Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven


Last Week in Event SPACE ...



The list of China Military Cos in which US persons are banned from investing continues to be a VERY big deal. It would be best to operate on a "better safe than sorry" basis. If you were not already out of these names, get out as soon as possible. 

Haier Smart Home (600690 CH)'s H/A discount has only been narrower on three trading days in the past year, all of which occurred in the second half of July, ahead of the pre-conditional proposal. to privatise Haier Electronics Group Co (1169 HK).

Avex Inc (7860 JP)'s ToSTNeT-3 stock repurchase would indicate activist Dalton exiting.

Beijing Jingneng Clean Energy (579 HK) is trading wide to terms following the despatch of the Composite Doc.
We still have a very large look-through discount on Naspers (NPN SJ).  As March approaches, the likelihood that investors realise there could be another large offering increases, which could put pressure on Tencent Holdings (700 HK) shares.
Plus, other events, CCASS movements, and Mood Spins.



(This insight covers specific insights &amp; comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events - or SPACE - in the past week)




EVENTS




OFAC Makes a Longer List of Trump Names of China Military Cos
On the 12th of November, newly lame-duck US president Donald Trump signed an Executive Order (Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies) banning investment and capital provision by "US persons" to companies in lists established by the US Department of Defense. New guidance from OFAC has been released. Based on these updates, Travis expects that MSCI, FTSE, and S&amp;P will likely have to delete the major telcos, including China Unicom Hong Kong (762 HK), China Mobile (941 HK), and China Telecom Corp Ltd (H) (728 HK) as well as CNOOC Ltd (883 HK). I expect that they would have to delete China Tower (788 HK) as well because it is more than 50% owned by the three major telcos. Cgn Power Co Ltd H (1816 HK) appears not to be addressed in previous iterations of the index providers lists but I expect it gets the boot. 

Travis estimates roughly 20-25% of the float of major names appears to be held by US persons. And it isn't just index holders who have to sell. Other major fundamental holders ALSO have to sell. This event creates a multitude of problems which need to be addressed. The index holders "have to" sell at the time the names are deleted from the indices.
Hedge funds which would normally buy the dip are stuck too. They have US investors. If they do not, they might be OK, but normally hedge funds which buy the dip also have to sell to someone later, and all US persons may be out of commission for a while. Hedge funds who own long positions or short positions would have to unwind them if they have US persons as fund investors, or as SMA clients. Hedge funds, pensions, and other investors who have long or short positions in futures and options which are linked to these indices will also have to liquidate their positions.


Overall, it is a BIG list of names targeted (Travis has a list of 133 names, most of which appear to be 50+% controlled, which could be affected in portfolios). Investors would do well to understand how much of the float is for sale.



(link to Travis' insight: OFAC Makes a Longer List of Trump Names of China Military Cos)




SHARE CLASS





Haier Smart Home (600690 CH) (HSH) / Haier Smart Home Co Ltd (6690 HK) 

On the 31 July this year, Haier Electronics Group Co (1169 HK) (HEG) announced a pre-conditional Scheme such that HEG shareholders would receive 1.6 new HSH H shares plus HK$1.95 in cash.  HEG's shares were suspended on the 11 December subsequent to its privatisation, with an implied look-through discount for HSH's H shares to the As of  30.4%. The Hs received by HEG shareholders commenced trading under the code Haier Smart Home Co Ltd (6690 HK) on the 23 December with a closing discount to the As of 22.1%. It was 21.6% at the time of my insight. This is not sustainable. 




What is a "fair" discount for the Hs? The mid-point price from the independent valuer of $38.03 - see page 75 - implied a 32% discount - H to the As. The average A/H premium for the Hang Seng Stock Connect China AH Premium Index is currently ~43%, or a ~31% discount. 
Key peer Hisense Home Appliances Group Co., Ltd. H (921 HK) is trading at a ~37% discount to  Hisense Kelon Electrical-A (000921 CH) versus a one-year average of 32%. 


A  basket of liquid A/Hs trade at a 44% discount and one of HSH's closest peers is at 37%. The implied discount via the independent advisor was 32%.


The trade here is to short the Hs and go long the As, with a target discount of at least 30%. 



(link to my insight: Haier Smart Homes (6690 HK): H-Shares Trading Tight To A-Shares)




M&amp;A - ASIA





China Logistics Property Holdings (1589 HK) (CLPH) (Mkt Cap: $1.7bn; Liquidity: $1mn)




CLPH has announced its two largest shareholders - Li Shifa (chairman, holding ~28.2%) and RRJ Capital (~22.8%) - are "conducting a preliminary strategic review of their stakes in the Company, which involves up to approximately 51.5% shareholding of the Company." The media is reporting these two shareholders are seeking a 20% premium to the unaffected price or around ~$4.70/share, roughly a four-year high. A sale could potentially trigger an unconditional mandatory general offer; or it may be structured by way of a Scheme in which Li/RRJ provide irrevocables to vote in favour of the delisting resolutions.


 CLPH is trading at a FY20E/FY21E EV/EBITDA of 35x/31x vs. 20x/18x for peers.  CLPH has consistently traded at a premium to peers on an EV/EBITDA metric. Daniel Hellberg analyses CLPH's EV/portfolio (the book value of property, equity investments, PP&amp;E). A further 20-25% upside from here places CLPH EV/portfolio at ~1x versus 1.2x for GLP at the time of its privatisation.
This is, as yet, a pre-event. There is no guarantee an Offer is forthcoming. Yet the company is very much in play, one that is likely to garner considerable interest from prospective suitors given the scarcity of logistic asset disposals. I would be buying the dips here, with a possible fair value range of $4.75-HK$5.00.





links to: Daniel Hellberg's insight: Major Shareholders of CLPH (1589:HK) Selling! Revisiting Narrative &amp; Valuations my insight: China Logistics (1589 HK): Possible Offer As Major Shareholders Seek Exit


Avex Inc (7860 JP) (Mkt Cap: $0.5bn; Liquidity: $3mn)

On 28 December, Avex announced that it would buy back up to 2.7mm shares at a price of ¥1,078/share in a ToSTNeT-3 stock repurchase transaction. This appears to be activist Dalton exiting.

Given the pro-forma financials for March-end, you could not pay Travis Lundy to be short this company. There was a sharp pop on shares on the 25th after the news and the stock traded significant volume, but it opened high and then fell. There were sellers. 
Travis expects the company will have significant enough cash to pay off all debt and buy back a lot more shares should it want to do so.  While numerous commentators have mourned the slow-moving death of Japanese pop, Avex is so ubiquitous that he would expect the company to have considerable staying power on the music scene. Travis would buy here. 




(link to Travis' insight: Avex (7860) ToSTNeT-3 Buyback After HUGE News)

Beijing Jingneng Clean Energy (579 HK)  (Mkt Cap: $2.7bn; Liquidity: $2mn)
The Composite Doc is now out. Beginning on page 29, Gram Capital (IFA) traversed familiar ground in concluding the Offer was fair and reasonable. Gram analysed 10 peers (with an average PER and P/B of 6.87x and 0.48x vs. 9.05x and 0.81x for Jingneng under the Offer) and past privatization (for all industries, not energy specifically). Gram also flagged Jingneng's issue obtaining equity financing. This was also used as one of the reasons for the H-share Offer and delisting.

The EGM/H-share class meeting will be held on the 19 February, following which the Offer will remain open to acceptance up until the 1 March.  Payment under the Offer is expected on or before the 10 March. 96.43% of shares out are in CCASS, which should assist the bankers in rustling up shareholders to tender once the delisting is (or should be) approved at the H-class meeting. 
Trading (at the time of the insight) at a gross/annualised spread of 6.3%/38.1%, assuming payment on the 10 March. The tendering condition is the key risk, as seen in the Harbin Electric Co Ltd H (1133 HK)  fiasco. However, this appears a solid entry point.
This is the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control since last year - and seventh in which interested parties have been circling. This Offer continues a clear directive to privatise clean energy plays. Some other possible names which could be targeted next include China Datang Corp Renewable Power (1798 HK).

(link to my insight: Beijing Jingneng (579 HK): Doc Out. IFA Says Fair &amp; Reasonable)







STUBS






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


Back on the 30 October, Prosus announced it would conduct a US$5bn buyback of Prosus shares and Naspers shares (i.e. the subsidiary would buy shares in the parent to avoid passing down income from sub to parent which could be taxed). This was discussed at length by Travis Lundy in Naspers &amp; Prosus - A $5bn Catalyst Arrives. The buyback of Prosus shares and Naspers shares wasn't a lot in the grand scheme of things, but $5bn is $5bn, and the Naspers discount was quite wide. Prosus' discount to NAV has subsequently narrowed to ~23% (at the time of the insight), from a pre-buyback discount of 38%. 

The three-year anniversary of the sale of shares of Tencent is coming up in March, just before the fiscal year-end. That means Prosus/Naspers comes off lockup and could sell more shares of Tencent. There is nothing keeping Prosus from selling another US$10-15bn of Tencent (the position is currently worth US$211bn) and locking themselves up for another year, then continuing to buy Naspers and Prosus shares at a wide-ish discount. 
Stay long Naspers vs Tencent at the current look-through value. I would expect Tencent's operations to come under greater scrutiny, under a wider regulatory mandate.
If Naspers+Prosus decide to sell some more Tencent in late March 2021 while the Naspers discount is still 50%, I would expect that Naspers+Prosus might decide to buy more Naspers shares back rather than pay too much for something. 




(link to my insight: StubWorld: Tencent Under Pressure From Antitrust Push) 





TOPIX INCLUSIONS!






Odk Solutions (3839 JP) (Mkt Cap: $0.1bn; Liquidity: &lt;$1mn)  


after the close on 22nd December 2020, ODK announced they had received approval to move from the Second Section to the First Section of the Tokyo Stock Exchange as of 29th 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 Jeyakumar, CFA estimates the Inclusion quantity to be 615,000-738,000 shares. This translates to an Inclusion Size of ¥0.45-0.54bn and an Impact of 24-28 days of volume based on 3-month ADV.
According to the company's most recent "Long-term Management Plan" the company's revenue target for FY22E is ¥7bn which is 36% higher than their FY20A revenue. This translates to a revenue CAGR of ~16.6% from FY20A to FY22E. Going by FY20A numbers, the current price translates to EV/Revenue and EV/EBITDA multiples of 0.8x and 4.6x, respectively, which are significantly lower than the estimated average for peers. 
Janaghan would be Bullish until the Inclusion Date (28th January 2021).




(link to Janaghan's insight: TOPIX Inclusion: ODK Solutions (3839 JP): High Impact BLUE Name) 


In  TOPIX Inclusion Trade Summary: Dec 2020, Janaghan provided performance updates for 11 "Live" event stocks which are expected to have Inclusion Events at the end of January 2021 and 6 "Post" event stocks that completed their Inclusion Events at the end of November 2020 and December 2020. Furthermore, I have also highlighted some interesting Pre-event situations involving stocks that are likely to become TSE1-promotion candidates in the near future. 





M&amp;A - EUROPE




On 18 December, Castellum AB (CAST SS) increased its bid for Entra ASA (ENTRA NO) by 13.9% to NOK 185/share in cash and shares. On 23 December, SBB raised its cash (65%) and stock bid for Entra to NOK 190 per share. SBB's bid also offers a larger cash component. In Entra - SBB - Castellum: Bidding War Heats Up, Jesus Rodriguez Aguilar recommends a long in Entra. 




H/A MONITOR





The previous week saw a gentle rebound in Quiddity H/A Share Recommendations (mixed long/short the spreads). Spread momentum continues to rule the day in most sectors, but finally not all. There were 54 delta-neutral spread recommendations which gained 0.97% on average. We have ~50 spread recommendations for this past week.



(link to Travis' insight: Quiddity H/A: National Team Buys Continue in Industrials; Recos Gain 97bp, 50 Recos This Week)





M&amp;A - 2020 ROUND-UP





The average premium for the new deals announced (or first discussed) in December was ~27% and the YTD average premium for all deals discussed on Smartkarma (158 all-in) is ~31%.  The average for all deals discussed on Smartkarma in 2019 (145 deals all-in) was, coincidentally, 31.5%.
(link to my insight: (Mostly) Asia M&amp;A: 2020 Roundup)





OTHER M&amp;A &amp; EVENT UPDATES







WPP AUNZ (WPP AU) has entered into a Scheme Implementation Deed with WPP PLC (WPP LN).
Shandong now holds 61.54% in Cardinal Resources (CDV AU).

Nitori Holdings (9843 JP) announced that it had successfully completed the Tender Offer for Shimachu Co Ltd (8184 JP), gaining 77.04% of the shares outstanding. This is lower than I expected, but it will allow them to squeeze out minorities. 


Noted activist (or noisy engagement investor) Asset Value Investors announced today that it had gone from 6.03% holding in Kanaden Corp (8081 JP) to 0.74%  by selling 1.4mm shares (4.91%) of the company at JPY 1260/share.  


The bidder for Joban Kaihatsu (1782 JP) announced a change in the end date for the Tender Offer, changing the end date from 28 December 2020 to 25 January 2021.


Eco World Development (ECW MK) and Uem Sunrise Bhd (UEMS MK) are exploring the feasibility of a merger. 

Cowell E Holdings (1415 HK) delays the dispatch of the Composite Doc to the 22 January. 



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




Coolpad (2369 HK) 
13.74%
Chiyu
Kingkey



360 Ludashi (3601 HK) 
30.76%
China Int'l
Outside CCASS



China Tontine Wines (389 HK) 
14.90%
CNI
Yuet Sheung



China Regenerative Medicine (8158 HK) 
10.25%
Prime
Outside CCASS


K Group (8475 HK)
34.37%
Sun Int'l
Quasar


Source: HKEx 




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





Name


% chg


Into


Out of



Wenling (1379 HK)
29.15%
Realord
Outside of CCASS


Source: HKEx 








Last Week in Event SPACE: OFAC's Longer List, Haier, Avex, Beijing Jingneng, Naspers/Tencent

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

In this edition of the Smartkarma North Asia Weekly, it summarizes some of the top insights on Smartkarma in the past week covering Japan, HK/China, and the Korean stock markets. The top topics are below:1) Alibaba: Antitrust Concerns2) Tencent Under Pressure From Antitrust Push3) POTUS Executive Order: New OFAC Clarification 4) China Logistics: Major Shareholders Seek to Exit 5) Kuaishou Technology IPO6) Yidu Tech IPO7) TOPIX Inclusion: ODK Solutions 8) New Horizon IPO9) Goldwin Bullish for Future Growth10) Yaoko: A Difficult 2021 Coming11) IQIYI Valuation12) Digital Currency: Still Remember Facebook Libra/​Diem?13) China Dental Care Industry14) ZTO Express &amp; BEST Inc15) Infrastructure Asset-Backed Securities: New Asset Class for Asia16) Japan Airport Terminal17) Will Biden Get Officially Inaugurated on 20 January?

In this edition of the Smartkarma North Asia Weekly, it summarizes some of the top insights on Smartkarma in the past week covering Japan, HK/China, and the Korean stock markets. The top topics are below:1) Alibaba: Antitrust Concerns2) Tencent Under Pressure From Antitrust Push3) POTUS Executive Order: New OFAC Clarification 4) China Logistics: Major Shareholders Seek to Exit 5) Kuaishou Technology IPO6) Yidu Tech IPO7) TOPIX Inclusion: ODK Solutions 8) New Horizon IPO9) Goldwin Bullish for Future Growth10) Yaoko: A Difficult 2021 Coming11) IQIYI Valuation12) Digital Currency: Still Remember Facebook Libra/​Diem?13) China Dental Care Industry14) ZTO Express &amp; BEST Inc15) Infrastructure Asset-Backed Securities: New Asset Class for Asia16) Japan Airport Terminal17) Will Biden Get Officially Inaugurated on 20 January? 

Smartkarma North Asia Weekly: Alibaba Antitrust, OFAC Clarification, China Logistics, & Kuaishou IPO

Quality-first, Business-perspective Strategy, Urbem (HK) Limited

Steven Chen

Quality-first, Business-perspective Strategy

Equity Bottom-Up

<ul>
<li>The Shenzhen-based game developer trades at an attractive valuation;</li>
<li>Meanwhile, the business has been growing at a nearly triple-digit rate while maintaining an above 30% return on equity and invested capital;</li>
<li>Should investors buy into this (seemingly quality) growth story?  We want to take a deep dive.</li>
</ul>


The Shenzhen-based game developer trades at an attractive valuation;
Meanwhile, the business has been growing at a nearly triple-digit rate while maintaining an above 30% return on equity and invested capital;
Should investors buy into this (seemingly quality) growth story?  We want to take a deep dive.


Equity Capital Markets

Kuaishou Technology / Equity Capital Markets

<div class="content-highlight">
Kuaishou is getting ready to complete its IPO in the HK exchange on 5 <a href="https://pandaily.com/short-video-app-kuaishou-aims-for-february-ipo-in-hong-kong-report/" target="_blank" rel="noopener">February</a> 2021. Kuaishou will be one of the largest IPOs in the world in 2021. 
Kuaishou was last valued at <a href="https://www.scmp.com/business/companies/article/3114992/tencent-backed-video-platform-kuaishou-targets-january-ipo-hong" target="_blank" rel="noopener">US$30 billion</a> in the private market valuations in late 2019 and raised US$3 billion at this time. According to the Chinese media outlet 36KR, Kuaishou Technology is targeting a valuation of HK$390 billion (US$50 billion) and raise up to US$5 billion from the IPO. Tencent owns a 21.6% stake in Kuaishou, which plans to use the proceeds from the IPO on marketing, artificial intelligence and data analytics upgrade, and pursue M&amp;A opportunities. 
</div><div data-position="1">
<div>Kuaishou is the largest live streaming platform by gross billings from virtual gifting and average live streaming MPUs, the second largest short video platform by average DAUs, and the second largest live streaming e-commerce platform by GMV in China, all for the six months ended June 30, 2020.</div>
<div></div>
<div>The company generated 39.1 billion RMB in revenue in 2019, up 92.7% YoY. From 2017 to 2019, Kuaishou's revenue increased at a CAGR of 117%. The company's gross margins improved from 28.6% in 2018 to 36.1% in 2019.  Its operating margin also improved from -2.6% in 2018 to 1.8% in 2019. The company's revenue growth slowed down in 1H 2020. Kuaishou generated revenue of 25.3 billion RMB in 1H 2020, up 48.3% YoY.</div>
</div>


Kuaishou is getting ready to complete its IPO in the HK exchange on 5 February 2021. Kuaishou will be one of the largest IPOs in the world in 2021. 
Kuaishou was last valued at US$30 billion in the private market valuations in late 2019 and raised US$3 billion at this time. According to the Chinese media outlet 36KR, Kuaishou Technology is targeting a valuation of HK$390 billion (US$50 billion) and raise up to US$5 billion from the IPO. Tencent owns a 21.6% stake in Kuaishou, which plans to use the proceeds from the IPO on marketing, artificial intelligence and data analytics upgrade, and pursue M&amp;A opportunities. 

Kuaishou is the largest live streaming platform by gross billings from virtual gifting and average live streaming MPUs, the second largest short video platform by average DAUs, and the second largest live streaming e-commerce platform by GMV in China, all for the six months ended June 30, 2020.

The company generated 39.1 billion RMB in revenue in 2019, up 92.7% YoY. From 2017 to 2019, Kuaishou's revenue increased at a CAGR of 117%. The company's gross margins improved from 28.6% in 2018 to 36.1% in 2019.  Its operating margin also improved from -2.6% in 2018 to 1.8% in 2019. The company's revenue growth slowed down in 1H 2020. Kuaishou generated revenue of 25.3 billion RMB in 1H 2020, up 48.3% YoY.


This week in StubWorld ...
Tech-giants such as <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> are under the hammer as investors second-guess whether Chinese regulators are targeting only <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> or a wider anti-trust mandate. 
<hr>
<div>
Preceding my comments on <a href="https://www.smartkarma.com/entities/naspers-ltd" target="_blank" data-smartkarma-citation="entities:21085:1" rel="noopener">Naspers (NPN SJ)</a> / <a href="https://www.smartkarma.com/entities/prosus-nv" target="_blank" data-smartkarma-citation="entities:28104:1" rel="noopener">Prosus (PRX NA)</a> / Tencent are the weekly setup/unwind tables for Asia-Pacific Holdcos.
</div>
<div>
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.
</div>

This week in StubWorld ...
Tech-giants such as Tencent Holdings (700 HK) are under the hammer as investors second-guess whether Chinese regulators are targeting only Alibaba Group (9988 HK) or a wider anti-trust mandate. 


Preceding my comments on Naspers (NPN SJ) / Prosus (PRX NA) / Tencent are the weekly setup/unwind tables for Asia-Pacific Holdcos.


These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.


StubWorld: Tencent Under Pressure From Antitrust Push

China

Tencent Holdings Limited operates as an investment holding company. The Company, through its subsidiaries, provides Internet and mobile value-added services (VAS), online advertising, and e-commerce transactions. Tencent Holdings offers services to users worldwide.

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Tencent (700 HK)

Last Week in Event SPACE: OFAC's Longer List, Haier, Avex, Beijing Jingneng, Naspers/Tencent

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Smartkarma North Asia Weekly: Alibaba Antitrust, OFAC Clarification, China Logistics, & Kuaishou IPO

In this edition of the Smartkarma North Asia Weekly, it summarizes some of the top insights on Smartkarma in the past week covering Japan, HK...

Douglas Kim

Fire Rock: A Value Play or Value Trap?

Another superior-return, fast-growing gaming business trading at an attractive level. Should investors buy into this (seemingly quality) growth...

Steven Chen

Kuaishou Technology IPO Preview

Kuaishou is getting ready to complete its IPO in the HK exchange on 5 February 2021. Kuaishou will be one of the largest IPOs in the world in 2021.

Douglas Kim

StubWorld: Tencent Under Pressure From Antitrust Push

Stay long long Naspers vs Tencent. As we approach March, the likelihood that investors realise there could be another large offering increases,...

David Blennerhassett

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