US: Stocks fall on political turmoil despite positive noises from the Fed with a dovish rate hike, a reduction in expected 2019 hikes and positive trends on employment and inflation.
Russia: Unexpected 25 bps rate hike in the face of higher inflation in Nov. Watch for impact of lower oil prices in coming quarters.
Turkey: Economic developments remain negative. The outlook for retail sales is poor as the economy in general is faltering.
Indonesia: Trade deficit in November. Exports down 3.3%; imports up 11.68%. This disappointing performance could be the beginning of a trend.
We’ve reviewed 10 companies in the sector. Of those, three are the consensus favorites of our Tokyo based panel of industry, financial and economics observers of the IR initiative over many years.
Based on pachinko alone, the stocks of these companies are fully valued. Based on potential tailwind from a license award within 6 months, they could be vastly undervalued.
Each of the three noted here brings strength to a bid less based on financials than corporate focus, outlook and experience in the field.
With U.S. markets stumbling, the MSCI ACWI index is breaking down to new lows: defensive Sectors remain attractive. Relative to MSCI ACWI however, emerging markets are the place to be.China, Brazil, Hungary, Qatar, India, Poland, and Indonesia all display positive price and/or RS trends. In this report we recap technical important levels on all major indexes and highlight attractive stocks within Real Estate, Health Care/Pharma, Precious Metals Mining, and Utilities.
Recent figures show China slipping down the Soft Power Index while Chinese language learning in the USA is also in decline. Have tighter controls over education policy and restrictions on academic freedom in China spooked the crowd?
Hansoh Pharma, a leading generic pharmaceutical manufacturer, filed an application to list on the Hong Kong Stock Exchange. In this insight, we will cover the following topics:
Hansoh Pharma’s core products and major pipeline drug candidates.
AsiaInfo Tech priced its IPO at HKD 10.50/share and will start trading today. Prior to the trading debut, in this short note, we summarize the latest information with updates on our valuation.
Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK)is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending.
HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn or HK$7.27/share) was 65%.
HE issued 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) to its parent in January this year, at HK$4.56/share or a 60.9% discount to the June 2017 book value. A similar discount to the June 2018 book value backs out HK$4.15/share, or ~67% upside from the undisturbed price, in line with the premium to ASMC’s Offer.
A privatisation would require a scheme-like vote for the H-shares. HEC holds no H shares. There are 675mn H shares and no single shareholder controls a 10% (or more) blocking stake.
Dissension rights are available according to HE’s articles of association, although what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident.
There are likely to be the customary PRC regulatory approvals required, however as HEC is already the controlling shareholder and an SOE, these conditions are not in doubt.
Should an offer emerge, expect completion in ~6 months from the initial announcement.
Last week’s report generated much discussion (see The S&P 500 Is In A Bear Market). Some of the questions related to the duration and downside target in a bear market. How far can stocks fall? How long will it last? What might be the trigger for a buy signal?
To reiterate our thesis from last week. Poor technical action and a recession forecast for late 2019 or early 2020 prompted the equity sell signal. The recession forecast stems from the combination of near-recession conditions based on conventional U.S. macro indicators, evidence of global weakness in both Europe and China, and the near certainty of a trade war which would further tank global growth.
What might turn this bear thesis around, or put a halt to the bear market? Here are a few possible fundamental triggers:
An end to the trade war
More stimulus underpinned by the ascendancy of MMT in fiscal policy circles
At this point, the jury is out as to whether these positive catalysts can actually happen, so we remain “data dependent”.
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 mainlanders in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.
Another busy week for IPO research from the GER team. This week, we recap the Tencent Music Entertainment (TME US) IPO which we noted is more fairly valued post its day one rally. Secondly, we dig into Chinese domiciled IPOs that are listed in the States and find some interesting trends on maximizing the ‘pop’, knowing when to get out and an assessment of longer-term performance. Arun nails his DCF valuation on WuXi AppTec Co. Ltd. (2359 HK) which closed at his base-case valuation while he recommends getting involved at the low-end for Shanghai Junshi Bioscience Co. Ltd. (1387344D CH) . Finally, Xinyi Energy Holdings Ltd (1671746D HK) spares further wrath as it postpones its IPO – Venkat digs into the reasons why he is cautious on the company.
Quote of the week:
Please note the post-apocalyptical fiction section has been moved to current affairs
– Sign in front of a UK bookstore
Video of the week: Santas hit the slopes in Maine
This is our last wrap of 2018 – we wish you a safe and happy festive period – and we will back in 2019!
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.
Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces.
Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.
In this issue readers will find:
An analysis of November container shipping rates, which our index suggests increased by over 20% Y/Y. We concede that our index skews toward volatile spot rates rather than contract rates, but we suspect higher average container rates in Q418, combined with moderating fuel prices, will result in surprisingly strong earnings for the quarter.
A look at November air cargo activity and air cargo pricing, which diverged. The volume of air cargo handled by the five airlines we track declined slightly (-0.1% Y/Y) but some of those carriers reported sharply higher yields (circa +10% Y/Y), due to limited capacity expansion in the region.
Some good news: fuel prices have continued to moderate. Bunker climbed by just 5.1% Y/Y as of mid-December, and jet fuel prices have fallen about 11% Y/Y. Given firm container rates and air cargo pricing, the drop in fuel prices bodes well for Q418 margins, though it’s unclear whether such gains are sustainable.
Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers and air cargo operations in the near-term. We believe many investors remain too pessimistic regarding near-term earnings for container carriers and airlines.
With the FTSE ST REIT index’s decline of 9.3% year-to-date, value has emerged for some of the bellwether names in the Singapore REITs sector. The forward yield spread between these REITs and the Singapore government 10-year bond yield (2.13%) currently stand at least 390 basis points. In view of the increasing concerns over global economic growth, rising interest rates and the ongoing trade tension between the US and China, I present three quality REITs with fortified portfolios that are well-positioned to weather the near-term market uncertainties. They possess growth potential from acquisitions, positive rental reversions and deliver resilient forward distribution yield of more than 6%. Some of the bellwether names in the more resilient retail REIT sector, while offering lower yield of around 5.0% – 5.7%, are also in my buy list.
After months of skirting around inventory build-up and a weakening demand outlook, Micron used their latest earnings report to call closing time on a revenue and profitability party that began in Q4 2016 and just got better and better with each passing quarter.
Micron reported Q1 FY2019 results on December 18’th and while revenues were largely in line with recently lowered guidance from the company, their outlook for both Q2 and 2019 as a whole was worse than even the most bearish of expectations.
Citing high inventory levels at key customers, Micron guided Q2 FY2019 revenues for $6 billion at the midpoint, down a staggering $1.9 billion, 24% QoQ and 18% YoY. At the same time, Micron revised down their CY2019 bit demand growth forecast for both DRAM (from 20% to 16%) and NAND (35%, the bottom of the previously forecasted range). The company plans to adjust both CapEx and bit supply output downwards to match.
In the wake of their guidance bombshell, Micron’s share price closed down almost 8% the following day to end the session at $31.41, a level last seen in August 2017. Micron is unique in reporting out of sync with its industry peers, making it the proverbial canary in a coal mine. The company’s gloomy outlook and clarion call for further CapEx reductions in a bid to rebalance supply and demand spells troubled times ahead for an already beleaguered semiconductor segment ahead of the upcoming earnings season.
Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes.
This month’s issue covers the following topics:
November express parcel pricing remained weak. Average pricing per express parcel fell by 7.8% Y/Y to just 11.06 RMB per piece. November’s average price represents a new all-time low for the industry, and November’s Y/Y decline was the steepest monthly decline in over two years (excluding Lunar New Year months, which tend to be distorted by the timing of the holiday).
Express parcel revenue growth dipped below 15% last month. Weak per-parcel pricing pulled express sector Y/Y revenue growth down to just 14.6% in November, the worst on record (again excluding distorted Lunar New Year comparisons). Chinese e-commerce demand has slowed and we suspect ‘O2O’ initiatives, under which online purchases are fulfilled via local stores, are also undermining express demand growth.
Intra-city pricing (ie, local delivery) remains firm relative to inter-city. Relative to weak inter-city express pricing (where ZTO Express (ZTO US) and the other listed express companies compete), pricing for local, intra-city express deliveries remained firm. In the first 11 months of 2018, express pricing rose 1.7% Y/Y versus a -2.9% decline in inter-city shipments (international pricing fell sharply, -14.5% Y/Y). Relatively firm pricing on local shipments may make it hard for local food delivery companies like Meituan Dianping (3690 HK) and Alibaba Group Holding (BABA US) ‘s ele.me to beat down unit operating costs.
Underlying domestic transport demand held up well again in November. Although demand for speedy, relatively expensive express service (and air freight) appears to be moderating, demand for rail and highway freight transport has held up well. The relative strength of rail and water transport (slow, cheap, industry-facing) versus express and air freight (fast, expensive, consumer-oriented) suggests a couple of things: a) upstream industrial activity is stronger than downstream retail activity and b) the people in charge of paying freight are shifting to cheaper modes of transport when possible.
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing appears to be falling faster than costs can be cut. Overall domestic transportation demand, however, remains solid and shows no signs of slowing.
After high-speed climb, bike-share giant collapses
A brighter new year for China’s stock market?
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.
How can we explain the fact that in the five years from 2012 the number of tourist visits to China fell from 11.6 to 10.5 million per year? True, business and family reunion visits have risen, but such a culturally rich country should have more tourists.
Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness. Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.
US: Stocks fall on political turmoil despite positive noises from the Fed with a dovish rate hike, a reduction in expected 2019 hikes and positive trends on employment and inflation.
Russia: Unexpected 25 bps rate hike in the face of higher inflation in Nov. Watch for impact of lower oil prices in coming quarters.
Turkey: Economic developments remain negative. The outlook for retail sales is poor as the economy in general is faltering.
Indonesia: Trade deficit in November. Exports down 3.3%; imports up 11.68%. This disappointing performance could be the beginning of a trend.
We’ve reviewed 10 companies in the sector. Of those, three are the consensus favorites of our Tokyo based panel of industry, financial and economics observers of the IR initiative over many years.
Based on pachinko alone, the stocks of these companies are fully valued. Based on potential tailwind from a license award within 6 months, they could be vastly undervalued.
Each of the three noted here brings strength to a bid less based on financials than corporate focus, outlook and experience in the field.
With U.S. markets stumbling, the MSCI ACWI index is breaking down to new lows: defensive Sectors remain attractive. Relative to MSCI ACWI however, emerging markets are the place to be.China, Brazil, Hungary, Qatar, India, Poland, and Indonesia all display positive price and/or RS trends. In this report we recap technical important levels on all major indexes and highlight attractive stocks within Real Estate, Health Care/Pharma, Precious Metals Mining, and Utilities.
Recent figures show China slipping down the Soft Power Index while Chinese language learning in the USA is also in decline. Have tighter controls over education policy and restrictions on academic freedom in China spooked the crowd?
Hansoh Pharma, a leading generic pharmaceutical manufacturer, filed an application to list on the Hong Kong Stock Exchange. In this insight, we will cover the following topics:
Hansoh Pharma’s core products and major pipeline drug candidates.
At recent meetings with the Chinese operators and China Tower (788 HK), Alastair Jones came away convinced the operators were not looking at a massive 5G capex burst in 2019. However, Alastair also worries that in the end, the decision is not made by the operators but with an eye to larger policy issues. With Huawei/ZTE under pressure and the China/US trade was simmering the risks to capex have increased. That said, we do not expect large scale 5G capex in 1H19 and with capacity utilization of the networks low their may even be room for further capex declines. We look for more details of 5G plans to be released in 1Q19.
Softbank Group (9984 JP)’s market cap has consistently traded below its NAV. A popular expectation was that the Softbank Corp (9434 JP) IPO should be a catalyst to narrow the conglomerate discount (holdco discount). On its trading debut today, SoftBank Corp’s shares fell 14.5% from its IPO price of JPY1,500 to JPY1,282 per share – the worst first-day decline ever for a major IPO in Japan since the Japan Display (6740 JP) IPO in 2014.
In our previous research, we stated that the SoftBank Corp IPO is unlikely to meaningfully narrow SoftBank’s holdco discount. Our updated SoftBank SoTP analysis which reflects SoftBank Corp’s trading debut suggests that SoftBank’s holdco discount has not meaningfully narrowed.
SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.
Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year.
These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season.
There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.
We believe that TME is fairly valued based on peer companies’ price / sales ratios.
The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).
AsiaInfo Tech priced its IPO at HKD 10.50/share and will start trading today. Prior to the trading debut, in this short note, we summarize the latest information with updates on our valuation.
Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK)is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending.
HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn or HK$7.27/share) was 65%.
HE issued 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) to its parent in January this year, at HK$4.56/share or a 60.9% discount to the June 2017 book value. A similar discount to the June 2018 book value backs out HK$4.15/share, or ~67% upside from the undisturbed price, in line with the premium to ASMC’s Offer.
A privatisation would require a scheme-like vote for the H-shares. HEC holds no H shares. There are 675mn H shares and no single shareholder controls a 10% (or more) blocking stake.
Dissension rights are available according to HE’s articles of association, although what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident.
There are likely to be the customary PRC regulatory approvals required, however as HEC is already the controlling shareholder and an SOE, these conditions are not in doubt.
Should an offer emerge, expect completion in ~6 months from the initial announcement.
Last week’s report generated much discussion (see The S&P 500 Is In A Bear Market). Some of the questions related to the duration and downside target in a bear market. How far can stocks fall? How long will it last? What might be the trigger for a buy signal?
To reiterate our thesis from last week. Poor technical action and a recession forecast for late 2019 or early 2020 prompted the equity sell signal. The recession forecast stems from the combination of near-recession conditions based on conventional U.S. macro indicators, evidence of global weakness in both Europe and China, and the near certainty of a trade war which would further tank global growth.
What might turn this bear thesis around, or put a halt to the bear market? Here are a few possible fundamental triggers:
An end to the trade war
More stimulus underpinned by the ascendancy of MMT in fiscal policy circles
At this point, the jury is out as to whether these positive catalysts can actually happen, so we remain “data dependent”.
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 mainlanders in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.
Another busy week for IPO research from the GER team. This week, we recap the Tencent Music Entertainment (TME US) IPO which we noted is more fairly valued post its day one rally. Secondly, we dig into Chinese domiciled IPOs that are listed in the States and find some interesting trends on maximizing the ‘pop’, knowing when to get out and an assessment of longer-term performance. Arun nails his DCF valuation on WuXi AppTec Co. Ltd. (2359 HK) which closed at his base-case valuation while he recommends getting involved at the low-end for Shanghai Junshi Bioscience Co. Ltd. (1387344D CH) . Finally, Xinyi Energy Holdings Ltd (1671746D HK) spares further wrath as it postpones its IPO – Venkat digs into the reasons why he is cautious on the company.
Quote of the week:
Please note the post-apocalyptical fiction section has been moved to current affairs
– Sign in front of a UK bookstore
Video of the week: Santas hit the slopes in Maine
This is our last wrap of 2018 – we wish you a safe and happy festive period – and we will back in 2019!
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.
Amer Sports Oyj (AMEAS FH)announced (ANTA’s is here) an Offer at €40/share (a 39% premium to the undisturbed price of 10 September 2018), and announced that the Board of Directors of Amer Sports has decided to unanimously recommend that Amer Sports’ shareholders accept the Tender Offer. Several major shareholders holding 7.91% have irrevocably undertaken to tender, and Maa-ja vesitekniikan tuki r.y., who hold ~4.29%, have expressed that they view the Tender Offer positively. ANTA indirectly holds 1,679,936 shares (1.4%) as well.
ANTA and consortium appear to have the funding. As suspected and discussed in the original doc, FountainVest is a fair bit smaller than 50%. The equity stakes are, indirectly, 57.95% ANTA, 15.77% FountainVest, 5.63% Tencent Holdings (700 HK), and 20.65% Anamered Investments (Chip Wilson’s vehicle). There is a Shareholders’ Agreement which allows FountainVest the right to effect a Trade Sale if a “Qualified IPO does not take place within 5 years”, which seems reasonable. This effectively means that the company will be put up for sale in 5yrs.
It should be 11.5 weeks from Monday to Tender Offer completion, with 81-83 days between trade settlement and payment for Tender shares. That is ~27.1% annualized as of Friday’s close. This spread should drop at least by half after the Tender Launch scheduled for 20 December. Anti-trust and other authorities’ approval will be required. If ANTA gets over 90% of the shares, they intend to commence mandatory redemption (squeezeout) proceedings.
It should be noted that this deal offers significant leverage to ANTA and even more to the minority investors. ANTA is effectively collateralizing some LBO debt with its own earnings. As ANTA will not consolidate, the only way to see the numbers will be to look through the affiliate income. The saving grace here for everyone may be that it is remote from ANTA, which means transfer pricing will be carefully watched.
NHK reported JDI was in talks to sell about a 33% stake to a Chinese consortium for $440m (probably ¥50bn) which would value the company at about 3.5x (at the time) its current market cap. INCJ is also, apparently, considering support. These moves would go a long way toward restoring the company’s beaten-up balance sheet and the cost cuts should allow the company to survive – although Apple’s struggles still cast a shadow on a return to a strong level of profitability. JDI’s share price shot up 34.6% on the news on Friday.
JDI’s massive share price drop since its listing has been due to its weakened balance sheet and a slow shift to OLED, which this reported funding will go some way to addressing. Mio Kato, CFA‘s view is that JDI has some very promising businesses and the company is undervalued.
JDI still has an unhealthy over-dependence on Apple but they are doing everything they can to dilute the influence, increasing automotive display sales at double-digit rates and maintaining and growing their top market share in that segment, as well as producing more VR and notebook LTPS screens.
There still remains excess capacity in the industry due to Chinese government subsidies for display panel manufacturers and an over-ambitious build-out of both LTPS and OLED capacity. This is not going to improve drastically anytime soon but some of the planned OLED capacity expansions are being pushed out and much of the LTPS capacity increases have already been completed.
After Pioneer revealed in September it had sold its Tohoku Pioneer subsidiary to Denso Corp (6902 JP) for ¥10.9bn, it announced an MOU with Barings and went into debt to them. That seemed like “the end of the line” for the company. Pioneer needed a sponsor, but it was going to stay listed. Last week,Pioneer announced a “Partnership” with Baring Private Equity Asia which is a revitalization plan of ¥102bn. The deal offers minority shareholders an exit. The announcement does not mention investors are effectively being asked to approve their own squeezeout at 25% below the last price.
In the deal as presented, shareholders are being asked to approve an exit price 75% below 52-week highs which came AFTER the capital reduction in summer 2017, and after the sale of assets earlier this year, sell their shares at roughly one-third of existing book value per share, and sell its 3D LiDAR business and technology for… zero.
There are caveats. ALL of Pioneer’s net equity is intangibles. It has payables higher than receivables as of the end of September, and ¥25bn in net debt (increased by the ¥25bn lent by Baring). The company has roughly 2.5x EBITDA in inventory, and in a company which is losing money by being in business, inventory as marked is not as good as cash. The company has close to ~¥30bn in underfunded pension liabilities.
Travis does not expect a public activist outcry. Activists who wanted to buy into this have already done so. Any who do going forward have no vote because the record date for the vote was 7 December.
On December 3rd, the boards of both Hindustan Unilever (HUVR IN) (“HUL”) and GlaxoSmithKkine (“GSKCH”) approved a merger (subject to regulatory and shareholder approval) – at an exchange ratio of 4.39 HUL shares for every 1 GSKCH share – in a £3.1 bn deal. Combining with GSKCH should see HUL leapfrog both Britannia Industries (BRIT IN)and Nestle India (NEST IN)in food and refreshment revenue, and put it roughly on level pegging with ITC Ltd (ITC IN).
Approvals should be a foregone conclusion. With neither Unilever or GSK required to abstain, the 75% shareholder approval threshold is all but a lock. GSKCH’s shareholders get the benefit of HUL’s vast distribution network, while HUL gets a better understanding of the pharma channel.
Regulatory approval should not be an issue. 90% of cases handled by India’s anti-trust body CCI have been approved without the requirement for any modification. There is minimal overlap here – this is HUL’s big splash to build a sustainable and profitable food and refreshment business in India. Greater opposition would be expected if either BRIT, NEST or ITC made a tilt for GSKCH.
The transaction should be completed in one year, subject to regulatory and shareholder approvals. It’s a long-dated, but low-risk deal. Expect the tight spread to remain tight – this deal may close faster than the “expected” one-year timeframe.
Red Hat has set a meeting date of January 16, 2019 for shareholders to vote on the merger agreement withIntl Business Machines (IBM US), and related matters. Red Hat also set a record date of December 11th, 2018 for shareholders entitled to vote on the deal.
The fact the meeting date has been set means the SEC chose not to review the merger proxy (a less common occurrence than a review) and notified the companies of this decision within the expected 10 calendar days.
While the Company issued the press release, a new proxy has not yet been filed. John DeMasi expects we will see a definitive merger proxy filed within the next few days. Since the HSR U.S. antitrust 30 day waiting period will not expire until December 21st, he doesn’t expect an update on HSR in the definitive proxy, and it still appears the EC Competition filing has not been made according to the EC website.
John believes the deal is still on track for a Q2/Q3 2019 close and believes the risk/reward looks attractive here.
Reportedly, preliminary discussions are underway between NineEntertainment Co Holdings (NEC AU) and MRN’s second-largest shareholder, John Singleton. This development is not entirely unsurprising; it appears formal discussions were deferred until the Nine/Fairfax Media (FXJ AU) merger was formally completed (which occurred on 7 December). Nine acquired Fairfax’s 54.5% stake in MRN in the merger, discussed in my insight Nine & Fairfax – Integrated Advertising.
Also reported in the press, Nine has offered $2/share (a 9.3% premium to the closing price of A$1.83 on December 4th), with Singleton (a willing seller) believed to be holding out for $2.15/share. In a further twist, Alan Jones, with 1.27% of MRN, is understood to have certain conditions/clauses attached to that stake, which may make an offer tabled by Nine potentially untenable.
MRN was trading between A$1.20 and A$1.60 during the first half of the year. Following the announcement of the Nine-Fairfax merger in July, the share price reached a high of A$2.18. While the expected offer price of A$2.00 is 8.3% lower than this lifetime high, it is still 26% higher than the stock’s undisturbed price of A$1.59 before the Nine-Fairfax merger deal was announced.
Nine is interested in mopping up shares in MRN it does not already own. John Singleton is a seller, at the right price. Nine’s CEO Hugh Marks is keen to move quickly, not just taking full control of MRN, but also divesting assets that do not focus on digital subscriptions, mass audiences andnational advertisers. It’s now a question of how much Nine is willing to pay, and the added benefits therein to Nine from a privatisation compared to its current majority and consolidating stake.
While Inc and Healthcare are not cross-linked by any shareholding, Healthcare is ostensibly Celltrion’s internal sales arm. Their fundamentals and prices should be (& are) highly correlated.
Sanghyun initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. The ongoing FSS investigation is hammering both, Healthcare more so as it is more directly exposed. But given what happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.
Sigma Healthcare had seen its share price fall 70% in 18 months after its relationship with MyChemist/Chemist Warehouse went sour in 2017, then their existing contract was not renewed for post-June 2019. This appears to be because Sigma did not want to continue trading under overly-generous (to MC/CW) terms and capital usage.
In September, API started buying shares in Sigma Healthcare on the market when they were down by half from the July 2017 news, buying just under 5% before approaching Sigma with an Indicative Proposal to Merge in a Scheme. Sigma responded saying it was willing to engage with API, but API did not respond in the subsequent months it appears. Thursday API bought half of Allan Gray’s stake to lift its own stake to 13.95%, then it publicly announced the same Indicative Proposal.
So now we wait. There is a business review in progress. Full year results for Sigma are due in March. ACCC clearance may take until mid-year.
The deal is at a nice premium – 46.8% to the one-month average, and 69% to the day before. It was about 10% better than where API started buying.
But it may not be good enough. The deal offers some cash, but also offers expensive scrip. API appears to need this deal as much as some would say Sigma does.
Sigma is in the process of doing a zero-based full business review with Accenture and indications are that everyone thinks the company is worth a lot more than where it was trading last week.
This deal looks like it has a big premium but it may not be enough.
Huatai Securities Co Ltd (A) (601688 CH)(and Huatai H) announced that the CSRC had given the company approval to list up to (but not more than) 82,515,000 GDRs. The English language LSE announcement of the “Intention to Float” can be found here and here. Each GDR represents 10 A shares, that is up to RMB13.7bn at the (then) last traded price of the A shares prior to the announcement. If all the shares were issued that would be about 10% of the share capital of Huatai (pre-issuance). This GDR launches the London side of the London-Shanghai Connect. A prospectus is expected in the new year.
Assuming the GDRs trade similarly to the Hs, or even 1% of their maximum issuance quantity, and assuming they have a similar discount to the As as do the Hs, the GDRs will not likely trade more volume than the H Shares.
It is not clear WHY the GDRs would, over time, maintain a tighter discount to the A Shares than the H Shares would …. Except for the fungibility. Which may be the only reason to hold the GDRs at a 20% discount when you can get the H-shares at a 30+% discount. But the system may not be ready to handle GDR creation by mainland domestic investors trying to export capital, even at a discount.
The whole deal comes across as somewhat iffy. It is not clear why the deal needs to be done other than to fill a political need to get the ball rolling. But one wonders why the London-Shanghai Connect ball actually needs to be rolled.
Naspers’ recent underperformance against Tencent has resulted in the discount to NAV widening to near-on 12 months lows. While Naspers remains a function of what happens to Tencent, it offers potentially interesting long-term prospects.
This pseudo-venture capital company is taking steps to narrow the valuation gap via the reduction in its Tencent stake, the sale of successful investments (Flipkart and tbogroup), the listing of profitable entities (Multichoice), the investment in specific areas (classifieds, online retail, payments businesses and food delivery), working to reduce its exposure to the Johannesburg Stock Exchange, and perhaps pursue a dual listing outside of SA, such as Hong Kong. To me, Naspers’ risk profile appears attractive here.
New Street Research‘s Alastair Jones views the most recent Naspers results as broadly positive with continued progress in profitability from its e-commerce assets. He also believes that, given moves to unbundle the pay-TV assets in 2019, there is scope for the NAV discount to narrow. The current low/negative valuation for the unlisted assets ignores their significant value.
Curtis Lehnert recommends a Toyota Industries’ set-up at current levels which are in excess of -2 Standard Deviations below the long-term average, while Toyota Industries is trading at a 35% discount to his NAV – Toyota Industries’ stake in Toyota Motor accounts for 60%).
The group boasts the #1 global market share in forklifts with an estimated 20% market share. Toyota Industries’ closest competitor in the materials handling business is KION Group AG (KGX GR); however, Curtis estimates the market is implying 0.83x for these ops, 28% lower than Kion’s 1.15x.
Newton’s Three Laws of Motion And How They Pertain to Index Inclusions
Travis Lundy noted that Newton’s Third Law, commonly understood that for every action there is always an equal and opposed reaction, applies in some measure to index inclusions.
For every index upweight, there is an equal and opposite downweight.
Travis published his H/A Spread Monitor Project offering a brief look at recent changes in H-Share and A-Share spreads, Southbound flow and impact, and where the spreads are trading within their own historical ranges. My share class monitor provides a snapshot of the premium/discounts for 215 share classifications around the region. Ke Yan, CFA, FRM issued his Discover HK Connect series, to help understand the flow of southbound trades via the Hong Kong Connect.
The 1P (005385 KS)/ 2P (005387 KS) dividend yield difference of 0.53% is close to a year high. Of interest is the recently announced hydrogen cell investment, which may be considered a signal that the HMG-government relation has vastly improved. This potentially suggests that any HMG restructuring may get accelerated, which would be positive for 1P. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time for 1P to Catch Up)
OTHER M&A UPDATES
Trade Me (TME NZ)and Apax Partners have entered into a scheme implementation agreement. Apax Funds have increased their offer price to $6.45/share (from $6.40) since the indicative proposal, following the completion of their due diligence. The Board has unanimously backed the offer. A booklet containing information relating to the scheme is expected to be mailed to Trade Me shareholders in March 2019. The Board expects that Trade Me shareholders will have the opportunity to vote on the scheme at a meeting in April 2019. If all the conditions are satisfied, the scheme is expected to be implemented in the second quarter of 2019. Hellman & Friedman was not expected to materially counter and promptly pulled out of the race.
Cityneon Holdings (CITN SP). West Knighton now has 98.6% of shares out and will move to compulsory acquire shares it does not own. The closing date has been extended until the 26 December.
Sinotrans Shipping (368 HK). As expected from the onset, shareholders approved the privatisation. Turnout was low – around 47.6% of shareholders entitled to vote, did so. Friday was the last day of trading. Cheques are expected to be dispatched on or before the 22 Jan 2019.
Stanmore Coal (SMR AU)‘s has released the Target Statement. The board continues to recommend shareholders reject the $0.95/share unsolicited Golden Investments. The IFA has a fair value range of $1.48-$1.90/share. Shares closed at A$1.04 on Friday.
CCASS
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.
With the FTSE ST REIT index’s decline of 9.3% year-to-date, value has emerged for some of the bellwether names in the Singapore REITs sector. The forward yield spread between these REITs and the Singapore government 10-year bond yield (2.13%) currently stand at least 390 basis points. In view of the increasing concerns over global economic growth, rising interest rates and the ongoing trade tension between the US and China, I present three quality REITs with fortified portfolios that are well-positioned to weather the near-term market uncertainties. They possess growth potential from acquisitions, positive rental reversions and deliver resilient forward distribution yield of more than 6%. Some of the bellwether names in the more resilient retail REIT sector, while offering lower yield of around 5.0% – 5.7%, are also in my buy list.
After months of skirting around inventory build-up and a weakening demand outlook, Micron used their latest earnings report to call closing time on a revenue and profitability party that began in Q4 2016 and just got better and better with each passing quarter.
Micron reported Q1 FY2019 results on December 18’th and while revenues were largely in line with recently lowered guidance from the company, their outlook for both Q2 and 2019 as a whole was worse than even the most bearish of expectations.
Citing high inventory levels at key customers, Micron guided Q2 FY2019 revenues for $6 billion at the midpoint, down a staggering $1.9 billion, 24% QoQ and 18% YoY. At the same time, Micron revised down their CY2019 bit demand growth forecast for both DRAM (from 20% to 16%) and NAND (35%, the bottom of the previously forecasted range). The company plans to adjust both CapEx and bit supply output downwards to match.
In the wake of their guidance bombshell, Micron’s share price closed down almost 8% the following day to end the session at $31.41, a level last seen in August 2017. Micron is unique in reporting out of sync with its industry peers, making it the proverbial canary in a coal mine. The company’s gloomy outlook and clarion call for further CapEx reductions in a bid to rebalance supply and demand spells troubled times ahead for an already beleaguered semiconductor segment ahead of the upcoming earnings season.
Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes.
This month’s issue covers the following topics:
November express parcel pricing remained weak. Average pricing per express parcel fell by 7.8% Y/Y to just 11.06 RMB per piece. November’s average price represents a new all-time low for the industry, and November’s Y/Y decline was the steepest monthly decline in over two years (excluding Lunar New Year months, which tend to be distorted by the timing of the holiday).
Express parcel revenue growth dipped below 15% last month. Weak per-parcel pricing pulled express sector Y/Y revenue growth down to just 14.6% in November, the worst on record (again excluding distorted Lunar New Year comparisons). Chinese e-commerce demand has slowed and we suspect ‘O2O’ initiatives, under which online purchases are fulfilled via local stores, are also undermining express demand growth.
Intra-city pricing (ie, local delivery) remains firm relative to inter-city. Relative to weak inter-city express pricing (where ZTO Express (ZTO US) and the other listed express companies compete), pricing for local, intra-city express deliveries remained firm. In the first 11 months of 2018, express pricing rose 1.7% Y/Y versus a -2.9% decline in inter-city shipments (international pricing fell sharply, -14.5% Y/Y). Relatively firm pricing on local shipments may make it hard for local food delivery companies like Meituan Dianping (3690 HK) and Alibaba Group Holding (BABA US) ‘s ele.me to beat down unit operating costs.
Underlying domestic transport demand held up well again in November. Although demand for speedy, relatively expensive express service (and air freight) appears to be moderating, demand for rail and highway freight transport has held up well. The relative strength of rail and water transport (slow, cheap, industry-facing) versus express and air freight (fast, expensive, consumer-oriented) suggests a couple of things: a) upstream industrial activity is stronger than downstream retail activity and b) the people in charge of paying freight are shifting to cheaper modes of transport when possible.
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing appears to be falling faster than costs can be cut. Overall domestic transportation demand, however, remains solid and shows no signs of slowing.
After high-speed climb, bike-share giant collapses
A brighter new year for China’s stock market?
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.
How can we explain the fact that in the five years from 2012 the number of tourist visits to China fell from 11.6 to 10.5 million per year? True, business and family reunion visits have risen, but such a culturally rich country should have more tourists.
