Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

On 15 December, <a href="https://www.smartkarma.com/entities/idemitsu-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:109:1" rel="noopener">Idemitsu Kosan (5019 JP)</a> launched a Tender Offer for subsidiary <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a> at what was an extraordinarily opportunistic price - JPY 2450/share.Some might call this price insultingly low.It was apparently deemed "fair" because the non-arms' length contract signed with the parent (and Tender Offeror) provides for an exceptionally low ROA, and the next few years involves some shutdowns for longer-term maintenance, which will lower FCF. This pricing process fairness problem was discussed in some detail in <a href="https://www.smartkarma.com/insights/idemitsu-launches-lowball-tender-offer-for-subsidiary-toa-oil-5008" target="_blank" data-smartkarma-citation="insights:46384" rel="noopener">Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)</a>. There have been a few developments since the announcement.<ul><li>Just prior to the offer being made, large shareholder Cornwall Capital had been increasing their stake and coincidentally announced an increased stake of 18.22% on the same day as the announcement. Since the offer has been made, they have filed two more amendments to quantity to lift their stake to 20.83% as of 24 December (reported 4 January). As seen from the chart, the shares have not traded below terms since they first freely traded pre-announcement, and Cornwall increased their stake by 2.6+% from 15-Dec to 24-Dec 2020 at prices ABOVE terms.</li></ul><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/182/218/original/Screenshot+2021-01-13+at+12.28.45+PM.png?1610512414" class="editor-image img-responsive" data-smartkarma-image-id="182218"></figure></section><ul>
<li>Since the 25th of December, another 5% of shares out have traded at prices above terms. Nobody else has yet announced a 5+% position. </li>
<li>Around year-end, specialty "business-politics" magazine Sentaku published an article talking about the oil refining business in Japan, JXTG/ENEOS's leading place in it, the Idemitsu deal for Toa which was termed odd, <a href="https://www.smartkarma.com/entities/fuji-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:12970:1" rel="noopener">Fuji Oil Co Ltd (5017 JP)</a>, <a href="https://www.smartkarma.com/entities/cosmo-energy-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:26565:1" rel="noopener">Cosmo Energy Holdings (5021 JP)</a>, and some speculation about what might be behind the Idemitsu deal for Toa. The conclusions of the article in that regard are striking. 
</li>
</ul><div class="content-highlight">
In the meantime, after a single day limit up ending below terms which saw 20,400 shares trade, the next 1.46mm shares (11.8% of shares out) have all traded above terms.
If one adds the 20.8% held by Cornwall Capital (including the 2.6% purchased above terms since announcement) plus the 9.2% which have traded above terms not purchased by Cornwall, that gets one to 30.4%, which is reasonably close to a blocking stake. 
</div>Discussion continues below.

On 15 December, Idemitsu Kosan (5019 JP) launched a Tender Offer for subsidiary Toa Oil Co Ltd (5008 JP) at what was an extraordinarily opportunistic price - JPY 2450/share.Some might call this price insultingly low.It was apparently deemed "fair" because the non-arms' length contract signed with the parent (and Tender Offeror) provides for an exceptionally low ROA, and the next few years involves some shutdowns for longer-term maintenance, which will lower FCF. This pricing process fairness problem was discussed in some detail in Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008). There have been a few developments since the announcement.Just prior to the offer being made, large shareholder Cornwall Capital had been increasing their stake and coincidentally announced an increased stake of 18.22% on the same day as the announcement. Since the offer has been made, they have filed two more amendments to quantity to lift their stake to 20.83% as of 24 December (reported 4 January). As seen from the chart, the shares have not traded below terms since they first freely traded pre-announcement, and Cornwall increased their stake by 2.6+% from 15-Dec to 24-Dec 2020 at prices ABOVE terms.
Since the 25th of December, another 5% of shares out have traded at prices above terms. Nobody else has yet announced a 5+% position. 
Around year-end, specialty "business-politics" magazine Sentaku published an article talking about the oil refining business in Japan, JXTG/ENEOS's leading place in it, the Idemitsu deal for Toa which was termed odd, Fuji Oil Co Ltd (5017 JP), Cosmo Energy Holdings (5021 JP), and some speculation about what might be behind the Idemitsu deal for Toa. The conclusions of the article in that regard are striking. 


In the meantime, after a single day limit up ending below terms which saw 20,400 shares trade, the next 1.46mm shares (11.8% of shares out) have all traded above terms.
If one adds the 20.8% held by Cornwall Capital (including the 2.6% purchased above terms since announcement) plus the 9.2% which have traded above terms not purchased by Cornwall, that gets one to 30.4%, which is reasonably close to a blocking stake. 
Discussion continues below.

Toa Oil (5008) Tender Offer Update - Looks Bumpity.

When one looks upon the landscape of Japan's oil refineries - a delightful vista of 20th century industrialisation being left by the wayside in the move to EVs, solar power, "green" investment, etc, one small refinery stands out - the Keihin refinery of <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a>. 
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/791/original/history-img12.jpg?1608048627" class="editor-image img-responsive" data-smartkarma-image-id="178791"></figure>
</section>
Toa Oil's Keihin Refinery has a Nelson Complexity Index higher than any other refinery in Japan to my knowledge (the Nelson Complexity Index provides a measure of the ability of a refinery to process inputs into lighter product. The lighter the end product, the higher the complexity score on that particular line/output (crude goes into an atmospheric distillation process and comes out as several products which are subsequently treated by hydro- or merox treaters, subject to secondary distillation, or gas processing, then subject to FCC feeds, cokers, hydrocracking, isomerization, reformer stages, etc). The complexity score of a refinery is the weighted average complexity of its output lines. Toa Oil is in the very high teens whereas most major refiners just get to double digits or slightly above.
Generically, a refinery's Nelson Complexity Index/Score is a measure of the value of the refinery - both in cost terms and in terms of value-add. 
Toa Oil effectively sold itself to Showa Shell in 1979 then Showa Shell consolidated it in 2005 when activists were knocking on the door of cheap stocks and Toa placed shares with Showa Shell taking their ownership to 50.1%. Since then, Showa Shell (and now Idemitsu) has effectively used it as an outsourced capital asset. Huge sums were invested, and subsequently depreciated, and now the "book value" of the assets is effectively below 20% of the investment cost, and the book value of the refinery portion (not including the land or some of the financial assets related to the oil business in Japan (oil refining taxes stream through companies like this as both assets and liabilities because of the methodology applied)) is probably on the order of 10-15% of its replacement value. 
But Showa Shell used it, and now Idemitsu uses it, as a rented asset. Toa sells 90% of its output to Idemitsu, and generates electricity with much of the rest, which it sells to TEPCO. The business with Idemitsu is just a tolling charge. Idemitsu supplies crude, uses the refinery for a fee, then takes the product. If spreads are good, Idemitsu benefits. If spreads are low, Idemitsu effectively has the low-cost producer on tap at a low price. How is that tolling charge set? It's not clear. The arithmetic doesn't add up to arms' length or market pricing. The board of Toa is a couple of inexpert independents, a former customer (who is described as independent), one or two internal people, and four people from Idemitsu and Showa Shell. It would be surprising if it were NOT Idemitsu determining for Toa how much Toa was going to charge. Toa could, of course, negotiate fiercely. The CEO (a former Idemitsu man) who gets paid by the board (full of Idemitsu people) to rent its asset to Idemitsu at a rate which is completely uneconomic long-term and ignores the value built up over the years by shareholders. 
Today, after years of speculation, Idemitsu announced that it would launch a Tender Offer for Toa Oil to take out the minorities. It comes at ¥2450/share which is a 23% premium to last, a slight premium to book, a discount to the land value under the refinery, and a tiny fraction of the replacement value of the asset, but the "fair value" assessed by the independent valuation agent based on numbers supplied by the Target Company based on its contract with the parent company shows that the price is not too far off "fair", as long as the contract with its parent is fair, and one ignores what the real world value is.
The Tender Offer starts today and goes for 30 days. 
Because this was a clear situation of informational edge owned by the Acquiror, who controls the company and its board, in a highly technical industry, with highly-regulated processes and somewhat complex valuation methodologies, it would make total sense that the inexpert independent board members seek out expert help to value the complex asset in a complex business. Obviously, with the social demands of the Corporate Governance Code and last year's METI Fair M&amp;A Guidelines weighing heavily on the Toa directors, they would have ensured that they were extra careful to establish a fair process, including a market check, expert valuation, a majority of minority investor agreement, and separate advisors for the Special Committee. They would have gotten a fairness opinion.
Toa Oil minority shareholders, unfortunately, are left without any of that. 
There is a large foreign shareholder who has been buying who, given their buying activity, and their long-term average purchase price, is unlikely to be ecstatic with this price. But to see this get a bump, it probably needs more people getting upset.

When one looks upon the landscape of Japan's oil refineries - a delightful vista of 20th century industrialisation being left by the wayside in the move to EVs, solar power, "green" investment, etc, one small refinery stands out - the Keihin refinery of Toa Oil Co Ltd (5008 JP). 



Toa Oil's Keihin Refinery has a Nelson Complexity Index higher than any other refinery in Japan to my knowledge (the Nelson Complexity Index provides a measure of the ability of a refinery to process inputs into lighter product. The lighter the end product, the higher the complexity score on that particular line/output (crude goes into an atmospheric distillation process and comes out as several products which are subsequently treated by hydro- or merox treaters, subject to secondary distillation, or gas processing, then subject to FCC feeds, cokers, hydrocracking, isomerization, reformer stages, etc). The complexity score of a refinery is the weighted average complexity of its output lines. Toa Oil is in the very high teens whereas most major refiners just get to double digits or slightly above.
Generically, a refinery's Nelson Complexity Index/Score is a measure of the value of the refinery - both in cost terms and in terms of value-add. 
Toa Oil effectively sold itself to Showa Shell in 1979 then Showa Shell consolidated it in 2005 when activists were knocking on the door of cheap stocks and Toa placed shares with Showa Shell taking their ownership to 50.1%. Since then, Showa Shell (and now Idemitsu) has effectively used it as an outsourced capital asset. Huge sums were invested, and subsequently depreciated, and now the "book value" of the assets is effectively below 20% of the investment cost, and the book value of the refinery portion (not including the land or some of the financial assets related to the oil business in Japan (oil refining taxes stream through companies like this as both assets and liabilities because of the methodology applied)) is probably on the order of 10-15% of its replacement value. 
But Showa Shell used it, and now Idemitsu uses it, as a rented asset. Toa sells 90% of its output to Idemitsu, and generates electricity with much of the rest, which it sells to TEPCO. The business with Idemitsu is just a tolling charge. Idemitsu supplies crude, uses the refinery for a fee, then takes the product. If spreads are good, Idemitsu benefits. If spreads are low, Idemitsu effectively has the low-cost producer on tap at a low price. How is that tolling charge set? It's not clear. The arithmetic doesn't add up to arms' length or market pricing. The board of Toa is a couple of inexpert independents, a former customer (who is described as independent), one or two internal people, and four people from Idemitsu and Showa Shell. It would be surprising if it were NOT Idemitsu determining for Toa how much Toa was going to charge. Toa could, of course, negotiate fiercely. The CEO (a former Idemitsu man) who gets paid by the board (full of Idemitsu people) to rent its asset to Idemitsu at a rate which is completely uneconomic long-term and ignores the value built up over the years by shareholders. 
Today, after years of speculation, Idemitsu announced that it would launch a Tender Offer for Toa Oil to take out the minorities. It comes at ¥2450/share which is a 23% premium to last, a slight premium to book, a discount to the land value under the refinery, and a tiny fraction of the replacement value of the asset, but the "fair value" assessed by the independent valuation agent based on numbers supplied by the Target Company based on its contract with the parent company shows that the price is not too far off "fair", as long as the contract with its parent is fair, and one ignores what the real world value is.
The Tender Offer starts today and goes for 30 days. 
Because this was a clear situation of informational edge owned by the Acquiror, who controls the company and its board, in a highly technical industry, with highly-regulated processes and somewhat complex valuation methodologies, it would make total sense that the inexpert independent board members seek out expert help to value the complex asset in a complex business. Obviously, with the social demands of the Corporate Governance Code and last year's METI Fair M&amp;A Guidelines weighing heavily on the Toa directors, they would have ensured that they were extra careful to establish a fair process, including a market check, expert valuation, a majority of minority investor agreement, and separate advisors for the Special Committee. They would have gotten a fairness opinion.
Toa Oil minority shareholders, unfortunately, are left without any of that. 
There is a large foreign shareholder who has been buying who, given their buying activity, and their long-term average purchase price, is unlikely to be ecstatic with this price. But to see this get a bump, it probably needs more people getting upset. 

Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Improvements in Japan are leading broad developed int’l indexes higher. The MSCI EAFE, local currency is bullishly inflecting above its downtrend and putting an end to the YTD pattern of lower highs. Both the TOPIX and Nikkei 225 have continued to improve, and now the TOPIX Small index is also bullishly inflecting. We provide a technical appraisal of major global markets, and highlight a number of actionable stocks within Japan, and across international markets.

Improvements in Japan are leading broad developed int’l indexes higher. The MSCI EAFE, local currency is bullishly inflecting above its downtrend and putting an end to the YTD pattern of lower highs. Both the TOPIX and Nikkei 225 have continued to improve, and now the TOPIX Small index is also bullishly inflecting. We provide a technical appraisal of major global markets, and highlight a number of actionable stocks within Japan, and across international markets.

MSCI EAFE Inflecting, Aided by Strength in Japan

In July 2015, after 7 months of speculation that #2 Japanese refiner by sales <a href="https://www.smartkarma.com/entities/109" target="_blank" data-smartkarma-citation="entities:109:1">Idemitsu Kosan Co Ltd (5019 JP)</a> and #4 <a href="https://www.smartkarma.com/entities/108" target="_blank" data-smartkarma-citation="entities:108:1">Showa Shell Sekiyu Kk (5002 JP)</a> would join together, the two companies announced an MOU whereby Idemitsu would buy a 33% stake in Showa Shell from Royal Dutch Shell, and then would look to merge.Five months later in early December 2015, #1 Japanese refiner <a href="https://www.smartkarma.com/entities/638" target="_blank" data-smartkarma-citation="entities:638:1">JX Holdings Inc (5020 JP)</a> and #3-by-sales-#2-by-refining-capacity <a href="https://www.smartkarma.com/entities/20116" target="_blank" data-smartkarma-citation="entities:20116:1">Tonengeneral Sekiyu Kk (5012 JP)</a> announced an MOU to merge.…

In July 2015, after 7 months of speculation that #2 Japanese refiner by sales Idemitsu Kosan Co Ltd (5019 JP) and #4 Showa Shell Sekiyu Kk (5002 JP) would join together, the two companies announced an MOU whereby Idemitsu would buy a 33% stake in Showa Shell from Royal Dutch Shell, and then would look to merge.Five months later in early December 2015, #1 Japanese refiner JX Holdings Inc (5020 JP) and #3-by-sales-#2-by-refining-capacity Tonengeneral Sekiyu Kk (5012 JP) announced an MOU to merge.…

Japan Refiner Mergers:  Antitrust Approvals Grouped Together

Chart based progressive global trading strategies, Chart Partners

Thomas Schroeder

Chart based progressive global trading strategies

Chart Partners

Chart Partners objective is to discover medium-term cycle turns and profit opportunities before they unfold, within structural trends while preserving capital with clear degrees of risk. We have real return ideas. 

Markets are dynamic and trading systems must reflect this. It is crucial to determine underlying correlations and lead-lag relationships within global markets and the impact on linked instruments. Our weekly Chartonics product gives you short-term trading strategies that can be applied within the medium and longer term macro trends that are mapped out in our strategy updates. 

Our methodology fuses global market variables and isolates drivers in trends. We specialize in FX, index trade in NY and Asia with a focus on Asian stocks. 

Chartonics webcast Tuesday 22 March 2016 <div>Asia FX action</div>To view click on this link:  <a href="http://www.screencast.com/t/m9gF64uDp" target="_blank">http://www.screencast.com/t/m9gF64uDp</a> 5:15 min.We run through trade points in Asia FX.<div>
INR - Still short USD to 65.90, uptick is viewed as corrective and not a bad place to add to USD short.</div><div>
KRW - Our USD 1,175 short hit our trailing limit at 1,167 for a minor gain. We maintain our USD bearish call to 1,140 for those still holding the USD short. At 1,140-42 would be covering ST short and probing for a USD buy…</div>

Chartonics webcast Tuesday 22 March 2016 Asia FX actionTo view click on this link:  http://www.screencast.com/t/m9gF64uDp 5:15 min.We run through trade points in Asia FX.
INR - Still short USD to 65.90, uptick is viewed as corrective and not a bad place to add to USD short.
KRW - Our USD 1,175 short hit our trailing limit at 1,167 for a minor gain. We maintain our USD bearish call to 1,140 for those still holding the USD short. At 1,140-42 would be covering ST short and probing for a USD buy…

Japan

Fuji Oil Company Ltd a holding company which was established through the merger of Arabian Oil Co and Fuji Oil Co.  The Company operates mining and refining crude oil, natural gas, and minerals.  AOC Holding manages subsidiarieswhich produce and sell crude oil and coal products.

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Fuji Oil Co Ltd (5017 JP)

Toa Oil (5008) Tender Offer Update - Looks Bumpity.

The trade is still to be long Toa Oil. This looks bumpity. The right outcome is still to sell Toa to JXTG but barring that, the trade is to get...

Travis Lundy

Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)

Idemitsu is 90% of revs, 50% of the ownership of Toa Oil. The business is not conducted at an arms' length basis so value has been transferred. Now...

Travis Lundy

MSCI EAFE Inflecting, Aided by Strength in Japan

Improvements in Japan are leading broad developed int’l indexes higher. The MSCI EAFE, local currency is bullishly inflecting above its downtrend...

Vermilion Research

Japan Refiner Mergers: Antitrust Approvals Grouped Together

In July 2015, after 7 months of speculation that #2 Japanese refiner by sales Idemitsu Kosan Co Ltd (5019 JP) and #4 Showa Shell Sekiyu Kk (5002...

Travis Lundy

Asia FX Action Points

Chartonics webcast Tuesday 22 March 2016 Asia FX actionTo view click on this link: http://www.screencast.com/t/m9gF64uDp 5:15 min.We run through...

Thomas Schroeder

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