Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p><em>This is Part I of two insights published simultaneously. It deals with the Exchange Ratio and where it might go. Part II deals with the trading outcomes and timing. </em></p><p>What seems ages ago, at the end of July 2017, <a href="https://www.smartkarma.com/entities/12001" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.smartkarma.com/entities/alps-electric-co-ltd&amp;source=gmail&amp;ust=1509426720765000&amp;usg=AFQjCNEZW64uHapsqFGKcaIG4n9zKxRQyg">Alps Electric Co Ltd (6770 JP)</a> and <a href="https://www.smartkarma.com/entities/2704" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.smartkarma.com/entities/alpine-electronics-inc&amp;source=gmail&amp;ust=1509426720766000&amp;usg=AFQjCNFbQhcxEmEeYvf_o1D99nzfMWXQQA">Alpine Electronics Inc (6816 JP)</a> announced Alps would acquire Alpine through a share swap some 17+ months hence. </p><h2>Fair? I think Not.</h2><p>At the time, the "fair value" as analyzed by Alps' and Alpine's financial advisors mashed the numbers of management forecasts and assets and came to a "fair ratio" range which was... suspect. Management interpreted that to mean because they had ticked certain procedural boxes, a Scrip Exchange Ratio of 0.68 shares of Alps for every share of Alpine was appropriate.</p><p>Investors took exception, including Oasis Management, who built their stake to 9+%, rolled out a website, wrote letters, made presentations, and made a decent case to the public.</p><p><a href="https://www.smartkarma.com/profiles/840" target="_blank" data-smartkarma-citation="accounts:840">David Blennerhassett</a> wrote an insight at the end of October lambasting the two firms' calculations in <a href="https://www.smartkarma.com/insights/alps-deal-for-alpine-not-fair-oasis-is-right" target="_blank" data-smartkarma-citation="insights:14832">Alps Deal for Alpine Not Fair - Oasis Is Right</a> suggesting the ratio was wrong. He noted the fair value for Alpine when counting Alpine's prodigious non-operating financial assets implied <em>a fair value for Alpine required a ratio 30-60% higher. Read it! There is a lot of detail there.</em></p><p>This was followed a day later after H1 earnings results, and revisions, showed Alpine doing far better than its own management forecasts on which the ratio was based. He wrote <a href="https://www.smartkarma.com/insights/alpine-alps-earnings-revisions-moooar-value-for-alpine" target="_blank" data-smartkarma-citation="insights:14881">Alpine &amp; Alps Earnings Revisions - Moooar Value for Alpine</a> which suggested that in addition to missing assets, the management-blessed earnings forecasts were also off.</p><h2>Q3 Results - Alpine Goes to 11</h2><p>Q3 results came out at the end of January and market observers could note that Alpine's OP forecast for the year went from 9bn yen to 11.</p><p><em>Every good movie buff knows what that means.</em></p><p><iframe src="https://www.youtube.com/embed/KOO5S4vxi0o" width="840" height="473" frameborder="0" allow="autoplay; encrypted-media" allowfullscreen="allowfullscreen"></iframe></p><p></p><p>Alps' full-year OP forecast rose from ¥67.3bn to ¥71bn on a consolidated basis, but that included the ¥2bn jump at Alpine so on a standalone basis (ex-Alpine, ex-Alps Logistics) the change was considerably less impressive.</p><p>With Q3 results came the hint that the companies were thinking of reviewing the terms. This caused some general excitement among investors who looked at the situation and saw a bump coming. On February 27th this year, the two companies announced a technical change in the post-acquisition structure, but no change in the financial terms. However, in the meantime, a global "risk off" move in tech and weakness particularly in the Apple supply chain had left Alps shares reeling (down 25% from November highs when the announcement was made). </p><h2>Annual Results</h2><p>The two companies announced annual results on April 26th after the close.</p><ul><li><strong>Alpine's interim results and full-year forecasts saw significant steps upward all year long. </strong></li><li>Alps' revenue forecasts rose as well, matching Alpine's forecast growth, but not its OP growth.</li><li>Alpine beat street OP forecasts strongly (by 17.8%), and its Mar2019 OP forecast, while lower than its 2018 results (despite the fact that the sales forecast is a full 8% higher) is above the street consensus and just 4% below the high Street estimate.</li><li>Alps beat street consensus on OP by just over 1%, then guided March 2019 revenue well below consensus and offered a consolidated OP forecast below the lowest estimate on the Street. </li><li><strong>If you look at Alps on an implied parent basis (i.e. stripping out revenue and OP from Alpine and Alps Logistics), it did even worse,</strong> and the forecast is to go back to March 2016 levels this next year. </li></ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/050/881/original/Screen%20Shot%202018-04-27%20at%2010.00.14%20PM.png?1524838098" class="editor-image img-responsive" data-smartkarma-image-id="50881"></figure><div style="text-align: left;" class="content-caption">data sources: company filings, capIQ consensus estimates, Travis Lundy</div><p></p><h2>Visualizing the Evolution of Earnings and Forecasts Post Ratio Determination</h2><p>The ratio was wrong to start with.</p><p>It has become wronger since.</p><p>To visualize the evolution of Street Consensus revenue and OP forecasts, along with the company forecasts, I have in the charts below created a ratio of Alpine Consensus Revenue divided by Alps Implied Parent Consensus Revenue, and done the same for OP. I have added dots for the same numbers using company forecasts.</p><p>The idea is that if one measures Alpine as a standalone business, and Alps as a standalone business, and the evolution of the ratio of those businesses, one can then look at an adjusted EV/EBITDA comparison (where both are adjusted by holdings in other businesses and financial assets (assuming that Alpine's non-cash financial holdings can be deducted from a standard EV as can Alps' non-cash financial holdings, including its stake in Alps Logistics. More on that below.</p><div style="text-align: left;" class="content-caption"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/050/892/original/Screen%20Shot%202018-04-28%20at%202.46.03%20PM.png?1524898015" class="editor-image img-responsive" data-smartkarma-image-id="50892"></figure><div class="content-caption">data sources: company filings, capIQ consensus estimates, Travis Lundy</div><p></p></div><p></p><h2>But Friday, Despite a HUGE Beat Thursday, Alpine (6816 JP) Shares Fell 0.5%.</h2><p>That was because Alpine fell 8% to a new 18-month low. And it may not be done. </p><p>Alpine shares were trading 16.4% through terms as of the close of Thursday. As of Friday they were trading at 25.7% through terms. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/050/883/original/Screen%20Shot%202018-04-27%20at%2011.15.02%20PM.png?1524842361" class="editor-image img-responsive" data-smartkarma-image-id="50883"></figure><div style="text-align: left;" class="content-caption">data source: Bloomberg, Travis Lundy</div><p></p><h2>And Has Alpine's Asset Base Suffered Since The Deal Announcement?</h2><p>When David Blennerhassett broke down the <em>Value of Alpine</em> by its non-operating assets (at that point some ¥42.4bn of listed shareholdings, ¥14bn of shareholdings in Neusoft affiliates, and ¥53.3bn of net cash (not to mention another ~¥14bn of other net short-term assets financed by equity).</p><p>The value of the shareholdings is up. The net cash is up. We can assume the attributable value of Neusoft affiliate stakes is higher, but we'll say no change. The pile of other net receivables and short term assets funded out of equity has grown this year by about ¥6.5-7.0bn on a net basis. Assuming the growth in net liquid assets and receivables are worth nothing, the other liquid non-operating financial assets are worth ¥1656.8 per Alpine share now vs. ¥1590/share in October. </p><p>If you make appropriate adjustments to a Treasury-share-adjusted market cap, that gives you an Enterprise Value just over ¥31.5bn yen. That is against an EBITDA of ¥20.8bn this past year, and a company forecast which looks like it would get to ¥20.2bn this year. </p><p>The current share price, which is 25% through terms, suggests a trailing TTM (adjusted) EV/EBITDA of 1.62x.</p><p>At the 0.68 ratio and Alps' Friday closing price of ¥2428/share, the (adjusted) TTM EV/EBITDA would be 0.21x.</p><p>Raising the exchange ratio 30% given Alps' recent underperformance would also be light. It would get you to an Adjusted TTM EV/EBITDA of 1.85x. </p><div class="content-highlight"><p><strong>Clearly the ratio as it stands is not appropriate. Clearly raising it 30% would still be inappropriate. It needed a 30-60% raise when Alps shares were much higher. </strong></p><p><strong>Alpine management supporting the concept of a 0.2x EV/EBITDA ratio is ludicrous. Ticking the procedural boxes did not make it fair then. It does not make it fair now.</strong></p><p><strong>Shareholders in Alpine who have not made their voices known have an opportunity. </strong></p><ul><li><strong>The shareholder vote has some interesting items on the proxy.</strong></li><li><strong>And any serious shareholder would look at this and see that a company is in play. </strong></li></ul><p><strong>The timing is weird. The stock is cheap, but there are temporary risks. If you think there is a chance the special div gets passed, you don't want to buy now. If you think it does not (and admittedly I think the chances are low), then the stock is still very cheap here, even 25% through terms.</strong></p></div><p>This insight is split into two parts. It is too long otherwise. </p><ul><li>Part I discusses the different way of looking at potential "fair" ratios and how far off those fair ratios are from the current ratio. </li><li>Part II discusses the trading issues. </li></ul>

This is Part I of two insights published simultaneously. It deals with the Exchange Ratio and where it might go. Part II deals with the trading outcomes and timing. What seems ages ago, at the end of July 2017, Alps Electric Co Ltd (6770 JP) and Alpine Electronics Inc (6816 JP) announced Alps would acquire Alpine through a share swap some 17+ months hence. Fair? I think Not.At the time, the "fair value" as analyzed by Alps' and Alpine's financial advisors mashed the numbers of management forecasts and assets and came to a "fair ratio" range which was... suspect. Management interpreted that to mean because they had ticked certain procedural boxes, a Scrip Exchange Ratio of 0.68 shares of Alps for every share of Alpine was appropriate.Investors took exception, including Oasis Management, who built their stake to 9+%, rolled out a website, wrote letters, made presentations, and made a decent case to the public.David Blennerhassett wrote an insight at the end of October lambasting the two firms' calculations in Alps Deal for Alpine Not Fair - Oasis Is Right suggesting the ratio was wrong. He noted the fair value for Alpine when counting Alpine's prodigious non-operating financial assets implied a fair value for Alpine required a ratio 30-60% higher. Read it! There is a lot of detail there.This was followed a day later after H1 earnings results, and revisions, showed Alpine doing far better than its own management forecasts on which the ratio was based. He wrote Alpine &amp; Alps Earnings Revisions - Moooar Value for Alpine which suggested that in addition to missing assets, the management-blessed earnings forecasts were also off.Q3 Results - Alpine Goes to 11Q3 results came out at the end of January and market observers could note that Alpine's OP forecast for the year went from 9bn yen to 11.Every good movie buff knows what that means.Alps' full-year OP forecast rose from ¥67.3bn to ¥71bn on a consolidated basis, but that included the ¥2bn jump at Alpine so on a standalone basis (ex-Alpine, ex-Alps Logistics) the change was considerably less impressive.With Q3 results came the hint that the companies were thinking of reviewing the terms. This caused some general excitement among investors who looked at the situation and saw a bump coming. On February 27th this year, the two companies announced a technical change in the post-acquisition structure, but no change in the financial terms. However, in the meantime, a global "risk off" move in tech and weakness particularly in the Apple supply chain had left Alps shares reeling (down 25% from November highs when the announcement was made). Annual ResultsThe two companies announced annual results on April 26th after the close.Alpine's interim results and full-year forecasts saw significant steps upward all year long. Alps' revenue forecasts rose as well, matching Alpine's forecast growth, but not its OP growth.Alpine beat street OP forecasts strongly (by 17.8%), and its Mar2019 OP forecast, while lower than its 2018 results (despite the fact that the sales forecast is a full 8% higher) is above the street consensus and just 4% below the high Street estimate.Alps beat street consensus on OP by just over 1%, then guided March 2019 revenue well below consensus and offered a consolidated OP forecast below the lowest estimate on the Street. If you look at Alps on an implied parent basis (i.e. stripping out revenue and OP from Alpine and Alps Logistics), it did even worse, and the forecast is to go back to March 2016 levels this next year. data sources: company filings, capIQ consensus estimates, Travis LundyVisualizing the Evolution of Earnings and Forecasts Post Ratio DeterminationThe ratio was wrong to start with.It has become wronger since.To visualize the evolution of Street Consensus revenue and OP forecasts, along with the company forecasts, I have in the charts below created a ratio of Alpine Consensus Revenue divided by Alps Implied Parent Consensus Revenue, and done the same for OP. I have added dots for the same numbers using company forecasts.The idea is that if one measures Alpine as a standalone business, and Alps as a standalone business, and the evolution of the ratio of those businesses, one can then look at an adjusted EV/EBITDA comparison (where both are adjusted by holdings in other businesses and financial assets (assuming that Alpine's non-cash financial holdings can be deducted from a standard EV as can Alps' non-cash financial holdings, including its stake in Alps Logistics. More on that below.data sources: company filings, capIQ consensus estimates, Travis LundyBut Friday, Despite a HUGE Beat Thursday, Alpine (6816 JP) Shares Fell 0.5%.That was because Alpine fell 8% to a new 18-month low. And it may not be done. Alpine shares were trading 16.4% through terms as of the close of Thursday. As of Friday they were trading at 25.7% through terms. data source: Bloomberg, Travis LundyAnd Has Alpine's Asset Base Suffered Since The Deal Announcement?When David Blennerhassett broke down the Value of Alpine by its non-operating assets (at that point some ¥42.4bn of listed shareholdings, ¥14bn of shareholdings in Neusoft affiliates, and ¥53.3bn of net cash (not to mention another ~¥14bn of other net short-term assets financed by equity).The value of the shareholdings is up. The net cash is up. We can assume the attributable value of Neusoft affiliate stakes is higher, but we'll say no change. The pile of other net receivables and short term assets funded out of equity has grown this year by about ¥6.5-7.0bn on a net basis. Assuming the growth in net liquid assets and receivables are worth nothing, the other liquid non-operating financial assets are worth ¥1656.8 per Alpine share now vs. ¥1590/share in October. If you make appropriate adjustments to a Treasury-share-adjusted market cap, that gives you an Enterprise Value just over ¥31.5bn yen. That is against an EBITDA of ¥20.8bn this past year, and a company forecast which looks like it would get to ¥20.2bn this year. The current share price, which is 25% through terms, suggests a trailing TTM (adjusted) EV/EBITDA of 1.62x.At the 0.68 ratio and Alps' Friday closing price of ¥2428/share, the (adjusted) TTM EV/EBITDA would be 0.21x.Raising the exchange ratio 30% given Alps' recent underperformance would also be light. It would get you to an Adjusted TTM EV/EBITDA of 1.85x. Clearly the ratio as it stands is not appropriate. Clearly raising it 30% would still be inappropriate. It needed a 30-60% raise when Alps shares were much higher. Alpine management supporting the concept of a 0.2x EV/EBITDA ratio is ludicrous. Ticking the procedural boxes did not make it fair then. It does not make it fair now.Shareholders in Alpine who have not made their voices known have an opportunity. The shareholder vote has some interesting items on the proxy.And any serious shareholder would look at this and see that a company is in play. The timing is weird. The stock is cheap, but there are temporary risks. If you think there is a chance the special div gets passed, you don't want to buy now. If you think it does not (and admittedly I think the chances are low), then the stock is still very cheap here, even 25% through terms.This insight is split into two parts. It is too long otherwise. Part I discusses the different way of looking at potential "fair" ratios and how far off those fair ratios are from the current ratio. Part II discusses the trading issues. 

What To Do With The Alpine/Alps Ratio Part I:  This One Went To 11! And Beyond!

Japan

SENKO Group Holdings Co., Ltd. mainly provides van truckload, logistics, warehousing, freight rail and marine transportation, cargo handling, supply chain management, and moving services around the world.  The Company transports construction materials, housing unit, commodity, textile products, and food stuffs.  Senko's customers include Asahi Kasei, Sekisui Chemical, and Sekisui House.

Nishi-Nippon Railroad Co., Ltd. provides rail and bus transportation services in the northern Kyushu area.  The Company also offers truckload and air cargo transportation services, leases, sells, and maintains real estate, and operates hotels, travel agents, supermarket, and grocery stores.  Nishi-Nippon Railroad manufactures and repairs its own buses.

FUKUYAMA TRANSPORTING CO., LTD. primarily provides van truckload services in western Japan and the Kanto areas.  The Company's services include express transportation, ground small package delivery, international carrier and air cargo, and moving services.  The Company is a member of Kinki Nippon Railway Group.

NIKKON HOLDINGS CO., LTD. transports freight by rail, trucks, ships, and airplanes.  The Company's freight includes automobile, automobile parts, and agricultural machinery.  In addition to freight services, the Company provides warehousing and packaging services.  The Company also offers customs clearing and casualty insurance services.

Sotetsu Holdings, Inc. provides both passenger and freight rail transportation and bus transportation services from Yokohama station to central part of Kanagawa prefecture.  The Company also sells and leases real estate, operates travel agents, golf course, hotels, and advertising agents, and offers construction works and building maintenance services.

Nankai Electric Railway Co., Ltd. provides passenger rail and bus transportation services which cover South Osaka and northern part of Wakayama, including a railway line to new Kansai International airport.  The Company maintains, leases, and sells real estate, operates department stores, amusement parks, travel agents, hotels, and restaurants, and offers construction works.

Maruzen Showa Unyu Co., Ltd. provides van truckload, international logistics, marine cargo transportation, cargo handling, air cargo transportation, and warehousing services.  The Company has consignors of NKK Corp. and Showa Denko and transports Fuji Photo Film exports.  The Company offers customs clearing services and leases real estate as well.

Sakai Moving Service Co., Ltd. mainly provides moving services of household goods based in Osaka prefecture.  The Company offers trucking, storage, and other related services.  The Company leases real estate as well.

SANKYU INC. provides truckload, logistics, freight rail transportation, freight air transportation, marine cargo transportation, cargo handling, and warehousing services around the world.  The Company designs, manufactures, builds, maintains, and transports blast furnaces and other plants.  Sankyu constructs a wide range of facilities and buildings and provides land development services.

HAMAKYOREX CO., LTD. provides trucking, warehousing, and other related services. The Company's trucking services include distribution for retail firms such as large supermarkets.  Hamakyorex develops integrated distribution system.

Shanghai Qiangsheng Holding Co., Ltd. provides taxi and mini bus transportation services.  The Company also provides automobile repair, automobile rental, and advertising services.

Universal Logistics Holdings, Inc. provides truck transportation services. The Company offers flatbed, heavy haul, oilfield, van, temperature controlled transportation, and logistics solutions. Universal Logistics serves customers in North America.

CJ Logistics Corporation provides logistics services. The Company provides land transportation, maritime transportation, harbor unloading, cargo storage, international logistics processing, and other services. CJ Logistics also provides internet home shopping services. CJ Logistics serves customers worldwide.

China Railway Tielong Container Logistics Co., Ltd. provides railroad, truck, and water transportation and related warehousing services.  The Company also manufactures concrete, develops real estate, and operates in commercial trading.

China Railway Tielong Container Log Co. (600125 CH)

BTS Group Holdings PCL is primarily in the business of Mass Transit.  The Company operates Bangkok's BTS SkyTrain system and the Bus Rapid Transit (BRT) System. BTS Group Holdings PCL is also involved in Media & Advertising, Property Development, and Services business.

Marten Transport, Ltd. is a long-haul truckload carrier providing protective service and time-sensitive transportation.  The Company specializes in protective service transportation of foods and other products requiring temperature-controlled carriage or insulated carriage.  Marten also provides dry freight carriage.

FirstGroup plc is an international passenger group which has bus and rail operations in the United Kingdom and North America.  The Group's operations comprise bus and passenger rail franchises, in addition to transit management, school bus operations, and fleet maintenance.

Northgate PLC is a light commercial vehicle rental business operating in the United Kingdom and Spain. The Company's core business is flexible vehicle rentals.  Northgate also sells former rental vehicles to both retail and trade customers.

The Jungfraubahn Holding AG founded in 1994, was the result of a merger between two primary railways, the Jungfraubahn and the Wengernalpbahn. These railways provide transportation for vacationers to the mountains of the Jungfrau region of the Swiss alps. The Group also holds participations in smaller railways and in related businesses such as parking facilities and restaurants.

ALPS LOGISTICS CO., LTD., a subsidiary of Alps Electric Co., Ltd., is a trucking and courier transportation company that works closely with Alps Electric. The Company also provides warehousing and storage services,  Alps Logistics distributes and sells various personal care goods and packaging materials as well.

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Alps Logistics (9055 JP)

What To Do With The Alpine/Alps Ratio Part I: This One Went To 11! And Beyond!

This is Part I of two insights published simultaneously. It deals with the Exchange Ratio and where it might go. Part II deals with the trading...

Travis Lundy

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