Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Happy Lunar New Year to everyone from Aequitas Research!
It has been a fairly quiet week leading up to Chinese New Year but it is not stopping Maoyan Entertainment (1896 HK) from listing on Monday. The IPO was priced at the bottom end of its offering range. The last we checked, it traded up 3% in the grey market on Friday. Ke Yan, CFA, FRM will follow up with a short note of his thoughts on post-IPO trading dynamics and bookbuild subscription levels.
Other updates on IPO in Hong Kong include Sinochem Energy allowing its IPO application to lapse while Koolearn (1373356D HK) and Shangde Qizhi Education re-filed for IPO. Edvantage, another new education IPO (and likely to be borderline US$100m deal size) filed for Hong Kong listing this week as well.
China Tower (788 HK)‘s lock-up will be expiring on the 8th of February and Ke Yan, CFA, FRM mentioned in his insight that any potential placement will be a good opportunity to accumulate the stock. Placements from cornerstone investors will likely be a liquidity event.
In India, Chalet Hotels Limited (CHALET IN) closed its bookbuild with a tepid overall demand of 1.57x. The silver lining for the IPO is that the institutional tranche saw a healthy 4.6x demand, similar to that of Lemon Tree Hotels (LEMONTRE IN) in terms of weak overall but strong institutional demand, which ended up performing well in its IPO.
Other upcoming India IPOs include Mazagon Dock Shipbuilders Ltd (9155507Z IN) and Embassy REIT which were said to be seeking listing towards the end of February. Sterling and Wilson is also looking to file its INR50bn IPO with the Sebi soon.
In Japan, Wingarc1st announced its IPO bookbuild to start on the 25th of February and will be listing in March. It is estimated to be raising about US$380m.
Accuracy Rate:
Our overall accuracy rate is 72% for IPOs and 63.8% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Edvantage Group (Hong Kong, ~US$100m)
Koolearn (Hong Kong, re-filed)
Shangde Qizhi Education Group (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings. In this Insight I review each of the companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.
Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:
Avoid the cultural backlash from Korean gamers
Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.
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Maoyan Entertainment was priced at HKD 14.8/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. Our recent studies on the movies slotted to launch during the Chinese New Year period suggest that the box office during the CNY period could be a positive catalyst to Maoyan, which lists right before the CNY.
On 31 January 2019, Bloomberg confirmed that local Chinese RMB bonds would be included in the Bloomberg Barclays Global Aggregate Index (methodology) (and the Global Treasury Index and EM Local Currency Government Bond Index), which covers roughly US$54 trillion of outstanding bonds. RMB would become the fourth largest weighted currency in the index after USD, euro, and JPY with a pro-forma 6.03% weighting as measured a week ago against a total basket of elibible securities of roughly US$3.26trln.
The inclusion will start in April 2019 and will take 20 months, as described in the original March 2018 press release. At that time, there was still work to be done to improve the infrastructure, including implementation of delivery vs. payment settlement, ability to allocate block trades across portfolios, and clarification on tax collection policies.
The phase-in period will include a scaling factor of 5% to be implemented incrementally over the 20 months trough December 2020.
Bloomberg will create ex-China versions of all three indices starting in April for investors who wish to continue without China exposure in the benchmark.
This creates flows. And I like to look at flows.
The basic flows are easy enough to calculate. But those flows aren’t the only flows to consider. Flows beget flows, and the universe of bonds is not static.
Are you prepared for US$30bn a month of foreign inflows by end 2020?
Still lovin’ it? Beijing serves new law for foreign investors
Slowdown sparks profit warnings
Luring foreign lolly with combined schemes
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.
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Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Happy Lunar New Year to everyone from Aequitas Research!
It has been a fairly quiet week leading up to Chinese New Year but it is not stopping Maoyan Entertainment (1896 HK) from listing on Monday. The IPO was priced at the bottom end of its offering range. The last we checked, it traded up 3% in the grey market on Friday. Ke Yan, CFA, FRM will follow up with a short note of his thoughts on post-IPO trading dynamics and bookbuild subscription levels.
Other updates on IPO in Hong Kong include Sinochem Energy allowing its IPO application to lapse while Koolearn (1373356D HK) and Shangde Qizhi Education re-filed for IPO. Edvantage, another new education IPO (and likely to be borderline US$100m deal size) filed for Hong Kong listing this week as well.
China Tower (788 HK)‘s lock-up will be expiring on the 8th of February and Ke Yan, CFA, FRM mentioned in his insight that any potential placement will be a good opportunity to accumulate the stock. Placements from cornerstone investors will likely be a liquidity event.
In India, Chalet Hotels Limited (CHALET IN) closed its bookbuild with a tepid overall demand of 1.57x. The silver lining for the IPO is that the institutional tranche saw a healthy 4.6x demand, similar to that of Lemon Tree Hotels (LEMONTRE IN) in terms of weak overall but strong institutional demand, which ended up performing well in its IPO.
Other upcoming India IPOs include Mazagon Dock Shipbuilders Ltd (9155507Z IN) and Embassy REIT which were said to be seeking listing towards the end of February. Sterling and Wilson is also looking to file its INR50bn IPO with the Sebi soon.
In Japan, Wingarc1st announced its IPO bookbuild to start on the 25th of February and will be listing in March. It is estimated to be raising about US$380m.
Accuracy Rate:
Our overall accuracy rate is 72% for IPOs and 63.8% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Edvantage Group (Hong Kong, ~US$100m)
Koolearn (Hong Kong, re-filed)
Shangde Qizhi Education Group (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings. In this Insight I review each of the companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.
Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:
Avoid the cultural backlash from Korean gamers
Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.
We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.
We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.
An earlier post outlined the general direction of the Objective Analysis 2019 forecast but didn’t provide any numbers. In this post I explain the 5%+ decrease in revenues that the market will experience and how and why various elements play into that number.
This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.
Our January Coverage of Hong Kong Connect southbound flow
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Beyond the aggregate figures, most investors interested in China housing markets would look at the breakdown by Tier. We introduce a few alternative ways to cut the house price growth data, illustrating some consistent patterns that could be more meaningful for any investment thesis than the simple by-tier.
For the December quarter results, the market is focusing on the slowdown of the revenue growth, but we notice that the growth rate of operating profits recovered.
In two of our previous reports, we mentioned BABA’s efforts on cost control in the second half of 2018. Now we can see the results.
We believe the most important risk is the significant operating losses in the minor business “digital media”.
The P/E band suggests that the stock price has an upside of 40%.
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In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.
We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.
We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.
An earlier post outlined the general direction of the Objective Analysis 2019 forecast but didn’t provide any numbers. In this post I explain the 5%+ decrease in revenues that the market will experience and how and why various elements play into that number.
This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.
Our January Coverage of Hong Kong Connect southbound flow
China’s 4Q GDP grew just 6.4% in Q4, 2018, the lowest since the Global Financial Crisis (GFC). We do not believe the number matched the market expectation, however. Since the GFC, every rebound of the Chinese economy has been accompanied with the rebound of the real estate sector (such as in 2009, in 2012 and in 2016). However, this time is different, in our view. The real estate sector only grew 2% in Q4, 2018, the lowest in 4 years.
If the Chinese government had relaxed its regulation on this sector, China would have grown higher, but that would be at the expense of bigger bubble-driven growth, in our judgment. As we argued before, the consumption growth is closely-corelated with the wealth effect from real estate market. Accordingly, as to the questions such as why the Chinese economy has slowed down, and why Chinese consumption has declined, we believe the answer lies in the real estate sector. As a result, this has become a matter of real estate bubble versus consumption, the debacle we believe will last at least this year.
In addition, the industrial-value added growth, infrastructure investment, electricity generation and retail sales as well, have all marginally rebounded in December. China’s growth may finally rebound in the second quarter of 2019.
This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:
The average premium/discount for each set over a one-year period is graphed below.
Source: CapIQ
For a granular breakdown of each data set, PDFs are attached at the bottom of this insight.
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Tesla Motors (TSLA US) stock is in a tailspin, again. Closing at $297 today, the stock is down 11% ytd, well off its high last August at $379 and trailing even 2018’s comparatively tepid average of $316. Tesla bondholders have remained wary, with the benchmark 5.3% senior notes still hovering near 86 where they’ve traded since last September after plunging more than 10 points versus the beginning of 2018.
Investors are spooked as more Wall Street analysts have slashed their formerly ambitious estimates for Tesla’s fourth-quarter and 2019 revenue, profit, and cash flow primarily due to what they now identify as lower than expected demand and profitability for Model 3. The thing is, Tesla has been signaling escalating troubles for months as I have warned in “Great Magic Trick Tesla; Now Do It Again” which digested Tesla’s “miracle” third quarter and “Tesla: Down to the Wire” which reviewed the frantic close of the fourth quarter).
So while it’s interesting that market estimates are collapsing toward my previously below-consensus estimates–and even I lowered my already cautious 2019 numbers–I’m concerned about other potentially quake-worthy news affecting performance for 2019 and beyond which we are not getting from Tesla.
Yet three weeks later we still have no idea how much this mega-plant will cost, or whether Tesla has “funding secured” to pay for it–and these may not even be most troubling facts investors don’t have.
Whatare Musk, and Tesla, and Tesla’s banks, and Musk’s China-based financiers not telling us about Shanghai Giga 3?I suspect the answers may come with potentially nasty surprises.
Despite elevated uncertainty and lowered growth expectations for 2019, the International Monetary Fund (IMF) still expects continued global economic expansion, thereby potentially placing it at variance with the expectations embedded in financial markets.
The remaining efficacy of monetary policy in the Eurozone is being undermined by the conspicuous absence of an interest rate buffer that could ultimately be detrimental to any future attempts to support aggregate demand.
Meanwhile, the Bank of Japan will continue its ultra-accommodative policy stance due to downside risks to medium and long-term inflationary expectations, but low corporate profits growth expectations limit downside equity market risks.
Current expectations for corporate profits growth in the Eurozone and China require downgrading due to their respective economic outlooks, implying downward pressure on equity prices.
Crucially, US corporate profit expectations have been scaled back to match revenue expansion, thereby indicating that analysts have finally embraced a more realistic approach towards the future path of operating margins.
Baidu’s new methodology directs the large majority of search results to its in-house functions, especially to its blog function BJH (百家号).
Baidu began to hide websites of search results after the change above was widely criticized. However, as a result, users can hardly find authoritative websites.
Because of these changes, it is hard for users to find useful content.
We believe Baidu is giving up its existing advantages for users and clients.
We also believe that users will choose to leave if the platform tries to choose content for them. If users leave Baidu, advertisers will follow them.
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We expect a gradual slowdown for prices and volumes – ending the year slightly negative year-on-year, off a high base, with the selective easing and relatively low land supply cushioning the impact of a cyclical downturn otherwise driven by financing conditions for developers, increased supply of new homes at the time of slowing sales off record volumes in 2018, and broader economic slowdown due to macro factors.
China Tower Corp, the owner and operator and telecommunication tower network in China, listed on August 8th last year. Over the past six months, the stock has returned 35% with the addition of a number of global investors to its share registry.
As it heads into lock-up expiry in Feb, in this insight we would like to examine China Tower’s performance since listing.
We note that China Tower has delivered a decent set of results for 3Q2018 and it will be a key beneficiary of China’s push into 5G built-up with little uncertainty.
The current valuation of the company was still lower than international tower providers.
With the improving operating metrics and stable income, we believe there are still upsides for China Tower Corp post-lock-up expiry.
Discussing real estate in China offers important insight into China economy. There is a lot of granular data that when examined can give us a solid picture what of if going on China’s economy on a macro level. To that end today’s newsletter has more graphs than we typically include, but we wanted to really cohesively lay out the Chinese real estate market. Some graphs we have included with commentary, others without comment.
We recently met a second-generation entrepreneur, operating in the paper industry for over two decades dealing with companies in India, UAE, China, Egypt, Turkey, Europe, South Korea & African countries. The discussion was aimed at understanding the key trends that have shaped the paper Industry in India and China for the last two years in order to answer the question: will the dream run in stock prices continue? Our discussions are focused on Jk Paper Ltd (CPM IN) , West Coast Paper Mills (WCPM IN) & International Paper Appm (IPAP IN) along with possible implications for Nine Dragons Paper (2689 HK) covered by David Lepper & Nicolas Van Broekhoven.
We maintain a cautious to negative view on the sector, we shall review our stance on the Industry post Q3 earnings releases. We would like to endorse the long view on Nine Dragons Paper (2689 HK)
A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).
Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.
In our view, the main logistics takeaways from BABA’s results are:
Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view.
CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19. This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.
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No longer playing catch up? The “world-leading” PLA
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
After 6.5bn+ shares came off lockup last week (by Travis Lundy’s estimate), Xiaomi made a placement equal to about 1% of shares outstanding at a sharp discount to the close. This follows a block of 120mm shares last Thursday at HK$8.80 (at a 13+% discount); Apoletto reported a distribution (sale) of 594+mm shares on January 9th to reduce their total position across all funds from 9.25% to 4.99%; and there was a block placement launched earlier in the week for 231mm shares for sale between HK$9.28 and HK$9.60.
While as much as 1bn shares may have already transacted (assuming most of the 594mm shares distributed by Apoletto have been sold in the market), there were ~6.5 billion shares which could be sold and an additional 1bn+ of additional conversions designed to be sold.
In another 6 months, there will be another 4bn+ shares which come off LockUp. In total, that is up to 10-11bn shares coming off lockup between a week ago and 6 months from now. That is four times the total IPO size, and 70-80% of the total position coming off lock-up has an average in-price of HK$2.00 or less. Apoletto’s average in-price was HK$9.72.
Travis is also skeptical that the company’s capital deserves a premium to peers, and is not entirely convinced that the pre-IPO profit forecasts are going to be met in the medium-term. In the meantime, a lot of the current capital structure base is looking to get out.
Nota Bene: Bloomberg’s 3bn-shares-to-come-off-lockup number was confirmed by Travis (the day he published the piece linked below) with the people who tallied the info for the CACS function. They had neglected to count a certain group of shareholders. The actual number will be well north of 6 billion shares.
After the close of trading on the 15 January, NTT announced it had repurchased 3.395mm shares for ¥15.349bn in the first 7 trading days of the month, purchasing 10.9% of the volume traded. This announcement was bang in line with Travis’ insight the prior day, where he anticipated the buybacks would soon be done.
The push to buy shares on-market at NTT vs off-market at NTT Docomo has had some effect but not a huge effect. The NTT/Docomo price ratio is a bit more than 5% off its late October 2018 lows prior to the “Docomo Shock”, but the ratio is off highs. Off the lows, the Stub Trade has done really well.
NTT DoCoMo bought back ¥600bn of shares from NTT at the end of 2018. That means NTT DoCoMo could buy back perhaps ¥300-400bn of shares from the market over the next year or so before ‘feeling the need’ to buy back shares from NTT again. NTT will likely buy back at least ¥160bn of NTT shares from the government in FY19 starting April 1st, which means there will be room to buy back another ¥100bn from the government before not having any more room to do so.
There could be an NTT buyback from the market in FY2019, and one should expect that for the company to buy back shares from the government again, if NTT follows the pattern shown to date, there should be another ¥400-500bn of buybacks from the market over the next two years, and if EPS threatens a further fall on NTT DoCoMo earnings weakness, NTT might boost the buyback to make up for that.
The very large sale by NTT of NTT Docomo shares this past December will free up a significant amount of Distributable Capital Surplus.
On a three-year basis, Travis would rather own NTT than NTT Docomo. But he expects the drift on the ratio will not be overwhelming unless NTT does “something significant”.
Singaporean real-estate group Capitaland has entered into a SPA to buy Ascendas-Singbridge (ASB) from its controlling shareholder, Temasek. The proposed acquisition values ASB at an enterprise value of S$10.9bn and equity value of S$6.0bn. Capitaland will fund the acquisition through 50% cash and 50% in shares (862.3mn shares @$3.25/share – ~17% dilution). Capitaland-ASB will have a pro-forma AUM of S$116bn, making it the largest real estate investment manager in Asia and the ninth largest global real estate manager.
Hitachi Ltd (6501 JP)announced it had received approvals from the relevant government authorities, and its Tender Offer for Yungtay (at TWD 60/share) has now launched. The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference between the offer details as discussed in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) back in October, is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).
This deal looks pretty straightforward, but the stock has been trading reasonably tight to terms, with annualized spreads on a reasonable expectation of closing date in the 3.5-4.5% annualized range for a decent part of December, rising into early January before seeing a jump in price and drop in annualized on the second trading day of the year. This shows some expectation of a fight and a bump.
To avoid that fight and bump – the Baojia Group, which supported Hsu Tso-Ming’s board revolt last summer (discussed in the previous insight), has reportedly accumulated a 10% stake – Hitachi has lowered its minimum threshold to complete the deal to get to one-third plus a share. Given that it controls 11.7% itself as the largest shareholder, and has another 4.3% from the chairman in the bag, that means it needs about 17.3% of the remaining 84% to be successful.
Because the minimum is only about 21% of the float, this deal has quite decent odds of getting up unless someone makes a more serious run for it. As an arb, Travis sees a small chance of a bump because of some potential harassment value by Hsu Tso-Ming’s friends at Baojia Group. Hitachi has already taken that into account with the lowering of the minimum, but it is possible that enough noise can be created to obtain a bump.
Courts, a leading electrical, consumer electronics and furniture retailer predominantly in Singapore and Malaysia, has announced a voluntary conditional offer from Japanese big box electronics retailer Nojima Corp (7419 JP) at $0.205/share, a 34.9% premium to the last closing price. The key condition to the Offer is the valid acceptances of 50% of shares out. Singapore Retail Group, with 73.8%, has given an irrevocable to tender. Once tendered, this offer will become unconditional. The question is whether minorities should hold on.
Barings/Topaz-controlled Singapore Retail Group are exiting, having not altered their shareholding since CAL’s 2012 listing. If Nojima receives acceptances from 90% of shareholders, it will move to compulsory delisting of the shares. If the Offer closes with Nojima holding >75% of shares, it could still launch an exit/delisting offer pursuant to Rule 1307 and Rule 1308.
Long-suffering shareholders may wish to hold on for a potential turnaround should Nojima extract expected synergies. But this looks like a decent opportunity (of sorts) to also exit along with the controlling shareholder.
The board of Navitas, a global education provider, has unanimously backed a revised bid by 18.4% shareholder BGH Consortium of A$5.825/share, 6% higher than its previous rejected offer and a 34% premium to undisturbed price.
The revised proposal drops the “lock out” conditions attached to BGH Consortium’s previous offer, enabling BGH to support a superior proposal. BGH has also been granted an exclusivity period until the 18 Feb.
Panalpina Welttransport announced that it had received an unsolicited, non-binding proposal from DSV A/S (DSV DC) to acquire the company at a price of CHF 170 per share, consisting of 1.58 DSV shares and CHF 55 in cash for each Panalpina share. The offer comes at a premium of 24% to Panalpina’s closing share price of CHF 137.5 as of 11 January 2019 and 31% to the 60-day VWAP of CHF 129.5 as of 11 January 2019. Following the announcement, Panalpina’s shares surged above the terms of the offer implying that the market was anticipating a higher bid from DSV or one of its competitors.
Investors lashed out at Panalpina’s board last year (after years of griping by some of the top holders), eventually forcing the main shareholder to support the installation of a new chairman of the board.
The stock is clearly in play. And the sector is seeing ongoing consolidation. DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’sCeva Logistics AG (CEVA SW). Media reports suggested Switzerland’s Kuehne & Nagel are also rumoured to be considering an offer for Panalpina.
Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46%. If EGS wants to see OPMs up at global standards level – in the area of DSV and KNIN – then they may need to see someone else manage the assets. If EGS is steadfastly against Panalpina losing its independence, a deal will not get done. That said, if a deal does not get done because the board reflects the interest of EGS, that proves the board is not as independent as previously claimed. But one must imagine there is a right price for everything.
Earlier this month, Bristol Myers Squibb Co (BMY US)and Celgene announced a definitive agreement for BMY to acquire Celgene in a $74bn cash and stock deal. The headline price of $102.43 per Celgene share plus one CVR (contingent value right) is a 53.7% premium to CELG’s closing price of $66.64 on January 2, 2019, before assigning any value to the CVR. The CVR has a binary outcome: it will either be worth zero or will be worth a $9 cash payment upon the FDA approval of three drugs.
While there don’t appear to be any major problems in commercial products, it remains to be seen whether the antitrust authorities go further into the pipeline to determine whether potential competition from drugs still in clinical trials could present issues in the future.
Overall, the merger agreement appears fairly standard, but it does (also) require BMY shareholder approval which typically overlays a higher risk premium. For John DeMasi, the attraction for this arb is the current risk/reward.
ANTYA Investments Inc. chimes in on the deal and considers it unlikely that a suitor for CELG emerges at a higher price, whereas rumours of suitors for BMY abound, and would therefore make a long bet on BMY.
On the 10 January, PAH announced CKI had entered into a placing agreement to sell 43.8mn shares (2.05% of shares out) at HK$52.93/share (a 4.7% discount to last close), reducing CKI’s holding in PAH to 35.96%. This is CKI’s first stake sale in PAH since the 2015 restructuring of the Li Ka Shing group of companies, and it has been over three years since the CKI/PAH scheme merger was blocked by minority shareholders. It is also around two months since FIRB blocked CKI/PAH/CKA/CKHH in its scheme offer for APA Group (APA AU).
I don’t see a sale of PAH as being a realistic outcome – this is more likely an opportunity to take some money (the placement is just US$328mn) off the table. CKI remains intertwined with PAH via their utility JVs in Australia, Europe and UK, and in most investments, together they have absolute control.
I would also not discount a merger re-load. The pushback in 2015 was that the (revised) merger ratio of 1.066x (PAH/CKI) was too low and took advantage of CKI’s outperformance prior to the announcement. That ratio is now around 0.9x. A relaunched deal at ~1x would probably get up – the average since the deal-break is 1.02x and the 12-month average is 0.95x. And a merger ratio at these levels would ensure Ck Hutchison Holdings (1 HK)‘s holding into the merged entity would be <50%, so it would not be required to consolidate. This recent sell-down does not, however, elevate the near-term chances of a renewed merger.
The takeaway is that the stub is very choppy, it often (but not always) widens after the full-year results, and the highest implied stub/EBITDA occurred outside of FY16, its most profitable year. The downward trend since January last year reflects the anticipated ~17% decline in EBITDA for FY18 to ₩148bn, its lowest level in the past four years.
Sanghyun mentioned that there are signs of improving fundamentals for local cosmetics stocks (as reflected in CapIQ) and that Holdcos have traditionally been more susceptible to fundamental changes. This should augur a shift to the upside in the implied stub.
I see the discount to NAV at 27%, right on the 2STD line and compares to a 12-month average of 3%. This looks like an interesting set-up level.
The Offer for Selangor Properties (SPR MK)has been bumped again, to RM6.30 from RM6.00. The original Offer was pitched at RM5.70/share. This latest proposal is a 55% premium to the undisturbed price and 10% above the initial bid. This is starting to look reasonable, at 0.89x P/B. On balance, this will probably now get up. (link to my earlier insight: Selangor Props – Privatisation Offer Does Not Reflect Full Value)
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Trawling through >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.
While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?
Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.
Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.
Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.
Corrigenda: There is an error in this insight. Please note the correction.
Correction: Please ignore the incomplete sentence at the end of the second paragraph in the blue box below (“On the valuation end,…”).
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
It has been a fairly busy week. Activity in the ECM space seems to be picking up with block trades taking the lead this week. We had Xiaomi Corp (1810 HK), Ayala Corporation (AC PM), Puregold Price Club (PGOLD PM), and Longfor Properties (960 HK) placements this week and most of them secondary sell-downs except for Puregold which was a top-up placement. Most placements performed well, trading above their IPO price, except for Longfor which only managed to claw back to its deal price on Friday.
Starting with Xiaomi, we think that there would likely be more selling considering that there is a massive overhang after the lock-up expired on 9th of January. Our calculation indicated that major shareholders may have about 6bn shares to be sold. Even if we exclude the founders’ shares, there will still be about 4bn shares left to be sold. The share price has managed to claw back above HK$10 level on Friday and we also heard that the books were several times covered with allocation being concentrated among a handful of investors. The tighter discount of this placement compared to the one earlier that crossed at 14% discount probably indicated demand is relatively better for this placement. On the valuation end, we
Ayala Corp’s placement was upsized and has also done well contrary to our view. We thought that the sell-down may perhaps indicate that there is an overhang from Mitsubishi’s remaining stake. But, we heard that books were well covered.
For IPOs this week, Weimob.com (2013 HK) traded well on the first day but took a spectacular dive on the second day of trading. It was down 30% intraday before bouncing back up and finally closing at IPO price on Friday. On the other hand, Chengdu Expressway Company Limited (1785 HK) hovered around its IPO price with little liquidity.
In terms of upcoming deals, PH Resorts Group (PHR PM) is looking to launch a US$350m share sale in about two months time. Maoyan Entertainment (EPLUS HK) has already launched its IPO on Friday while there will be more IPOs heading to the US. Jubilant Pharma is said to have turned to the US for its US$500m IPO after trying to list in Singapore last year. Home Credit Group and Sinopec’s retail unit might be seeking to this in Hong Kong this year. Luckin Coffee is also said to be seeking an IPO in Hong Kong.
Accuracy Rate:
Our overall accuracy rate is 71.9% for IPOs and 64.1% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Shenwan Hongyuang Group (Hong Kong, >US$1bn)
Tai Hing Holdings (Hong Kong, ~US$200m)
Changsha Broad Homes Industrial Group (Hong Kong, >US$100m)
Shanghai Gench Education (Hong Kong, >US$100m)
China Yunfang Holdings (Hong Kong, ~US$100m)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
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If you are a follower of the Asian stock markets, one of the “rules of thumb” is to carefully follow the investments trails of the “superman” Li Ka-Shing, who has recently publicly declared that he supports Bakkt. On December 31st, 2018, Bakkt raised $182.5 million from high profile investors including Li Ka-Shing backed Horizon Ventures, M12 (Microsoft’s venture capital arm), Intercontinental Exchange (owner of the New York Stock Exchange), Alan Howard, and the Boston Consulting Group.
Starbucks and Bakkt have yet to mention exactly when Starbucks will allow consumers to use Bitcoin to purchase coffee at their stores. In terms of timing, we believe that the probable time frame is likely to be sometime in 4Q 2019 to 2020 when Starbucks will start allowing their consumers to start using Bitcoin at some of their stores. This will represent a crucial positive tipping point for Bitcoin in the next two years.
China: US-China trade negotiations are focusing on the easy parts to avoid truly difficult discussions on thornier structural issues. Brazil: Early economic numbers have been positive for new president Bolsonaro. Data this week and next will show the way forward. Thailand: Elections set for March 24th. Constitutional changes may avoid the repeat of the populist/protest /coup cycle that has dominated Thai politics since 2000.
We think the market is underestimating global LNG supply in the early to mid-2020s from current facilities: initially we look at Australia, which became the world’s largest LNG exporter on a monthly basis in November (~80mtpa or 25% of global supply). Our analysis of Australian LNG supply suggests that production in the early to mid-2020s will be much higher than market expectations of falling production, as fields move into decline. Overall we think this is negative longer-term for the LNG market as supply could supply to the upside but it is a relative positive for the Australian LNG companies.
We think production could grow to around 95mtpa by the mid-2020s due to substantial upside to the nameplate capacity on existing facilities, tie-backs and new developments keeping existing facilities full and utilizing new brownfield LNG trains. Australia’s key advantages versus LNG projects elsewhere are the low offshore upstream operating costs, cheap shipping costs to Asia, an investor friendly environment and having a huge installed base of LNG infrastructure and associated cashflows.
Ebang (EBANG HK) is a Chinese designer of bitcoin mining machines which are sold under the Ebit brand. Ebang refiled its draft prospectus with HKEX on 20 December 2018, but the IPO plans of cryptocurrency related companies are in a state of flux. Last week, the CEO of the Hong Kong Exchanges and Clearing, said that companies seeking to go public in Hong Kong should show consistency in their business models, in response to questions about the IPO applications of Bitmain Technologies Ltd (1374554D CH), Canaan Inc. (CANAAN HK) and Ebang.
While 1H18 results were strong, Ebang cautions that it experienced significant decreases in revenue and gross profit for 3Q18 compared to 2Q18. In the absence of any 3Q18 financial metrics, we scrutinised the financial accounts to find clues on the extent of the slowdown. Our analysis of the financial accounts’ leading indicators points to a rapid slowdown.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this week’s HK Connect Discovery, we highlight that CRRC’s outflow coincides with media reports that highlight the risks of China’s investment in high-speed railway. We also see a very substantial southbound flow into Car Inc.
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