Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<ul>
<li>Stocks in the China Property Services industry have taken a beating over the last year on heightened regulatory fears, placements and potential stake sales by their large property developer holders.</li>
<li>The Hang Seng Property Service and Management Index (HSPSM) has underperformed the Hang Seng Mainland Property Index (HSMPI) over the last 3 months and there could be some recovery.</li>
<li>We take a look at some pair trades that could provide outperformance in the short-term with a lower level of risk.</li>
</ul>


Stocks in the China Property Services industry have taken a beating over the last year on heightened regulatory fears, placements and potential stake sales by their large property developer holders.
The Hang Seng Property Service and Management Index (HSPSM) has underperformed the Hang Seng Mainland Property Index (HSMPI) over the last 3 months and there could be some recovery.
We take a look at some pair trades that could provide outperformance in the short-term with a lower level of risk.


China Property Services: Pair Trades in a Beaten Down Industry

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.

Event-Driven

Sichuan Languang Justbon Service Group / Event-Driven

<p><a href="https://www.smartkarma.com/entities/sichuan-languang-justbon-service-group-co-ltd-h" target="_blank" data-smartkarma-citation="entities:28337:1" rel="noopener">Sichuan Languang Justbon Service Group (2606 HK)</a> has despatched the composite document in relation to <a href="https://www.smartkarma.com/entities/country-garden-services-holdings-company-limited" target="_blank" data-smartkarma-citation="entities:27343:1" rel="noopener">Country Garden Services Holdings (6098 HK)</a> base and enhanced offer. Currently, Country Garden owns 71.17% of the outstanding shares comprising 66.99% of the domestic shares and 71.20% of the H Shares. </p><p>The base offer is an unconditional mandatory cash offer for all the issued shares is HK$51.0571 per H-share (RMB42.8547 per domestic share. The enhanced share offer, which is payable only if the delisting is approved, is HK$54.3000 per H-share (RMB45.5768 per domestic share). </p><p>Unsurprisingly, the IFA considers the base and enhanced offer to be fair and reasonable. We broadly agree with the IFA analysis with the exception that the peer multiple comparisons could be improved. </p><p>The two key conditions for the delisting will be approval by at least 75% independent H-shareholders (&lt;10% of all independent H-shareholders rejection) and the satisfaction of the minimum acceptance condition (90% of H-shares held by independent H-shareholders). Satisfaction of the minimum acceptance condition is the key hurdle. We note the privatisation proposals for <a href="https://www.smartkarma.com/entities/beijing-jingneng-clean-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:16316:1" rel="noopener">Beijing Jingneng Clean Energy (579 HK)</a> and <a href="https://www.smartkarma.com/entities/harbin-electric-co-ltd-h" target="_blank" data-smartkarma-citation="entities:11116:1" rel="noopener">Harbin Electric Co Ltd H (1133 HK)</a> have previously failed due to the inability to meet the 90% minimum acceptance condition.  </p><div class="content-highlight"><p>Country Garden Services has bought itself some leeway by having the right to extend the closing date from 17 June to not later than 3 September. In theory, the extended time period should provide a greater chance of meeting the 90% threshold. At the last close, the gross spread to the enhanced offer price of HK$54.3000 stands at 4.9%.</p></div>

Sichuan Languang Justbon Service Group (2606 HK) has despatched the composite document in relation to Country Garden Services Holdings (6098 HK) base and enhanced offer. Currently, Country Garden owns 71.17% of the outstanding shares comprising 66.99% of the domestic shares and 71.20% of the H Shares. The base offer is an unconditional mandatory cash offer for all the issued shares is HK$51.0571 per H-share (RMB42.8547 per domestic share. The enhanced share offer, which is payable only if the delisting is approved, is HK$54.3000 per H-share (RMB45.5768 per domestic share). Unsurprisingly, the IFA considers the base and enhanced offer to be fair and reasonable. We broadly agree with the IFA analysis with the exception that the peer multiple comparisons could be improved. The two key conditions for the delisting will be approval by at least 75% independent H-shareholders (&lt;10% of all independent H-shareholders rejection) and the satisfaction of the minimum acceptance condition (90% of H-shares held by independent H-shareholders). Satisfaction of the minimum acceptance condition is the key hurdle. We note the privatisation proposals for Beijing Jingneng Clean Energy (579 HK) and Harbin Electric Co Ltd H (1133 HK) have previously failed due to the inability to meet the 90% minimum acceptance condition.  Country Garden Services has bought itself some leeway by having the right to extend the closing date from 17 June to not later than 3 September. In theory, the extended time period should provide a greater chance of meeting the 90% threshold. At the last close, the gross spread to the enhanced offer price of HK$54.3000 stands at 4.9%.

Languang Justbon’s Composite Document, IFA Opinion and Extended Closing Date

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

<p>Despite a much more mixed market environment, our weight-of-the-evidence approach continues to support a constructive intermediate-term outlook. The bottom line: there is little evidence that suggests a pullback would be anything more than a buying opportunity.</p>

Despite a much more mixed market environment, our weight-of-the-evidence approach continues to support a constructive intermediate-term outlook. The bottom line: there is little evidence that suggests a pullback would be anything more than a buying opportunity.

Defensives Are Worth A Look; Hang Seng, Shanghai Comp, Nikkei 225, STOXX 50 Support Levels Holding

<p><a href="https://www.smartkarma.com/entities/country-garden-services-holdings-company-limited" target="_blank" data-smartkarma-citation="entities:27343:1" rel="noopener">Country Garden Services Holdings (6098 HK)</a> has entered into agreements with three vendors to purchase a combined 71.17% of outstanding shares in <a href="https://www.smartkarma.com/entities/sichuan-languang-justbon-service-group-co-ltd-h" target="_blank" data-smartkarma-citation="entities:28337:1" rel="noopener">Sichuan Languang Justbon Service Group (2606 HK)</a> for RMB42.8546 (equivalent to HK$51.0569).</p><p>As a reminder on 25 February 2021, Languang Justbon announced that Languang Hejun, the controlling shareholder, entered a memorandum of understanding (MOU) with Country Garden Services to sell 115.1 million H shares (64.62% of the outstanding shares) at a price of RMB42.1105 per H share. On 11 March, the MOU was updated such that Languang Hejun will sell Country Garden Services 0.75 million domestic shares (0.42% of the outstanding shares) in addition to the previously agreed 115.1 million H shares (64.62% of the outstanding shares). The acquisition price was modestly bumped 1.8% from RMB42.1105 per H share to RMB42.8546 per H share or per domestic share. </p><p>On completion of the agreements, Country Garden Services will be required to make an unconditional mandatory cash offer under Rule 26.1 of the Takeovers Code. The unconditional mandatory cash offer (base offer) for all the issued shares is HK$51.0571 per H-share (RMB42.8547 per domestic share). Notably, Country Garden Services proposes to delist Languang Justbon by offering an enhanced cash offer of HK$54.3000 per H-share (RMB45.5768 per domestic share). The enhanced share offer, which is payable only if the delisting is approved, is a 3.6% premium to the last close of HK$52.40 and a 39.41% premium to the unaffected price of HK$38.95 (22 February 2021 prior to the first trading halt). </p><div class="content-highlight"><p>The two key conditions for the delisting will be approval by at least 75% independent H-shareholders (&lt;10% of all independent H-shareholders rejection) and the satisfaction of the minimum acceptance condition (90% of H-shares held by independent H-shareholders). Independent H-shareholders shareholders represent 51.0 million shares which are 28.62% of outstanding shares. Consequently, the 10% blocking stake is 5.1 million shares which is 2.86% of the outstanding shares. Overall, as we think that the enhanced offer price is reasonable, the delisting proposal will likely succeed. </p></div>

Country Garden Services Holdings (6098 HK) has entered into agreements with three vendors to purchase a combined 71.17% of outstanding shares in Sichuan Languang Justbon Service Group (2606 HK) for RMB42.8546 (equivalent to HK$51.0569).As a reminder on 25 February 2021, Languang Justbon announced that Languang Hejun, the controlling shareholder, entered a memorandum of understanding (MOU) with Country Garden Services to sell 115.1 million H shares (64.62% of the outstanding shares) at a price of RMB42.1105 per H share. On 11 March, the MOU was updated such that Languang Hejun will sell Country Garden Services 0.75 million domestic shares (0.42% of the outstanding shares) in addition to the previously agreed 115.1 million H shares (64.62% of the outstanding shares). The acquisition price was modestly bumped 1.8% from RMB42.1105 per H share to RMB42.8546 per H share or per domestic share. On completion of the agreements, Country Garden Services will be required to make an unconditional mandatory cash offer under Rule 26.1 of the Takeovers Code. The unconditional mandatory cash offer (base offer) for all the issued shares is HK$51.0571 per H-share (RMB42.8547 per domestic share). Notably, Country Garden Services proposes to delist Languang Justbon by offering an enhanced cash offer of HK$54.3000 per H-share (RMB45.5768 per domestic share). The enhanced share offer, which is payable only if the delisting is approved, is a 3.6% premium to the last close of HK$52.40 and a 39.41% premium to the unaffected price of HK$38.95 (22 February 2021 prior to the first trading halt). The two key conditions for the delisting will be approval by at least 75% independent H-shareholders (&lt;10% of all independent H-shareholders rejection) and the satisfaction of the minimum acceptance condition (90% of H-shares held by independent H-shareholders). Independent H-shareholders shareholders represent 51.0 million shares which are 28.62% of outstanding shares. Consequently, the 10% blocking stake is 5.1 million shares which is 2.86% of the outstanding shares. Overall, as we think that the enhanced offer price is reasonable, the delisting proposal will likely succeed. 

Languang Justbon’s Mandatory Offer and Voluntary Delisting Proposal from Country Garden Services

Equity Capital Markets

Evergrande Property Services / Equity Capital Markets

<div>
<p><a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Services (EGS HK)</a> is a Chinese property management provider. Evergrande ranked fourth in GFA under management, among the Top 100 property management companies in China in 2019, according to CIA. The controlling shareholder is <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a>.</p>
<p>At the proposed IPO price range of HK$8.50-9.75 per share, Evergrande will have a market cap of HK$91,891.9-105,405.4 million ($11.9-13.6 billion). At the mid-point of the IPO price range, the total proceeds are HK$14,797 million ($1.9 billion) which is equally split between a primary and secondary raise. The selling shareholder is CEG Holdings, which is owned by China Evergrande Group. </p>
</div><div><p>21 cornerstone investors will subscribe for HK$7,207.9 million worth of the offer shares (48.68% of the offer shares at the IPO mid-point). The cornerstone investors are mostly "friends-and-family" accounts and over half have business ties with Evergrande Group. </p></div><div><div><div class="content-highlight"><p>In <a href="https://www.smartkarma.com/insights/evergrande-property-services-ipo-initiation-standing-out" target="_blank" data-smartkarma-citation="insights:45554" rel="noopener">Evergrande Property Services IPO Initiation: Standing Out</a>, we stated that Evergrande’s fundamentals are strong. Our valuation analysis suggests that the IPO price range is attractive. </p></div></div></div>


Evergrande Services (EGS HK) is a Chinese property management provider. Evergrande ranked fourth in GFA under management, among the Top 100 property management companies in China in 2019, according to CIA. The controlling shareholder is Evergrande Real Estate Group (3333 HK).
At the proposed IPO price range of HK$8.50-9.75 per share, Evergrande will have a market cap of HK$91,891.9-105,405.4 million ($11.9-13.6 billion). At the mid-point of the IPO price range, the total proceeds are HK$14,797 million ($1.9 billion) which is equally split between a primary and secondary raise. The selling shareholder is CEG Holdings, which is owned by China Evergrande Group. 
21 cornerstone investors will subscribe for HK$7,207.9 million worth of the offer shares (48.68% of the offer shares at the IPO mid-point). The cornerstone investors are mostly "friends-and-family" accounts and over half have business ties with Evergrande Group. In Evergrande Property Services IPO Initiation: Standing Out, we stated that Evergrande’s fundamentals are strong. Our valuation analysis suggests that the IPO price range is attractive. 

Evergrande Property Services IPO: Valuation Insights

China

Jihua Group Corporation Limited manufactures munitions for the People's Liberation Army and the People's Armed Police Porce.  The Company's products include uniforms, footwear, and protective tools.

Tianjin Capital Environmental Protection Group Company Limited, through its subsidiaries, processes sewage water and constructs sewage water processing plants.  The Company also operates road and toll stations in Tianjin.

Zhongyuan Environment Protection Co., Ltd. manufactures and markets grinding tools, including coated abrasive tools and fixed grinding tools. The Company also produces yeast and supplies heaters.

Eternal Asia Supply Chain Management Ltd. offers supply chain outsourcing services.  The Company offers logistics, operation, settlement, information system, and data processing services.

Beijing GeoEnviron Engineering & Technology, Inc. focuses on environmental technology research and general pollution control solutions. The Company provides custom and integrated services including design, consulting, construction, supply and installation of material and projects management.

Focused Photonics Hangzhou Incorporation develops, produces and sells instrumentations for environmental monitoring, industrial process analysis and safety monitoring.  The Company's main products are environmental monitoring systems, digital environmental protection information systems, industrial process analysis systems and security monitoring systems.

Zhejiang Henglin Chair Industry CO., LTD. designs and manufactures furniture products. The Company produces office, massage, and elderly chairs, as well as functional sofa products. Zhejiang Henglin Chair Industry markets its products worldwide.

Hongbo Co., Ltd. provides commercial printing, marketing and designing services. The company primarily prints commercial papers, lottery tick ets and various receipts.

Bestsun Energy Co., Ltd is a natural gas distributor. The Company invests in natural gas pipelines, liquefied natural gas, and natural gas vehicle fillings stations. Bestsun also provides gas appliances, installations, and maintenances.

Beijing Originwater Technology Co., Ltd. provides sewage treatment and sewage facility development services.  The Company's services include sewage treatment plant construction and design, equipment integration solution, and technical support services.

Beijing Originwater Technology Co,Ltd. (300070 CH)

S1 Corporation provides security systems services.  The Company installs, maintains, and sells a variety of security systems used in households, businesses, financial institutions, and automobiles.  S1 also provides guarding services, systems integration services, structural safety diagnosis services.

OKAMURA CORPORATION manufactures office furniture including desks, chairs, and shelves.  The Company offers comprehensive office systems such as partition walls with built-in air conditioners and underfloor wiring systems.  Okamura also develops material handling equipment and industrial machinery.

Steelcase Inc. designs and manufactures products used to create high performance work environments.  The Company's products include office furniture, furniture systems, interior architectural products, technology products, seating, and related products and services.  Steelcase has operations in various countries.

KEPCO Plant Service & Engineering Co., Ltd. provides maintenance services for power plants and industrial plants.  The Company's main service areas are turbine maintenance, generator and motor maintenance, pump maintenance, and boiler maintenance.

Kepco Plant Service & Engineering (051600 KS)

Montrose Environmental Group, Inc. operates as an environmental company. The Company offers air quality and environmental laboratory services. Montrose Environmental Group serves to the landfills, electric utilities, water treatment facilities, municipalities, and corporations worldwide.

CoreCivic, Inc. provides detention and corrections services to governmental agencies. The Company designs, constructs, owns, manages, and renovates jails, prisons, government agencies, and inmate transportation companies. CoreCivic operates throughout the United States.

PILOT CORPORATION is a holding company established through the merger of Pilot and its affiliates, Pilot Ink and Pilot Precision.  Pilot Corp manages its subsidiaries' operation which manufactures and sells stationary products.

AEON DELIGHT CO., LTD. is a building maintenance company.  The Company provides services such as cleaning, security, and equipment management for buildings.

Pitney Bowes Inc. sells and finances, rents, and services integrated mail and document management systems.  The Company offers a full suite of equipment, supplies, software and services for end-to-end mailstream solutions.

DUSKIN CO., LTD. sells and leases cleaning equipment and commodity. The Company operates food franchise chain as well.

Greentown Service Group Co. Ltd. is a property management service provider. The Company provides property management services for high-end residential property, property consulting services, and community value-added services.

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Greentown Service Group (2869 HK)

China Property Services: Pair Trades in a Beaten Down Industry

Stocks from the China Property Management industry have been beaten down over the last year on increased regulation and potential stake sales by...

Brian Freitas

Languang Justbon’s Composite Document, IFA Opinion and Extended Closing Date

Satisfaction of the minimum acceptance condition is the key hurdle. At the last close, the gross spread to the enhanced offer price of HK$54.3000...

Arun George

Defensives Are Worth A Look; Hang Seng, Shanghai Comp, Nikkei 225, STOXX 50 Support Levels Holding

A review of major global indexes reveals an absence of major breakdowns. We highlight opportunities within defensive Sectors (Real Estate, Consumer...

Vermilion Research

Languang Justbon’s Mandatory Offer and Voluntary Delisting Proposal from Country Garden Services

CGS has announced a voluntary delisting proposal at HK$54.3000 per H-share subject to shareholder approval and min acceptance conditions. We think...

Arun George

Evergrande Property Services IPO: Valuation Insights

Evergrande has launched its IPO to raise total proceeds of $1.9 billion at the mid-point. Our valuation analysis suggests that the IPO price range...

Arun George

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