Hengan Intl Group (1044 HK), China’s leading sanitary towel and nappy producer, has been targeted by a short seller, Bonitas Research. Hengan has denied Bonitas’ allegations to which Bonitas has responded that Hengan’s response was weak and evasive. The shares have continued to slide suggesting that investors are less than convinced with Hengan’s rebuttal.
The aim of our note is to analyse alternative financial metrics to judge if Bonitas’ allegations are groundless or have some substance. Overall, our analysis suggests that Bonitas’ claims have some substance and investors should not be so quick to dismiss them.
Alpha Smart (ALS HK), the parent of Chinese menswear fashion retailer GXG, plans to raise US$300m in its Hong Kong IPO. L Catterton, LVMH’s investment arm, along with another PE investor, owns a 73% stake in the company.
Earnings have been consistently growing with the highest contribution still coming from its flagship brand “GXG”. The recent expansion of the online channel has further aided sales growth, with ASL claiming to be the largest menswear retailer in terms of online sales.
Apart from a large dividend payout which covered half of the acquisition costs for L Capital, nothing much seems to have changed recently. In addition, operating cash flow has not kept pace with earnings due to a consistent increase in inventory. To add to that there are a few related party issues as well including some stores being run by former employees.
An 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.
The Nitty-Gritty Details Follow
There are five sets of data for now: 1. HK-Shanghai Connect Southbound Turnover and Net Buying vs Indices and HKEx Turnover 2. Top 20 Net Southbound buys and sells over the last 5 days 3. H-Share/A-Share Discounts, Changes in Discount over 1 and 4 wks, Changes in Southbound Flow 4. Southbound Flow as a % of Volume and Float on All Eligible Stocks 5. H-Share/A-Share Sector Discount Ranges and Averages Charted Over the Last 12 months
Historical Southbound Flows: Outright & vs HKEx Turnover
Net Southbound flows continue to be somewhat lacklustre. November was negative after a couple of positive months. December so far is very mildly positive. Northbound had been strongly positive for months, but say RMB 5.8bn of outflows in October only to rebound to RMB +32.5bn in November. So far this month, NB is positive too.
data source: capitalIQ, HKEx, calculations Travis Lundy
Wuxi Apptec’s USD 1 billion IPO was priced at HKD 68/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.
Tencent Music Entertainment (TME US) rallied up 14% on day one of trade to hit our PT and closed up c8% on its first day of trade. Given the skepticism/ambivalence on the story, poor macro backdrop, weak recent listings from China in the US alongside a full-sized deal and a mid-December launch, this day one performance is a solid result in our view. We outline some further thoughts and next steps for the TME story below.
A recap of the trade: We recommended buying Tencent Music at the low end of the range ($13) and we estimated a base-case fair value of 14% upside. Tencent music rallied up 14% intraday on its first day of trade and closed up c8%. We think this is a fairly good result given the skepticism/ambivalence on the name alongside a weak macro backdrop and a mid-December deal-launch.
Historical week one trade provides mixed support for further gains:
Long-term – we prefer TME to Spotify but recent events give us pause on the cautious near-term view for Spotify:
If there is one thing China is acutely aware of it is the debt risks. For many years, I questioned whether China even understood the enormity of its debt risks. Due to a number of factors, I have actually become quite convinced that yes they do understand these debt risks. It should be emphasized that just because they understand the size and enormity of the debt risks does not mean they are going to take corrective steps that in normal financial markets we would expect (I will return to this point later). However, they do clearly grasp the underlying risks of the debt buildup.
Xinyi Energy Holdings Ltd (1671746D HK) is a solar farm operator seeking a listing on Hongkong stock exchange raising up to US$680M (including Greenshoe). The company announced a price range of HK$1.89/share to HK$2.42/share valuing the company between HK$12.5B to HK$16B. The company is issuing 1.9B shares and 282M shares of Greenshoe as part of the IPO. The offer price will be announced on 13th December. The shares are expected to trade on Hongkong Stock Exchange on the 21st December.
Based on GER’s analysis valuations appear rich and the investors should avoid the IPO which are priced at a significant premium at the lower end of offer price compared to its peers.
Trade Me (TME NZ), the largest online auction platform operating in New Zealand, has entered into a scheme implementation agreement with Apax Partners. Apax Partners has upped its bid for Trade Me from NZ$6.40 to $6.45 a share, to match Hellman & Friedman’s bid.
Hellman & Friedman has until the shareholder vote scheduled for April 2019, to make a binding offer which is superior to Apax Partners, according to press reports. While Hellman & Friedman will likely have one last roll of the dice with an improved bid, we continue to believe that that the formal “winning” bid is unlikely to present a material bump.
At the time of the IPO we were quite negative on China Tower (788 HK) prospects. However, in recent calls and meetings our view has changed and become more constructive. Chris Hoare now believes that China Tower is managing to generate co-location growth outside the Master Services Agreement (MSA) and at a much lower level of capital intensity (perhaps up to 50%) than indicated in the IPO. Management has also proven to be more open to shareholders than expected and with lower capex, higher FCF generation we upgrade to a BUY with a HK$1.60 target price. The stock has started to move as the market has begun to understand the more positive outlook. It will be interesting to see if China Tower is allowed to retain these benefits long term.
Ahead of Tencent Music (TME US)‘s IPO today , we have done a deep-dive analysis on the past 28 major Chinese IPOs that have listed in the US. We note the following points
A higher pop associated with a lower free float?
If it starts weak , we wouldn’t assume disaster – historically shares have broken above IPO price at some point during day one trade
Day one moves by pricing range – pops across the board
Natural Food International H (1837 HK)‘s IPO was priced at the low-end at HKD1.62/share. The retail tranche was 1.4x covered and the institutional tranche was said to be moderately over-subscribed. I have covered most aspects of the deal in my earlier insight,
In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.
Mobvista (1860 HK)‘s IPO was priced just above the low-end at HKD4/share, the retail tranche was 1.8x covered while the institutional tranche was moderately oversubscribed. I have covered most aspects of the deal in my earlier insights:
In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.
Following David Blennerhassett‘s recent StubWorld note, we wanted add a bit more detail on the non Tencent Holdings (700 HK) part of Naspers (NPN SJ). In any discussion of Naspers, this tends to get overlooked but in fact, Naspers has generally done quite well in these businesses, by building them, monetizing them, and in some cases selling them. Alastair Jones 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.
Tencent Music Entertainment (TME US)‘s IPO was priced at the low-end US$13/share. The shares will begin trading tonight. As per earlier media reports, books were well covered.
I have covered most aspects of the deal in my previous series of insight, links to which are below. In this insight, I’ll re-look at what peers have been doing since book building began and how its main listed peer Spotify Technology Sa (SPOT US) has been performing. I’ll also provide a sensitivity table of the implied valuations at different price points and my thoughts on the price range for near-term trading.
Global equities (MSCI ACWI) are testing 52-week lows as prices have been consolidating over the last 1-2 months. Our outlook for global equities remains extremely cautious and we expect downward consolidation to continue. Equity prices will need to show signs of bottoming in order for this outlook to change. In our December International Strategy, we explore various themes which lead to our cautious outlook, provide a technical appraisal of major world markets, explore a possible bottom in the Chinese market, and highlight attractive setups in the Consumer Staples, Communications, Health Care, and Utilities Sectors.
The falling CPI and PPI matters for important reasons in that Chinese analysts are talking about potential deflation in 2019 absent stimulus. Overall the CPI increased 2.2% in YoY comparison. Food prices have slowed an overall increase, but some key sectors in food are sluggish and as a result a concern for us.
Dena Co Ltd (2432 JP) used to be the GO-GO internet stock for both retail and institutional investors in Japan during the previous bull run before 2008 and trading at 40-50x PER. The multiples have since then collapsed to 10-20x PER although the business prospect remains solid if not better. Benefiting from the increasing regulation in China, DeNA signed an agreement with Tencent Holdings (700 HK) to distribute Arena of Valor in Japan which will boost revenue and improve margin. At 14x PER and 1.2x PBR, DeNA looks attractive.
Bond investors have recently joined their equity counterparts and raised the ante on the Federal Open Market Committee (FOMC) to pause further increases in the federal funds rate.
Despite the lack of sufficient evidence that economic growth has reverted to a more sustainable footing, bond investors have reverted to playing the long-standing game of chicken with the FOMC about the economy’s ability to withstand members’ estimate of the neutral federal funds rate.
Concerns about yield curve inversion have recently returned, but investors are struggling to adjust to a more normal environment where short-term interest rate volatility is no longer being artificially suppressed by Fed policy.
The persistently low term premium demanded by bond investors has boosted financial accommodation at any given policy rate level, thereby raising the risks that the FOMC may still increase the federal funds rate even after the yield curve has become inverted in order to achieve sustainable growth.
East Asian economies have imparted a downward bias on US inflation and bond yields over the past 25 years and have consequently pushed the Fed into adopting more accommodative policy settings over the aforementioned period.
The FOMC needs unambiguous evidence of slowing jobs growth towards levels that alleviate downward pressure on the unemployment rate before contemplating a pause in hiking the federal funds rate at the March FOMC meeting.
CMGE is an intellectual-property (IP) oriented mobile game operator. The company delisted from Nasdaq in 2015 and tried to do a backdoor listing on Shenzhen Exchange in late 2015 but it was canceled due to unfavorable market condition. It is now trying to list on the Hong Kong Exchange when the sentiment is poor due to the game approval suspension.
In this insight, we will take a look at the financial performance, key operating metrics, and analyze its games pipeline.
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.
An 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.
The Nitty-Gritty Details Follow
There are five sets of data for now: 1. HK-Shanghai Connect Southbound Turnover and Net Buying vs Indices and HKEx Turnover 2. Top 20 Net Southbound buys and sells over the last 5 days 3. H-Share/A-Share Discounts, Changes in Discount over 1 and 4 wks, Changes in Southbound Flow 4. Southbound Flow as a % of Volume and Float on All Eligible Stocks 5. H-Share/A-Share Sector Discount Ranges and Averages Charted Over the Last 12 months
Historical Southbound Flows: Outright & vs HKEx Turnover
Net Southbound flows continue to be somewhat lacklustre. November was negative after a couple of positive months. December so far is very mildly positive. Northbound had been strongly positive for months, but say RMB 5.8bn of outflows in October only to rebound to RMB +32.5bn in November. So far this month, NB is positive too.
data source: capitalIQ, HKEx, calculations Travis Lundy
Wuxi Apptec’s USD 1 billion IPO was priced at HKD 68/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.
Tencent Music Entertainment (TME US) rallied up 14% on day one of trade to hit our PT and closed up c8% on its first day of trade. Given the skepticism/ambivalence on the story, poor macro backdrop, weak recent listings from China in the US alongside a full-sized deal and a mid-December launch, this day one performance is a solid result in our view. We outline some further thoughts and next steps for the TME story below.
A recap of the trade: We recommended buying Tencent Music at the low end of the range ($13) and we estimated a base-case fair value of 14% upside. Tencent music rallied up 14% intraday on its first day of trade and closed up c8%. We think this is a fairly good result given the skepticism/ambivalence on the name alongside a weak macro backdrop and a mid-December deal-launch.
Historical week one trade provides mixed support for further gains:
Long-term – we prefer TME to Spotify but recent events give us pause on the cautious near-term view for Spotify:
If there is one thing China is acutely aware of it is the debt risks. For many years, I questioned whether China even understood the enormity of its debt risks. Due to a number of factors, I have actually become quite convinced that yes they do understand these debt risks. It should be emphasized that just because they understand the size and enormity of the debt risks does not mean they are going to take corrective steps that in normal financial markets we would expect (I will return to this point later). However, they do clearly grasp the underlying risks of the debt buildup.
Xinyi Energy Holdings Ltd (1671746D HK) is a solar farm operator seeking a listing on Hongkong stock exchange raising up to US$680M (including Greenshoe). The company announced a price range of HK$1.89/share to HK$2.42/share valuing the company between HK$12.5B to HK$16B. The company is issuing 1.9B shares and 282M shares of Greenshoe as part of the IPO. The offer price will be announced on 13th December. The shares are expected to trade on Hongkong Stock Exchange on the 21st December.
Based on GER’s analysis valuations appear rich and the investors should avoid the IPO which are priced at a significant premium at the lower end of offer price compared to its peers.
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.
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.
IPO listings this week have mostly been within our expectation. Mobvista (1860 HK), Natural Food International H (1837 HK), and Fosun Tourism (1992 HK) have all struggled to hold on to their IPO price on the first day of trading. Unfortunately, WuXi AppTec Co (2359 HK) has also struggled on this first day despite our expectation that the company should be trading at a relatively smaller 19% A-H premium which would imply about 11% upside based on Ke Yan, CFA, FRM‘s sensitivity analysis and Wuxi Apptec’s A share Friday close price.
In the US, Tencent Music Entertainment (TME US) performed well within our expectation. The company’s share price opened about 9% above IPO price. As Sumeet Singh has mentioned in his insight, Tencent Music IPO – Firework – Trading Strategies, this is unlikely going to be a bumper IPO and short-term investors could take profit at high single-digit to low double-digit returns on debut. Indeed, after a decent debut, TME has collapsed below its IPO price, probably due to investors taking profit as the broad market traded poorly on Friday.
Next week, all eyes will be on Softbank Corp (9434 JP)‘s debut and Mio Kato, CFA summarised in his note some of the reasons why Softbank Corp could perform poorly in the near term. Bookbuild results have been mixed. Bloomberg report suggested that Softbank’s international bookbuild was 2-3x oversubscribed while retail offering was at almost 2x. However, Nikkei Asian Review’s article reported that it has been a struggle to sell the IPO shares to retail investors. In any case, we will put out a note next week on our thoughts on bookbuild, updated valuation of peers, and how we think the IPO will likely trade after the recent series of events.
Our overall accuracy rate is 72% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings this week
Shanghai Henlius Biotech (Hong Kong, ~US$500m)
Ingrid Millet (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.
Weichai Power, China’s largest independent Diesel engine producer, has been looking for a new core business to survive in long term downward trend of its current core business (Diesel engine for commercial vehicle and construction machines) since 2012 when it acquired 25% stake of KION Group AG (KGX GR). By now Weichai owns KION (materials handling equipment), Dematics (integrated automated supply chain technology, directly own ed by KION), Power Solutions International (PSIX US) (cleantech engine). It also has stakes in Ballard Power Systems (BLDP CN) (PEM fuel cell products), Ceres Power Holdings (CWR LN) (fuel cell technology and engineering). Lately, Weichai entered into an agreement with Westport Fuel System (WPRT.US) to develop and commercialise HPDI 2.0.
It seems Weichai decides to put its chip on fuel cell and low-emission engines. However, our analysis shows all the above investment would not be enough to secure Weichai’s market outlook in the next 5-10 years.
This note focus on an evaluation of Weichai’s technology choices on a 5-10 year time horizon. We will discuss the company’s 12-months view in another note.
New industry data this week, plus take-aways from our latest discussions with company managements, all confirm that the likely trend in the industrial segment of the global real estate industry is for rental rates to rise.
The growth in e-commerce is continuing to accelerate globally. In some key market, this is “triggering a land grab for distribution space that experts say is accelerating”.
Therefore, the increasing scarcity value of well situated industrial real estate in high demand markets is likely to continue to push up rental rates to higher and higher levels.
Given our expectation that fundamentals driving the growing demand for Last Mile Industrial real estate are likely to persist, we continue to expect this segment to outperform the broader Real Estate sector for the foreseeable future.
The National Bureau of Statistics (NBS) released today the key China data for November, related to property sales and investments by developers at a national level, showing a gradually decelerating growth of new home sales volumes (residential gross floor area for “commercial residential” property) year-to-date year-on-year and the decline on a 3-month year-on-year basis, with a sustained pace of new starts and investments, slightly slower land acquisition growth. In line with our expectations.
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.
Following David Blennerhassett‘s recent StubWorld note, we wanted add a bit more detail on the non Tencent Holdings (700 HK) part of Naspers (NPN SJ). In any discussion of Naspers, this tends to get overlooked but in fact, Naspers has generally done quite well in these businesses, by building them, monetizing them, and in some cases selling them. Alastair Jones 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.
Tencent Music Entertainment (TME US)‘s IPO was priced at the low-end US$13/share. The shares will begin trading tonight. As per earlier media reports, books were well covered.
I have covered most aspects of the deal in my previous series of insight, links to which are below. In this insight, I’ll re-look at what peers have been doing since book building began and how its main listed peer Spotify Technology Sa (SPOT US) has been performing. I’ll also provide a sensitivity table of the implied valuations at different price points and my thoughts on the price range for near-term trading.
Global equities (MSCI ACWI) are testing 52-week lows as prices have been consolidating over the last 1-2 months. Our outlook for global equities remains extremely cautious and we expect downward consolidation to continue. Equity prices will need to show signs of bottoming in order for this outlook to change. In our December International Strategy, we explore various themes which lead to our cautious outlook, provide a technical appraisal of major world markets, explore a possible bottom in the Chinese market, and highlight attractive setups in the Consumer Staples, Communications, Health Care, and Utilities Sectors.
The falling CPI and PPI matters for important reasons in that Chinese analysts are talking about potential deflation in 2019 absent stimulus. Overall the CPI increased 2.2% in YoY comparison. Food prices have slowed an overall increase, but some key sectors in food are sluggish and as a result a concern for us.
