Consumer

In this briefing:

1. Tesla’s Weak QTD Deliveries Signal March Expectation Madness
2. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW
3. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover
4. ECM Weekly (30 March 2019) – ESR, Yunji, Ruhnn, Jinxin Fertility, Metropolis Health, Viva Biotech
5. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?

1. Tesla’s Weak QTD Deliveries Signal March Expectation Madness

EV-Sales’s report of global electric vehicle sales for February confirmed that Tesla Motors (TSLA US) total deliveries at just over 14,000 were the weakest for any month since May 2018, the first month of the full ramp-up of the flagship Model 3. 

So for the disastrous January and February combined, Tesla delivered about 24,900 cars, only a third of the cars it projected for the entire first quarter. 

This explains the chaos and drama which dominated March as Tesla hurried through additional price cuts and layoffs, bungled the launch of a harried new online-sales strategy, and threw together a reveal of the disappointing and far-from-ready Model Y (see my reports Tesla’s Plan B 2.0; Y Not and Tesla: Now We Know the Y, But Not the How and Tesla Bonds Go Boom). 

Less convincing were Tesla’s conveniently “leaked” teases over the past couple of weeks about a “massive increase in delivery volume” and “Vehicle Delivery Help Needed!” to get a remarkable 30,000 cars to customers the last 15 days of March. Especially since several price cuts already this year have yet to reignite fading demand even for Model 3, much less the aging Models S and X amid accelerating competition from stronger rivals and Tesla’s alarming quality and service troubles which are driving away customers.

We’ve seen this quarter-end movie too many times, and investors responded last week by selling off Tesla stock and bonds to six-month lows.

Thankfully, we are just days away from finding out Tesla’s deliveries for the quarter, which the company will likely report on or before Tuesday. I’m guessing it won’t be pretty.

Market concensus estimates have been falling like meteors the past couple of weeks, and still seem far too ambitious versus my estimates.

Bond Angle analysis continues below.

2. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW

Last Week in Event SPACE …

• The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
• The value enhancement to Naspers Ltd (NPN SJ) from spinning off and separately listing its stake in Tencent Holdings (700 HK) is not apparent.
• Trading around its “undisturbed” levels, Lynas Corp Ltd (LYC AU) looks like a short after rejecting Wesfarmers Ltd (WES AU)‘s left-field unsolicited proposal.
• The gloves are off as Merck KGaA (MRK GR) announced an unsolicited $48/share cash tender offer for Versum Materials (VSM US). 
• With the ACCC’s blessing, now is a good time for Xenith Ip (XIP AU) to jettison Qantm Intellectual Property (QIP AU) and engage with IPH Ltd (IPH AU).
• While the deal for Scout24 AG (G24 GR) is likely to get up, someone else coming over the top at this late stage is not impossible.
• PCCW Ltd (8 HK) is “cheap” relative to HKT Ltd (6823 HK) – a catalyst to narrow the discount would be helpful.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nissan Motor (7201 JP) (Mkt Cap: $32bn; Liquidity: $98mn)

Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.

• Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
• If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
  
• Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP.  He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
• Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.

Links to:
Mio’s insight: Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger.
Travis’ insight: Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Samsung Electronics (005930 KS) (Mkt Cap: $265bn; Liquidity: $464mn)

Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.

• And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
• SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.

(link to Sanghyun’s insight: Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price)

Briefly …

Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $1bn; Liquidity: $7mn)

Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme.  This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.

• Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia. 

• This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago.  Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25. 
• A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
• At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
  

(link to Travis’ insight: Wesfarmers Puts Out A Bid for Lynas)

Xenith Ip (XIP AU) (Mkt Cap: $115mn; Liquidity: $1mn)

The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.

• None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
• With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.

(link to my insight: Xenith Is Running Out Of Excuses)

China Power New Energy Development Co (735 HK) (Mkt Cap: $581mn; Liquidity: $1mn)

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

• This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
• Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
• The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend. 

(link to my insight: China Power New Energy To Be Delisted After SOE Injection Abandoned)

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $79mn)

Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.

• Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
• The shareholder vote on the VSM/ENTG is scheduled for April 26^th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
• Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”

(link to John DeMasi‘s: Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III))

Scout24 AG (G24 GR) (Mkt Cap: $5.6bn; Liquidity: $20mn)

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer.  The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.

• The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming. 
• Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
• Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.

(link to Travis’ insight: Scout24 Tender Offer Launched: Price Still Not Quite Full)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.

• Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
• The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”.  It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing. 
• Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return.  I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.

(link to my insight: StubWorld: Naspers Embeds Another Layer Into Tencent)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.

• The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
• As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.

(link to Curtis’ insight: TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On)

• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s SPA has completed – you can see the movement in shares on CCASS – triggering the MGO.

  Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.

• Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.

• Ophir Energy (OPHR LN)‘s shareholders approved Medco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.

• 9.12% of shares out have tendered into Delta Electronics Thai (DELTA TB)‘s Offer, bringing the Offeror’s total holding to 30.05%. 
• The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.

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.   

3. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

• Hankook Tire Holdco/Sub are at +2σ for 5 consecutive days now. It was reported on Mar 25 that Sub (Hankook Tire) was on the verge of taking over Hanon Systems at a hefty 70% premium. Hankook Tire pays ₩5tril for Hahn & Co’s 50% stake.
• ₩5tril is really a lot for the Group. Holdco will also have to be heavily involved in funding. Whatever suffering Sub will have to endure should also be nearly equally applied to Holdco.
• Only long-term oriented local public offering funds had heavily dumped Sub shares. In contrast, highly short-term oriented local hedge funds (PEs) had rather shorted Holdco in the same time span. Sub disappoints and alienates a lot of long-term investors but it was Holdco who attracted the attention of short-term traders.
• Current +2σ divergence stayed for several days now. Considering where local short sellers are, I don’t think it will last much longer. I’d join local short-sellers. Just for a safer setup, I’d do pair trades, go long Sub and short Holdco.

4. ECM Weekly (30 March 2019) – ESR, Yunji, Ruhnn, Jinxin Fertility, Metropolis Health, Viva Biotech

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.

Accuracy Rate:

Our overall accuracy rate is 72.4% for IPOs and 63.9% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• Haitong UniTrust International Leasing (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.

News on Upcoming IPOs

• As IPO flood recedes, Asia bankers bet on follow-on capital raising
• Bitmain forced to delay Hong Kong IPO amid crypto-mining decline

This week Analysis on Upcoming IPO

• Viva Biotech (维亚生物) IPO: Warning Signs from 2018 Numbers (Part 2)
• Metropolis Healthcare IPO – Fairly Valued, at Best
• Jinxin Fertility (锦欣生殖) Pre-IPO: Strong Foothold in Sichuan but Weak Sentiment for Sector
• Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
• Yunji (云集) Pre-IPO Review – Poor Disclosure on Data
• ESR Cayman Pre-IPO- First Stab at Valuation
• Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward
• Dongzheng Auto Finance (东正汽车金融) IPO Review – Relaunched at Lower Price
• SNK Corp (950180 KS)

5. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?

• Carl Icahn has built his position since February 7th to where he now controls over 28% of the stock of Caesars Entertainment Corporation.
• He has already put three members on the board and will get a fourth seat if management can’t name a new CEO by April 15th.
• Icahn’s track record in casino deals has made him over $2.5bn since 1998/ Investors who joined him have made solid returns, deal after deals.

In this briefing:

1. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?
2. 7-Eleven in India: Standard Franchise Model Would Require Minor Tweaks in India
3. Rakuten (4755 JP): Lyft IPO’s Big Lift Unlikely to Lead to a Sustained Re-Rating
4. Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell

1. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?

• We evaluate the attractiveness of Sea Ltd’s (SE US) US$1 bn follow-on public offering announced last Fri.
• This offering is a typical opportunistic fundraising as its ADR price has recently surged.
• At assumed deal price of US$21, SE post deal would trade at 4.6x 2019E P/adjusted sales (excl. 1P e-commerce sales), vs. peers average of 5.2x.
• We would recommend investors to go for the deal if it is priced at US$20 or lower.

2. 7-Eleven in India: Standard Franchise Model Would Require Minor Tweaks in India

• 7-Eleven partners up with Future Retail in an effort to enter the growing Indian Market
• Indian E-Commerce giants pose a significant threat to 7-Eleven’s plans
• 7-Eleven’s recent shift focuses more on developing markets.
• Lack of profitability in India could require changes to the standard franchise agreement in order to attract franchisees

On 28th February 2019, Seven & I Holdings (3382 JP), the operator of the world’s largest convenience store chain 7-Eleven, announced that the company has signed a master franchise agreement with Kishore Biyani’s Future Retail, the operator of the Indian large format store chain Big Bazaar, to expand the 7-Eleven convenience stores into India. Future Retail and Seven & I Holdings expect the first 7-Eleven convenience store in India to be opened in Mumbai in 2019.

3. Rakuten (4755 JP): Lyft IPO’s Big Lift Unlikely to Lead to a Sustained Re-Rating

Lyft Inc (0812823D US) has kicked off its IPO by posting its S-1 filing last Friday. Rakuten Inc (4755 JP) is Lyft’s single largest shareholder with a 13.05% stake. Rakuten has invested around $700 million to acquire its current Lyft stake and stands to make 3-4 times its investment if Lyft achieves its rumoured IPO valuation range of $20-25 billion.

4. Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell

Last Week in Event SPACE …

• Nintendo Co Ltd (7974 JP)‘s offering and the buyback are strong symbols and practical examples of what the Corporate Governance Code wants to accomplish.
• Calling an EGM by the Ernst Göhner Foundation is both “sneaky” AND interesting (and bullish) news for the Panalpina Welttransport Holding (PWTN SW) offer by DSV A/S (DSV DC). 

• Merck KGaA (MRK GY) gatecrashes Versum Materials (VSM US)/Entegris Inc (ENTG US) friendly merger.

• Shareholders in Hanergy Thin Film Power (566 HK) face a “Hobson’s Choice” ahead of its forced delisting.

• With the combination of increased hostility leading to a greater likelihood of eventual private takeout, shorts will cover and foreigners may buy, squeezing existing Descente Ltd (8114 JP) minorities up and out.

• The IFA conclusion is flawed on Hopewell Holdings (54 HK)‘s low-ball Offer.

• Plus other events, CCASS movements and expected upcoming events for key M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nintendo Co Ltd (7974 JP) (Mkt Cap: $33.3bn; Liquidity: $615mn)
Bank Of Kyoto (8369 JP) (Mkt Cap: $3.4bn; Liquidity: $7mn)

Nintendo announced (J) a Secondary Share Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the then-last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33bn worth (whichever is reached first) to be commenced the day after settlement of the Offering.

• These banks (such as Bank of Kyoto) which have long-held policy cross-holdings in a Kyoto company with a diehard Kyoto cultural heritage (which can often include a diehard cross-holding culture) may have all succumbed to the new Corporate Governance Code. This is really important. 
• This deal is going to retail investors, quite specifically because Nintendo management and board view retail investors as both “sticky” investors and likely to largely follow management’s agenda in AGMs. Management might have misjudged how much this will get flipped.
  
• The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains. Given the size, it looks like the former though it will be difficult to get confirmation. Travis Lundy would want to be long Bank of Kyoto both outright and against the cross-holding portfolio.

link to Travis’ insight:
Nintendo Offering & Buyback: The Import & The Dynamics
Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?

NTT Docomo Inc (9437 JP) (Mkt Cap: $72.4bn; Liquidity: $92mn)

NTT Docomo announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February. The buyback has already occurred. However, by the vagaries of TSE-calculated indices, they lead to index down-weightings (unless otherwise offset).

• This is a very large cancellation for a very large company, so it means a selldown of – by Travis’ estimate – 21.5-22.8mm shares at the close of trading March 28th. Traders looking to tilt short NTT Docomo or tilt long NTT short NTT Docomo will have that as a tailwind.

(link to Travis’ insight: NTT Docomo Share Cancellation)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $21mn)

Panalpina’s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation (EGF), made a formal request to hold an EGM prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights be abolished and a “One Share One Vote” structure be adopted. The situation has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the EGF which were deemed “grandfathered” prior to the change. 

• EGF wants to pass this giving everyone their capital share percentage vote because the alternative is worse. Getting this passed would slightly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance but it would mean that the EGF could continue to block any deal it did not like.  The thing is, there is nothing in the Articles of Association which grants EGF that “grandfathered” exemption.
• Cevian wants to block such this from going through, and to have the EGF capped at 5% like the Articles of Association suggest all should be. Cevian says that Panalpina has unlawfully maintained a grandfathering exemption from the 5% cap for the EGF. IF the EGF is capped, it means that effectively the EGF loses the ability to block deals they don’t like. 
• The situation is weird. It is possible that Panalpina is asking a convoluted and possibly unlawful voting structure with non-best-practice registration deadlines to vote on changing the vote structure. To Travis, this actually probably deserves a court challenge.

links to Travis’ insight:
Panalpina To Have EGM to Approve One Share One Vote.
The Mechanics of the Panalpina Vote

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $60mn)

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum with the announcement of a $48/share (51.7% premium to the undisturbed) acquisition proposal. Late last month Versum and Entegris announced a $9bn (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the remaining 52.5%.

• It’s now in VSM’s court. Should it opt to ditch Entegris’ merger-of-equals proposal and side with Merck, it would incur a US$140mn termination fee or $1.28/share.
• John DeMasi reckons Merck’s proposal is superior, however a pure cash offer vs. stock swap are not directly comparable. The prospect of Entegris substantially increasing the exchange ratio or adding a chunk of cash to the merger consideration seems remote. John expects we will see a bump in Merck’s offer to make it friendly, and a recommended deal, in short order.

(link to John’s insight: Versum Materials – Entegris Beaten to the Punch by Merck KGaA)

Wabco Holdings (WBC US) (Mkt Cap: $7.1bn; Liquidity: $56mn)

Brake supplier, Wabco confirmed that it is in takeover talks with ZF Friedrichshafen, one of the leading auto parts suppliers in Germany.   ZF and Wabco jointly develop the Evasive Manoeuvre Assist system for trucks, combining Wabco’s braking and vehicle dynamics control systems alongside ZF’s active steering technology.

• The pushback is the Zeppelin Foundation, ZF’s controlling shareholder, and its aversion to taking on excess debt. Management and the foundation previously clashed over the €13.5bn TRW transaction in 2015.

(link to Lightstream’s insight: WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF)

Hanergy Thin Film Power (566 HK) (Mkt Cap/Liquidity: n.a) 

Back in October last year, Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China. The key issue, putting aside the fact Hanergy has been suspended for near-on four years, is that the scrip consideration has no assigned value.

• Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares (with an as yet undermined jurisdiction), which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, they will hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as would be the case per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to potentially squeeze out minorities at a bargain price.
• It is not clear why the SFC is okay with this takeover proposal, apart from simply being open to any idea to remove Hanergy from the Exchange. At a guess, the SPV consideration structure (as opposed to a straightforward cash offer) is possibly geared to reduce shareholder rights compared to those available under Bermuda Companies Act, Bermuda being where Hanergy is incorporated.
• The Scheme doc, due out later this month, or early next, requires sign-off from the SFC. Presumably the SPV jurisdiction should at least be known by then. It is hard to believe an official takeover document would be dispatched boasting no determinate offer value in addition to unknown shareholder protection rights attached to the unlisted scrip.

(link to my insight: Hanergy’s Hobson’s Choice)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $5mn) 

Descente said will release its Mid-Term Plan early in an effort to encourage shareholders to not tender. For its part, Itochu has released an amendment to its original doc, saying Descente has been naughty (bad-mouthing Itochu to the press while in negotiations), and that it will wait until after the Tender Offer is completed to re-engage. Itochu effectively reserves the right to go full hostile.

• ANTA’s CEO was quoted in an interview saying ANTA supports Itochu’s tender offer and management restructuring and governance initiatives because they say they believe it will lift corporate value.  That means Itochu+ANTA have a functional majority if not absolute.
• This should raise back end values. Descente management is quite stuck here. To Travis, there is likely some upside optionality. Some may decide to stick with the company, raising pro-ration rates.

(link to Travis’ insight: Descente Descended and Itochu Angle Is More Hostile)

Hopewell Holdings (54 HK) (Mkt Cap: $4bn; Liquidity: $11mn) 

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  

• The Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years – the Glorious Property (845 HK) offer, which incidentally was voted down. The widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.
• Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. Therefore, the IFA concluded the Offer is reasonable by referencing the premium to last close and historical pricing. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.
• A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ). Trading at a wide gross/annualised return of 7.8%/45.4%, reflecting the risk to completion, and the significant downside should the scheme be voted down.

(link to my insight: Hopewell’s Egregiously Bad Offer, But What Can You Do?) 

DHG Pharmaceutical Jsc (DHG VN) (Mkt Cap: $668mn; Liquidity: $1.5mn) 

Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer at VND 120,000 (3.5% premium to the previous close when the doc was prepared), this time to purchase up to 21.7% of the Vietnam-listed DHG, lifting its stake to 56.69%.

• The State Capital Investment Corporation (SCIC) owns 43.31%. IF the SCIC tenders, the minimum proration is 33.38%.  IF the SCIC does NOT tender their shares, this is effectively a full tender. All of your shares would be purchased.
• The very recent performance has been most curious. The last 11 days – before the announcement – have seen the stock move 37.6% on 9x average volume, with little to no news to drive it as far as Travis can tell. Looks some leakage ahead of the partial offer announcement.

• Travis thinks there is a non-negligible possibility that Taisho will have to bump their Tender Offer Price. And a non-negligible chance that SCIC tenders.

(link to Travis’ insight: Taisho To Launch Another DHG Pharma Tender)

Yahoo Japan (4689 JP) (Mkt Cap: $13.5bn; Liquidity: $53mn) 

OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. 

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture en masse.

(link to LightStream Research ‘s insight: Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”)

Ruralco Holdings (RHL AU) (Mkt Cap: $335mn; Liquidity: $0.5mn)

Ruralco has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

• Nutrien has first mover advantage, however a counter from Elders Ltd (ELD AU) is possible. The two companies have a history after Ruralco attempted to buy out Elders in 2012, but failed over a disagreement in pricing.
• ACCC should not be issue to this transaction. A 2013 ruling did not oppose a Ruralco/Elders tie-up, and a similar conclusion is expected for Nutrien.
• The gross/annualised spread of 0.2%/0.7% is unattractive. But at this deal price, Elders could still come over the top. Trading itself at 11.4x EV/EBITDA (according to CapIQ), upping the price by 10% would still be accretive to Elders.

(link to my insight: Nutrien’s Move On Ruralco Makes Agronomic Sense)

Yungtay Engineering (1507 TT) (Mkt Cap: $792mn; Liquidity: $1mn) 

Revealed in the release of notes about the Board approval of the Independent Review Committee’s review in late January was the news that Otis offered to buy the company for NT$63/share but it didn’t go anywhere. In addition, some directors – most likely the partisan ones installed in the failed board proxy fight last summer – objected to the lower minimum threshold, which is a sign they don’t want the deal to go through (because the lowering of that threshold is otherwise an unmitigated positive for minority investors).

• Despite stories of a suit of breach of trust against six directors for not entertaining or pursuing offers at NT$63 by Otis and/or Schindler, the company had not received any notification from judicial authorities and has not updated the market about Tender-related matters in the last two weeks.
• Travis thinks there is the small possibility of a bump to NT$63; but it is not a difficult deal to get done at the minimum threshold at NT$60.

(link to Travis’ insight: Yungtay Noises Haven’t Produced a Result Yet) 

Golden Land Prop Dvlp (GOLD TB) (Mkt Cap: $611mn; Liquidity: $1mn) 

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for GOLD at Bt8.50/share, ~2.4% premium to last close. Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

• This tender offer therefore has been initiated to consolidate the Sirivadhanabhakdi family’s holding into GOLD. Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. The tender offer will be unconditional.
• The intention to delist GOLD is evident although it will be challenging for FPT to secure 90%+ in the tender offer process, given the single-digit premium to last close, and the fact GOLD traded above the current terms as recently as early December. Getting to 90% requires almost 50% of the minority to submit their shares.
• Currently trading at a gross/annualized spread of 2.4%/5.9% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

(link to my insight: Golden Land: Less An Offer, More A Consolidation Of Interests) 

Sichuan Swellfun Co Ltd A (600779 CH)(Mkt Cap: $3.1bn; Liquidity: $28mn) 

Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00/share. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

• On a trading basis, this is somewhat interesting. If you are quite bullish the stock, you have a partial put (and you own it already). If you are tentatively bullish A-shares, this offers you a partial put, but there is a possibility that the RMB 45.00 price creates a kind of short-term cap just because it is a sticky price in peoples’ minds.
• Travis is not particularly bearish the stock despite the fact that the earnings forecasts have dropped a fair bit since he looked at this six months ago. The consensus EPS forecasts for Dec 2020 today are roughly the same as they were for Dec 2019 six months ago.

(link to Travis’ insight: Diageo Proposes Another Partial Tender for Sichuan Swellfun)

Briefly …

• Douglas Kim reported that Amazon.com Inc (AMZN US) and Comcast Corp Class A (CMCSA US) may enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. (link to Douglas’s insight:  Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!)
• The new news on Kosaido Co Ltd (7868 JP) is that the independent statutory auditor Nakatsuji-san has officially expressed his opposition to the Tender Offer. With the shares 19% through terms despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share looks low, and this seems a situation where the deal may fail unless there is a bump. (link to Travis’ insight: Kosaido (7868 JP) TOB Extended)
• On the 28 Feb, Bank Danamon Indonesia (BDMN IJ)‘s shares went ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected, but Travis thinks they could fall further: there is no compelling reason to own the bank after it goes ex-rights to receive cash. (link to Travis’ insight: Bank Danamon Goes Ex-Rights)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

FY18 results for PCCW, HKT, and PCPD are out. Plugging in the de-consolidated numbers, I estimate PCCW’s discount to NAV at ~37%, right on the 2 STD line. On a simple ratio (PCCW/HKT), it is again approaching an all-time low. 

• Still select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW’s stub ops, recording negative EBITDA in FY18, reversing the positive figure recorded in FY17. FY16’s stub EBITDA was also negative.
• One positive takeaway is that the dividend pass through is holding at around 90%.

(link to my insight: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating)

Korean Stubs Spotlight

Douglas provided the one-year share price comparisons of 30 Korean holdcos and the opcos as well as changes to the foreign ownership stakes of these companies YTD. Significant changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades. 

• Among these 30 pair, five recorded significant share prices divergence in the past year (by 30% or more): Hyosung Corporation (004800 KS) vs. Hyosung Advanced Materials C (298050 KS), BGF Retail (282330 KS) vs. BGF Co Ltd (027410 KS), Doosan Corp (000150 KS) vs. Doosan Heavy Industries (034020 KS), Cuckoo Holdings (192400 KS) vs. Cuckoo Homesys (284740 KS) and Orion Holdings (001800 KS) vs. Orion Corp (271560 KS).
• Among these 30 pairs, five experienced 2.0% or more changes in the difference of the holdco and opco’s foreign shareholding percentages: Doosan Corp (000150 KS) vs.Doosan Heavy Industries (034020 KS),  Halla Corp (014790 KS) vs.Mando Corp (204320 KS), Lotte Holdings (004990 KS) vs. Lotte Shopping Co (023530 KS), LS Corp (006260 KS) vs. Ls Industrial Systems (010120 KS) and SK Telecom (017670 KS) vs. SK Hynix Inc (000660 KS).

(link to Douglas insight: Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership)

• Sanghyun Park points out that Hyundai Motor Co (005380 KS)‘s Common vs. pref ratio is getting out of whack, possibly because of Elliott’s ₩4.5tn dividend demand. Both 1P and 2PB are sufficiently undervalued relative to the Common. The div yield difference to Common is also at the highest levels for both pref types. Sanghyun suggests shorting the Common and being long 1P or 2PB now. 1P is probably a safer bet, but 2PB is more liquid. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time to Short Common & Long Pref)
• Sanghyun also points out Samsung Electronics (005930 KS) Common/1P price ratio gap is again above +100% of σ on a 20D MA in favour of Common. He recommends going long 1P and short Common for now. (link to Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices)

For the month of February, thirteen new deals were discussed on Smartkarma with a cumulative deal size of US$12.3bn. This overall number includes the “offer” for Hanergy Thin Film Power (566 HK) which has no value, as yet, attached to the scrip component. A firm number for Glow Energy Pcl (GLOW TB) has yet to be announced, which could result in a US$4bn+ deal. The average premium to last close for the new deals was 27.5%.

(link to my insight: M&A: A Round-Up of Deals in February 2019)

• Pioneer Corp (6773 JP) announced that the deal had received all relevant anti-trust approvals, and payment for shares by the Acquirer (BPAE) of the Third Party Placement was now expected to take place on March 8th. 

• Glow Energy Pcl (GLOW TB) announced it has entered an S&P to sell Glow SPP1 to B. Grimm Power Service for Bt3.3bn. The P/B was not provided. This is equivalent to ~2.5% of Glow’s market cap.

• Propertylink Group (PLG AU)‘s Offer has been extended to 8th March as they look to get to 90% and move to compulsory.

• Delta Electronics Thai (DELTA TB) has now clarified that the dividend will be added to the offer.

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.   

In this briefing:

1. 7-Eleven in India: Standard Franchise Model Would Require Minor Tweaks in India
2. Rakuten (4755 JP): Lyft IPO’s Big Lift Unlikely to Lead to a Sustained Re-Rating
3. Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell

1. 7-Eleven in India: Standard Franchise Model Would Require Minor Tweaks in India

• 7-Eleven partners up with Future Retail in an effort to enter the growing Indian Market
• Indian E-Commerce giants pose a significant threat to 7-Eleven’s plans
• 7-Eleven’s recent shift focuses more on developing markets.
• Lack of profitability in India could require changes to the standard franchise agreement in order to attract franchisees

On 28th February 2019, Seven & I Holdings (3382 JP), the operator of the world’s largest convenience store chain 7-Eleven, announced that the company has signed a master franchise agreement with Kishore Biyani’s Future Retail, the operator of the Indian large format store chain Big Bazaar, to expand the 7-Eleven convenience stores into India. Future Retail and Seven & I Holdings expect the first 7-Eleven convenience store in India to be opened in Mumbai in 2019.

2. Rakuten (4755 JP): Lyft IPO’s Big Lift Unlikely to Lead to a Sustained Re-Rating

Lyft Inc (0812823D US) has kicked off its IPO by posting its S-1 filing last Friday. Rakuten Inc (4755 JP) is Lyft’s single largest shareholder with a 13.05% stake. Rakuten has invested around $700 million to acquire its current Lyft stake and stands to make 3-4 times its investment if Lyft achieves its rumoured IPO valuation range of $20-25 billion.

3. Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell

Last Week in Event SPACE …

• Nintendo Co Ltd (7974 JP)‘s offering and the buyback are strong symbols and practical examples of what the Corporate Governance Code wants to accomplish.
• Calling an EGM by the Ernst Göhner Foundation is both “sneaky” AND interesting (and bullish) news for the Panalpina Welttransport Holding (PWTN SW) offer by DSV A/S (DSV DC). 

• Merck KGaA (MRK GY) gatecrashes Versum Materials (VSM US)/Entegris Inc (ENTG US) friendly merger.

• Shareholders in Hanergy Thin Film Power (566 HK) face a “Hobson’s Choice” ahead of its forced delisting.

• With the combination of increased hostility leading to a greater likelihood of eventual private takeout, shorts will cover and foreigners may buy, squeezing existing Descente Ltd (8114 JP) minorities up and out.

• The IFA conclusion is flawed on Hopewell Holdings (54 HK)‘s low-ball Offer.

• Plus other events, CCASS movements and expected upcoming events for key M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nintendo Co Ltd (7974 JP) (Mkt Cap: $33.3bn; Liquidity: $615mn)
Bank Of Kyoto (8369 JP) (Mkt Cap: $3.4bn; Liquidity: $7mn)

Nintendo announced (J) a Secondary Share Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the then-last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33bn worth (whichever is reached first) to be commenced the day after settlement of the Offering.

• These banks (such as Bank of Kyoto) which have long-held policy cross-holdings in a Kyoto company with a diehard Kyoto cultural heritage (which can often include a diehard cross-holding culture) may have all succumbed to the new Corporate Governance Code. This is really important. 
• This deal is going to retail investors, quite specifically because Nintendo management and board view retail investors as both “sticky” investors and likely to largely follow management’s agenda in AGMs. Management might have misjudged how much this will get flipped.
  
• The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains. Given the size, it looks like the former though it will be difficult to get confirmation. Travis Lundy would want to be long Bank of Kyoto both outright and against the cross-holding portfolio.

link to Travis’ insight:
Nintendo Offering & Buyback: The Import & The Dynamics
Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?

NTT Docomo Inc (9437 JP) (Mkt Cap: $72.4bn; Liquidity: $92mn)

NTT Docomo announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February. The buyback has already occurred. However, by the vagaries of TSE-calculated indices, they lead to index down-weightings (unless otherwise offset).

• This is a very large cancellation for a very large company, so it means a selldown of – by Travis’ estimate – 21.5-22.8mm shares at the close of trading March 28th. Traders looking to tilt short NTT Docomo or tilt long NTT short NTT Docomo will have that as a tailwind.

(link to Travis’ insight: NTT Docomo Share Cancellation)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $21mn)

Panalpina’s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation (EGF), made a formal request to hold an EGM prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights be abolished and a “One Share One Vote” structure be adopted. The situation has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the EGF which were deemed “grandfathered” prior to the change. 

• EGF wants to pass this giving everyone their capital share percentage vote because the alternative is worse. Getting this passed would slightly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance but it would mean that the EGF could continue to block any deal it did not like.  The thing is, there is nothing in the Articles of Association which grants EGF that “grandfathered” exemption.
• Cevian wants to block such this from going through, and to have the EGF capped at 5% like the Articles of Association suggest all should be. Cevian says that Panalpina has unlawfully maintained a grandfathering exemption from the 5% cap for the EGF. IF the EGF is capped, it means that effectively the EGF loses the ability to block deals they don’t like. 
• The situation is weird. It is possible that Panalpina is asking a convoluted and possibly unlawful voting structure with non-best-practice registration deadlines to vote on changing the vote structure. To Travis, this actually probably deserves a court challenge.

links to Travis’ insight:
Panalpina To Have EGM to Approve One Share One Vote.
The Mechanics of the Panalpina Vote

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $60mn)

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum with the announcement of a $48/share (51.7% premium to the undisturbed) acquisition proposal. Late last month Versum and Entegris announced a $9bn (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the remaining 52.5%.

• It’s now in VSM’s court. Should it opt to ditch Entegris’ merger-of-equals proposal and side with Merck, it would incur a US$140mn termination fee or $1.28/share.
• John DeMasi reckons Merck’s proposal is superior, however a pure cash offer vs. stock swap are not directly comparable. The prospect of Entegris substantially increasing the exchange ratio or adding a chunk of cash to the merger consideration seems remote. John expects we will see a bump in Merck’s offer to make it friendly, and a recommended deal, in short order.

(link to John’s insight: Versum Materials – Entegris Beaten to the Punch by Merck KGaA)

Wabco Holdings (WBC US) (Mkt Cap: $7.1bn; Liquidity: $56mn)

Brake supplier, Wabco confirmed that it is in takeover talks with ZF Friedrichshafen, one of the leading auto parts suppliers in Germany.   ZF and Wabco jointly develop the Evasive Manoeuvre Assist system for trucks, combining Wabco’s braking and vehicle dynamics control systems alongside ZF’s active steering technology.

• The pushback is the Zeppelin Foundation, ZF’s controlling shareholder, and its aversion to taking on excess debt. Management and the foundation previously clashed over the €13.5bn TRW transaction in 2015.

(link to Lightstream’s insight: WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF)

Hanergy Thin Film Power (566 HK) (Mkt Cap/Liquidity: n.a) 

Back in October last year, Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China. The key issue, putting aside the fact Hanergy has been suspended for near-on four years, is that the scrip consideration has no assigned value.

• Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares (with an as yet undermined jurisdiction), which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, they will hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as would be the case per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to potentially squeeze out minorities at a bargain price.
• It is not clear why the SFC is okay with this takeover proposal, apart from simply being open to any idea to remove Hanergy from the Exchange. At a guess, the SPV consideration structure (as opposed to a straightforward cash offer) is possibly geared to reduce shareholder rights compared to those available under Bermuda Companies Act, Bermuda being where Hanergy is incorporated.
• The Scheme doc, due out later this month, or early next, requires sign-off from the SFC. Presumably the SPV jurisdiction should at least be known by then. It is hard to believe an official takeover document would be dispatched boasting no determinate offer value in addition to unknown shareholder protection rights attached to the unlisted scrip.

(link to my insight: Hanergy’s Hobson’s Choice)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $5mn) 

Descente said will release its Mid-Term Plan early in an effort to encourage shareholders to not tender. For its part, Itochu has released an amendment to its original doc, saying Descente has been naughty (bad-mouthing Itochu to the press while in negotiations), and that it will wait until after the Tender Offer is completed to re-engage. Itochu effectively reserves the right to go full hostile.

• ANTA’s CEO was quoted in an interview saying ANTA supports Itochu’s tender offer and management restructuring and governance initiatives because they say they believe it will lift corporate value.  That means Itochu+ANTA have a functional majority if not absolute.
• This should raise back end values. Descente management is quite stuck here. To Travis, there is likely some upside optionality. Some may decide to stick with the company, raising pro-ration rates.

(link to Travis’ insight: Descente Descended and Itochu Angle Is More Hostile)

Hopewell Holdings (54 HK) (Mkt Cap: $4bn; Liquidity: $11mn) 

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  

• The Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years – the Glorious Property (845 HK) offer, which incidentally was voted down. The widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.
• Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. Therefore, the IFA concluded the Offer is reasonable by referencing the premium to last close and historical pricing. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.
• A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ). Trading at a wide gross/annualised return of 7.8%/45.4%, reflecting the risk to completion, and the significant downside should the scheme be voted down.

(link to my insight: Hopewell’s Egregiously Bad Offer, But What Can You Do?) 

DHG Pharmaceutical Jsc (DHG VN) (Mkt Cap: $668mn; Liquidity: $1.5mn) 

Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer at VND 120,000 (3.5% premium to the previous close when the doc was prepared), this time to purchase up to 21.7% of the Vietnam-listed DHG, lifting its stake to 56.69%.

• The State Capital Investment Corporation (SCIC) owns 43.31%. IF the SCIC tenders, the minimum proration is 33.38%.  IF the SCIC does NOT tender their shares, this is effectively a full tender. All of your shares would be purchased.
• The very recent performance has been most curious. The last 11 days – before the announcement – have seen the stock move 37.6% on 9x average volume, with little to no news to drive it as far as Travis can tell. Looks some leakage ahead of the partial offer announcement.

• Travis thinks there is a non-negligible possibility that Taisho will have to bump their Tender Offer Price. And a non-negligible chance that SCIC tenders.

(link to Travis’ insight: Taisho To Launch Another DHG Pharma Tender)

Yahoo Japan (4689 JP) (Mkt Cap: $13.5bn; Liquidity: $53mn) 

OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. 

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture en masse.

(link to LightStream Research ‘s insight: Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”)

Ruralco Holdings (RHL AU) (Mkt Cap: $335mn; Liquidity: $0.5mn)

Ruralco has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

• Nutrien has first mover advantage, however a counter from Elders Ltd (ELD AU) is possible. The two companies have a history after Ruralco attempted to buy out Elders in 2012, but failed over a disagreement in pricing.
• ACCC should not be issue to this transaction. A 2013 ruling did not oppose a Ruralco/Elders tie-up, and a similar conclusion is expected for Nutrien.
• The gross/annualised spread of 0.2%/0.7% is unattractive. But at this deal price, Elders could still come over the top. Trading itself at 11.4x EV/EBITDA (according to CapIQ), upping the price by 10% would still be accretive to Elders.

(link to my insight: Nutrien’s Move On Ruralco Makes Agronomic Sense)

Yungtay Engineering (1507 TT) (Mkt Cap: $792mn; Liquidity: $1mn) 

Revealed in the release of notes about the Board approval of the Independent Review Committee’s review in late January was the news that Otis offered to buy the company for NT$63/share but it didn’t go anywhere. In addition, some directors – most likely the partisan ones installed in the failed board proxy fight last summer – objected to the lower minimum threshold, which is a sign they don’t want the deal to go through (because the lowering of that threshold is otherwise an unmitigated positive for minority investors).

• Despite stories of a suit of breach of trust against six directors for not entertaining or pursuing offers at NT$63 by Otis and/or Schindler, the company had not received any notification from judicial authorities and has not updated the market about Tender-related matters in the last two weeks.
• Travis thinks there is the small possibility of a bump to NT$63; but it is not a difficult deal to get done at the minimum threshold at NT$60.

(link to Travis’ insight: Yungtay Noises Haven’t Produced a Result Yet) 

Golden Land Prop Dvlp (GOLD TB) (Mkt Cap: $611mn; Liquidity: $1mn) 

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for GOLD at Bt8.50/share, ~2.4% premium to last close. Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

• This tender offer therefore has been initiated to consolidate the Sirivadhanabhakdi family’s holding into GOLD. Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. The tender offer will be unconditional.
• The intention to delist GOLD is evident although it will be challenging for FPT to secure 90%+ in the tender offer process, given the single-digit premium to last close, and the fact GOLD traded above the current terms as recently as early December. Getting to 90% requires almost 50% of the minority to submit their shares.
• Currently trading at a gross/annualized spread of 2.4%/5.9% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

(link to my insight: Golden Land: Less An Offer, More A Consolidation Of Interests) 

Sichuan Swellfun Co Ltd A (600779 CH)(Mkt Cap: $3.1bn; Liquidity: $28mn) 

Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00/share. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

• On a trading basis, this is somewhat interesting. If you are quite bullish the stock, you have a partial put (and you own it already). If you are tentatively bullish A-shares, this offers you a partial put, but there is a possibility that the RMB 45.00 price creates a kind of short-term cap just because it is a sticky price in peoples’ minds.
• Travis is not particularly bearish the stock despite the fact that the earnings forecasts have dropped a fair bit since he looked at this six months ago. The consensus EPS forecasts for Dec 2020 today are roughly the same as they were for Dec 2019 six months ago.

(link to Travis’ insight: Diageo Proposes Another Partial Tender for Sichuan Swellfun)

Briefly …

• Douglas Kim reported that Amazon.com Inc (AMZN US) and Comcast Corp Class A (CMCSA US) may enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. (link to Douglas’s insight:  Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!)
• The new news on Kosaido Co Ltd (7868 JP) is that the independent statutory auditor Nakatsuji-san has officially expressed his opposition to the Tender Offer. With the shares 19% through terms despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share looks low, and this seems a situation where the deal may fail unless there is a bump. (link to Travis’ insight: Kosaido (7868 JP) TOB Extended)
• On the 28 Feb, Bank Danamon Indonesia (BDMN IJ)‘s shares went ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected, but Travis thinks they could fall further: there is no compelling reason to own the bank after it goes ex-rights to receive cash. (link to Travis’ insight: Bank Danamon Goes Ex-Rights)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

FY18 results for PCCW, HKT, and PCPD are out. Plugging in the de-consolidated numbers, I estimate PCCW’s discount to NAV at ~37%, right on the 2 STD line. On a simple ratio (PCCW/HKT), it is again approaching an all-time low. 

• Still select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW’s stub ops, recording negative EBITDA in FY18, reversing the positive figure recorded in FY17. FY16’s stub EBITDA was also negative.
• One positive takeaway is that the dividend pass through is holding at around 90%.

(link to my insight: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating)

Korean Stubs Spotlight

Douglas provided the one-year share price comparisons of 30 Korean holdcos and the opcos as well as changes to the foreign ownership stakes of these companies YTD. Significant changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades. 

• Among these 30 pair, five recorded significant share prices divergence in the past year (by 30% or more): Hyosung Corporation (004800 KS) vs. Hyosung Advanced Materials C (298050 KS), BGF Retail (282330 KS) vs. BGF Co Ltd (027410 KS), Doosan Corp (000150 KS) vs. Doosan Heavy Industries (034020 KS), Cuckoo Holdings (192400 KS) vs. Cuckoo Homesys (284740 KS) and Orion Holdings (001800 KS) vs. Orion Corp (271560 KS).
• Among these 30 pairs, five experienced 2.0% or more changes in the difference of the holdco and opco’s foreign shareholding percentages: Doosan Corp (000150 KS) vs.Doosan Heavy Industries (034020 KS),  Halla Corp (014790 KS) vs.Mando Corp (204320 KS), Lotte Holdings (004990 KS) vs. Lotte Shopping Co (023530 KS), LS Corp (006260 KS) vs. Ls Industrial Systems (010120 KS) and SK Telecom (017670 KS) vs. SK Hynix Inc (000660 KS).

(link to Douglas insight: Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership)

• Sanghyun Park points out that Hyundai Motor Co (005380 KS)‘s Common vs. pref ratio is getting out of whack, possibly because of Elliott’s ₩4.5tn dividend demand. Both 1P and 2PB are sufficiently undervalued relative to the Common. The div yield difference to Common is also at the highest levels for both pref types. Sanghyun suggests shorting the Common and being long 1P or 2PB now. 1P is probably a safer bet, but 2PB is more liquid. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time to Short Common & Long Pref)
• Sanghyun also points out Samsung Electronics (005930 KS) Common/1P price ratio gap is again above +100% of σ on a 20D MA in favour of Common. He recommends going long 1P and short Common for now. (link to Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices)

For the month of February, thirteen new deals were discussed on Smartkarma with a cumulative deal size of US$12.3bn. This overall number includes the “offer” for Hanergy Thin Film Power (566 HK) which has no value, as yet, attached to the scrip component. A firm number for Glow Energy Pcl (GLOW TB) has yet to be announced, which could result in a US$4bn+ deal. The average premium to last close for the new deals was 27.5%.

(link to my insight: M&A: A Round-Up of Deals in February 2019)

• Pioneer Corp (6773 JP) announced that the deal had received all relevant anti-trust approvals, and payment for shares by the Acquirer (BPAE) of the Third Party Placement was now expected to take place on March 8th. 

• Glow Energy Pcl (GLOW TB) announced it has entered an S&P to sell Glow SPP1 to B. Grimm Power Service for Bt3.3bn. The P/B was not provided. This is equivalent to ~2.5% of Glow’s market cap.

• Propertylink Group (PLG AU)‘s Offer has been extended to 8th March as they look to get to 90% and move to compulsory.

• Delta Electronics Thai (DELTA TB) has now clarified that the dividend will be added to the offer.

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.   

In this briefing:

1. 7-Eleven in India: Standard Franchise Model Would Require Minor Tweaks in India
2. Rakuten (4755 JP): Lyft IPO’s Big Lift Unlikely to Lead to a Sustained Re-Rating
3. Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell
4. Tesla (TSLA): The Cost of Innovation Seems to Be Catching Up

1. 7-Eleven in India: Standard Franchise Model Would Require Minor Tweaks in India

• 7-Eleven partners up with Future Retail in an effort to enter the growing Indian Market
• Indian E-Commerce giants pose a significant threat to 7-Eleven’s plans
• 7-Eleven’s recent shift focuses more on developing markets.
• Lack of profitability in India could require changes to the standard franchise agreement in order to attract franchisees

On 28th February 2019, Seven & I Holdings (3382 JP), the operator of the world’s largest convenience store chain 7-Eleven, announced that the company has signed a master franchise agreement with Kishore Biyani’s Future Retail, the operator of the Indian large format store chain Big Bazaar, to expand the 7-Eleven convenience stores into India. Future Retail and Seven & I Holdings expect the first 7-Eleven convenience store in India to be opened in Mumbai in 2019.

2. Rakuten (4755 JP): Lyft IPO’s Big Lift Unlikely to Lead to a Sustained Re-Rating

Lyft Inc (0812823D US) has kicked off its IPO by posting its S-1 filing last Friday. Rakuten Inc (4755 JP) is Lyft’s single largest shareholder with a 13.05% stake. Rakuten has invested around $700 million to acquire its current Lyft stake and stands to make 3-4 times its investment if Lyft achieves its rumoured IPO valuation range of $20-25 billion.

3. Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell

Last Week in Event SPACE …

• Nintendo Co Ltd (7974 JP)‘s offering and the buyback are strong symbols and practical examples of what the Corporate Governance Code wants to accomplish.
• Calling an EGM by the Ernst Göhner Foundation is both “sneaky” AND interesting (and bullish) news for the Panalpina Welttransport Holding (PWTN SW) offer by DSV A/S (DSV DC). 

• Merck KGaA (MRK GY) gatecrashes Versum Materials (VSM US)/Entegris Inc (ENTG US) friendly merger.

• Shareholders in Hanergy Thin Film Power (566 HK) face a “Hobson’s Choice” ahead of its forced delisting.

• With the combination of increased hostility leading to a greater likelihood of eventual private takeout, shorts will cover and foreigners may buy, squeezing existing Descente Ltd (8114 JP) minorities up and out.

• The IFA conclusion is flawed on Hopewell Holdings (54 HK)‘s low-ball Offer.

• Plus other events, CCASS movements and expected upcoming events for key M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nintendo Co Ltd (7974 JP) (Mkt Cap: $33.3bn; Liquidity: $615mn)
Bank Of Kyoto (8369 JP) (Mkt Cap: $3.4bn; Liquidity: $7mn)

Nintendo announced (J) a Secondary Share Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the then-last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33bn worth (whichever is reached first) to be commenced the day after settlement of the Offering.

• These banks (such as Bank of Kyoto) which have long-held policy cross-holdings in a Kyoto company with a diehard Kyoto cultural heritage (which can often include a diehard cross-holding culture) may have all succumbed to the new Corporate Governance Code. This is really important. 
• This deal is going to retail investors, quite specifically because Nintendo management and board view retail investors as both “sticky” investors and likely to largely follow management’s agenda in AGMs. Management might have misjudged how much this will get flipped.
  
• The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains. Given the size, it looks like the former though it will be difficult to get confirmation. Travis Lundy would want to be long Bank of Kyoto both outright and against the cross-holding portfolio.

link to Travis’ insight:
Nintendo Offering & Buyback: The Import & The Dynamics
Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?

NTT Docomo Inc (9437 JP) (Mkt Cap: $72.4bn; Liquidity: $92mn)

NTT Docomo announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February. The buyback has already occurred. However, by the vagaries of TSE-calculated indices, they lead to index down-weightings (unless otherwise offset).

• This is a very large cancellation for a very large company, so it means a selldown of – by Travis’ estimate – 21.5-22.8mm shares at the close of trading March 28th. Traders looking to tilt short NTT Docomo or tilt long NTT short NTT Docomo will have that as a tailwind.

(link to Travis’ insight: NTT Docomo Share Cancellation)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $21mn)

Panalpina’s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation (EGF), made a formal request to hold an EGM prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights be abolished and a “One Share One Vote” structure be adopted. The situation has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the EGF which were deemed “grandfathered” prior to the change. 

• EGF wants to pass this giving everyone their capital share percentage vote because the alternative is worse. Getting this passed would slightly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance but it would mean that the EGF could continue to block any deal it did not like.  The thing is, there is nothing in the Articles of Association which grants EGF that “grandfathered” exemption.
• Cevian wants to block such this from going through, and to have the EGF capped at 5% like the Articles of Association suggest all should be. Cevian says that Panalpina has unlawfully maintained a grandfathering exemption from the 5% cap for the EGF. IF the EGF is capped, it means that effectively the EGF loses the ability to block deals they don’t like. 
• The situation is weird. It is possible that Panalpina is asking a convoluted and possibly unlawful voting structure with non-best-practice registration deadlines to vote on changing the vote structure. To Travis, this actually probably deserves a court challenge.

links to Travis’ insight:
Panalpina To Have EGM to Approve One Share One Vote.
The Mechanics of the Panalpina Vote

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $60mn)

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum with the announcement of a $48/share (51.7% premium to the undisturbed) acquisition proposal. Late last month Versum and Entegris announced a $9bn (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the remaining 52.5%.

• It’s now in VSM’s court. Should it opt to ditch Entegris’ merger-of-equals proposal and side with Merck, it would incur a US$140mn termination fee or $1.28/share.
• John DeMasi reckons Merck’s proposal is superior, however a pure cash offer vs. stock swap are not directly comparable. The prospect of Entegris substantially increasing the exchange ratio or adding a chunk of cash to the merger consideration seems remote. John expects we will see a bump in Merck’s offer to make it friendly, and a recommended deal, in short order.

(link to John’s insight: Versum Materials – Entegris Beaten to the Punch by Merck KGaA)

Wabco Holdings (WBC US) (Mkt Cap: $7.1bn; Liquidity: $56mn)

Brake supplier, Wabco confirmed that it is in takeover talks with ZF Friedrichshafen, one of the leading auto parts suppliers in Germany.   ZF and Wabco jointly develop the Evasive Manoeuvre Assist system for trucks, combining Wabco’s braking and vehicle dynamics control systems alongside ZF’s active steering technology.

• The pushback is the Zeppelin Foundation, ZF’s controlling shareholder, and its aversion to taking on excess debt. Management and the foundation previously clashed over the €13.5bn TRW transaction in 2015.

(link to Lightstream’s insight: WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF)

Hanergy Thin Film Power (566 HK) (Mkt Cap/Liquidity: n.a) 

Back in October last year, Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China. The key issue, putting aside the fact Hanergy has been suspended for near-on four years, is that the scrip consideration has no assigned value.

• Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares (with an as yet undermined jurisdiction), which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, they will hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as would be the case per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to potentially squeeze out minorities at a bargain price.
• It is not clear why the SFC is okay with this takeover proposal, apart from simply being open to any idea to remove Hanergy from the Exchange. At a guess, the SPV consideration structure (as opposed to a straightforward cash offer) is possibly geared to reduce shareholder rights compared to those available under Bermuda Companies Act, Bermuda being where Hanergy is incorporated.
• The Scheme doc, due out later this month, or early next, requires sign-off from the SFC. Presumably the SPV jurisdiction should at least be known by then. It is hard to believe an official takeover document would be dispatched boasting no determinate offer value in addition to unknown shareholder protection rights attached to the unlisted scrip.

(link to my insight: Hanergy’s Hobson’s Choice)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $5mn) 

Descente said will release its Mid-Term Plan early in an effort to encourage shareholders to not tender. For its part, Itochu has released an amendment to its original doc, saying Descente has been naughty (bad-mouthing Itochu to the press while in negotiations), and that it will wait until after the Tender Offer is completed to re-engage. Itochu effectively reserves the right to go full hostile.

• ANTA’s CEO was quoted in an interview saying ANTA supports Itochu’s tender offer and management restructuring and governance initiatives because they say they believe it will lift corporate value.  That means Itochu+ANTA have a functional majority if not absolute.
• This should raise back end values. Descente management is quite stuck here. To Travis, there is likely some upside optionality. Some may decide to stick with the company, raising pro-ration rates.

(link to Travis’ insight: Descente Descended and Itochu Angle Is More Hostile)

Hopewell Holdings (54 HK) (Mkt Cap: $4bn; Liquidity: $11mn) 

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  

• The Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years – the Glorious Property (845 HK) offer, which incidentally was voted down. The widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.
• Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. Therefore, the IFA concluded the Offer is reasonable by referencing the premium to last close and historical pricing. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.
• A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ). Trading at a wide gross/annualised return of 7.8%/45.4%, reflecting the risk to completion, and the significant downside should the scheme be voted down.

(link to my insight: Hopewell’s Egregiously Bad Offer, But What Can You Do?) 

DHG Pharmaceutical Jsc (DHG VN) (Mkt Cap: $668mn; Liquidity: $1.5mn) 

Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer at VND 120,000 (3.5% premium to the previous close when the doc was prepared), this time to purchase up to 21.7% of the Vietnam-listed DHG, lifting its stake to 56.69%.

• The State Capital Investment Corporation (SCIC) owns 43.31%. IF the SCIC tenders, the minimum proration is 33.38%.  IF the SCIC does NOT tender their shares, this is effectively a full tender. All of your shares would be purchased.
• The very recent performance has been most curious. The last 11 days – before the announcement – have seen the stock move 37.6% on 9x average volume, with little to no news to drive it as far as Travis can tell. Looks some leakage ahead of the partial offer announcement.

• Travis thinks there is a non-negligible possibility that Taisho will have to bump their Tender Offer Price. And a non-negligible chance that SCIC tenders.

(link to Travis’ insight: Taisho To Launch Another DHG Pharma Tender)

Yahoo Japan (4689 JP) (Mkt Cap: $13.5bn; Liquidity: $53mn) 

OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. 

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture en masse.

(link to LightStream Research ‘s insight: Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”)

Ruralco Holdings (RHL AU) (Mkt Cap: $335mn; Liquidity: $0.5mn)

Ruralco has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

• Nutrien has first mover advantage, however a counter from Elders Ltd (ELD AU) is possible. The two companies have a history after Ruralco attempted to buy out Elders in 2012, but failed over a disagreement in pricing.
• ACCC should not be issue to this transaction. A 2013 ruling did not oppose a Ruralco/Elders tie-up, and a similar conclusion is expected for Nutrien.
• The gross/annualised spread of 0.2%/0.7% is unattractive. But at this deal price, Elders could still come over the top. Trading itself at 11.4x EV/EBITDA (according to CapIQ), upping the price by 10% would still be accretive to Elders.

(link to my insight: Nutrien’s Move On Ruralco Makes Agronomic Sense)

Yungtay Engineering (1507 TT) (Mkt Cap: $792mn; Liquidity: $1mn) 

Revealed in the release of notes about the Board approval of the Independent Review Committee’s review in late January was the news that Otis offered to buy the company for NT$63/share but it didn’t go anywhere. In addition, some directors – most likely the partisan ones installed in the failed board proxy fight last summer – objected to the lower minimum threshold, which is a sign they don’t want the deal to go through (because the lowering of that threshold is otherwise an unmitigated positive for minority investors).

• Despite stories of a suit of breach of trust against six directors for not entertaining or pursuing offers at NT$63 by Otis and/or Schindler, the company had not received any notification from judicial authorities and has not updated the market about Tender-related matters in the last two weeks.
• Travis thinks there is the small possibility of a bump to NT$63; but it is not a difficult deal to get done at the minimum threshold at NT$60.

(link to Travis’ insight: Yungtay Noises Haven’t Produced a Result Yet) 

Golden Land Prop Dvlp (GOLD TB) (Mkt Cap: $611mn; Liquidity: $1mn) 

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for GOLD at Bt8.50/share, ~2.4% premium to last close. Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

• This tender offer therefore has been initiated to consolidate the Sirivadhanabhakdi family’s holding into GOLD. Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. The tender offer will be unconditional.
• The intention to delist GOLD is evident although it will be challenging for FPT to secure 90%+ in the tender offer process, given the single-digit premium to last close, and the fact GOLD traded above the current terms as recently as early December. Getting to 90% requires almost 50% of the minority to submit their shares.
• Currently trading at a gross/annualized spread of 2.4%/5.9% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

(link to my insight: Golden Land: Less An Offer, More A Consolidation Of Interests) 

Sichuan Swellfun Co Ltd A (600779 CH)(Mkt Cap: $3.1bn; Liquidity: $28mn) 

Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00/share. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

• On a trading basis, this is somewhat interesting. If you are quite bullish the stock, you have a partial put (and you own it already). If you are tentatively bullish A-shares, this offers you a partial put, but there is a possibility that the RMB 45.00 price creates a kind of short-term cap just because it is a sticky price in peoples’ minds.
• Travis is not particularly bearish the stock despite the fact that the earnings forecasts have dropped a fair bit since he looked at this six months ago. The consensus EPS forecasts for Dec 2020 today are roughly the same as they were for Dec 2019 six months ago.

(link to Travis’ insight: Diageo Proposes Another Partial Tender for Sichuan Swellfun)

Briefly …

• Douglas Kim reported that Amazon.com Inc (AMZN US) and Comcast Corp Class A (CMCSA US) may enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. (link to Douglas’s insight:  Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!)
• The new news on Kosaido Co Ltd (7868 JP) is that the independent statutory auditor Nakatsuji-san has officially expressed his opposition to the Tender Offer. With the shares 19% through terms despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share looks low, and this seems a situation where the deal may fail unless there is a bump. (link to Travis’ insight: Kosaido (7868 JP) TOB Extended)
• On the 28 Feb, Bank Danamon Indonesia (BDMN IJ)‘s shares went ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected, but Travis thinks they could fall further: there is no compelling reason to own the bank after it goes ex-rights to receive cash. (link to Travis’ insight: Bank Danamon Goes Ex-Rights)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

FY18 results for PCCW, HKT, and PCPD are out. Plugging in the de-consolidated numbers, I estimate PCCW’s discount to NAV at ~37%, right on the 2 STD line. On a simple ratio (PCCW/HKT), it is again approaching an all-time low. 

• Still select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW’s stub ops, recording negative EBITDA in FY18, reversing the positive figure recorded in FY17. FY16’s stub EBITDA was also negative.
• One positive takeaway is that the dividend pass through is holding at around 90%.

(link to my insight: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating)

Korean Stubs Spotlight

Douglas provided the one-year share price comparisons of 30 Korean holdcos and the opcos as well as changes to the foreign ownership stakes of these companies YTD. Significant changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades. 

• Among these 30 pair, five recorded significant share prices divergence in the past year (by 30% or more): Hyosung Corporation (004800 KS) vs. Hyosung Advanced Materials C (298050 KS), BGF Retail (282330 KS) vs. BGF Co Ltd (027410 KS), Doosan Corp (000150 KS) vs. Doosan Heavy Industries (034020 KS), Cuckoo Holdings (192400 KS) vs. Cuckoo Homesys (284740 KS) and Orion Holdings (001800 KS) vs. Orion Corp (271560 KS).
• Among these 30 pairs, five experienced 2.0% or more changes in the difference of the holdco and opco’s foreign shareholding percentages: Doosan Corp (000150 KS) vs.Doosan Heavy Industries (034020 KS),  Halla Corp (014790 KS) vs.Mando Corp (204320 KS), Lotte Holdings (004990 KS) vs. Lotte Shopping Co (023530 KS), LS Corp (006260 KS) vs. Ls Industrial Systems (010120 KS) and SK Telecom (017670 KS) vs. SK Hynix Inc (000660 KS).

(link to Douglas insight: Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership)

• Sanghyun Park points out that Hyundai Motor Co (005380 KS)‘s Common vs. pref ratio is getting out of whack, possibly because of Elliott’s ₩4.5tn dividend demand. Both 1P and 2PB are sufficiently undervalued relative to the Common. The div yield difference to Common is also at the highest levels for both pref types. Sanghyun suggests shorting the Common and being long 1P or 2PB now. 1P is probably a safer bet, but 2PB is more liquid. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time to Short Common & Long Pref)
• Sanghyun also points out Samsung Electronics (005930 KS) Common/1P price ratio gap is again above +100% of σ on a 20D MA in favour of Common. He recommends going long 1P and short Common for now. (link to Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices)

For the month of February, thirteen new deals were discussed on Smartkarma with a cumulative deal size of US$12.3bn. This overall number includes the “offer” for Hanergy Thin Film Power (566 HK) which has no value, as yet, attached to the scrip component. A firm number for Glow Energy Pcl (GLOW TB) has yet to be announced, which could result in a US$4bn+ deal. The average premium to last close for the new deals was 27.5%.

(link to my insight: M&A: A Round-Up of Deals in February 2019)

• Pioneer Corp (6773 JP) announced that the deal had received all relevant anti-trust approvals, and payment for shares by the Acquirer (BPAE) of the Third Party Placement was now expected to take place on March 8th. 

• Glow Energy Pcl (GLOW TB) announced it has entered an S&P to sell Glow SPP1 to B. Grimm Power Service for Bt3.3bn. The P/B was not provided. This is equivalent to ~2.5% of Glow’s market cap.

• Propertylink Group (PLG AU)‘s Offer has been extended to 8th March as they look to get to 90% and move to compulsory.

• Delta Electronics Thai (DELTA TB) has now clarified that the dividend will be added to the offer.

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.   

4. Tesla (TSLA): The Cost of Innovation Seems to Be Catching Up

Tesla’s innovation, as we have been opining in our insights on Smartkarma, rests more on its direct distribution model than on technological innovation.  Tesla’s press release on Thursday, February 28, announcing the new $35,000 Model 3’s came with several other details that have been highlighted in press reports which we also summarize here:

1. Management does not expect to achieve profitability in 1Q19, with a likely 2Q19 profitability according to the press release.
2. According to the announcement, all Tesla sales will move online, first in the U.S. then expanding worldwide.  An unspecified number of sales outlets will also be closed “with a small number of stores in high-traffic locations remaining as galleries, showcases and Tesla information centers.” (see attached copy of the Form 8K).
3. Management promised to increase investments on after service.
4. According to press reports, CEO Elon Musk was also quoted as saying there will be layoffs with the new distribution plan (see https://edition.cnn.com/business/live-news/elon-musk-tesla-announcement/index.html).

The Tesla Model 3

In this briefing:

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

In this briefing:

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
2. Tesla’s New Plan – Buy Before You Try

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

2. Tesla’s New Plan – Buy Before You Try

Buried in the lede is that Tesla also is initiating additional price cuts across the board, including for Models S and X. It’s moving to an online-only sales strategy and closing hundreds of stores which will trigger additional layoffs.

Oh, and the first quarter will not be profitable after all, according to CEO Elon Musk on the conference call today to discuss Tesla’s announcements.

So is Telsa pursuing a new, evolving strategy for the future or is it being pushed to retrench?

Read on for Bond Angle analysis.

In this briefing:

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
2. Tesla’s New Plan – Buy Before You Try
3. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

2. Tesla’s New Plan – Buy Before You Try

Buried in the lede is that Tesla also is initiating additional price cuts across the board, including for Models S and X. It’s moving to an online-only sales strategy and closing hundreds of stores which will trigger additional layoffs.

Oh, and the first quarter will not be profitable after all, according to CEO Elon Musk on the conference call today to discuss Tesla’s announcements.

So is Telsa pursuing a new, evolving strategy for the future or is it being pushed to retrench?

Read on for Bond Angle analysis.

3. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

In this briefing:

1. Havells India
2. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
3. Scout24 Tender Offer Launched: Price Still Not Quite Full
4. Koolearn (新东方在线) Trading Update – A Wobbly Start
5. Denso Continues to Strengthen Its Investment CASE with Acquisitions

1. Havells India

As the summer sets in, we visit distributor and retailers of air conditioners in our home town Vadodara, Gujarat where temperatures soar really high in summer and air conditioning is becoming a necessity.  Our checks are focused on Havells India (HAVL IN) and its’ consumer brand Llyod. Our takeaways from visits suggest celebrity endorsements unlikely to work, competition intensifying with the entry of Daikin in the mass premium segment, Ifb Industries (IFBI IN) joins the price war with its ACs, the season is off to a muted start due to prolonged winters.  At current price of INR 776, risk-reward offered is not in favour for Havells investors with a medium-term horizon. Using consensus estimates and average 3 year forward PE of 41x, target price works out to be INR 807. Investors will be better off waiting for an attractive entry point.

2. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely

Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year.  The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.

Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.

3. Scout24 Tender Offer Launched: Price Still Not Quite Full

In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.

The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low. 

The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.

The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top. 

The New News

Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.

More discussion below.

4. Koolearn (新东方在线) Trading Update – A Wobbly Start

Koolearn (1797 HK) raised about US$214m at HK$10.20 per share, the mid-point of its IPO price range. We have previously covered the IPO in: 

• Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending
• New Regulatory Tightening on Online Education Reads Badly on Koolearn IPO
• Koolearn (新东方在线) Pre-IPO – Profitable Online Edu Company but Poor Sentiment Weighs

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

5. Denso Continues to Strengthen Its Investment CASE with Acquisitions

Denso Corp (6902 JP) announced this month that it has invested in the Seattle-based connected vehicle services pioneer- Airbiquity Inc. Airbiquity is one of the leading companies in the connected vehicle services sector and has been one of the companies that has continuously developed automotive telematics technology. This investment made by Denso follows its investment made in Quadric.io this year ( Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims). As we previously mentioned, Denso is in full swing in its development in the autonomous driving field and next-generation technologies development. Thus, it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. According to Denso, its investment worth $5m in Airbiquity is expected to accelerate the development of over-the-air (OTA) systems for wirelessly updating automotive software from a remote location. OTA systems are methods of distributing new software, configuration settings, and providing updates to the electronic device in use, for instance, a car navigation system in a vehicle. These OTA systems which have been increasingly used to update the software of such multimedia products in a vehicle are now gaining more prominence given the emergence of next-generation technologies such as electrification, EV and connectivity. We also believe that Denso’s Stake in Airbiquity is likely to accelerate Denso’s transition in its business model to be a leading software solution provider. Thus, its series of investments such as in Tohoku Pioneer EG, JOLED, ThinCI, Quadric, and now Airbiquity are indicative of the decisiveness of its change in business model and moves towards achieving next-generation technology leadership.

In this briefing:

1. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW
2. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover
3. ECM Weekly (30 March 2019) – ESR, Yunji, Ruhnn, Jinxin Fertility, Metropolis Health, Viva Biotech
4. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?
5. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

1. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW

Last Week in Event SPACE …

• The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
• The value enhancement to Naspers Ltd (NPN SJ) from spinning off and separately listing its stake in Tencent Holdings (700 HK) is not apparent.
• Trading around its “undisturbed” levels, Lynas Corp Ltd (LYC AU) looks like a short after rejecting Wesfarmers Ltd (WES AU)‘s left-field unsolicited proposal.
• The gloves are off as Merck KGaA (MRK GR) announced an unsolicited $48/share cash tender offer for Versum Materials (VSM US). 
• With the ACCC’s blessing, now is a good time for Xenith Ip (XIP AU) to jettison Qantm Intellectual Property (QIP AU) and engage with IPH Ltd (IPH AU).
• While the deal for Scout24 AG (G24 GR) is likely to get up, someone else coming over the top at this late stage is not impossible.
• PCCW Ltd (8 HK) is “cheap” relative to HKT Ltd (6823 HK) – a catalyst to narrow the discount would be helpful.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nissan Motor (7201 JP) (Mkt Cap: $32bn; Liquidity: $98mn)

Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.

• Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
• If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
  
• Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP.  He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
• Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.

Links to:
Mio’s insight: Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger.
Travis’ insight: Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Samsung Electronics (005930 KS) (Mkt Cap: $265bn; Liquidity: $464mn)

Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.

• And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
• SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.

(link to Sanghyun’s insight: Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price)

Briefly …

Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $1bn; Liquidity: $7mn)

Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme.  This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.

• Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia. 

• This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago.  Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25. 
• A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
• At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
  

(link to Travis’ insight: Wesfarmers Puts Out A Bid for Lynas)

Xenith Ip (XIP AU) (Mkt Cap: $115mn; Liquidity: $1mn)

The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.

• None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
• With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.

(link to my insight: Xenith Is Running Out Of Excuses)

China Power New Energy Development Co (735 HK) (Mkt Cap: $581mn; Liquidity: $1mn)

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

• This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
• Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
• The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend. 

(link to my insight: China Power New Energy To Be Delisted After SOE Injection Abandoned)

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $79mn)

Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.

• Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
• The shareholder vote on the VSM/ENTG is scheduled for April 26^th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
• Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”

(link to John DeMasi‘s: Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III))

Scout24 AG (G24 GR) (Mkt Cap: $5.6bn; Liquidity: $20mn)

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer.  The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.

• The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming. 
• Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
• Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.

(link to Travis’ insight: Scout24 Tender Offer Launched: Price Still Not Quite Full)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.

• Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
• The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”.  It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing. 
• Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return.  I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.

(link to my insight: StubWorld: Naspers Embeds Another Layer Into Tencent)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.

• The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
• As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.

(link to Curtis’ insight: TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On)

• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s SPA has completed – you can see the movement in shares on CCASS – triggering the MGO.

  Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.

• Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.

• Ophir Energy (OPHR LN)‘s shareholders approved Medco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.

• 9.12% of shares out have tendered into Delta Electronics Thai (DELTA TB)‘s Offer, bringing the Offeror’s total holding to 30.05%. 
• The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.

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.   

2. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

• Hankook Tire Holdco/Sub are at +2σ for 5 consecutive days now. It was reported on Mar 25 that Sub (Hankook Tire) was on the verge of taking over Hanon Systems at a hefty 70% premium. Hankook Tire pays ₩5tril for Hahn & Co’s 50% stake.
• ₩5tril is really a lot for the Group. Holdco will also have to be heavily involved in funding. Whatever suffering Sub will have to endure should also be nearly equally applied to Holdco.
• Only long-term oriented local public offering funds had heavily dumped Sub shares. In contrast, highly short-term oriented local hedge funds (PEs) had rather shorted Holdco in the same time span. Sub disappoints and alienates a lot of long-term investors but it was Holdco who attracted the attention of short-term traders.
• Current +2σ divergence stayed for several days now. Considering where local short sellers are, I don’t think it will last much longer. I’d join local short-sellers. Just for a safer setup, I’d do pair trades, go long Sub and short Holdco.

3. ECM Weekly (30 March 2019) – ESR, Yunji, Ruhnn, Jinxin Fertility, Metropolis Health, Viva Biotech

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.

Accuracy Rate:

Our overall accuracy rate is 72.4% for IPOs and 63.9% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• Haitong UniTrust International Leasing (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.

News on Upcoming IPOs

• As IPO flood recedes, Asia bankers bet on follow-on capital raising
• Bitmain forced to delay Hong Kong IPO amid crypto-mining decline

This week Analysis on Upcoming IPO

• Viva Biotech (维亚生物) IPO: Warning Signs from 2018 Numbers (Part 2)
• Metropolis Healthcare IPO – Fairly Valued, at Best
• Jinxin Fertility (锦欣生殖) Pre-IPO: Strong Foothold in Sichuan but Weak Sentiment for Sector
• Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
• Yunji (云集) Pre-IPO Review – Poor Disclosure on Data
• ESR Cayman Pre-IPO- First Stab at Valuation
• Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward
• Dongzheng Auto Finance (东正汽车金融) IPO Review – Relaunched at Lower Price
• SNK Corp (950180 KS)

4. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?

• Carl Icahn has built his position since February 7th to where he now controls over 28% of the stock of Caesars Entertainment Corporation.
• He has already put three members on the board and will get a fourth seat if management can’t name a new CEO by April 15th.
• Icahn’s track record in casino deals has made him over $2.5bn since 1998/ Investors who joined him have made solid returns, deal after deals.

5. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) released Q3 (Dec 2018) data for industry mobile virtual network operator (MVNO) subs today (29 March) characterized by continued declines in growth YoY (+15% in Q3 v 18% in Q2) and the lowest absolute net adds (+480K) since Q2 2014.  Growth for the largest consumer-focused MVNO Rakuten Inc (4755 JP) also appears to be the lowest since data has become available but that is not necessarily a sign of strength for the existing network operators as it makes sense for Rakuten to slow MVNO growth before its October real network launch.  

In this briefing:

1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.