Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

China Resources Beer Holdings / Event-Driven

This piece is just a fork in support of Jon's <a href="http://www.smartkarma.com/insights/beer-is-cheap-but-is-it-cheap-enough" target="_blank">piece</a> on China Resources Enterprise.It makes no judgments about good deal, bad deal, etc. It assumes that the deal goes through as presented. This piece presents the arbitrage values of residual fair value of your holding on the assumption that you buy CRE shares at a price, if the shares are below the tender offer price after the dividend you tender them. If not, you don't. Your "purchase price" is your mark-to-market price on the left.Tables are presented for the values regarding your residual position in NEWBREWCO (or as Jon calls it, "CRE Brew-Co") post div and tender action, for Breakeven Price Per Share, Price/Earnings Ratio of that Breakeven Price, PBR of that B/E Price, and the EV/EBITDA Ratio of your B/E price. CONCLUSION:<ul><li>Buying CRE to get a position in NEWBREWCO is much more attractive at 22.00 than 24.00.</li><li>My early cocktail napkin calculations suggest a minimum fill ratio well above Jon's conservative 26%. Absolute minimum is 20.75%. I see a strong likelihood the number would not go below about 35-40%.</li></ul>

This piece is just a fork in support of Jon's piece on China Resources Enterprise.It makes no judgments about good deal, bad deal, etc. It assumes that the deal goes through as presented. This piece presents the arbitrage values of residual fair value of your holding on the assumption that you buy CRE shares at a price, if the shares are below the tender offer price after the dividend you tender them. If not, you don't. Your "purchase price" is your mark-to-market price on the left.Tables are presented for the values regarding your residual position in NEWBREWCO (or as Jon calls it, "CRE Brew-Co") post div and tender action, for Breakeven Price Per Share, Price/Earnings Ratio of that Breakeven Price, PBR of that B/E Price, and the EV/EBITDA Ratio of your B/E price. CONCLUSION:Buying CRE to get a position in NEWBREWCO is much more attractive at 22.00 than 24.00.My early cocktail napkin calculations suggest a minimum fill ratio well above Jon's conservative 26%. Absolute minimum is 20.75%. I see a strong likelihood the number would not go below about 35-40%.

Jon's Beer is Cheap - The Arb Calculations

Hop on a plane and fly to somewhere you don't need to go. They will give you a free beer. It is usually cheaper to stay home and buy the beer yourself.The China Resource Enterprises (291 HK) restructuring situation is complicated. The basic deal is that CRH buys all but the brewery assets from investors, CRE then pays a huge dividend (HKD 11.50/share), then CRH conducts a tender offer to buy ~21% of the remaining float (10% of shares out) at HKD 12.70 a share. Investors then are left with what I will call NEWBREWCO, a pure-play brewery which is China's largest by volume. You can read about the basics in the <a href="http://www.smartkarma.com/insights/beer-is-cheap-but-is-it-cheap-enough" target="_blank">piece</a> by Jon.  Let me preface my comments by saying that I think this deal is great value...For the buyer. Hint: That's not CRE holders or buyers.THIS DEAL HAS ISSUES REGARDING PRICE AND ECONOMICS. GIVEN THE OWNER EFFECTIVELY CONTROLS MANAGEMENT AND THE BOARD, THIS COULD BE CONSTRUED AS A POTENTIAL GOVERNANCE ISSUE. The SOE parent is proposing to buy 72% of the December 2014 equity at a 20% discount to book and effectively zero premium to market. This Binding Proposal is being put to shareholders. CRE Directors should be asked, just one month after the release of 2014 accounts, how they could possibly support a deal which means a 20% write down of equity (or a 54% write down to goodwill) on the Disposal Assets and sale at 0.8x book, when<ol><li>That level is for full control of those consumer assets, at a price cheaper (in PBR terms) than 98.6% of Southbound-eligible non-financial stocks'  at announcement (and 99.7% of SHCOMP trades at a PBR &gt; 1),</li><li>that level is for a package of branded consumer goods purveyors, in a newly resurgent Chinese stock market, with a government bent on supporting a resurgent Chinese consumer, and is being bought 10% off a 52-week low, down 20% from a year earlier, when H-Shares are up 45% and Shanghai is up 100% over that same year.</li><li>And CRH is asking CRE shareholders to pay for that, when it is CRH management, ownership, and board, which are responsible for the business underperformance. </li></ol>...but it will be put to shareholders instead. Because most of the directors were put in place by the buyer. The stock has popped 50% but investors should look closely at the deal and its details. SECOND POINT: THIS DEAL HAS ACCOUNTING VISUALISATION ISSUES. The deal is equity-dilutive to NEWBREWCO holders. A nice special dividend is dangled in front of investors and then NEWBREWCO takes a 50% write down to its pro forma equity. Look at the pretty birdy... WHACK!Then investors have to deal with consolidation accounting of Minority Interest. This sounds technical and lots of people will say "aaah... it all comes out in the wash". Well... maybe... But if it does, that might be bearish. Beware the forward valuation differentials!CONCLUSIONS: <ul><li>There are economic issues that should be questioned. I think because of the control that these can be construed as potential governance issues. </li><li>The residual asset has accounting events and future valuation visualization issues you should be aware of.</li><li>This is NOT a "Done Deal" yet. Investors who look closely could object. The IFA could easily say this deal is "Neither Fair Nor Reasonable" and proxy advisors could agree. The risk on this deal is quite binary.</li></ul>

Hop on a plane and fly to somewhere you don't need to go. They will give you a free beer.  It is usually cheaper to stay home and buy the beer yourself.The China Resource Enterprises (291 HK) restructuring situation is complicated. The basic deal is that CRH buys all but the brewery assets from investors, CRE then pays a huge dividend (HKD 11.50/share), then CRH conducts a tender offer to buy ~21% of the remaining float (10% of shares out) at HKD 12.70 a share. Investors then are left with what I will call NEWBREWCO, a pure-play brewery which is China's largest by volume. You can read about the basics in the piece by Jon.  Let me preface my comments by saying that I think this deal is great value...For the buyer. Hint: That's not CRE holders or buyers.THIS DEAL HAS ISSUES REGARDING PRICE AND ECONOMICS. GIVEN THE OWNER EFFECTIVELY CONTROLS MANAGEMENT AND THE BOARD, THIS COULD BE CONSTRUED AS A POTENTIAL GOVERNANCE ISSUE. The SOE parent is proposing to buy 72% of the December 2014 equity at a 20% discount to book and effectively zero premium to market. This Binding Proposal is being put to shareholders. CRE Directors should be asked, just one month after the release of 2014 accounts, how they could possibly support a deal which means a 20% write down of equity (or a 54% write down to goodwill) on the Disposal Assets and sale at 0.8x book, whenThat level is for full control of those consumer assets, at a price cheaper (in PBR terms) than 98.6% of Southbound-eligible non-financial stocks'  at announcement (and 99.7% of SHCOMP trades at a PBR &gt; 1),that level is for a package of branded consumer goods purveyors, in a newly resurgent Chinese stock market, with a government bent on supporting a resurgent Chinese consumer, and is being bought 10% off a 52-week low, down 20% from a year earlier, when H-Shares are up 45% and Shanghai is up 100% over that same year.And CRH is asking CRE shareholders to pay for that, when it is CRH management, ownership, and board, which are responsible for the business underperformance. ...but it will be put to shareholders instead. Because most of the directors were put in place by the buyer. The stock has popped 50% but investors should look closely at the deal and its details. SECOND POINT: THIS DEAL HAS ACCOUNTING VISUALISATION ISSUES. The deal is equity-dilutive to NEWBREWCO holders. A nice special dividend is dangled in front of investors and then NEWBREWCO takes a 50% write down to its pro forma equity. Look at the pretty birdy... WHACK!Then investors have to deal with consolidation accounting of Minority Interest. This sounds technical and lots of people will say "aaah... it all comes out in the wash". Well... maybe... But if it does, that might be bearish. Beware the forward valuation differentials!CONCLUSIONS: There are economic issues that should be questioned. I think because of the control that these can be construed as potential governance issues. The residual asset has accounting events and future valuation visualization issues you should be aware of.This is NOT a "Done Deal" yet. Investors who look closely could object. The IFA could easily say this deal is "Neither Fair Nor Reasonable" and proxy advisors could agree. The risk on this deal is quite binary.

CRE (291 HK): Playing Devil's Advocate - An expensive way to get a cheap beer!

Hong Kong

China Resources Beer (Holdings) Company Limited is an alcoholic beverage retailer.

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China Resources Beer Holdings (291 HK)

Jon's Beer is Cheap - The Arb Calculations

This piece is just a fork in support of Jon's piece on China Resources Enterprise.It makes no judgments about good deal, bad deal, etc. It assumes...

Travis Lundy

CRE (291 HK): Playing Devil's Advocate - An expensive way to get a cheap beer!

Hop on a plane and fly to somewhere you don't need to go. They will give you a free beer. It is usually cheaper to stay home and buy the beer...

Travis Lundy

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