Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

11 weeks ago yesterday, for the end of 2020, I published my report <a href="https://www.smartkarma.com/insights/2021-high-conviction-shinsei-bank" target="_blank" data-smartkarma-citation="insights:46544" rel="noopener">2021 High Conviction - Shinsei Bank</a> idea. Since the close of the next day, the shares are up 46.7%. A large part of that performance has been due to the rise in the TOPIX Bank Index - up 26.7% in the same period. Much of that move has occurred in the past five weeks as The Great Rotation, driven by higher rates, a steeper curve, and inflationary expectations, has propelled last year's losers to this year's winners, and <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a>, SaaS stocks, junk stocks, and others have underperformed. But there were a couple of other bits in the story too. A buyback, an asset sale, and understanding of the float dynamics given the over-arching goal of <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> and its shareholders is to be able to get the government out of its shares (and accompanying oversight) it purchased in March 2000. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/193/195/original/Screenshot+2021-03-10+at+1.09.10+AM.png?1615309764" class="editor-image img-responsive" data-smartkarma-image-id="193195"></figure></section>This insight provides a brief update to those inputs.

11 weeks ago yesterday, for the end of 2020, I published my report 2021 High Conviction - Shinsei Bank idea. Since the close of the next day, the shares are up 46.7%. A large part of that performance has been due to the rise in the TOPIX Bank Index - up 26.7% in the same period. Much of that move has occurred in the past five weeks as The Great Rotation, driven by higher rates, a steeper curve, and inflationary expectations, has propelled last year's losers to this year's winners, and Tesla Motors (TSLA US), SaaS stocks, junk stocks, and others have underperformed. But there were a couple of other bits in the story too. A buyback, an asset sale, and understanding of the float dynamics given the over-arching goal of Shinsei Bank (8303 JP) and its shareholders is to be able to get the government out of its shares (and accompanying oversight) it purchased in March 2000. This insight provides a brief update to those inputs.

2021 High Conviction Update - Shinsei Bank Float Squeeze to Mitigate Near-Term

Event-Driven

Yesterday, the Taiwan Fair Trade Commission announced its "non-prohibition" of the takeover of <a href="https://www.smartkarma.com/entities/jih-sun-financial-holdings" target="_blank" data-smartkarma-citation="entities:17971:1" rel="noopener">Jih Sun Financial (5820 TT)</a> by <a href="https://www.smartkarma.com/entities/fubon-financial-holding-co" target="_blank" data-smartkarma-citation="entities:11869:1" rel="noopener">Fubon Financial Holding Co (2881 TT)</a>.
As a reminder, this deal was put forth on 18 December 2020 by Fubon at TWD 13.00/share, to purchase 50.01-100.00% of Jih Sun Financial in a Tender Offer, making it the first merger in Taiwan of financial holding companies. 
It came with an FSC stamp of approval baked in, but not TFTC, and days after the deal was announced, there were questions about Fubon's intentions with regard to one of the shareholders. 
Yesterday, the Taiwan Fair Trade Commission gave its stamp of approval. Now it's a question of whether Fubon can get to 50%.

Yesterday, the Taiwan Fair Trade Commission announced its "non-prohibition" of the takeover of Jih Sun Financial (5820 TT) by Fubon Financial Holding Co (2881 TT).
As a reminder, this deal was put forth on 18 December 2020 by Fubon at TWD 13.00/share, to purchase 50.01-100.00% of Jih Sun Financial in a Tender Offer, making it the first merger in Taiwan of financial holding companies. 
It came with an FSC stamp of approval baked in, but not TFTC, and days after the deal was announced, there were questions about Fubon's intentions with regard to one of the shareholders. 
Yesterday, the Taiwan Fair Trade Commission gave its stamp of approval. Now it's a question of whether Fubon can get to 50%.

Fubon Financial Deal for Jih Sun Gets TFTC Signoff

Coming just two months after the FSC had rejected a proposal by Thai tycoon Charoen Pokphand's holding company to purchase the 24.09% stake in <a href="https://www.smartkarma.com/entities/jih-sun-financial-holdings" target="_blank" data-smartkarma-citation="entities:17971:1" rel="noopener">Jih Sun Financial (5820 TT)</a> held by Hong Kong-based Capital Target Limited, it initially looked to me like the <a href="https://www.smartkarma.com/entities/fubon-financial-holding-co" target="_blank" data-smartkarma-citation="entities:11869:1" rel="noopener">Fubon Financial Holding Co (2881 TT)</a> announcement of a low-premium Tender Offer at NT$13/share to purchase Jih Sun Financial, which camecomplete with regulator pre-approval, was likely wrapped up as a nice package to get Shinsei and Capital Target out without requiring other minorities to sell.  A couple of days afterwards, Fubon noted that it had not made any contact with either of  <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> or Hong Kong-based Capital Target Limited prior to making the offer, but noted that it had wanted to purchase Jih Sun to raise its market share of Taiwanese stock market turnover (from 5.54% to 9.13% by adding Jih Sun's 3.59%). It noted that it would issue new shares - 60% common shares and 40% preferred shares - in order to finance the acquisition.Yesterday, Jih Sun announced the result of its board consideration of the Offer after having obtained the requisite fairness opinions required by Article 14 of the Regulations Governing Public Tender Offers for Securities of Public Companies.Jih Sun noted that it had not discussed the Tender Offer with Fubon prior to Fubon making its offer, and also noted that the accounting firms which had been engaged to provide fair value opinions found that a fair value per share estimated range was NT$13.89-15.71/share, and when looking at the "market price method", the other accountant had suggested the range NT$9.63-16.93/share against the NT$13 Offer. Several days after the announcement of the Offer, the Financial Supervisory Commission noted in response to legislator questions that the FSC was investigating the nature of the spike in share price and volume before the Tender Offer announcement, noting that the FSC itself and its personnel had kept quiet about the deal since October when they started looking at it. The news around this situation suggests my analysis of who owned Capital Target Limited may have been wrong - that a different originally offshore Chinese person may be (or have been) the controller of Capital Target Limited.This makes things a bit weirder.

Coming just two months after the FSC had rejected a proposal by Thai tycoon Charoen Pokphand's holding company to purchase the 24.09% stake in Jih Sun Financial (5820 TT) held by Hong Kong-based Capital Target Limited, it initially looked to me like the Fubon Financial Holding Co (2881 TT) announcement of a low-premium Tender Offer at NT$13/share to purchase Jih Sun Financial, which camecomplete with regulator pre-approval, was likely wrapped up as a nice package to get Shinsei and Capital Target out without requiring other minorities to sell.  A couple of days afterwards, Fubon noted that it had not made any contact with either of  Shinsei Bank (8303 JP) or Hong Kong-based Capital Target Limited prior to making the offer, but noted that it had wanted to purchase Jih Sun to raise its market share of Taiwanese stock market turnover (from 5.54% to 9.13% by adding Jih Sun's 3.59%). It noted that it would issue new shares - 60% common shares and 40% preferred shares - in order to finance the acquisition.Yesterday, Jih Sun announced the result of its board consideration of the Offer after having obtained the requisite fairness opinions required by Article 14 of the Regulations Governing Public Tender Offers for Securities of Public Companies.Jih Sun noted that it had not discussed the Tender Offer with Fubon prior to Fubon making its offer, and also noted that the accounting firms which had been engaged to provide fair value opinions found that a fair value per share estimated range was NT$13.89-15.71/share, and when looking at the "market price method", the other accountant had suggested the range NT$9.63-16.93/share against the NT$13 Offer. Several days after the announcement of the Offer, the Financial Supervisory Commission noted in response to legislator questions that the FSC was investigating the nature of the spike in share price and volume before the Tender Offer announcement, noting that the FSC itself and its personnel had kept quiet about the deal since October when they started looking at it. The news around this situation suggests my analysis of who owned Capital Target Limited may have been wrong - that a different originally offshore Chinese person may be (or have been) the controller of Capital Target Limited.This makes things a bit weirder. 

Fubon Financial Offer for Jih Sun Gets Even Weirder

In May of this year, <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> made an <a href="https://www.release.tdnet.info/inbs/ek/140120200430403171.pdf" target="_blank" rel="noopener">announcement</a> that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by <a href="https://www.smartkarma.com/profiles/mio-kato" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a> in <a href="https://www.smartkarma.com/insights/shinsei-bank-offering-flowers-in-the-wind" target="_blank" data-smartkarma-citation="insights:31638" rel="noopener">Shinsei Bank Offering: Flowers in the Wind</a>, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. <section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/654/original/Screenshot%202020-12-21%20at%207.48.00%20PM.png?1608551293" class="editor-image img-responsive" data-smartkarma-image-id="179654"></figure></section>Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director <a href="https://disclosure.edinet-fsa.go.jp/E01EW/download?uji.verb=W0EZA104CXP001003Action&amp;uji.bean=ee.bean.parent.EECommonSearchBean&amp;PID=W1E63011&amp;SESSIONKEY=1608551363459&amp;lgKbn=2&amp;pkbn=0&amp;skbn=1&amp;dskb=&amp;askb=&amp;dflg=0&amp;iflg=&amp;preId=1&amp;mul=8303&amp;oth=on&amp;cal=1&amp;era=R&amp;yer=&amp;mon=&amp;pfs=4&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=&amp;s=S100ITI7" target="_blank" rel="noopener">received</a> 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID <a href="https://pdf.irpocket.com/C8303/yCGV/B6S9/bQ8o.pdf" target="_blank" rel="noopener">announce</a> a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had <a href="https://pdf.irpocket.com/C8303/mxGt/rDGI/qr73.pdf" target="_blank" rel="noopener">purchased</a> 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  </section>Discussion ensues below.

In May of this year, Shinsei Bank (8303 JP) made an announcement that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by Mio Kato in Shinsei Bank Offering: Flowers in the Wind, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director received 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID announce a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had purchased 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  Discussion ensues below.

On Friday 18 December, <a href="https://www.smartkarma.com/entities/fubon-financial-holding-co" target="_blank" data-smartkarma-citation="entities:11869:1" rel="noopener">Fubon Financial Holding Co (2881 TT)</a> announced a board decision to conduct a Tender Offer to take control of <a href="https://www.smartkarma.com/entities/jih-sun-financial-holdings" target="_blank" data-smartkarma-citation="entities:17971:1" rel="noopener">Jih Sun Financial (5820 TT)</a> at NT$13/share. The offer will be contingent on gaining 50.01% of the shares and Fubon will buy any and all shares tendered if it clears that hurdle. This is not a huge premium, and comes to only a small premium to book value (1.05x) but is most likely to be successful because of the two owners who currently own 60%. This deal comes pre-blessed by the Financial Supervisory Commission which approved on Thursday apparently. It is interesting because last month a 24% stake acquisition by a foreign corporate (non-financial) was nixed by the FSC, and this would represent the first time that a domestic financial holding company has been taken over by another domestic financial holding company. And there is, crucially, another leg to this trade.More below the fold.

On Friday 18 December, Fubon Financial Holding Co (2881 TT) announced a board decision to conduct a Tender Offer to take control of Jih Sun Financial (5820 TT) at NT$13/share. The offer will be contingent on gaining 50.01% of the shares and Fubon will buy any and all shares tendered if it clears that hurdle. This is not a huge premium, and comes to only a small premium to book value (1.05x) but is most likely to be successful because of the two owners who currently own 60%. This deal comes pre-blessed by the Financial Supervisory Commission which approved on Thursday apparently. It is interesting because last month a 24% stake acquisition by a foreign corporate (non-financial) was nixed by the FSC, and this would represent the first time that a domestic financial holding company has been taken over by another domestic financial holding company. And there is, crucially, another leg to this trade.More below the fold. 

Fubon Financial Tender Offer for Jih Sun Financial

Taiwan

Fubon Financial Holding Co., Ltd. is a financial holding company, formed through the merger of Fubon Insurance, Fubon Securities, Fubon Commercial Bank, and Fubon Life Assurance.

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Fubon Financial Holding Co (2881 TT)

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