Consumer

In this briefing:

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

1. 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.

2. 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)

3. 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.

4. 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.  

5. 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.

In this briefing:

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
2. Subaru: Another Month, Another Recall
3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
4. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

1. 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.

2. Subaru: Another Month, Another Recall

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.

3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

4. 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.

In this briefing:

1. Descente Descended and Itochu Angle Is More Hostile

1. Descente Descended and Itochu Angle Is More Hostile

Descente Ltd (8114 JP) has been in the press quite a bit in recent days with management commentary about how the company and directors disagree with the Tender Offer launched by Itochu Corp (8001 JP) to raise their stake from 30% to 40% and how it could lead to conflict of interest and worsening management, lower morale for employees, and a loss of independence.

Management, former management, and former employees have all joined the party. Wednesday saw a significant sell-down of shares to a post-Tender Offer low, but it was not clear why.

Descente had, on the 26th, noted in a puff piece in the Nikkei that it would move up the release of its next Mid-Term (Three Year) Plan (normally due in May this year), and it would focus on growing direct sales in China through more stores, growing sales in the US through adding products to the list (currently the major product in North America is skiwear), selling LeCoq Sportif in Indonesia and Munsingwear in Vietnam. WHEN is unknown, but the explicit goal is to encourage shareholders to keep their shares rather than tender them to Itochu.

Today saw a new filing from Itochu in which it amended its original announcement, claimed Descente’s activity in the media was additional and additive to the Target Company Position Statement filed on 7 February, and for that reason, their activity had not been appropriately disclosed to shareholders. Furthermore, Itochu noted that while the jibber-jabber had been going on the last two-plus weeks, Descente had asked Itochu to negotiate post-Tender management structure plans, and Itochu had agreed. Itochu and Descente talked for 9 days from 11-20 Feb but Descente was bad-mouthing Itochu in the press at the same time. That induced Itochu to stop talks. And late today, the Nikkei has released a 27 February interview with the CEO of ANTA, Itochu’s longtime textile partner in China and a 6.86% holder of Descente shares, where he says that he supports Itochu’s tender offer, will not sell their shares in Descente, and would support Itochu efforts to restructure management. 

These three new developments change things in interesting ways, in my opinion pushing Descente’s own plans closer to Itochu’s, and introducing the possibility of significantly more hostility to come, with a much higher likelihood Itochu can win the proxy wars to come. 

In-depth analysis below the fold.

Previous insights on the situation and its runup are listed below.

In this briefing:

1. ECM Weekly (30 March 2019) – ESR, Yunji, Ruhnn, Jinxin Fertility, Metropolis Health, Viva Biotech
2. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?
3. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten
4. Havells India
5. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely

1. 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)

2. 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.

3. 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.  

4. 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.

5. 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.

In this briefing:

1. Nutrien’s Move On Ruralco Makes Agronomic Sense

1. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) 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. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

In this briefing:

1. Nutrien’s Move On Ruralco Makes Agronomic Sense
2. Hargreaves Lansdown (HL/:LN) No Flow, No Go

1. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) 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. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

2. Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  

Hargreaves Lansdown: What does it do ?

Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK’s largest direct to investor platform administering £86bn of investments for more than 1.1m active clients

Why is it in the Short portfolio ?

Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

In this briefing:

1. Nutrien’s Move On Ruralco Makes Agronomic Sense
2. Hargreaves Lansdown (HL/:LN) No Flow, No Go
3. S&P 500 and S&P 600 Testing Resistance

1. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) 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. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

2. Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  

Hargreaves Lansdown: What does it do ?

Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK’s largest direct to investor platform administering £86bn of investments for more than 1.1m active clients

Why is it in the Short portfolio ?

Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

3. S&P 500 and S&P 600 Testing Resistance

We believe the market is at short-term overbought extremes and is contending with resistance. Resistance levels we are monitoring include 2,810-2,817 on the S&P 500 and the 200-day moving average on the S&P 600 Small Cap index… see charts below. We would welcome some consolidation or a mild pullback which would be a healthy correction of the current extended market conditions.

In today’s report we highlight attractive Groups and stocks within Manufacturing and Technology: Construction Equipment, Industrial Rental Equipment, Data Storage Solutions & Devices, Small-Cap, and Software, Financial Mgmt. Solutions.

In this briefing:

1. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?
2. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten
3. Havells India
4. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
5. Scout24 Tender Offer Launched: Price Still Not Quite Full

1. 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.

2. 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.  

3. 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.

4. 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.

5. 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.

In this briefing:

1. Denso Continues to Strengthen Its Investment CASE with Acquisitions
2. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?
3. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
4. Cupid Ltd: Attractive Valuation Post Significant Correction
5. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

1. 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.

2. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”

The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP). 

There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.

Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan. 

Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot. 

There are clear patches in the fog. Two things shine through immediately. 

1. Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
2. The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.

There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July. 

The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.

More below.

3. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger

Today Nissan Motor (7201 JP) released its report from the Special Committee for Improving Governance. The FT also reported that Renault SA (RNO FP) (i.e. the French government) was keen to restart merger talks within twelve months with an eye towards then acquiring Fiat Chrysler Automobiles Nv (FCAU US).

The details of the former are unsurprising but disappointing, while Renault’s M&A ambitions just seem delusional at this point.

4. Cupid Ltd: Attractive Valuation Post Significant Correction

Cupid Ltd one of the largest manufacturers of condoms in India 9MFY19 revenue was largely as per our expectations, as there was some order slippages. As forecasted in our initiation report Cupid Ltd: Protecting the Needy, the company reported a 20% decline in revenue at Rs 505mn, which also resulted in lower profitability both at the operating as well as net level. EBITDA stood at INR 161.6 mn declining by 32.53% with EBITDA margin at 31.95%. PAT was INR 108.5 mn declining by 24.58% with PAT margin at 21.46%.

Despite this below-par performance in the 9MFY19, we are fairly positive on the future growth prospects of the company. As of March 2019, it has a healthy order book of INR 1300 m with Book to Bill ratio of  1.99 times on its TTM sales. We expect revenues to grow at 15% over FY18-19 and margins to improve in medium to long term horizon.

Having corrected by 67% from its peak, the stock currently trades at 10.20x its FY19 EPS and 8.34x its FY20 EPS; we believe that this provides a good entry point for this niche high margin healthcare company with attractive long term growth possibilities.

5. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps. 

Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions. 

You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:

• finish the historical overview of the Li family and PCCW
• present my trade idea and rationale
• give a detailed overview of the business units of PCCW and the associated performance of each
• recap ALL of my stub trades on Smartkarma and the performance of each  

In this briefing:

1. Hargreaves Lansdown (HL/:LN) No Flow, No Go
2. S&P 500 and S&P 600 Testing Resistance

1. Hargreaves Lansdown (HL/:LN) No Flow, No Go

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket.  A tough market background and Brexit concerns have reduced in-flows into Wealth and Investment Management companies. This growth hiatus could last for some time.  

Hargreaves Lansdown: What does it do ?

Hargreaves Lansdown is a wealth manager and private client stockbroker with a market value of  GBP8bn. It provides the UK’s largest direct to investor platform administering £86bn of investments for more than 1.1m active clients

Why is it in the Short portfolio ?

Interim figures for the 6 months to December 2018, (published 29th Jan)  mark a deterioration in operating performance brought about by adverse market conditions. Assets under administration declined and net new business was 25% down on the prior year. Earnings per share increased 4%. The share price declined 6% on the day of the results but has subsequently been stable leaving the group on a forward multiple of over 30x. Unless the retail investment market recovers quickly this premium rating may prove vulnerable. 

2. S&P 500 and S&P 600 Testing Resistance

We believe the market is at short-term overbought extremes and is contending with resistance. Resistance levels we are monitoring include 2,810-2,817 on the S&P 500 and the 200-day moving average on the S&P 600 Small Cap index… see charts below. We would welcome some consolidation or a mild pullback which would be a healthy correction of the current extended market conditions.

In today’s report we highlight attractive Groups and stocks within Manufacturing and Technology: Construction Equipment, Industrial Rental Equipment, Data Storage Solutions & Devices, Small-Cap, and Software, Financial Mgmt. Solutions.