Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Archegos Charges Higher, 1Q21 Results Reduce Capital Raise Risk: The immediate financial impact from Archegos is larger than expected (USD 4.7 bn). The combination of stellar 1Q21 results plus the decision to manage 1H21 capital charges has allowed Credit Suisse Group (CSGN.VX) [Credit Suisse] to preserve its a 2020 dividend. Fortunately, the big profit beat has cushioned the blow from poor risk management allowing CET1 to remain above 12%. The fear of an equity capital raise seems to have abated for the moment; and *Outclassed By US Counterparts: Goldman Sachs &amp; Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse which didn’t have close to the full Archegos picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos.

*Archegos Charges Higher, 1Q21 Results Reduce Capital Raise Risk: The immediate financial impact from Archegos is larger than expected (USD 4.7 bn). The combination of stellar 1Q21 results plus the decision to manage 1H21 capital charges has allowed Credit Suisse Group (CSGN.VX) [Credit Suisse] to preserve its a 2020 dividend. Fortunately, the big profit beat has cushioned the blow from poor risk management allowing CET1 to remain above 12%. The fear of an equity capital raise seems to have abated for the moment; and *Outclassed By US Counterparts: Goldman Sachs &amp; Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse which didn’t have close to the full Archegos picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos.

*Taking It On The Chin…Again:Having finally seen enough of this feckless global investment bank, S&amp;P Global Ratings has finally come around (took you long enough) and downgraded its outlook on all Credit Suisse entities to negative from stable. Putting S&amp;P over the edge was Credit Suisse’ exposure to Archegos Capital Management (Archegos) share liquidation as a result of margin calls whereby the bank is amongst the most exposed;  and*Ratings Agency Concerns: While Credit Suisse seems to be in competition with Deutsche Bank (DBK.GY) as the world’s most poorly managed bank, we find it incredulous that its actually S&amp;P calling out Credit Suisse for risk management. There are too many market participants have very little discipline, and to make matters worse, central banks have been all too happy to remove the moral hazard involved with excessive risk taking. In our view, the credit ratings agency model is permanently broken as waterfall risks in various corporates, rated pools and tranches have become increasingly significant with the markets unable to self-regulate and regulators either unable to regulate (or told not to regulate).

*Taking It On The Chin…Again:Having finally seen enough of this feckless global investment bank, S&amp;P Global Ratings has finally come around (took you long enough) and downgraded its outlook on all Credit Suisse entities to negative from stable. Putting S&amp;P over the edge was Credit Suisse’ exposure to Archegos Capital Management (Archegos) share liquidation as a result of margin calls whereby the bank is amongst the most exposed;  and*Ratings Agency Concerns: While Credit Suisse seems to be in competition with Deutsche Bank (DBK.GY) as the world’s most poorly managed bank, we find it incredulous that its actually S&amp;P calling out Credit Suisse for risk management. There are too many market participants have very little discipline, and to make matters worse, central banks have been all too happy to remove the moral hazard involved with excessive risk taking. In our view, the credit ratings agency model is permanently broken as waterfall risks in various corporates, rated pools and tranches have become increasingly significant with the markets unable to self-regulate and regulators either unable to regulate (or told not to regulate). 

Credit Suisse Group – Hit Parade Continues

*Bankrupt: On February 5, 2021, Luckin filed for Chapter 15 bankruptcy protection - less than a year after Luckin’s admission that its former COO, Jian Liu, “had engaged in certain misconduct, including fabricating certain transactions" beginning in 2019 amounting to about USD 310 mn ahead of its IPO; and*Will CAR Crash Next?: In addition to the common ownership of Luckin Coffee and CAR, Inc. (699.HK), and common former senior company officer problem, we also note that Ernst &amp; Young in mainland China audits both Luckin Coffee and CAR, Inc. That in and of itself does not suggest there is a problem, but the commonality does raise eyebrows. While we are not suggesting that there is a problem with CAR Inc., there are areas where we see where the investment community could challenge CAR Inc. and seek a re-audit for CAR between 2008-18.

*Bankrupt: On February 5, 2021, Luckin filed for Chapter 15 bankruptcy protection - less than a year after Luckin’s admission that its former COO, Jian Liu, “had engaged in certain misconduct, including fabricating certain transactions" beginning in 2019 amounting to about USD 310 mn ahead of its IPO; and*Will CAR Crash Next?: In addition to the common ownership of Luckin Coffee and CAR, Inc. (699.HK), and common former senior company officer problem, we also note that Ernst &amp; Young in mainland China audits both Luckin Coffee and CAR, Inc. That in and of itself does not suggest there is a problem, but the commonality does raise eyebrows. While we are not suggesting that there is a problem with CAR Inc., there are areas where we see where the investment community could challenge CAR Inc. and seek a re-audit for CAR between 2008-18. 

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<div>
Following the <a href="https://www.smartkarma.com/entities/luckin-coffee-inc" target="_blank" data-smartkarma-citation="entities:28046:1" rel="noopener">Luckin Coffee (LK US)</a> debacle and the ensuing fallout (discussed in <a href="https://skr.ma/p7ikw" target="_blank" rel="noopener">Car Inc (699 HK) - Needs A Hire Purpose</a> and <a href="https://skr.ma/4TZfG" target="_blank" rel="noopener">Car Inc (699 HK): MBK's Firm Offer</a>), on the 13 November MBK <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1113/2020111301538.pdf" target="_blank" rel="noopener">tabled</a> a pre-conditional general cash Offer of $4.00/share for <a href="https://www.smartkarma.com/entities/car-inc" target="_blank" data-smartkarma-citation="entities:942:1" rel="noopener">Car Inc (699 HK)</a>, a 17.99% premium to last close.  
A truncated summary of the announcements below brings you up to date.:
</div>
<div>
<div>
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 115.258px;">
<h3>Date</h3>
</td>
<td style="width: 588.274px;">
<h3>Data in the Date</h3>
</td>
</tr>
<tr>
<td style="width: 115.258px;">9-Apr-20</td>
<td style="width: 588.274px;">Car's largest shareholder, <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0409/2020040900021.pdf" target="_blank" rel="noopener">sold</a> 44.666mn shares, or 2.11% of shares out, on the day Car's shares collapsed. NOT a good look. UCAR held ~27.65% of shares out in Car after the sale. Lu is the controller of UCAR with a 39.94% stake. UCAR <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0512/2020051201219.pdf" target="_blank" rel="noopener">sold</a> a further 100k shares (0.0047% of shares out) on the 11 May, and <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0623/2020062301508.pdf" target="_blank" rel="noopener">7.085mn</a> shares (0.33%) between the 12 May and 22 June.</td>
</tr>
<tr>
<td style="width: 115.258px;">16-Apr-20</td>
<td style="width: 588.274px;">
Amber Gem <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0416/2020041601733.pdf" target="_blank" rel="noopener">entered</a> into a SPA with UCAR to acquire 98.6mn shares (4.65% of shares out - known as the first tranche) from UCAR at HK$2.30/share; and 264.08mn shares (12.46% of shares out - the second tranche) at HK$3.40/share. This works out to an average price of $3.10/share.

At the time of the SPA, Amber Gem held 10.11%. According to the <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0401/2020040101309.pdf" target="_blank" rel="noopener">2019 annual report</a> (page 49), Warburg Pincus holds a 60.47% stake in Amber Gem. 
</td>
</tr>
<tr>
<td style="width: 115.258px;">1-Jun-20</td>
<td style="width: 588.274px;">
Car <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0601/2020060100013.pdf" target="_blank" rel="noopener">announced</a> Amber Gem and UCAR had terminated their second tranche. The first tranche <a href="https://di.hkex.com.hk/di/NSNoticePersonList.aspx?sa2=np&amp;scpid1=69816&amp;scpid3=0&amp;scpid2=109421&amp;sa1=pl&amp;scsd=21%2f07%2f2019&amp;sced=21%2f07%2f2020&amp;pn=Amber+Gem&amp;src=MAIN&amp;lang=EN&amp;" target="_blank" rel="noopener">appears</a> to have been completed on the 30 May, lifting Amber Gem's stake to 14.76%.

Separately  UCAR and BAIC Group <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0601/2020060100013.pdf" target="_blank" rel="noopener">entered</a> into a non-legally binding strategic cooperation agreement, such that BAIC would acquire 450.79mn shares in Car, or 21.26% of shares out, from UCAR.
</td>
</tr>
<tr>
<td style="width: 115.258px;">9-Jun-20</td>
<td style="width: 588.274px;">Lu <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0610/2020061000043.pdf" target="_blank" rel="noopener">resigned</a> as Chairman and NED, with effect from June 9 (i.e. immediate).</td>
</tr>
<tr>
<td style="width: 115.258px;">2-Jul-20</td>
<td style="width: 588.274px;">
Car announced UCAR had entered into an offer letter with <a href="https://www.smartkarma.com/entities/saic-motor-corp-ltd-a" target="_blank" data-smartkarma-citation="entities:20833:1" rel="noopener">SAIC Motor (600104 CH)</a> such that SAIC will acquire UCAR's 20.87% stake in Car at HK$3.10.

Separately, SAIC entered into an offer letter with Amber Gem to acquire an 8.05% stake in Car, also at HK$3.10/share.  The completion of these Offer letters would result in SAIC holding 28.92%, below the 30% mandatory general offer threshold.
</td>
</tr>
<tr>
<td style="width: 115.258px;">20-Jul-20</td>
<td style="width: 588.274px;">
Car announced that UCAR has terminated its agreement with SAIC; and that UCAR had now entered into a SPA with Jinggangshan BAIC to acquire its 20.87% stake in Car at HK$3.10/share. Jinggangshan BAIC also signed an offer letter with Amber Gem to acquire an 8.04% of shares out (@ HK$3.10/share) - to collectively give Jinggangshan BAIC 28.91%. Amber Gem would be left holding 6.7% of shares out. 

Car <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0720/2020072001067.pdf" target="_blank" rel="noopener">announced</a> that it has been informed that "UCAR has received a notice from the China Securities Regulatory Commission (and that the) CSRC has initiated an investigation on UCAR in connection with suspected violations of information disclosure laws and regulations by UCAR". 
</td>
</tr>
<tr>
<td style="width: 115.258px;">24-Jul-20</td>
<td style="width: 588.274px;">
Profit warning. Car expects a net loss n the 1H20 vs. net profit of RMB279mn in 1H19. Looking at impairment charges with respect to is vehicle fleet of RMB2.5bn-3RMBbn. 
</td>
</tr>
<tr>
<td style="width: 115.258px;">26-Jul-20</td>
<td style="width: 588.274px;">
Amber Gem and Jinggangshan BAIC <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0726/2020072600011.pdf" target="_blank" rel="noopener">entered</a> into a SPA such that BAIC acquires 170.72mn shares (8.05% of shares out) from Amber at $3.10/share.
</td>
</tr>
<tr>
<td style="width: 115.258px;">3-Aug-20</td>
<td style="width: 588.274px;">
Xiaogeng Li, an NED, <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0803/2020080300015.pdf" target="_blank" rel="noopener">resigned</a>, ceasing her membership of the audit and compliance committee
</td>
</tr>
<tr>
<td style="width: 115.258px;">3-Aug-20</td>
<td style="width: 588.274px;">
The CSRC <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0803/2020080300019.pdf" target="_blank" rel="noopener">completed</a> its (two-week) investigation and dished out some fines to UCAR and certain directors/senior management. 
</td>
</tr>
<tr>
<td style="width: 115.258px;">20-Aug-20</td>
<td style="width: 588.274px;">
A Reuters article suggests MBK is kicking tyres
</td>
</tr>
<tr>
<td style="width: 115.258px;">10-Nov-20</td>
<td style="width: 588.274px;">
<a href="https://www.smartkarma.com/entities/car-inc" target="_blank" data-smartkarma-citation="entities:942:1" rel="noopener">Car Inc (699 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1110/2020111001297.pdf" target="_blank" rel="noopener">announced</a> the S&amp;P with UCAR, BAIC is terminated. MBK Partners to acquire ~20.86% of shares in Car for HK$1.77bn ($4/share).
</td>
</tr>
<tr>
<td style="width: 115.258px;">13-Nov-20</td>
<td style="width: 588.274px;">
MBK's <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1113/2020111301538.pdf" target="_blank" rel="noopener">firm Offer</a>
</td>
</tr>
<tr>
<td colspan="2" style="width: 115.258px;">Source: mainly HKEx announcements</td>
</tr>
</tbody>
</table>
The pre-conditions to the Offer may be waived, either in whole or in part; the Offer is subject to only a simple merger case by SAMR; the UCAR SPA has now completed; and the Offer is subject to a 50% tendering condition - with MBK holding 47.41% at the completion of a SPA with UCAR, together with irrevocables. 
This looks done.
Yet, the gross spread has steadily widened since the 28 December. What gives? 
More thoughts below the fold.

</div>
</div>


Following the Luckin Coffee (LK US) debacle and the ensuing fallout (discussed in Car Inc (699 HK) - Needs A Hire Purpose and Car Inc (699 HK): MBK's Firm Offer), on the 13 November MBK tabled a pre-conditional general cash Offer of $4.00/share for Car Inc (699 HK), a 17.99% premium to last close.  
A truncated summary of the announcements below brings you up to date.:







Date


Data in the Date



9-Apr-20
Car's largest shareholder, sold 44.666mn shares, or 2.11% of shares out, on the day Car's shares collapsed. NOT a good look. UCAR held ~27.65% of shares out in Car after the sale. Lu is the controller of UCAR with a 39.94% stake.  UCAR sold a further 100k shares (0.0047% of shares out) on the 11 May, and 7.085mn shares (0.33%) between the 12 May and 22 June.


16-Apr-20

Amber Gem entered into a SPA with UCAR to acquire 98.6mn shares (4.65% of shares out - known as the first tranche) from UCAR at HK$2.30/share; and 264.08mn shares (12.46% of shares out - the second tranche) at HK$3.40/share. This works out to an average price of $3.10/share.

At the time of the SPA, Amber Gem held 10.11%. According to the 2019 annual report (page 49), Warburg Pincus holds a 60.47% stake in Amber Gem. 



1-Jun-20

Car announced Amber Gem and UCAR had terminated their second tranche. The first tranche appears to have been completed on the 30 May, lifting Amber Gem's stake to 14.76%.

Separately  UCAR and BAIC Group entered into a non-legally binding strategic cooperation agreement, such that BAIC would acquire 450.79mn shares in Car, or 21.26% of shares out, from UCAR.



9-Jun-20
Lu resigned as Chairman and NED, with effect from June 9 (i.e. immediate).


2-Jul-20

Car announced UCAR had entered into an offer letter with SAIC Motor (600104 CH) such that SAIC will acquire UCAR's 20.87% stake in Car at HK$3.10.

Separately, SAIC entered into an offer letter with Amber Gem to acquire an 8.05% stake in Car, also at HK$3.10/share.  The completion of these Offer letters would result in SAIC holding 28.92%, below the 30% mandatory general offer threshold.



20-Jul-20

Car announced that UCAR has terminated its agreement with SAIC; and that UCAR had now entered into a SPA with Jinggangshan BAIC to acquire its 20.87% stake in Car at HK$3.10/share. Jinggangshan BAIC also signed an offer letter with Amber Gem to acquire an 8.04% of shares out (@ HK$3.10/share) - to collectively give Jinggangshan BAIC 28.91%. Amber Gem would be left holding 6.7% of shares out. 

Car announced that it has been informed that "UCAR has received a notice from the China Securities Regulatory Commission (and that the) CSRC has initiated an investigation on UCAR in connection with suspected violations of information disclosure laws and regulations by UCAR". 



24-Jul-20

Profit warning. Car expects a net loss n the 1H20 vs. net profit of RMB279mn in 1H19. Looking at impairment charges with respect to is vehicle fleet of RMB2.5bn-3RMBbn. 



26-Jul-20

Amber Gem and Jinggangshan BAIC entered into a SPA such that BAIC acquires 170.72mn shares (8.05% of shares out) from Amber at $3.10/share.



3-Aug-20

Xiaogeng Li, an NED, resigned, ceasing her membership of the audit and compliance committee



3-Aug-20

The CSRC completed its (two-week) investigation and dished out some fines to UCAR and certain directors/senior management. 



20-Aug-20

A Reuters article suggests MBK is kicking tyres



10-Nov-20

Car Inc (699 HK) announced the S&amp;P with UCAR, BAIC is terminated. MBK Partners to acquire ~20.86% of shares in Car for HK$1.77bn ($4/share).



13-Nov-20

MBK's firm Offer



Source: mainly HKEx announcements



The pre-conditions to the Offer may be waived, either in whole or in part; the Offer is subject to only a simple merger case by SAMR; the UCAR SPA has now completed; and the Offer is subject to a 50% tendering condition - with MBK holding 47.41% at the completion of a SPA with UCAR, together with irrevocables. 
This looks done.
Yet, the gross spread has steadily widened since the 28 December. What gives? 
More thoughts below the fold.




Car Inc (699 HK):  Are We Missing Anything?

*SEC Settlement: On December 16, 2020, the Securities and Exchange Commission (SEC) announced that Luckin Coffee had agreed to pay USD 180 mn to settle regulatory claims that it made its growth metrics appear more robust to meet earnings targets and achieve a better IPO valuation. As per usual when these cases are settled, Luckin Coffee neither admitted nor denied the SEC’s claim of fraud; and*Will CAR Crash Next?: In addition to the common ownership of Luckin Coffee and CAR, Inc. (699.HK), and common former senior company officer problem, we also note that Ernst &amp; Young in mainland China audits both Luckin Coffee and CAR, Inc. That in and of itself does not suggest there is a problem, but the commonality does raise eyebrows. While we are not suggesting that there is a problem with CAR Inc., there are areas where we see where the investment community could challenge CAR Inc. and seek a re-audit for CAR between 2008-18.

*SEC Settlement: On December 16, 2020, the Securities and Exchange Commission (SEC) announced that Luckin Coffee had agreed to pay USD 180 mn to settle regulatory claims that it made its growth metrics appear more robust to meet earnings targets and achieve a better IPO valuation. As per usual when these cases are settled, Luckin Coffee neither admitted nor denied the SEC’s claim of fraud; and*Will CAR Crash Next?: In addition to the common ownership of Luckin Coffee and CAR, Inc. (699.HK), and common former senior company officer problem, we also note that Ernst &amp; Young in mainland China audits both Luckin Coffee and CAR, Inc. That in and of itself does not suggest there is a problem, but the commonality does raise eyebrows. While we are not suggesting that there is a problem with CAR Inc., there are areas where we see where the investment community could challenge CAR Inc. and seek a re-audit for CAR between 2008-18. 

China

Luckin Coffee Inc. provides non-alcoholic beverages. The Company offers various types of coffee. Luckin Coffee serves customers in China.

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Luckin Coffee (LKNCY US)

Credit Suisse Group – Painful To Watch

CREDIT SUISSE GROUP: The immediate impact from Archegos is larger than expected. However, the stellar 1Q21 results plus managing 1H21 capital...

Thomas J. Monaco

Credit Suisse Group – Hit Parade Continues

CREDIT SUISSE GROUP: S&P Global Ratings has finally downgraded its outlook on all Credit Suisse entities to negative resultant over its exposure to...

Thomas J. Monaco

Luckin Coffee – Chapter 15

LUCKIN COFFEE: On February 5, 2021, Luckin filed for Chapter 15 bankruptcy protection after COO engaged in misconduct. Luckin and CAR have common...

Thomas J. Monaco

Car Inc (699 HK): Are We Missing Anything?

I believe this deal remains on track to complete, and well ahead of the pre-con long stop date. MBK also has an excellent completion rate on firm...

David Blennerhassett

Luckin Coffee – Bad Luckin

LUCKIN COFFEE: On December 16, 2020, the SEC announced that Luckin had agreed to pay USD 180 mn to settle regulatory claims. Related CAR Inc. needs...

Thomas J. Monaco

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