Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>In the annals of foreign buyers of Japanese tourism-related real estate assets, there have been a few good examples, and several disasters. Yesterday, we got a new suitor for assets. </li>
<li>Fortress SPV Ontario GK will attempt to buy out Fukushima-based <a href="https://www.smartkarma.com/entities/joban-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:2826:1" rel="noopener">Joban Kosan (9675 JP)</a> through a double Tender Offer. </li>
<li>There is a history here of a bump on an MBO on an associated company. That may have caused it to trade at a premium on Day 1. It's unrelated.</li>
</ul>


In the annals of foreign buyers of Japanese tourism-related real estate assets, there have been a few good examples, and several disasters. Yesterday, we got a new suitor for assets. 
Fortress SPV Ontario GK will attempt to buy out Fukushima-based Joban Kosan (9675 JP) through a double Tender Offer. 
There is a history here of a bump on an MBO on an associated company. That may have caused it to trade at a premium on Day 1. It's unrelated.


Joban Kosan (9675) - Fortress Buys Out a Fukushima Tourism Asset

David Blennerhassett

<ul>
<li>
<a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd-d7b798e2-202d-4e01-9a1e-799e2ae8f0c7" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group Holding (9988 HK)</a> was (finally) included in the Shanghai/Shenzhen-HK Connect programs; on the same day a Cayman court uplifted a BABA dissenter's merger price by 659%.</li>
<li>MBK has teamed up with <a href="https://www.smartkarma.com/entities/young-poong-corporation" target="_blank" data-smartkarma-citation="entities:11740:1" rel="noopener">Young Poong (000670 KS)</a> to secure control of <a href="https://www.smartkarma.com/entities/korea-zinc-co-ltd" target="_blank" data-smartkarma-citation="entities:17944:1" rel="noopener">Korea Zinc (010130 KS)</a> via Partial Tender Offers for Korea Zinc and <a href="https://www.smartkarma.com/entities/young-poong-precision-corp" target="_blank" data-smartkarma-citation="entities:16188:1" rel="noopener">Young Poong Precision (036560 KS)</a>
</li>
<li>Like all long-dated arbs, <a href="https://www.smartkarma.com/entities/shinko-electric-industries" target="_blank" data-smartkarma-citation="entities:15066:1" rel="noopener">Shinko Electric (6967 JP)</a> is really about buying dips, then lightening up when it gets tighter, as long as the opinion about eventual result/path is unchanged.</li>
</ul>



Alibaba Group Holding (9988 HK) was (finally) included in the Shanghai/Shenzhen-HK Connect programs; on the same day a Cayman court uplifted a BABA dissenter's merger price by 659%.
MBK has teamed up with Young Poong (000670 KS) to secure control of Korea Zinc (010130 KS) via Partial Tender Offers for Korea Zinc and Young Poong Precision (036560 KS)

Like all long-dated arbs, Shinko Electric (6967 JP) is really about buying dips, then lightening up when it gets tighter, as long as the opinion about eventual result/path is unchanged.


Last Week in Event SPACE: Alibaba, Young Poong/Korea Zinc, Shinko Electric, Guotai Junan/Haitong Sec

<ul>
<li>I tally 40 - mostly firm, mostly Asia-Pac - transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.</li>
<li>Six new deals: <a href="https://www.smartkarma.com/entities/hotel-property-investments" target="_blank" data-smartkarma-citation="entities:9850:1" rel="noopener">Hotel Property (HPI AU)</a>, <a href="https://www.smartkarma.com/entities/guotai-junan-international" target="_blank" data-smartkarma-citation="entities:13438:1" rel="noopener">Guotai (1788 HK)</a>/<a href="https://www.smartkarma.com/entities/haitong-securities-co-ltd-h" target="_blank" data-smartkarma-citation="entities:5665:1" rel="noopener">Haitong  (6837 HK)</a>, <a href="https://www.smartkarma.com/entities/joban-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:2826:1" rel="noopener">Joban Kosan (9675 JP)</a>, <a href="https://www.smartkarma.com/entities/dyna-mac-holdings-ltd" target="_blank" data-smartkarma-citation="entities:16153:1" rel="noopener">Dyna Mac (DMHL SP)</a>, <a href="https://www.smartkarma.com/entities/korea-zinc-co-ltd" target="_blank" data-smartkarma-citation="entities:17944:1" rel="noopener">Korea Zinc (010130 KS)</a>/<a href="https://www.smartkarma.com/entities/young-poong-precision-corp" target="_blank" data-smartkarma-citation="entities:16188:1" rel="noopener">Young Poong Precision (036560 KS)</a>, <a href="https://www.smartkarma.com/entities/hulic-co-ltd" target="_blank" data-smartkarma-citation="entities:388:1" rel="noopener">Hulic (3003 JP)</a>.</li>
<li>Key updates took place on <a href="https://www.smartkarma.com/entities/namoi-cotton-co-operative" target="_blank" data-smartkarma-citation="entities:10711:1" rel="noopener">Namoi Cotton Co Operative (NAM AU)</a>, <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a>, <a href="https://www.smartkarma.com/entities/fuji-soft-inc" target="_blank" data-smartkarma-citation="entities:17504:1" rel="noopener">Fuji Soft (9749 JP)</a>, <a href="https://www.smartkarma.com/entities/descente-ltd" target="_blank" data-smartkarma-citation="entities:8225:1" rel="noopener">Descente (8114 JP)</a>, &amp; <a href="https://www.smartkarma.com/entities/silverlake-axis-ltd" target="_blank" data-smartkarma-citation="entities:14150:1" rel="noopener">Silverlake Axis (SILV SP)</a>.</li>
</ul>


I tally 40 - mostly firm, mostly Asia-Pac - transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
Six new deals: Hotel Property (HPI AU), Guotai (1788 HK)/Haitong  (6837 HK), Joban Kosan (9675 JP), Dyna Mac (DMHL SP), Korea Zinc (010130 KS)/Young Poong Precision (036560 KS), Hulic (3003 JP).
Key updates took place on Namoi Cotton Co Operative (NAM AU), Seven &amp; I Holdings (3382 JP), Fuji Soft (9749 JP), Descente (8114 JP), &amp; Silverlake Axis (SILV SP).


(Mostly) Asia-Pac M&A: Seven & I, Hotel Property, Hulic, Joban Kosan, Dyna Mac, Fuji Soft, Descente

<a href="https://www.smartkarma.com/entities/joban-kaihatsu-co-ltd" target="_blank" data-smartkarma-citation="entities:14588:1" rel="noopener">Joban Kaihatsu (1782 JP)</a> is a small cap construction/development company based in Fukushima which has run about US$150mm of revenue per year for the last five years, with semi-large <a href="http://www.jobankaihatsu.co.jp/work/building/results.html" target="_blank" rel="noopener">public and private construction projects</a> in and around Iwaki-City. They also do medium-scale public works projects in the area, including highways, bridges/overpasses, riverbeds, tunnels, slope management, etc. They also do environmental analysis. A lot of their work appears to be public sector work. It is all-in-all a decent little contracting business with it appears, good OP Margin and Net Profit Margin on relatively little in the way of hard assets. For the last five years, they have averaged net profit of about ¥1.2bn a year. A week ago, it was announced that Chairman Sagawa had proposed a Management Buyout at ¥7800/share and the Board had decided to accept and support the buyout. Like most MBOs, the goal is to "streamline management" and "create a system not bound by short-term results" and to promote "drastic structural reforms."Most MBOs involve existing owners with significant stakes trying to get rid of meddlesome minorities.  This one involves Mr Sagawa, who owns 0.5% of shares out and has launched the bid, and the number one shareholder <a href="https://www.smartkarma.com/entities/joban-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:2826:1" rel="noopener">Joban Kosan (9675 JP)</a> (note the similarity of the name) which owns 12.8% and who has agreed to tender. Mr. Sagawa will own 90% and a director, Mr. Shinohara, will also stay on in management and will own 10%. <div class="content-highlight">
That is a little unusual.
What is MORE unusual is that the Tender Offer Price values the entire company at ¥6.115bn while the company has a portfolio of net cash + securities of ¥7.00bn as of end-September.*
¥7bn of net cash + securities comes to ¥8,933/share. 
Tangible Book Value Per Share is ¥12,233.
</div><div class="content-remarks">*All other Current Assets against all other liabilities comes out to be -¥300mm. The other LT Assets are an additional ¥2.5bn.</div>The company's recent 5-year history has seen an average of ¥16.4bn of revenue a year and roughly ¥1.84bn a year in OP - about 11% OP Margins. Despite the promised worsening revenue outlook, the management forecast used to calculate fair value is to see every year in the next six with revenue a minimumof ¥1bn higher than the average of the last five years. Operating Profit, however, is scheduled to average 66% lower than the average of the past five years.Nonetheless, despite margins dropping by 70% to 3.5% - lower than any SINGLE year since 2012, there is still positive value there and positive free cashflow. Unfortunately, the "Independent Financial Advisor" looked at the DCF of this company with ¥8,933/share of net cash+securities and decided that the DCF value of the Company ranged from ¥7,149 to ¥8,520/share. They compared the company to four similar-sized construction and civil engineering companies (Tokura Corp, Moriya Corporation, Kaneshita Construction, and Sata Construction) to come up with a "similar company comparison method" which suggested a share price valuation of ¥6,812 - 8,458/share. What the explanation does not tell you is that every single one of those four companies ALSO trades at a negative Enterprise Value when counting net cash + financial investments. Every single one. <div class="content-highlight">
In effect, the Chairman is trying to buy the company at a discount to net cash + securities and take away the other net assets and the somewhat long-dated and visible cashflow for free.
And after reviewing the numbers the Board agreed (after getting the bidder to raise his bid four times from the original bid of ¥7,200/share).
There was zero effort to find a competing bid (it is not as if the Chairman with 0.5% was going to block) or obtain more value by selling securities and dividending out cash. 
This is too small a situation for most people to care. It is almost comically illiquid for a tiny-cap with relatively high float. But it matters. Every situation that gets pushed through like this cements precedent that says it is OK to abuse shareholders.
</div><div>As I suggested in <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" data-smartkarma-citation="insights:41191" rel="noopener">Japan Needs More Cowbell</a>...</div><div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/172/725/original/image?1605806166" class="editor-image img-responsive" data-smartkarma-image-id="172725"></figure></div><div><div>

Independent shareholders need to speak up. If you do not, you tacitly approve.
More below the fold.
</div></div>

Joban Kaihatsu (1782 JP) is a small cap construction/development company based in Fukushima which has run about US$150mm of revenue per year for the last five years, with semi-large public and private construction projects in and around Iwaki-City. They also do medium-scale public works projects in the area, including highways, bridges/overpasses, riverbeds, tunnels, slope management, etc. They also do environmental analysis. A lot of their work appears to be public sector work. It is all-in-all a decent little contracting business with it appears, good OP Margin and Net Profit Margin on relatively little in the way of hard assets. For the last five years, they have averaged net profit of about ¥1.2bn a year. A week ago, it was announced that Chairman Sagawa had proposed a Management Buyout at ¥7800/share and the Board had decided to accept and support the buyout. Like most MBOs, the goal is to "streamline management" and "create a system not bound by short-term results" and to promote "drastic structural reforms."Most MBOs involve existing owners with significant stakes trying to get rid of meddlesome minorities.  This one involves Mr Sagawa, who owns 0.5% of shares out and has launched the bid, and the number one shareholder Joban Kosan (9675 JP) (note the similarity of the name) which owns 12.8% and who has agreed to tender. Mr. Sagawa will own 90% and a director, Mr. Shinohara, will also stay on in management and will own 10%. 
That is a little unusual.
What is MORE unusual is that the Tender Offer Price values the entire company at ¥6.115bn while the company has a portfolio of net cash + securities of ¥7.00bn as of end-September.*
¥7bn of net cash + securities comes to ¥8,933/share. 
Tangible Book Value Per Share is ¥12,233.
*All other Current Assets against all other liabilities comes out to be -¥300mm. The other LT Assets are an additional ¥2.5bn.The company's recent 5-year history has seen an average of ¥16.4bn of revenue a year and roughly ¥1.84bn a year in OP - about 11% OP Margins. Despite the promised worsening revenue outlook, the management forecast used to calculate fair value is to see every year in the next six with revenue a minimumof ¥1bn higher than the average of the last five years. Operating Profit, however, is scheduled to average 66% lower than the average of the past five years.Nonetheless, despite margins dropping by 70% to 3.5% - lower than any SINGLE year since 2012, there is still positive value there and positive free cashflow. Unfortunately, the "Independent Financial Advisor" looked at the DCF of this company with ¥8,933/share of net cash+securities and decided that the DCF value of the Company ranged from ¥7,149 to ¥8,520/share. They compared the company to four similar-sized construction and civil engineering companies (Tokura Corp, Moriya Corporation, Kaneshita Construction, and Sata Construction) to come up with a "similar company comparison method" which suggested a share price valuation of ¥6,812 - 8,458/share. What the explanation does not tell you is that every single one of those four companies ALSO trades at a negative Enterprise Value when counting net cash + financial investments. Every single one. 
In effect, the Chairman is trying to buy the company at a discount to net cash + securities and take away the other net assets and the somewhat long-dated and visible cashflow for free.
And after reviewing the numbers the Board agreed (after getting the bidder to raise his bid four times from the original bid of ¥7,200/share).
There was zero effort to find a competing bid (it is not as if the Chairman with 0.5% was going to block) or obtain more value by selling securities and dividending out cash. 
This is too small a situation for most people to care. It is almost comically illiquid for a tiny-cap with relatively high float. But it matters. Every situation that gets pushed through like this cements precedent that says it is OK to abuse shareholders.
As I suggested in Japan Needs More Cowbell...

Independent shareholders need to speak up. If you do not, you tacitly approve.
More below the fold.


SmallCap Joban Kaihatsu Founder Tries a Free MBO

Japan

Joban Kosan Co., Ltd. operates resort facilities such as amusement park, hotels, and golf courses.  The Company also manufactures industrial wrapping materials, and undertakes various types of engineering works.

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Joban Kosan (9675 JP)

Joban Kosan (9675) - Fortress Buys Out a Fukushima Tourism Asset

Fortress is buying out a hotel/tourism asset with a bunch of odds and ends attached, at probably too-low a price. Book is overly depreciated....

Travis Lundy

Last Week in Event SPACE: Alibaba, Young Poong/Korea Zinc, Shinko Electric, Guotai Junan/Haitong Sec

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

(Mostly) Asia-Pac M&A: Seven & I, Hotel Property, Hulic, Joban Kosan, Dyna Mac, Fuji Soft, Descente

This insight provides a summary of gross/annualised spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and...

David Blennerhassett

SmallCap Joban Kaihatsu Founder Tries a Free MBO

The MBO proposed by the Chairman of long-standing Fukushima local public works contractor Joban Kaihatsu (1782) comes at a level below the value of...

Travis Lundy

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