-Central Retail Corp: Thailand Delisting Offer Trading Tight)

Citadel Group (CGL AU) (Mkt Cap: $0.3bn; Liquidity: $2mn)

Canberra-based IT services outfit Citadel ("CGL") has entered into a Scheme with Private Equity Partners (PEP). The unsolicited cash consideration of A$5.70/share is a 43.2% premium to the last close of A$3.98/share. A scrip alternative will be made available. The proposal values CGL's equity at A$448.6mn (US$327mn). It is the intention of CGL's board to declare a fully franked special dividend of up to A$0.15/share on or shortly before the Scheme implementation date, which theoretically could enable some shareholders to receive up to A0.064/share additional benefit. The cash consideration will be reduced by the special dividend.

  • The offer price backs out a solid 14.7x EV/EBITDA, according to the announcement. The acquisition of Wellbeing, discussed below, was conducted for 15.8x EV/EBITDA. Optically, the Offer price appears fair, pitched around the share price high since the May 2019 trading update, which resulted in shares cratering ~40%.
  • On the 18 February of this year, CGL announced the acquisition of Wellbeing Software Group, the UK market-leading provider of radiology and maternity software solutions. As part of the Wellbeing acquisition, CGL undertook a two-stage capital raise at HK$4.65/share, with the first raise for institutional investors for A$34.4mn on the 24 February; and the second capital raise on the 2 April 2020 for A$93mn, which was subject to a shareholder vote at the EGM held on the 30 March 2020.
  • Apart from standard Scheme shareholder approvals, the Offer has limited conditionality - it is not subject to due diligence nor any funding condition. The Offer has not been declared final. Trading tight at a gross/annualised spread of 1.8%/7.3%. This will ostensibly trade closer to terms as some shareholders take advantage of the franking credits. I reckon there's enough premium in the Offer for the deal to get up. Major shareholders are in the money; and management, who are also key shareholders, support the deal.

Cross Harbour Holdings (32 HK) (Mkt Cap: $0.5bn; Liquidity: <$1mn)

CHHL) has announced a voluntary conditional cash offer from its major shareholder. Rose Dynamics, a wholly-owned vehicle of Cheung Chung Kiu (Chairman/ED of CHHL), holding 22.69% in CHHL, has made a cash offer of $14/share, a 42.4% premium to last close. The Offer price has not been declared final. A third quarterly interim dividend may be declared in November which would be added to the Offer price. The key condition to the Offer is the Offeror holding more than 50% at the close of the Offer. The Offer is not aware of any authorisation or consent required to complete the Offer.

  • But there is considerably more to CHHL's ops beyond driving schools and tunnel operations. The company had net cash of HK$2.135bn (HK$5.73/share) as at 30 June 2020 - see page 4. CHHL also had HK$2.7bn in "other financial assets". Apart from unlisted fund investments of HK$1.15bn, CHHL had (an estimated) 54mn shares in Evergrande Health Industry (708 HK), whose shares are up ~240% since 30 June 2020. that would place a value of HK$1.36bn for its stake - assuming it is still held. All told, cash + investments is probably worth HK$5.6-HK$6bn - more than the implied market cap under the offer.
  • Currently trading at a gross/annualised return of 1.8%/24.5% - assuming payment the third week of October. That appears a reasonable entry-level - plus there is still a possibility the Offer, which has not been declared final, gets a bump. Net of cash/short term investments, you are getting the main business ops for free. The Offeror knows this. This is a buy. It is a high price which means shareholders may accept, but it is too cheap, which means it could be worth a bump.

(link to my insight: Cross-Harbour (32 HK): Voluntary Offer. Price Not Final)

Allcargo Logistics (AGLL IN) (Mkt Cap: $0.4bn; Liquidity: <$1mn)

India-based integrated logistics company Allcargo announced they had received a “Delisting Proposal Letter" from members of its Promoter Group. The Promoters collectively hold 172.0mn shares representing a 70.01% stake and the Offer will be made to acquire the remaining 29.99%. The Final Offer Price will be determined upon completion of the Reverse Book Building (RBB) process. Following the completion of the transaction, the Promoters will voluntarily delist the shares of Allcargo from BSE Limited and National Stock Exchange of India Limited.

  • Indian Delisting Offers are rarely suitable for a "set-and-forget" approach. They trade with a lot of noise which opens up many interesting trading opportunities. Similarly, Janaghan expects Allcargo to trade with a lot of noise until completion which means it will be advisable to be prepared to enter and exit the Deal multiple times over the next few months.
  • Allcargo's current multiples are reasonably inexpensive compared to peers. There does not seem to be a sufficient control premium embedded in the current share price when compared to its undisturbed level (which also means the fall in the case of deal break is unlikely to be too much of a concern this is trade).
  • Jaanghan expects the share price to gradually move up as the Deal progresses and the discovered price to be much higher than the current share price.

Viglacera Corp (VGC VN) (Mkt Cap: $0.45bn; Liquidity: >$1mn)

Vietnam Electrical Equipment J (GEX VN) also known as GELEX announced in June that it intended to up its stake in Viglacera Corp (VGC VN). It officially announced its intentions to buy 95 million shares or 21.2% in early July, then launched a Tender Offer at a lower price of VND 17,700 - a sharp discount to the price in the market. On 11 September it lifted its price to VND 21,100 but that was still at a discount to market. On Friday 18 September, GELEX upped its price once more to VND 23,500.

The question on people's minds should be whether the Ministry of Construction would tender its stake (or the maximum allowable portion of it). Travis expects not. The decree promulgated at end-June set a deadline of end-December for 120 SOEs or stakes and end-November for another four. Viglacera was in a separate category of 18 which were supposed to have the relevant Ministry propose a plan for the equitization of the holding. They do not need to sell their 38.85% stake in Viglacera by year-end.

  • If the MOC does not tender their shares, the minimum pro-ration is 58.6%.
  • If GELEX gets all the shares they want, float will be down to 15%. The rules require a float of 20% within a year. The deadline for the MOC selling down its stake is unknown.
  • If GELEX gets all the shares they want, they would be able to buy more shares to get to 50+% control without launching another Tender Offer.
  • Travis tends to think that post-tender the shares could fall on supply to come. He recommends tendering if you have shares.
  • Travis thinks that IF an extension is possible, yet another bump could be possible. He recommends tendering if you have shares, but notes it is not that expensive all things considered.

(link to Travis' insight: Gelex Bumps Viglacera Bid Again. High Pro-Ration Likely)

The Tender Offer for LINE Corp (3938 JP) is done. All told the acquirers bought about 31.23mm shares. That leaves about 25mn shares out in the float. There will likely be no squeeze for shares as there was for FamilyMart Co Ltd (8028 JP). Almost all the shares in the float are held by real investors. There would have been no reason to short into the Tender and need to buy back. And there should be almost no index ownership. Those seeking Appraisal Rights and a higher price should be aware of several things if you are new to the game. First: talk to a lawyer. Second: get your procedural ducks in a row now. There are financing/leverage issues. This will be a longer zombie twilight than normal. The EGM to approve the squeezeout is expected for December 2020 and the Effective Date would likely be a month or so later. (link to Travis' insight: LINE: The Zombie Twilight Begins)

In 🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation, Campbell Gunn analyses the "Buffett Trade". He concludes Berkshire Hathway's first major disclosed foray into Japanese equities is welcome and should prompt a debate about approaches to valuation in this market. If, in addition, the macro backdrop in Asia becomes inflationary over the next five years, the 'Buffett Trade' should prove highly profitable and prompt a broader 'Japan Trade' in which many of today's 'Deep-Value' opportunities could return to market leadership.

In Familymart: What's Next? And Will Mitsubishi React?, Michael Causton asks now that Itochu has succeeded in its bid, the question remains whether Mitsubishi Corp (8058 JP) will now look to consolidate its own food retail assets like Lawson Inc (2651 JP) and Life Corp (8194 JP).

STUBS

I estimated Genting was trading at a ~56% discount to NAV, its 12-month low and +2STD against a one-year average of ~46%. The implied stubs for GENS and GENM (simply netting of each separately) are both at multi-year lows. Stripping out the holding in GENS, the implied stub is now at the same negative level it has (modestly) rebounded off five times since March. GENT continued to underperform even after GENM announced it will subscribe for up to US$150mn of preferred stock in 49%-held Empire Reports, which operates a casino resort outside of New York.

  • GENT looks cheap here. The market is assigning RM2.2bn (~RM0.57/share) LESS for the stub ops (net of all listcos) since this time last year. The drop in EBITDA in the 1H20, does not, all else being equal, justify this decline. However, by my calcs, net debt at the parent level has ballooned to RM9.4bn as at 30 June 2020, from RM7.3bn at Dec-19-end, and RM5.9bn as at 30 June 2019. I assume this is with respect to RWLV although it is not adequately explained in the interim/final results. RWLV is expected to incur a further investment of ~US$2bn.
  • ~87%/66% of GENT's NAV/GAV, including the Resorts World management fee, is exposed to gaming. That exposure is increasing via RWLV. Empire is another thorny issue. GENM had already sunk US$360mn into the casino resort - before the lastest fundraising drive. The market has erased ~RM400mn from GENM's market cap since that announcement, or ~64% of the investment. I think GENM has further to fall.
  • Genting Hong Kong (678 HK) recently announced it would temporarily suspend all payments to the Group’s financial creditors. GENT holds no interest in GHK. But with Lim Kok Thay holding a 44.8% stake in GENT and 75.69% in GHK, rumours have circulated that GENT could somehow be used to assist GHK. I don't see it, but clearly GHK is on life support.
  • The Trade? The oil & gas ops are reasonably steady, as are (to some extent) the plantation ops. But these two businesses are becoming increasingly marginalised at the stub level. I'm not a big proponent of a ‘tick’ shaped earnings recovery in the casino space. You could entertain a set-up here with a view to mean reversion; however, that reversion may take considerable time to play out; and it is not clear what the "new " normal average will look like as RWLV exposure increases.

(link to my insight: StubWorld: Genting's NAV Discount Plumbs New 2020 Low)

US-LISTED CHINESE COMPANIES
- APPRAISAL RIGHTS & FAIR VALUE

In this insight, I explored the mechanics of Section 238 of the Cayman Companies Law, the case history of four appraisal rights judgments, and what dissenting shareholders may expect when taking their merger objections to Court.

  • Recent rulings highlight the Court can, and will, blend methodologies - market price, transaction price, DCF - to reach an appropriate fair value. For Integra, DCF was given a 75% weighting, with market price afforded 25%. In Shanda, as agreed by both parties, DCF was given a 100% weighting. In Qunar, DCF and the market prices were split 50:50. And in Nord Anglia. a 40% weight was given to DCF, with a 60% weighting to the merger price.
  • It also serves to highlight the appraisal award need not be of the magnitude seen in Shanda, nor the inconsequential premium in Qunar. In addition, a minority discount may apply, as in the Shanda judgment, but may not, as in Nord Anglia. To date, the Courts have not assigned a primary reliance on the market price in any of these cases when determining fair value.
  • What determines "fair value" will be highly fact- and industry-sensitive/dependent. But given the Grand Court’s willingness to adopt a DFC valuation methodology (and what level of confidence than can be placed upon the reliability of underlying cash flow models, assumptions and the validity inputs to be tested ), expect these appraisal proceedings to remain wide open.

(link to my insight: Homecoming For Chinese Companies: Appraisal Rights & Fair Value)

M&A - US

51 Job Inc Adr (JOBS US) (Mkt Cap: $5.3bn; Liquidity: $11mn)

HR solutions provider 51job announced it has received a preliminary non-binding Proposal from DCP Capital Partners to acquire all of its shares for US$79.05/common share. The Proposal represents a premium of 18.82% to 51job's 30-day VWAP, and a premium of 16.05% to 51job's last close. Pricing appears opportunistic after 51job was down 20% YTD, ahead of the Offer. Currently, trading through terms at US$79.42. There are no super-voting rights in 51job. Directors hold 22.8% of shares including Rick Yau (co-founder, CEO) with 19.2%. The major shareholder is Recruit Holdings (6098 JP) with 35%.

  • Recruit is well in the money, having bought in via a private placement back in April 2006. MFS, another large shareholder (6.6%), is also well in the money. One can envisage Rick Yan and other senior management (and potentially Recruit) rolling over their shares into an unlisted entity - with a view to re-listing at a higher valuation in a market closer to where 51job's operations are located.
  • However, this appears a highly opportunistic Offer, one that is dead on arrival if either the directors or Recruit are on not onboard. According to CapIQ, the Offer price equates to a forward PER and EV/EBITDA of 33.2x and 21.8x respectively. This compares to a peer basket average of 54x and 26x. Over the past five years, 51job has traded at a 19% and 14% discount to peers on a forward EV/EBITDA and PER basis. Both metrics under the Offer appear underwhelming.
  • The Trade. I would buy around the offer price, on the expectation of a bump. This appears just the opening salvo. The pushback? This remains a non-binding proposal.

Nam Tai Property Inc (NTP US) (Mkt Cap: $0.4bn; Liquidity: $1mn)

IsZo Capital LP released a press release saying they had delivered to Nam Tai "verified requests" to convene a meeting of the Company's shareholders from shareholders holding more than 40% of the shares outstanding. The threshold for doing so is 30%. This should get over the line.

  • The trade is to own Nam Tai here, and in near-space above, but not to chase it too hard. This stock may be worth US$20/share. It may be worth US$30/share. But until you get the Kwoks out, nothing at all is done.
  • It would not be surprising to have a situation where the company has just spent a lot of cash last quarter buying the Dongguan asset and now that cash is depleted, there could be a risk of a downturn so the company would need to raise cash by offering shares. A third-party placement to a strong development partner like Kaisa might be engineered. It is often the way of things. It is specifically what the activists and their supporters are trying to make sure does not happen. But they are right to be worried that it might.
  • Travis thinks the risk here is that if the Board is NOT spilled, there is a risk of entrenchment. For that, the risk gets binary as an EGM approaches. Travis says "trade with care but I would be long here."
  • UPDATE: The CEO has resigned "for personal reasons." This paves the way for a clearing of the decks. Shares popped. This should go up some more. On Friday 18 Sep, IsZo released yet another Press Release and letter to shareholders.

TOPIX INCLUSIONS!

Gift Inc (9279 JP) (Mkt Cap: $0.2bn; Liquidity: $2mn)

TSE Mothers-listed noodle restaurant chain Gift Inc announced (J-only) on Friday after market close it had received approval to move to TSE1 as of 18th September 2020. TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 29th October 2020. Jaanghan estimates the Inclusion to be 0.52-0.63mn shares which translates to a Inclusion Size of ¥0.85-1.02bn and an impact of 12-14 days of volume - a small-sized impact.

  • Fundamentals do not raise any serious concern of overvaluation. Capital IQ consensus projections translate to strong Revenue and NP CAGRs of 21% and 17% from FY2019 to FY2022. While the EV/Rev (LTM) multiple of the stock is higher than the estimated average for peers, the stock has always traded at a premium to the selected basket of peers and more importantly its premium is well below its historical average.
  • Recommend taking a LONG position until the Inclusion Date. CAVEAT: If any of the shareholders who entered through one of the tachiaigai bunbai offerings (Oct 2019 or Dec 2019) had continued to hold onto their shares (without panic-selling in March 2020) and if the share price rises sharply in the next few weeks, there is a chance they might want to quit close to their original entry prices (¥2076 and ¥2228.5 on a split-adjusted basis) with little or no profits. I would start being more cautious if the stock reaches these levels.

(link to Janaghan's insight: TOPIX Inclusion (9279 JP): Gift Inc)

Gremz Inc (3150 JP)(Mkt Cap: $0.4bn; Liquidity: $2mn)

Gremz announced (J-only) a tachiaigai bunbai (equity offering) today stating that they intend to work towards achieving the Section Transfer requirements to move from TSE2 to TSE1. The shares for sale will be coming from controlling shareholder Masaomi Tanaka's holdings. The Offering will place up to 878,000 shares with a maximum limit of 800 shares per buyer. The Offering is scheduled to take place from 25th September to 2nd October 2020. The Offer Price will be set at a discount to the last close prior to the Offer Date. Usually the Offer Date is the first day in the period. This is a pre-event stage of the TOPIX Inclusion - based on the current section transfer requirements and the company's float, market cap, shareholder count, and financials, I believe they will be able to qualify for TSE1 assignment.

  • Janaghan would be LONG at or below the (then) current trading price - ¥1,609. This is unlikely to be set-and-forget trade. One should be prepared to enter and exit multiple times. Expect the price to gradually climb until a potential Inclusion date which could be somewhere in Q1 2021 - expect end-January or end-February.

(link to Janaghan's insight: TOPIX Inclusion Pre-Event Trade (3150 JP): Tachiaigai Bunbai Announced. It's GREEN)

M&A - EUROPE

Patrick Drahi, through Next Private has launched an agreed takeover offer for the 22.42% voting rights of Altice NV A (ATC NA) he does not already control” at EUR 4.11 per share. The minimum acceptance level to achieve this is 95%. Jesus reckons buying around the offer topic on the expectation of a bump. (link to Jesus Rodriguez Aguilar's insight: Altice - Next Private Takeover Announcement)
In Caixabank-Bankia: Share Exchange Tug-Of-War, in a Merger of Unequals, Victor Galliano reckons CaixaBank SA (CABK SM) and Bankia SA (BKIA SM)'s merger talks are intensifying, and share exchange terms could be announced later this week; the relative valuation discussions are being driven by Caixabank’s currently largest shareholder Fundacio Bancaria la Caixa (Caixa Foundation) with 40%, and the Spanish government’s bank fund FROB, which holds a 62% stake in Bankia.

INDEX REBALS

FTSE GEIS December 2020. Based on current market prices, Brian Freitas sees a high probability of Smoore International (6969 HK), SK Biopharmaceuticals (326030 KS), Hygeia Healthcare Group (6078 HK) and Sri Trang Gloves (STGT TB) being included in the FTSE All-World index. Kangji Medical (9997 HK) and Mindspace Business Parks REIT (MBP IN) could be added to the All-World index if their stock prices increase by around 15% by 11 November, else they will be added to the FTSE All-Cap index. There are a few other HK listed stocks that could be added to the FTSE All-Cap index: Akeso Biopharma Inc (9926 HK), Yeahka Limited (9923 HK), Archosaur Games (9990 HK) and Peijia Medical (9996 HK). (link to Brian's insight: FTSE GEIS December 2020 - Potential IPO Inclusion)

SET50 Index Rebalance Preview. Brian sees a high probability of Bangkok Commercial Asset Management (BAM TB) being included in the SET50 index and of Thanachart Capital (TCAP TB) being deleted from the index. There is a lower probability of Com7 PCL (COM7 TB) and CK Power PCL (CKP TB) being included in the index and of Banpu Power PCL (BPP TB) and WHA Corp Pcl (WHA TB) being excluded. There is a chance that TTW Pcl (TTW TB) fails the liquidity test in which case it will be deleted from the index, and WHA Corp Pcl (WHA TB) stays in the index. (link to Brian's insight: SET50 Index Rebalance Preview: Three Changes for Now, Could Be One More)

HSCEI Index Rebalance Preview. Brian sees a high probability of China Overseas Land & Investment Ltd (688 HK), JD.com (HK) (9618 HK), Alibaba Health Information Technology (241 HK), Haidilao (6862 HK), China Feihe (6186 HK), Semiconductor Manufacturing (981 HK) and Evergrande Real Estate Group (3333 HK) being included in the Hang Seng China Enterprises Index (HSCEI INDEX), and of China Taiping Insurance Hldgs (966 HK), China Telecom Corp Ltd (H) (728 HK), China Minsheng Banking H (1988 HK), China Vanke Co Ltd (H) (2202 HK), Fosun International (656 HK), China Citic Bank Corp Ltd H (998 HK) and China Shenhua Energy Co H (1088 HK) being deleted from the index. Depending on price movements between now and 30 September, NetEase (9999 HK) and Hansoh Pharmaceutical (3692 HK) could be included in the index, which would see Want Want (151 HK) and PICC Property & Casualty H (2328 HK) being deleted. (link to Brian's insight: HSCEI Index Rebalance Preview - December 2020: HUGE Number of Changes and Turnover Expected)

SHARE CLASS

In Liquid Universe of European Ordinary and Preferred Shares: September Report, Jesus looked at seven share classes (pref vs. ords) throughout Europe, with trade recommendations thereon.

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

China Ronzhong (3963 HK)20.55%BOCIOutside CCASS
Sunac China Holdings (1918 HK) 21.91%CitiMS
Worldgate Global Logistics L (8292 HK) 16.67%AstrumOutside CCASS
Zhicheng (8511 HK)73.48%EasyOutside CCASS
Shi Shi (8181 HK)25.70%HSBCKingston
Amvig Holdings (2300 HK) 44.15%UBSOutside CCASS
Nexion Technologies Ltd (8420 HK) 22.83%Kim EngOutside CCASS
China Youzan Limited (8083 HK) 11.86%GF SecOutside CCASS
Source: HKEx

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

Name

% chg

Into

Out of

Tailam (6193 HK)20.07%BoCOutside CCASS
Platt Nera (1949 HK)75.00%EasyChaorshang
MabPharm (2181 HK) 49.95%HSBCSt Chart
Source: HKEx
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