Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Capital Markets

Today after the close it was <a href="https://www.globenewswire.com/news-release/2020/10/06/2103999/0/en/Danone-intends-to-sell-its-stake-in-Yakult.html" target="_blank" rel="noopener">announced</a> that <a href="https://www.smartkarma.com/entities/danone-sa" target="_blank" data-smartkarma-citation="entities:21403:1" rel="noopener">Danone SA (BN FP)</a> - currently the largest shareholder in <a href="https://www.smartkarma.com/entities/yakult-honsha-co-ltd" target="_blank" data-smartkarma-citation="entities:17153:1" rel="noopener">Yakult Honsha (2267 JP)</a> - intended to sell down the last of its stake after a 20-year run.The press release notes "Danone's collaboration with Yakult began in 2004."That's saying it nicely. Danone bought 5% in 2000 then bought up to 20% in the market in 2003 in an effort to get Yakult to collaborate. It was not done with Yakult's permission, but it got their attention.<div>
Yakult and Danone signed an Alliance Agreement in March 2004. That agreement was renewed in 2008 so the agreement would stay in place until 2012. In 2012, negotiations on the future alliance were extended and extended and finally, in late April 2013 - after a year-plus of jawboning and speculation of a hostile bid, occasionally dampened by public promises to the contrary by Danone executives - the two companies decided they could not, in the end, agree, and they cancelled their Strategic Alliance and signed a Memorandum of Understanding on a Collaborative Relationship.
The lack of hostile action by Danone may have been the result of the fact that Yakult-friendly Japanese corporate investors bought shares in the meantime, lifting the share price by 60-70% in a year and lifting the friendly ownership to over 50%, making hostile action essentially futile. 
</div><div>
That relationship basically stood as a standstill agreement with 3 Danone appointees named to the Yakult board, and ongoing JV operation in their 50/50 Vietnam and 80/20 (Yakult/Danone) Joint Ventures and ongoing 'collaboration' in the probiotics business. Since the big buy in 2003, including dividends, Danone was up 500% on its investment as of February 2018 when it decided to sell down a very large stake after activist Corvex Management had taken on Danone and urged it to reduce capital assets which didn't provide much. At the time, Yakult traded at 20x EV/EBITDA and 36x PER. 
<h2>The NEW News</h2>
Danone is bailing on the rest of the stake while the existing commercial partnerships, "including joint-ventures in India and Vietnam remain in place" (according to the <a href="https://ml-eu.globenewswire.com/Resource/Download/768c55f8-a7c0-4ba7-b4e8-9f01bf4bef68" target="_blank" rel="noopener">announcement</a>).
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/163/665/original/Screenshot%202020-10-06%20at%204.58.37%20PM.png?1601974734" class="editor-image img-responsive" data-smartkarma-image-id="163665"></figure>
The weekly chart shows they did not catch the top last time (14 Feb 2018 announcement when the stock was ¥7940/share), but they enjoyed a nice run-up from a year prior. At the time, both TOPIX and TOPIX FOOD Sector indices had taken a sharp drop.
After the announcement the last time, the shares fell 6.8% on the next day. That time was a Public Offering which required a book building phase and then delivery saw a couple of weeks of large volume. The shares traded in line with market and sector before falling in April and May 2018. Since then, the shares have largely underperformed both TOPIX and the sector.
This deal is an Accelerated Block Offering. It makes things more interesting. Valuations are different than last time and the shareholder structure is different too. 
Much more below the fold.
</div>

Today after the close it was announced that Danone SA (BN FP) - currently the largest shareholder in Yakult Honsha (2267 JP) - intended to sell down the last of its stake after a 20-year run.The press release notes "Danone's collaboration with Yakult began in 2004."That's saying it nicely. Danone bought 5% in 2000 then bought up to 20% in the market in 2003 in an effort to get Yakult to collaborate. It was not done with Yakult's permission, but it got their attention.
Yakult and Danone signed an Alliance Agreement in March 2004. That agreement was renewed in 2008 so the agreement would stay in place until 2012. In 2012, negotiations on the future alliance were extended and extended and finally, in late April 2013 - after a year-plus of jawboning and speculation of a hostile bid, occasionally dampened by public promises to the contrary by Danone executives - the two companies decided they could not, in the end, agree, and they cancelled their Strategic Alliance and signed a Memorandum of Understanding on a Collaborative Relationship.
The lack of hostile action by Danone may have been the result of the fact that Yakult-friendly Japanese corporate investors bought shares in the meantime, lifting the share price by 60-70% in a year and lifting the friendly ownership to over 50%, making hostile action essentially futile. 

That relationship basically stood as a standstill agreement with 3 Danone appointees named to the Yakult board, and ongoing JV operation in their 50/50 Vietnam and 80/20 (Yakult/Danone) Joint Ventures and ongoing 'collaboration' in the probiotics business. Since the big buy in 2003, including dividends, Danone was up 500% on its investment as of February 2018 when it decided to sell down a very large stake after activist Corvex Management had taken on Danone and urged it to reduce capital assets which didn't provide much. At the time, Yakult traded at 20x EV/EBITDA and 36x PER. 
The NEW News
Danone is bailing on the rest of the stake while the existing commercial partnerships, "including joint-ventures in India and Vietnam remain in place" (according to the announcement).

The weekly chart shows they did not catch the top last time (14 Feb 2018 announcement when the stock was ¥7940/share), but they enjoyed a nice run-up from a year prior. At the time, both TOPIX and TOPIX FOOD Sector indices had taken a sharp drop.
After the announcement the last time, the shares fell 6.8% on the next day. That time was a Public Offering which required a book building phase and then delivery saw a couple of weeks of large volume. The shares traded in line with market and sector before falling in April and May 2018. Since then, the shares have largely underperformed both TOPIX and the sector.
This deal is an Accelerated Block Offering. It makes things more interesting. Valuations are different than last time and the shareholder structure is different too. 
Much more below the fold.


Danone Sells The Last of Their Yakult - Buy the Cleanup

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<div>
<a href="https://www.smartkarma.com/entities/21403" target="_blank" data-smartkarma-citation="entities:21403:1" rel="noopener">Danone SA (BN FP)</a> is selling its remaining 6.2% stake in <a href="https://www.smartkarma.com/entities/17153" target="_blank" data-smartkarma-citation="entities:17153:1" rel="noopener">Yakult Honsha Co Ltd (2267 JP)</a>.
Prior to this, Danone sold over 24.6m shares (some back to Yakult) in Feb 2018, which was done via an a global offering. We covered that deal in <a href="https://www.smartkarma.com/insights/yakult-honsha-placement-a-little-more-correction-would-be-ideal" target="_blank" rel="noopener">Yakult Honsha Placement - A Little More Correction Would Be Ideal</a>.
</div><div>In this insight, I'll run the deal through our ECM framework and talk about the deal dynamics for the current placement.</div>


Danone SA (BN FP) is selling its remaining 6.2% stake in Yakult Honsha Co Ltd (2267 JP).
Prior to this, Danone sold over 24.6m shares (some back to Yakult) in Feb 2018, which was done via an a global offering. We covered that deal in Yakult Honsha Placement - A Little More Correction Would Be Ideal.
In this insight, I'll run the deal through our ECM framework and talk about the deal dynamics for the current placement.

Yakult Honsha Placement - Danone Heads for a Clean-Up

Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

In our previous two insights on China Feihe’s IPO, we mainly focused on the industry, the company’s business model and its financials. This follow-up insight mainly discusses the company’s valuation. China Feihe, China’s largest infant milk formula company opened the book building for its Hong Kong IPO on Monday (28th October 2019).At an IPO price of HK$7.5-10 a share, the company is expected to raise gross proceeds of HK$6.7-8.9bn (US$0.96-1.28 a share) with an expected market capitalisation of HK$67-89bn (US$8.6-11.4bn). This will give the company an EV of about HK$56-76bn (adjusted for gross IPO proceeds).<table class="table table-striped"><tbody>
<tr><td colspan="2" style="width: 248.0pt;">China Feihe IPO Details</td></tr>
<tr>
<td style="width: 146.0pt;">No. of Shares Offered</td>
<td style="width: 102.0pt;">                893,000,000</td>
</tr>
<tr>
<td style="width: 146.0pt;">Total Shares Outstanding</td>
<td style="width: 102.0pt;">             8,933,000,000</td>
</tr>
<tr>
<td style="width: 146.0pt;">Offer as a % of Total Shares Outstanding</td>
<td style="width: 102.0pt;">10.0%</td>
</tr>
<tr>
<td style="width: 146.0pt;">IPO Price</td>
<td style="width: 102.0pt;">HK$7.5-10.0</td>
</tr>
<tr>
<td style="width: 146.0pt;">Gross Proceeds</td>
<td style="width: 102.0pt;">HK$6.7-8.9bn</td>
</tr>
<tr>
<td style="width: 146.0pt;">Market Capitalisation (HK$bn)</td>
<td style="width: 102.0pt;">HK$67-89bn</td>
</tr>
<tr>
<td style="width: 146.0pt;">Enterprise Value (HK$bn)</td>
<td style="width: 102.0pt;">HK$56-76bn</td>
</tr>
<tr>
<td style="width: 146.0pt;">Trading Date</td>
<td style="width: 102.0pt;">13th November 2019</td>
</tr>
</tbody></table><div class="content-caption">
Source: Company Disclosures (Net debt is adjusted for gross proceeds from IPO)
</div>Based on our analysis, we believe the company’s IPO target price and the implied valuation are reasonable compared to its average local and international peer multiples. However, comparing the company against its global counterpart, Bellamy’s Australia reveals that the company’s multiples are at a severe discount to Bellamy’s who has a much smaller operation with negative growth in revenues and only a fraction of Feihe’s margins.Given the company’s exposure and strong presence in the growing Chinese IMF market, Feihe’s top-line and bottom-line will see strong growth over the next couple of years, which should warrant a higher valuation for the company. That being said, potential investors should wary of risks arising from governance related concerns and others such as contamination or spoilage of IMF products, shortage of fresh milk, stringent regulations in terms of quality and standards, more mothers opting to breastfeed and the tension between the US and China which could hurt Feihi’s nutritional supplement business in the US, Vitamin World.Please click on the following links to access our previous insights on the company:<a href="https://www.smartkarma.com/insights/china-feihe-ipo-right-formula-for-growth-but-there-could-be-risks" target="_blank" rel="noopener">https://www.smartkarma.com/insights/china-feihe-ipo-right-formula-for-growth-but-there-could-be-risks</a><a href="https://www.smartkarma.com/insights/china-feihe-ipo-part-ii-right-formula-for-growth" target="_blank" rel="noopener">https://www.smartkarma.com/insights/china-feihe-ipo-part-ii-right-formula-for-growth</a>

In our previous two insights on China Feihe’s IPO, we mainly focused on the industry, the company’s business model and its financials. This follow-up insight mainly discusses the company’s valuation. China Feihe, China’s largest infant milk formula company opened the book building for its Hong Kong IPO on Monday (28th October 2019).At an IPO price of HK$7.5-10 a share, the company is expected to raise gross proceeds of HK$6.7-8.9bn (US$0.96-1.28 a share) with an expected market capitalisation of HK$67-89bn (US$8.6-11.4bn). This will give the company an EV of about HK$56-76bn (adjusted for gross IPO proceeds).
China Feihe IPO Details

No. of Shares Offered
                893,000,000


Total Shares Outstanding
             8,933,000,000


Offer as a % of Total Shares Outstanding
10.0%


IPO Price
HK$7.5-10.0


Gross Proceeds
HK$6.7-8.9bn


Market Capitalisation (HK$bn)
HK$67-89bn


Enterprise Value (HK$bn)
HK$56-76bn


Trading Date
13th November 2019


Source: Company Disclosures (Net debt is adjusted for gross proceeds from IPO)
Based on our analysis, we believe the company’s IPO target price and the implied valuation are reasonable compared to its average local and international peer multiples. However, comparing the company against its global counterpart, Bellamy’s Australia reveals that the company’s multiples are at a severe discount to Bellamy’s who has a much smaller operation with negative growth in revenues and only a fraction of Feihe’s margins.Given the company’s exposure and strong presence in the growing Chinese IMF market, Feihe’s top-line and bottom-line will see strong growth over the next couple of years, which should warrant a higher valuation for the company. That being said, potential investors should wary of risks arising from governance related concerns and others such as contamination or spoilage of IMF products, shortage of fresh milk, stringent regulations in terms of quality and standards, more mothers opting to breastfeed and the tension between the US and China which could hurt Feihi’s nutritional supplement business in the US, Vitamin World.Please click on the following links to access our previous insights on the company:https://www.smartkarma.com/insights/china-feihe-ipo-right-formula-for-growth-but-there-could-be-riskshttps://www.smartkarma.com/insights/china-feihe-ipo-part-ii-right-formula-for-growth

China Feihe IPO Valuation: Reasonable Compared to Peers but Cheap Compared to Market Deal Multiples

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<a href="https://www.smartkarma.com/entities/china-feihe" target="_blank" data-smartkarma-citation="entities:24413:1" rel="noopener">China Feihe (FEIHE HK)</a> is the leading player in the China IMF (infant milk formula) market as measured by retail sales value in 2018, according to Frost &amp; Sullivan. Feihe has launched its IPO at an indicative price range of HK$7.50-10.00 per share. The price range implies a market cap range of $8.5-11.4 billion.<div class="content-highlight">In <a href="https://www.smartkarma.com/insights/china-feihe-ipo-preview-the-winning-formula" target="_blank" rel="noopener">our initiation note</a>, we stated that the Feihe’s equity story offers more positives than negatives, and we would place it on our must-look IPO watchlist. We <a href="https://www.smartkarma.com/insights/china-feihe-ipo-uncowed" target="_blank" rel="noopener">furthered noted that the PHIP</a> which discloses 2Q19 metrics reinforces this view.  Our valuation analysis suggests that the IPO valuation is attractive and we would participate in the IPO. </div>

China Feihe (FEIHE HK) is the leading player in the China IMF (infant milk formula) market as measured by retail sales value in 2018, according to Frost &amp; Sullivan. Feihe has launched its IPO at an indicative price range of HK$7.50-10.00 per share. The price range implies a market cap range of $8.5-11.4 billion.In our initiation note, we stated that the Feihe’s equity story offers more positives than negatives, and we would place it on our must-look IPO watchlist. We furthered noted that the PHIP which discloses 2Q19 metrics reinforces this view.  Our valuation analysis suggests that the IPO valuation is attractive and we would participate in the IPO. 

China Feihe IPO: Valuation Is Good for You

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

China Mengniu Dairy Co / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/china-mengniu-dairy-co" target="_blank" data-smartkarma-citation="entities:354:1" rel="noopener">China Mengniu Dairy Co (2319 HK)</a>submitted a bid to buy <a href="https://www.smartkarma.com/entities/bellamy-s-australia-ltd" target="_blank" data-smartkarma-citation="entities:17377:1" rel="noopener">Bellamy's Australia (BAL AU)</a> to increase its participation in the infant milk formula market in China (IMF), aiming to take market share from <a href="https://www.smartkarma.com/entities/health-and-happiness-h-h-int" target="_blank" data-smartkarma-citation="entities:20582:1" rel="noopener">Health And Happiness (H&amp;H) (1112 HK)</a> , <a href="https://www.smartkarma.com/entities/yashili-international-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3397:1" rel="noopener">Yashili International Holdings (1230 HK)</a> and <a href="https://www.smartkarma.com/entities/ausnutria-dairy-corp-ltd" target="_blank" data-smartkarma-citation="entities:13799:1" rel="noopener">Ausnutria Dairy Corp (1717 HK)</a> . Besides a potential revenue increase, Mengniu's management is more than happy to align itself with a superior product that is highly favored by customers, a trusted western technology, Bellamy.Bellamy's effort to develop a direct export market in China has been dampened by the Chinese authorities, including a temporary ban in 2017 that yet to approve the company's application to restart direct sales.Earlier this year, the Chinese government has issued a protectionist policy to increase the proportion of domestically manufactured baby milk powder sold in China rather than importing them. Labeling made in China or owned by a Chinese firm could, in the short term, potentially be damaging to Bellamy's reputation as a trusted product in China.In the short to mid-term, Mengniu's share price may experience an increase in volatility and potential downturn as the deal may not go through and operationally, investment in CapEx is expected while an increase in revenue is far from certain given a potential shift in customers' preference.

China Mengniu Dairy Co (2319 HK)submitted a bid to buy Bellamy's Australia (BAL AU) to increase its participation in the infant milk formula market in China (IMF), aiming to take market share from Health And Happiness (H&amp;H) (1112 HK) , Yashili International Holdings (1230 HK) and Ausnutria Dairy Corp (1717 HK) . Besides a potential revenue increase, Mengniu's management is more than happy to align itself with a superior product that is highly favored by customers, a trusted western technology, Bellamy.Bellamy's effort to develop a direct export market in China has been dampened by the Chinese authorities, including a temporary ban in 2017 that yet to approve the company's application to restart direct sales.Earlier this year, the Chinese government has issued a protectionist policy to increase the proportion of domestically manufactured baby milk powder sold in China rather than importing them. Labeling made in China or owned by a Chinese firm could, in the short term, potentially be damaging to Bellamy's reputation as a trusted product in China.In the short to mid-term, Mengniu's share price may experience an increase in volatility and potential downturn as the deal may not go through and operationally, investment in CapEx is expected while an increase in revenue is far from certain given a potential shift in customers' preference. 

France

Danone SA is a food processing company. The Company produces dairy products, beverages, baby food and clinical/medical nutrition products.

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Danone SA (BN FP)

Danone Sells The Last of Their Yakult - Buy the Cleanup

Today after the close it was announced that $Danone

Travis Lundy

Yakult Honsha Placement - Danone Heads for a Clean-Up

Danone SA (BN FP) is selling 19.9m shares in Yakult Honsha Co Ltd (2267 JP). Prior to this, Danone was expected to sell 24.6m shares but, Yakult...

Sumeet Singh

China Feihe IPO Valuation: Reasonable Compared to Peers but Cheap Compared to Market Deal Multiples

In our previous two insights on China Feihe’s IPO, we mainly focused on the industry, the company’s business model and its financials. This...

Shifara Samsudeen, ACMA, CGMA

China Feihe IPO: Valuation Is Good for You

China Feihe (FEIHE HK) is the leading player in the China IMF (infant milk formula) market as measured by retail sales value in 2018, according to...

Arun George

Mengniu (2319): Short Term Uncertainty

China Mengniu Dairy Co (2319 HK)submitted a bid to buy Bellamy's Australia (BAL AU) to increase its participation in the infant milk formula market...

Henry Soediarko

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