Healthcare

In this briefing:

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook
2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer
3. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport
4. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged
5. M&A: A Round-Up of Deals in January 2019

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, finally received a firm but marginally lower offer from Brookfield Asset Management (BAM US) through a recommended implementation deed.

3. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport

Last Week in Event SPACE …

• Toppan Printing (7911 JP)‘s management prefers to run a long/short fund rather than support the company’s long-suffering shareholders. 

• Hyundai Heavy Industries Holdings (267250 KS) discount to NAV was all set to narrow after Aramco’s intention to acquire 19.9% in Hyundai Oilbank Co; then 31%-held Hyundai Heavy Industries (009540 KS) announced a multi-step split-off, payment in kind and rights issue.

• Following Itochu Corp (8001 JP)‘s partial offer, Descente Ltd (8114 JP) has the ability to play dirty and investors and traders should be aware of that.

• Brookfield firms up a reduced offer for Healthscope Ltd (HSO AU), however the BGH-consortium is not out of the picture.

• Mcmillan Shakespeare (MMS AU) pushes back on Eclipx (ECX AU)‘s first court date, but MACs have not been triggered.

• Pioneer Corp (6773 JP)‘s shareholders vote to implement a self-imposed (self-inflicted?) equity “cramdown” of sorts. 

• Bidding could still go crazily higher from here as Mastercard Inc Class A (MA US) and Visa Inc Class A Shares (V US) wrestle for Earthport plc (EPO LN).
• Plus 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)

Toppan Printing (7911 JP) (Mkt Cap: $5.3bn; Liquidity: $14mn)

Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years. 

• Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
• The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP) (its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
• Toppan’s business and investment portfolio should be radically pruned or eliminated.  Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.   

(link to Campbell’s insight: Toppan Printing: Money for Nothing (& Your Clicks for Free)

Hyundai Heavy Industries (009540 KS) (HHIC) (Mkt Cap: $8.1bn; Liquidity: $37mn)

HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.

• Next the Korean Dev Bank will exchange its 55.7% stake in Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME) for 15.2mn shares in the intermediate holdco (21.5% of shares out) via a payment in kind.
• Following which, the intermediate holdco will do a ₩1.25tn rights offer to its shareholders, including Hyundai Heavy Industries Holdings (267250 KS).
• Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.

links to:
Sanghyun’s insight: Hyundai Heavy/DSME Event – Comprehensive Summary
Douglas Kim‘s insight: Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings.

Nexon Co Ltd (3659 JP) (Mkt Cap: $8.1bn; Liquidity: $37mn)

Netmarble Games (251270 KS) officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:

• To avoid the cultural backlash from Korean gamers.
• Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

(link to Douglas’ insight: Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?) 

Descente Ltd (8114 JP) (Mkt Cap: $1.9bn; Liquidity: $3mn)

Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.

• Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason. 
• Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top. 
• Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience. 

links to:
Travis’ insight: No Détente for Descente: Itochu Launches Partial Tender
Michael Causton‘s insight: Wacoal and Descente Agree Partial Merger to Head Off Itochu

Healthscope Ltd (HSO AU) (Mkt Cap: $3.1bn; Liquidity: $25mn)

Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

• HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
• The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
• Shares are trading  at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.

(link to my insight: BGH Lurks As Brookfield Firms Offer For Healthscope) 

Clarion Co Ltd (6796 JP) (Mkt Cap: $1.3bn; Liquidity: $10mn)

On 26 October Hitachi Ltd (6501 JP) and  Faurecia (EO FP) announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence.  Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days). 

• This deal is quite straightforward. The deal is on schedule and coming through as planned.
• Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
• At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.

(link to Travis’ insight: Faurecia Launches Tender Offer for Clarion) 

Eclipx (ECX AU) (Mkt Cap: $520mn; Liquidity: $3mn)

Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

• Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
• But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
• Still, at a 15% gross spread to terms and trading ~5% above  its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

(link to my insight: McMillan’s Offer For Eclipx Wobbles) 

Pioneer Corp (6773 JP) (Mkt Cap: $228mn; Liquidity: $3.7mn)

The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process. 

• For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.

(link to Travis’ insight: Pioneer Shareholders Approve Deal | What Next?) 

Veriserve Corp (3724 JP) (Mkt Cap: $270mn; Liquidity: $1mn)

SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.

• The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
• Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
• There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)) 

Jiec Co Ltd (4291 JP) (Mkt Cap: $147mn; Liquidity: $.03mn)

Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.

• The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
• But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders. 
• So you suck it up and buy and tender, or tender what you own.  And then you write a public comment to the METI Fair M&A process.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary JIEC)

Earthport plc (EPO LN) (Mkt Cap: $304mn; Liquidity: $2mn)

Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumping Visa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected. 

• For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.

• A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
• There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.

(link to my insight: Earthport the Winner as Mastercard/Visa Jostle For Position)  

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $13mn)

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

• CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing. 

(link to my insight: CEVA’s Fair & Reasonable Offer; But Please Don’t Tender)

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.

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

Hyundai Heavy Industries Holdings (267250 KS)/Hyundai Heavy Industries (009540 KS)

As widely reported in the press and discussed by Douglas Kim (Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank) and Sanghyun Park (Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal), Aramco announced an intention to acquire a 19.9% equity investment in Hyundai Oilbank Co (HOC) for US$1.6bn. This places an overall value for HOC at ₩8.98tn (the media is reporting that Aramco plans to value HOC at ₩10tn) or ₩8.2tn for HHI’s current 91.13% stake. This is HHI’s largest investment, accounting for 83%/67% of NAV/GAV. 

• HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year. 
• Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
• But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue.  Please refer to this development in the “Events” section above.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted) 

United Co Rusal (486 HK)/Mmc Norilsk Nickel Pjsc (Adr) (MNOD LI)

The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force. 

• Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
  • The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later.  This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)). 
  • As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
• Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.

The average premium/discount for each set over a one-year period is graphed below.

(link to my insight: Share Classifications: Jan 2019 Month-End Snapshot) 

Briefly …

• Sanghyun recommended a long Common and short 1P, after LG Chem Ltd (051910 KS) Common/1P is touched levels last seen in mid October last year. LG Chem Share Class: Common Discount to 1P Should Be Reverted at This Point.

By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday. 

• Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP) buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
• A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.

(link to Travis’ insight: 31 January TOPIX & JPX Nikkei 400 Major Index Changes)

• The Greencross Ltd (GXL AU)/TPG transaction has now received FIRB approval. The scheme meeting is scheduled for the 6 Feb.

• The Bank Tabungan Pensiunan Nasional (BTPN IJ) deal with Sumitomo Mitsui Financial (8316 JP) went through. SMFG paid IDR 4,282 and almost all BTPN shareholders took them up on it. 
• The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares. 
• Minebea Co Ltd (6479 JP) announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
• The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).

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. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged

Hoya Corporation (7741 JP) reported its 3QFY03/19 earnings yesterday (01^st Feb). The revenues grew at 4.9% YoY while operating profit increased by a hefty 20.2% YoY during the quarter. On a constant currency basis, revenues grew 6.6% YoY while pre-tax profit increased 15.0% YoY during the period. In addition, Hoya’s margin too witnessed an expansion with operating profit margin reaching 27.8% from 24.3%, while it reported a pre-tax margin of 27.7% compared to 25.4% a year ago. Moreover, the company beat consensus estimates on revenue, operating profit and pre-tax profit.

Revenues grew thanks to strong performances by the Life Care and Electronics businesses although the Imaging business saw a decline.

5. M&A: A Round-Up of Deals in January 2019

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.

In this briefing:

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook
2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer
3. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport
4. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged
5. M&A: A Round-Up of Deals in January 2019

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, finally received a firm but marginally lower offer from Brookfield Asset Management (BAM US) through a recommended implementation deed.

3. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport

Last Week in Event SPACE …

• Toppan Printing (7911 JP)‘s management prefers to run a long/short fund rather than support the company’s long-suffering shareholders. 

• Hyundai Heavy Industries Holdings (267250 KS) discount to NAV was all set to narrow after Aramco’s intention to acquire 19.9% in Hyundai Oilbank Co; then 31%-held Hyundai Heavy Industries (009540 KS) announced a multi-step split-off, payment in kind and rights issue.

• Following Itochu Corp (8001 JP)‘s partial offer, Descente Ltd (8114 JP) has the ability to play dirty and investors and traders should be aware of that.

• Brookfield firms up a reduced offer for Healthscope Ltd (HSO AU), however the BGH-consortium is not out of the picture.

• Mcmillan Shakespeare (MMS AU) pushes back on Eclipx (ECX AU)‘s first court date, but MACs have not been triggered.

• Pioneer Corp (6773 JP)‘s shareholders vote to implement a self-imposed (self-inflicted?) equity “cramdown” of sorts. 

• Bidding could still go crazily higher from here as Mastercard Inc Class A (MA US) and Visa Inc Class A Shares (V US) wrestle for Earthport plc (EPO LN).
• Plus 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)

Toppan Printing (7911 JP) (Mkt Cap: $5.3bn; Liquidity: $14mn)

Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years. 

• Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
• The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP) (its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
• Toppan’s business and investment portfolio should be radically pruned or eliminated.  Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.   

(link to Campbell’s insight: Toppan Printing: Money for Nothing (& Your Clicks for Free)

Hyundai Heavy Industries (009540 KS) (HHIC) (Mkt Cap: $8.1bn; Liquidity: $37mn)

HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.

• Next the Korean Dev Bank will exchange its 55.7% stake in Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME) for 15.2mn shares in the intermediate holdco (21.5% of shares out) via a payment in kind.
• Following which, the intermediate holdco will do a ₩1.25tn rights offer to its shareholders, including Hyundai Heavy Industries Holdings (267250 KS).
• Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.

links to:
Sanghyun’s insight: Hyundai Heavy/DSME Event – Comprehensive Summary
Douglas Kim‘s insight: Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings.

Nexon Co Ltd (3659 JP) (Mkt Cap: $8.1bn; Liquidity: $37mn)

Netmarble Games (251270 KS) officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:

• To avoid the cultural backlash from Korean gamers.
• Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

(link to Douglas’ insight: Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?) 

Descente Ltd (8114 JP) (Mkt Cap: $1.9bn; Liquidity: $3mn)

Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.

• Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason. 
• Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top. 
• Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience. 

links to:
Travis’ insight: No Détente for Descente: Itochu Launches Partial Tender
Michael Causton‘s insight: Wacoal and Descente Agree Partial Merger to Head Off Itochu

Healthscope Ltd (HSO AU) (Mkt Cap: $3.1bn; Liquidity: $25mn)

Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

• HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
• The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
• Shares are trading  at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.

(link to my insight: BGH Lurks As Brookfield Firms Offer For Healthscope) 

Clarion Co Ltd (6796 JP) (Mkt Cap: $1.3bn; Liquidity: $10mn)

On 26 October Hitachi Ltd (6501 JP) and  Faurecia (EO FP) announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence.  Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days). 

• This deal is quite straightforward. The deal is on schedule and coming through as planned.
• Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
• At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.

(link to Travis’ insight: Faurecia Launches Tender Offer for Clarion) 

Eclipx (ECX AU) (Mkt Cap: $520mn; Liquidity: $3mn)

Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

• Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
• But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
• Still, at a 15% gross spread to terms and trading ~5% above  its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

(link to my insight: McMillan’s Offer For Eclipx Wobbles) 

Pioneer Corp (6773 JP) (Mkt Cap: $228mn; Liquidity: $3.7mn)

The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process. 

• For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.

(link to Travis’ insight: Pioneer Shareholders Approve Deal | What Next?) 

Veriserve Corp (3724 JP) (Mkt Cap: $270mn; Liquidity: $1mn)

SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.

• The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
• Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
• There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)) 

Jiec Co Ltd (4291 JP) (Mkt Cap: $147mn; Liquidity: $.03mn)

Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.

• The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
• But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders. 
• So you suck it up and buy and tender, or tender what you own.  And then you write a public comment to the METI Fair M&A process.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary JIEC)

Earthport plc (EPO LN) (Mkt Cap: $304mn; Liquidity: $2mn)

Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumping Visa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected. 

• For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.

• A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
• There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.

(link to my insight: Earthport the Winner as Mastercard/Visa Jostle For Position)  

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $13mn)

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

• CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing. 

(link to my insight: CEVA’s Fair & Reasonable Offer; But Please Don’t Tender)

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.

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

Hyundai Heavy Industries Holdings (267250 KS)/Hyundai Heavy Industries (009540 KS)

As widely reported in the press and discussed by Douglas Kim (Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank) and Sanghyun Park (Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal), Aramco announced an intention to acquire a 19.9% equity investment in Hyundai Oilbank Co (HOC) for US$1.6bn. This places an overall value for HOC at ₩8.98tn (the media is reporting that Aramco plans to value HOC at ₩10tn) or ₩8.2tn for HHI’s current 91.13% stake. This is HHI’s largest investment, accounting for 83%/67% of NAV/GAV. 

• HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year. 
• Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
• But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue.  Please refer to this development in the “Events” section above.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted) 

United Co Rusal (486 HK)/Mmc Norilsk Nickel Pjsc (Adr) (MNOD LI)

The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force. 

• Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
  • The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later.  This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)). 
  • As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
• Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.

The average premium/discount for each set over a one-year period is graphed below.

(link to my insight: Share Classifications: Jan 2019 Month-End Snapshot) 

Briefly …

• Sanghyun recommended a long Common and short 1P, after LG Chem Ltd (051910 KS) Common/1P is touched levels last seen in mid October last year. LG Chem Share Class: Common Discount to 1P Should Be Reverted at This Point.

By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday. 

• Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP) buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
• A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.

(link to Travis’ insight: 31 January TOPIX & JPX Nikkei 400 Major Index Changes)

• The Greencross Ltd (GXL AU)/TPG transaction has now received FIRB approval. The scheme meeting is scheduled for the 6 Feb.

• The Bank Tabungan Pensiunan Nasional (BTPN IJ) deal with Sumitomo Mitsui Financial (8316 JP) went through. SMFG paid IDR 4,282 and almost all BTPN shareholders took them up on it. 
• The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares. 
• Minebea Co Ltd (6479 JP) announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
• The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).

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. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged

Hoya Corporation (7741 JP) reported its 3QFY03/19 earnings yesterday (01^st Feb). The revenues grew at 4.9% YoY while operating profit increased by a hefty 20.2% YoY during the quarter. On a constant currency basis, revenues grew 6.6% YoY while pre-tax profit increased 15.0% YoY during the period. In addition, Hoya’s margin too witnessed an expansion with operating profit margin reaching 27.8% from 24.3%, while it reported a pre-tax margin of 27.7% compared to 25.4% a year ago. Moreover, the company beat consensus estimates on revenue, operating profit and pre-tax profit.

Revenues grew thanks to strong performances by the Life Care and Electronics businesses although the Imaging business saw a decline.

5. M&A: A Round-Up of Deals in January 2019

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.

In this briefing:

1. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport
2. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged
3. M&A: A Round-Up of Deals in January 2019
4. BGH Lurks As Brookfield Firms Offer For Healthscope

1. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport

Last Week in Event SPACE …

• Toppan Printing (7911 JP)‘s management prefers to run a long/short fund rather than support the company’s long-suffering shareholders. 

• Hyundai Heavy Industries Holdings (267250 KS) discount to NAV was all set to narrow after Aramco’s intention to acquire 19.9% in Hyundai Oilbank Co; then 31%-held Hyundai Heavy Industries (009540 KS) announced a multi-step split-off, payment in kind and rights issue.

• Following Itochu Corp (8001 JP)‘s partial offer, Descente Ltd (8114 JP) has the ability to play dirty and investors and traders should be aware of that.

• Brookfield firms up a reduced offer for Healthscope Ltd (HSO AU), however the BGH-consortium is not out of the picture.

• Mcmillan Shakespeare (MMS AU) pushes back on Eclipx (ECX AU)‘s first court date, but MACs have not been triggered.

• Pioneer Corp (6773 JP)‘s shareholders vote to implement a self-imposed (self-inflicted?) equity “cramdown” of sorts. 

• Bidding could still go crazily higher from here as Mastercard Inc Class A (MA US) and Visa Inc Class A Shares (V US) wrestle for Earthport plc (EPO LN).
• Plus 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)

Toppan Printing (7911 JP) (Mkt Cap: $5.3bn; Liquidity: $14mn)

Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years. 

• Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
• The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP) (its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
• Toppan’s business and investment portfolio should be radically pruned or eliminated.  Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.   

(link to Campbell’s insight: Toppan Printing: Money for Nothing (& Your Clicks for Free)

Hyundai Heavy Industries (009540 KS) (HHIC) (Mkt Cap: $8.1bn; Liquidity: $37mn)

HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.

• Next the Korean Dev Bank will exchange its 55.7% stake in Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME) for 15.2mn shares in the intermediate holdco (21.5% of shares out) via a payment in kind.
• Following which, the intermediate holdco will do a ₩1.25tn rights offer to its shareholders, including Hyundai Heavy Industries Holdings (267250 KS).
• Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.

links to:
Sanghyun’s insight: Hyundai Heavy/DSME Event – Comprehensive Summary
Douglas Kim‘s insight: Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings.

Nexon Co Ltd (3659 JP) (Mkt Cap: $8.1bn; Liquidity: $37mn)

Netmarble Games (251270 KS) officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:

• To avoid the cultural backlash from Korean gamers.
• Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

(link to Douglas’ insight: Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?) 

Descente Ltd (8114 JP) (Mkt Cap: $1.9bn; Liquidity: $3mn)

Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.

• Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason. 
• Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top. 
• Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience. 

links to:
Travis’ insight: No Détente for Descente: Itochu Launches Partial Tender
Michael Causton‘s insight: Wacoal and Descente Agree Partial Merger to Head Off Itochu

Healthscope Ltd (HSO AU) (Mkt Cap: $3.1bn; Liquidity: $25mn)

Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

• HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
• The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
• Shares are trading  at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.

(link to my insight: BGH Lurks As Brookfield Firms Offer For Healthscope) 

Clarion Co Ltd (6796 JP) (Mkt Cap: $1.3bn; Liquidity: $10mn)

On 26 October Hitachi Ltd (6501 JP) and  Faurecia (EO FP) announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence.  Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days). 

• This deal is quite straightforward. The deal is on schedule and coming through as planned.
• Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
• At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.

(link to Travis’ insight: Faurecia Launches Tender Offer for Clarion) 

Eclipx (ECX AU) (Mkt Cap: $520mn; Liquidity: $3mn)

Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

• Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
• But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
• Still, at a 15% gross spread to terms and trading ~5% above  its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

(link to my insight: McMillan’s Offer For Eclipx Wobbles) 

Pioneer Corp (6773 JP) (Mkt Cap: $228mn; Liquidity: $3.7mn)

The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process. 

• For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.

(link to Travis’ insight: Pioneer Shareholders Approve Deal | What Next?) 

Veriserve Corp (3724 JP) (Mkt Cap: $270mn; Liquidity: $1mn)

SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.

• The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
• Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
• There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)) 

Jiec Co Ltd (4291 JP) (Mkt Cap: $147mn; Liquidity: $.03mn)

Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.

• The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
• But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders. 
• So you suck it up and buy and tender, or tender what you own.  And then you write a public comment to the METI Fair M&A process.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary JIEC)

Earthport plc (EPO LN) (Mkt Cap: $304mn; Liquidity: $2mn)

Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumping Visa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected. 

• For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.

• A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
• There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.

(link to my insight: Earthport the Winner as Mastercard/Visa Jostle For Position)  

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $13mn)

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

• CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing. 

(link to my insight: CEVA’s Fair & Reasonable Offer; But Please Don’t Tender)

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.

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

Hyundai Heavy Industries Holdings (267250 KS)/Hyundai Heavy Industries (009540 KS)

As widely reported in the press and discussed by Douglas Kim (Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank) and Sanghyun Park (Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal), Aramco announced an intention to acquire a 19.9% equity investment in Hyundai Oilbank Co (HOC) for US$1.6bn. This places an overall value for HOC at ₩8.98tn (the media is reporting that Aramco plans to value HOC at ₩10tn) or ₩8.2tn for HHI’s current 91.13% stake. This is HHI’s largest investment, accounting for 83%/67% of NAV/GAV. 

• HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year. 
• Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
• But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue.  Please refer to this development in the “Events” section above.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted) 

United Co Rusal (486 HK)/Mmc Norilsk Nickel Pjsc (Adr) (MNOD LI)

The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force. 

• Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
  • The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later.  This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)). 
  • As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
• Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.

The average premium/discount for each set over a one-year period is graphed below.

(link to my insight: Share Classifications: Jan 2019 Month-End Snapshot) 

Briefly …

• Sanghyun recommended a long Common and short 1P, after LG Chem Ltd (051910 KS) Common/1P is touched levels last seen in mid October last year. LG Chem Share Class: Common Discount to 1P Should Be Reverted at This Point.

By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday. 

• Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP) buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
• A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.

(link to Travis’ insight: 31 January TOPIX & JPX Nikkei 400 Major Index Changes)

• The Greencross Ltd (GXL AU)/TPG transaction has now received FIRB approval. The scheme meeting is scheduled for the 6 Feb.

• The Bank Tabungan Pensiunan Nasional (BTPN IJ) deal with Sumitomo Mitsui Financial (8316 JP) went through. SMFG paid IDR 4,282 and almost all BTPN shareholders took them up on it. 
• The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares. 
• Minebea Co Ltd (6479 JP) announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
• The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).

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. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged

Hoya Corporation (7741 JP) reported its 3QFY03/19 earnings yesterday (01^st Feb). The revenues grew at 4.9% YoY while operating profit increased by a hefty 20.2% YoY during the quarter. On a constant currency basis, revenues grew 6.6% YoY while pre-tax profit increased 15.0% YoY during the period. In addition, Hoya’s margin too witnessed an expansion with operating profit margin reaching 27.8% from 24.3%, while it reported a pre-tax margin of 27.7% compared to 25.4% a year ago. Moreover, the company beat consensus estimates on revenue, operating profit and pre-tax profit.

Revenues grew thanks to strong performances by the Life Care and Electronics businesses although the Imaging business saw a decline.

3. M&A: A Round-Up of Deals in January 2019

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.

4. BGH Lurks As Brookfield Firms Offer For Healthscope

Healthscope Ltd (HSO AU) has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share.

The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.

Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.

Brookfield’s proposals have unanimous HSO Board backing. 

The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.

HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.

An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.

Currently trading tight to the Scheme consideration at $2.45/share.

In this briefing:

1. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged
2. M&A: A Round-Up of Deals in January 2019
3. BGH Lurks As Brookfield Firms Offer For Healthscope

1. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged

Hoya Corporation (7741 JP) reported its 3QFY03/19 earnings yesterday (01^st Feb). The revenues grew at 4.9% YoY while operating profit increased by a hefty 20.2% YoY during the quarter. On a constant currency basis, revenues grew 6.6% YoY while pre-tax profit increased 15.0% YoY during the period. In addition, Hoya’s margin too witnessed an expansion with operating profit margin reaching 27.8% from 24.3%, while it reported a pre-tax margin of 27.7% compared to 25.4% a year ago. Moreover, the company beat consensus estimates on revenue, operating profit and pre-tax profit.

Revenues grew thanks to strong performances by the Life Care and Electronics businesses although the Imaging business saw a decline.

2. M&A: A Round-Up of Deals in January 2019

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.

3. BGH Lurks As Brookfield Firms Offer For Healthscope

Healthscope Ltd (HSO AU) has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share.

The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.

Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.

Brookfield’s proposals have unanimous HSO Board backing. 

The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.

HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.

An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.

Currently trading tight to the Scheme consideration at $2.45/share.

In this briefing:

1. BGH Lurks As Brookfield Firms Offer For Healthscope

1. BGH Lurks As Brookfield Firms Offer For Healthscope

Healthscope Ltd (HSO AU) has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share.

The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.

Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.

Brookfield’s proposals have unanimous HSO Board backing. 

The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.

HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.

An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.

Currently trading tight to the Scheme consideration at $2.45/share.

In this briefing:

1. IPO Analytics: Corporate Governance – Alpha Generator, Shortlist of Bookrunners to Avoid/Keep Happy
2. Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
3. RHT Health Trust – Cash on Sale
4. CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates

1. IPO Analytics: Corporate Governance – Alpha Generator, Shortlist of Bookrunners to Avoid/Keep Happy

Since inception of our IPO research in 2015, the Aequitas Research team has covered over 361 IPOs, which raised over US$100m each, across Asia Pacific (excluding Korea and China A-shares) and the US (Asia linked listings).

For this insight, we used data from our IPO framework, the prospectus, company filings and market data to analyse 244 IPOs across Developed and Emerging Asia Pacific (excluding Korea and China A-shares) that took place over 2016-18. Our results are split across two insights.

In our previous insight, IPO Analytics: Cut your losses and let you profits runs, holds true for IPOs, we highlighted:

• Overall IPOs have provided an average 4.8% return at the end of the first week, some geographies like India and Thailand have clearly outperformed with average returns of over 10%.
• IPOs in Hong Kong despite topping the list with the most number of deals provided only 2.4% average returns.
• In terms of sectors, Financials and Real Estate sector have been the biggest capital guzzlers in the region. While Healthcare has been a consistent underperformer across geographies over the first few months of listing.
• Incremental returns are higher from holding on to winners than from trying to bet on losers turning around, both in terms of the percentage of such cases and in terms of the average returns overall.

This is the second and final part of our twin series of insights covering our findings. In this insight, we’ll analyse the best and worst bookrunners by country, corporate governance impact on listing performance, earnings and liquidity analysis. Our key findings include:

• Some of the biggest names in Investment Banking, one American bank in particular, has by far the lousiest record of providing investor returns from IPOs in this region
• IPOs without any corporate governance issues outperformed the ones with a few issues by 9% on the first day and over the first month. Deals with related party issues and cash/dividend payout prior to listing performed the worst on average.
• Sales estimates at the time of IPO appear to be a lot more reliable than the net income estimates. The latter has a bias towards being revised downwards much more so than the sales estimates. Target price changes seem to mirror share price movements and were largely out of sync with earnings revisions
• In terms of volume traded as percentage of shares offered, deals that did well on an average trade 2.5x more than deals that were under water. India had the highest proportion of shares being flipped owing to the high allocation to retail and HNIs while Australia had the lowest liquidity.

This report has been prepared by the entire Aequitas Research Team:  Ke Yan, CFA, FRM, Zhen Zhou, Toh and  Sumeet Singh.

2. Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio

Shanghai Henlius, a subsidiary of Fosun Pharma, is seeking to list in Hong Kong. In this insight, we will discuss the following topics:

• The company’s background
• Details of pipeline drug candidates, the potential market of these products and the competition
• Shareholders and investors
• Summary of our likes and concerns
• Questions for management meetings

We will leave the discussion of valuation for our next insight.

• CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)

• Viva Biotech (维亚生物) IPO: When CRO Becomes Early Stage Biotech Investor

• Hansoh Pharma (翰森制药) IPO: Takeaways from Recent 4+7 City Centralized Tender Results

• Hansoh Pharma (翰森制药) IPO: A Leading Generic Player with Regulatory Overhang (Part 1)
• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different

• Frontage Holding (方达控股) IPO: More Disclosure Needed to Understand Moat and Growth Prospect
• Ascentage Pharma (亚盛医药) IPO: Too Early for an IPO
• Junshi Bioscience (君实医药) IPO: Thoughts on Valuation (Part 2)
• Junshi Bioscience (君实医药) IPO: Early in Application but Behind in Key Indications (Part 1)
• CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)

• AOBiome Therapeutics IPO: Hope for Natural Therapeutic Treatment
• Stealth Biotherapeutics IPO: Cure the Symptoms but Not the Cause (Part 1)
• Innovent Biologics (信达生物) IPO: Pricing the PD-1 and Biosimilars Competition (Part 2)
• Innovent Biologics (信达生物) IPO: A Major PD-1 MAb Competitor Might Have Just Emerged (Part 1)
• MicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
• Hua Medicine (华领医药) IPO: Thoughts on Valuation
• Hua Medicine (华领医药) IPO: Reviving Roche’s Failed Attempt?
• BeiGene (百济神州) IPO: Dual-Listing with Upside Capped in the Near Term
• Ascletis Pharma (歌礼制药) IPO: Valuation Not Justified by Ganovo and Ravidasvir NPV (Part 3)
• Ascletis Pharma (歌礼制药) IPO: Three Valuation Risk Factors (Part 2)
• Ascletis Pharma (歌礼制药) IPO: Emerging Player in the Crowded HCV Drug Market
• China Isotope & Radiation IPO: Oligopoly, Visible Growth and High Barrier to Entry
• Zai Lab IPO: Thoughts on Valuation, Risks and Upsides (Part 2)
• Zai Lab IPO: Experienced Team, Promising In-Licensing Drug Pipeline (Part 1)

3. RHT Health Trust – Cash on Sale

On 15^th January 2019, RHT Health Trust (RHT SP) announced the completion of the disposal of RHT’s entire asset portfolio of clinical establishments and hospitals in India to Fortis.

The balance net cash proceeds of S$32.52 mil will be retained as undistributed proceeds to cover on-going expenses of RHT following Completion. This translates to a cash NAV of S$0.04 per unit.

RHT’s closing unit price today was S$0.029 per unit, translating to a 28% discount to its cash NAV of S$0.04 per unit.

Taking Saizen REIT’s premium as a reference, RHT could potentially trade up to a 20% premium to its cash NAV, implying a unit price of S$0.048 per unit, or an upside potential of 65.5% when it announces progress in acquiring new assets/business.

Key risk is the suspension in trading of RHT units if it is unable to acquire new business.

Recommended investment strategy is to acquire RHT at current price (steep discount to cash NAV), hold out till a re-rating upon the announcement of a potential acquisition, and divest at a premium to cash NAV.

4. CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates

CStone Pharma (CSTONE HK) is a biopharmaceutical company which is developing a pipeline of 14 drug candidates of which 9 are in clinical development. CStone has started pre-marketing for a Hong Kong IPO to raise around $400 million, according to press reports.

In this briefing:

1. U.S. Equity Strategy: Has “the Pullback” Begun?
2. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader
3. Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside

1. U.S. Equity Strategy: Has “the Pullback” Begun?

The weight of the evidence suggests that the pullback has begun. This belief is supported by overbought conditions combined with the S&P 500, MSCI ACWI, and nearly all Sectors hitting logical resistance. Assuming the pullback continues, the next question is how deep or damaging will it be? In this report we highlight various market/technical indicators we are monitoring, as well as pointing out attractive set ups within Consumer Discretionary and Health Care Sectors.

2. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader

• Thyrocare Technologies (THYROCAR IN) is the fourth largest pathology chain in India and derives 54% of revenues from the wellness/preventive segment (Rs60bn market growing at 20% Cagr). Margins in wellness are ~2x that of illness segment.
• It is positioned as the lowest price provider in the market with some of its tests priced at 50-70% discount to peers.
• It enjoys the highest operating margin in the industry with excellent control of reagent and manpower costs.
• However, hyper competition in the wellness segment is pushing down pricing. Pullback in adspends is leading to loss of market share over FY18-1HFY19.
• Two-thirds of its capital is invested in the radiology business that does not have economies of scale. Business is loss-making and a drag on return ratios.
• We expect Revenue and PAT Cagr of 15% and 12% respectively over FY18-21 in the face of intensified competition against 24% and 19% respectively delivered over FY14-18.
• Softer growth coupled with utilization of free-cash from the clinical pathology business into the capital intensive and loss-making radiology business will weigh on stock performance. We value the stock at 22.5x FY20 EPS- at 25% discount to the industry leader Dr Lal Pathlabs (DLPL IN) . Our target price is Rs 494 implying 10% downside.

3. Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, noted today that Brookfield Asset Management (BAM US) is seeking the necessary internal approvals to submit a binding proposal by 31 January. We believe that Brookfield will come through with its binding proposal as the delays are not due to issues cropping up from the due diligence but due to ongoing financing negotiations with multiple banks.

In this briefing:

1. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu
2. Snippets #18: Naughty CEOs, Southern Crusades
3. CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)
4. Bristol-Myers Beats the Drum for Celgene in 4Q18 Earnings Call
5. Bristol Myers Squib – Reaffirming Its View on Celgene Corp

1. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu

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 71.9% for IPOs and 63.8% for Placements 

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

No new IPO filings

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

• Asia’s thirst for beer adds fizz to mega-brewer’s plans for IPO
• Chinese cryptocurrency exchanges seek reverse mergers in Hong Kong
• Market, bankers pin hope on Chalet Hotels for breaking lull in IPO launches
• Hong Kong exchange head clarifies listing rules as IPO hopes dim for cryptocurrency giant Bitmain

Smartkarma Community’s this week Analysis on Upcoming IPO

• CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)
• Maoyan Entertainment IPO Valuation: Press the Skip Button
• Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
• Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials

List of pre-IPO Coverage on Smartkarma

2. Snippets #18: Naughty CEOs, Southern Crusades

In this review, we highlight five new unrelated developments that might impact the Thai stock market if you happen to hold the affected stocks.

• Skeletons in the closet. CIMB’s Thai CEO went on voluntary leave to clear his name regarding a legacy case back in his KTB days, while one of Thailand’s highest profile tycoon Dr. Prasert has been implicated in a stock manipulation case of Bangkok Airways from way back in 2015.
• Religious wars? As the southern insurgency spreads to economically vibrant province of Songkhla, insurgents attack a Buddhist temple and kill two monks, possibly in an effort to turn the crisis into a religious war. Doesn’t sound great for overall stability.
• A rare bump in the Baht. Despite QE unwinding, the Baht has risen almost 3% against the greenback. Bad news for exporters (eg. TUF, DELTA) good news for serial acquirers (think Thai Beverage, Banpu).
• Government-inspired deals. Is the government driving M&A in Thailand these days? They certainly had a hand in the TMB-Thanachart deal and now are rumored to be buying Thaicom, the country’s only satellite operator.
• Air quality takes a dive thanks to diesel and aggressive skytrain construction programs. Stores selling face mask and companies that substitute ethanol to diesel are set to benefit, while BTS might hit headwinds as government forces them to slow down construction.

3. CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)

CStone Pharma is raising up to USD 400 million via a listing on the Hong Kong Stock Exchange. In this insight, we will discuss the following topics:

• The company’s background
• Details of pipeline drug candidates
• Potential market size for the key products
• Shareholders and investors
• Summary of our likes and concerns
• Questions for management meetings

We will leave the discussion of valuation for our next insight.

• Hansoh Pharma (翰森制药) IPO: A Leading Generic Player with Regulatory Overhang (Part 1)
• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different

• Frontage Holding (方达控股) IPO: More Disclosure Needed to Understand Moat and Growth Prospect
• Ascentage Pharma (亚盛医药) IPO: Too Early for an IPO
• Junshi Bioscience (君实医药) IPO: Thoughts on Valuation (Part 2)
• Junshi Bioscience (君实医药) IPO: Early in Application but Behind in Key Indications (Part 1)
• CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)

• AOBiome Therapeutics IPO: Hope for Natural Therapeutic Treatment
• Stealth Biotherapeutics IPO: Cure the Symptoms but Not the Cause (Part 1)
• Innovent Biologics (信达生物) IPO: Pricing the PD-1 and Biosimilars Competition (Part 2)
• Innovent Biologics (信达生物) IPO: A Major PD-1 MAb Competitor Might Have Just Emerged (Part 1)
• MicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
• Hua Medicine (华领医药) IPO: Thoughts on Valuation
• Hua Medicine (华领医药) IPO: Reviving Roche’s Failed Attempt?
• BeiGene (百济神州) IPO: Dual-Listing with Upside Capped in the Near Term
• Ascletis Pharma (歌礼制药) IPO: Valuation Not Justified by Ganovo and Ravidasvir NPV (Part 3)
• Ascletis Pharma (歌礼制药) IPO: Three Valuation Risk Factors (Part 2)
• Ascletis Pharma (歌礼制药) IPO: Emerging Player in the Crowded HCV Drug Market
• China Isotope & Radiation IPO: Oligopoly, Visible Growth and High Barrier to Entry
• Zai Lab IPO: Thoughts on Valuation, Risks and Upsides (Part 2)
• Zai Lab IPO: Experienced Team, Promising In-Licensing Drug Pipeline (Part 1)

4. Bristol-Myers Beats the Drum for Celgene in 4Q18 Earnings Call

Bristol Myers Squibb Co (BMY US) announced earnings for 4Q18 this morning followed by a conference call. Most metrics beat street expectations but the withdrawal of its application for Opdivo + low-dose Yervoy for first-line (NSCLC) lung cancer patients with high tumor mutation burdens after discussions with the FDA weighed on shares of BMY today. But for arbs who have the CELG/BMY spread set up, the positive comments on the Celgene Corp (CELG US) acquisition provided further assurance of BMY’s commitment to the deal.

5. Bristol Myers Squib – Reaffirming Its View on Celgene Corp

The management of Bristol Myers Squibb Co (BMY US) reiterated its optimistic view regarding the acquisition of Celgene Corp (CELG US) on its Q4-18 earnings conference call today. Unlike most acquisitions that succeed based on cost cuts or revenue synergies, Celgene’s distressed valuation allowed BMY to swoop in and buy a leading bio-tech at a bargain price: if the pipeline succeeds. We are betting it will. If not, the robust cash flows from Revlimid make it a low-risk , low-return deal.  

In this briefing:

1. HK Connect Discovery Weekly: CRRC, Car Inc/UCar (2019-01-25)
2. Olympus Corporation (7733 JP): Overvalued with Too Many Controversies
3. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts
4. 31 January TOPIX & JPX Nikkei 400 Major Index Changes
5. Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch

1. HK Connect Discovery Weekly: CRRC, Car Inc/UCar (2019-01-25)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight that CRRC’s outflow coincides with media reports that highlight the risks of China’s investment in high-speed railway. We also see a very substantial southbound flow into Car Inc. 

2. Olympus Corporation (7733 JP): Overvalued with Too Many Controversies

Olympus Corporation is currently trading at JPY4,525 per share which we believe is overvalued based on our EV/EBIT valuation. The company generates nearly 80.0% of its revenue from its Medical Business where it is the global market leader for gastrointestinal endoscopes. Despite Olympus’ market share and technology leadership, the segment has been hit by investigations related to its duodenoscopies and has been fined for violating safety regulations. In addition, the Medical Division is also subject to several bribery-related investigations by the US Department of Justice and could risk losing its market share if the allegations are proven given the industry is highly competitive. Meanwhile its Imaging Business which offers cameras and lenses, is operating in a contracting market, where the segment continues to see declining revenues and is loss making.

To add to all of the above, the company is under scrutiny for governance-related issues such as lack of board diversity as well as poor corporate culture. On the positive side, the management has announced a plan to transform its business, including appointing three new (non-Japanese) directors to its board, all due to the pressure from its largest shareholder ValueAct Capital. The Management has mentioned that they will be proposing one of the partners of ValueAct as one of the three new directors at its shareholder meeting in April 2019, which is encouraging. However, that being said, we are yet to witness any tangible improvement in the way the company has conducted itself since the exposure of its accounting fraud in 2011 and has not been able to stay free of controversy. Hence, in our opinion the hefty premium at which the shares are currently trading is not justified suggesting to us that the potential turnaround in governance quality is being priced in too fully at this point. It is uncertain what other skeletons may be in Olympus’ closets and it seems premature to afford the stock a premium valuation.

3. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts

In this version of the GER weekly events wrap, we assess the recent lock-up expiry for Pinduoduo (PDD US) which may have led to a short squeeze. Secondly, we assess the debt tender for Softbank Group (9984 JP) which may be supporting the equity. Finally, we provide updates on bids for M1 Ltd (M1 SP) and Healthscope Ltd (HSO AU) as well as update a list of upcoming M&A and equity bottom-up catalysts. 

The rest of our event-driven research can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

4. 31 January TOPIX & JPX Nikkei 400 Major Index Changes

On December 17th 2018, the TSE announced a somewhat strange and unexpected treatment of the TSE-calculated indices for two companies where shares were issued to shareholders of a foreign company where the Japanese company had acquired the foreign company through a Scheme of Arrangement under foreign jurisdiction. 

The two companies were LIFULL (2120 JP) and Takeda Pharmaceutical (4502 JP).

The announcements for TOPIX and JPX Nikkei 400 were made then, and despite the events being entirely similar in construct, but different in month of Scheme Effective Date, they were put in the same month for Mitula and the first tranche of the Takeda inclusion, which was split between two months because of its large impact. 

The large IPO last month of Softbank Corp (9434 JP) means there is another large inclusion going effective as of the open of trading on 31 January. 

Wednesday is going to be a big day.

If everyone trades their required index amount on the day, it should be a trillion yen plus of flows.

5. Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch

Last Week in Event SPACE …

• The eventual unwind of tension may involve an increase in Nissan Motor (7201 JP)‘s stake in Renault SA (RNO FP) and a decrease in Renault’s stake in Nissan.
• After being in the works for two years (or more), a Mitsubishi UFJ Financial (8306 JP) / Bank Danamon Indonesia Tbk (BDMN IJ) deal has finally come to fruition. 
• Where there is smoke there is often fire. This smells like smoke in the rumoured negotiations between KDDI Corp (9433 JP) and Kabu.Com Securities (8703 JP).
• Bristol Myers Squibb Co (BMY US) talk up the Celgene Corp (CELG US) deal, but remain tight-lipped on regulatory filings. 

• Intouch Holdings (INTUCH TB) pops on rumours of a government-backed takeover of Thaicom Pcl (THCOM TB).

• Plus 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)

Bank Danamon Indonesia (BDMN IJ) (Mkt Cap: $6.2bn; Liquidity: $3.1mn)

In December 2017, Mitsubishi UFJ Financial (8306 JP) launched a complicated three-step process to acquire up to 40%, then up to 73.8% (or more) in BDMN, five years after DBS’ aborted attempt to obtain a majority in the same bank. Mid-week, local papers announced the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019.

• It looks like this is almost completely bedded down. MUFG has a good relationship with Indonesian regulators and it would not have arrived at this Step 3 without pretty clear pre-approval indicated. 
• The result is an effective Tender Offer Trade at IDR 9,590/share for the float of BDMN. With shares up 8% the day of the announcement, there was another 6+% left for payment in three months and a week which comes out to 25.4% annualized in IDR terms through the close. Travis thought this is an excellent return for the risk here.
• Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. The upshot is that if you tender, you will get the Tender Offer consideration. And if EVERY public shareholder tenders, MUFG will have to conduct a selldown of 7.5% within a very short period, and a selldown of 20% within 2 years or up to 5 years (a virtual IPO when it comes), in order to meet the free float requirements.

(link to Travis Lundy‘s insight: BDMN/BBNP Merger Leads to BDMN Buyout Arb)  

Propertylink Group (PLG AU) (Mkt Cap: $497mn; Liquidity: $2.3mn)

ESR has now declared its Offer for Propertylink “to be best and final“, and the Offer has been extended until the 28 February (unless further extended).  After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash. The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG,  together with unanimous PLG board support.

• The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) its 19.5% stake in PLG. 
• Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“. 
• Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Currently trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.

(link to my insight: Propertylink – CNI Shareholders To Vote On ESR’s Final Offer)  

 Shinmaywa Industries (7224 JP) (Mkt Cap: $1.2bn; Liquidity: $0.5mn) 

The company announced a Tender Offer to buy back 26.666mm of its own shares at a roughly 10.5% premium to last trade.  That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding.  Shinmaywa prepared this well because they rearranged their holding grouping to be all held under corporate entities (in many situations, they hold under personal names). For some of us, that should have been a clue.

• The main purpose of this effort is to get rid of Murakami-san, but Travis’ back of the napkin suggests just a 25% gain for Murakami, which is small beer for an investor bullish on the company’s prospects. 
• The outright long prospects do not impress.  There are a lot of companies in the market with 3+% dividend rates and low PERs which are illiquid. The company will go into a net debt situation. That will likely cap future buybacks to the limit of spending this year’s net income. That would be big, but Travis expects with a high dividend, buybacks will be less likely. 
• Overall the business is OK, but it is unlikely to grow dramatically enough to warrant an ROE and margins which would make a price of 1.3-1.5x book appropriate in the near-term.  Travis expects the tender offer to go through, and expects the price to be a bit “sticky” at this level near-term.

(link to Travis’ insight: Shinmaywa Own Share Tender Offer at Premium)

New Sports Group (299 HK) (Mkt Cap: $233mn; Liquidity: $0.5mn)

Huarong-CMB network [HCN] play New Sports announced a cash or scrip offer, with the cash alternative of $0.435/share priced at a premium of 3.57% to last close. The Offeror (China Goldjoy (1282 HK) – another HCN play) has entered into an SPA to acquire 37.18% of shares out. Upon successful completion of the SPA, Goldjoy will hold 66.44% and be required to make an unconditional general offer for all remaining shares.

• The key condition to the SPA is Goldjoy’s shareholder approval. This should be a simple majority and the major shareholder, Yao Jianhui, has 41.9% in Goldjoy according to HKEx and page 23 of the Offer announcement.
• Despite the potential issues faced by New Sports, this is a very real deal, with financing in place for the cash option.

(link to my insight: Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar)  

Kabu.Com Securities (8703 JP) (Mkt Cap: $1.4bn; Liquidity: $3.7mn)

The Nikkei surprised everyone with an article saying KDDI Corp (9433 JP) was holding negotiations to acquire a stake of up to just under 50% in Kabu.com, which is the online brokerage entity of Mitsubishi UFJ Financial Group (8306 JP) with 1.1mn customers. 

• The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” KDDI needs non-telecom revenue channels.  KDDI has a bank, and life insurance, and some investment in asset management channels. It needs more, and better. A broker with a bank attached is a pretty good way to get long-term investment and savings products to customers.
• Kabu.com is not the best one out there in terms of bang for buck. But KDDI already has a JV with kabu.com majority shareholder MUFG and another with kabu.com. If you could buy an online broker, you might choose to buy Rakuten or SBI, but you can’t. You have to buy the rest of the company with them.
• Kabu.com shares were bid limit up all day long after the Nikkei article and closed at ¥462, which is a 10+ year closing high.  You have to believe that KDDI is willing to pay a knock-out price to get this trade done. They may, but that is the bet. But Travis sees no impediment to the deal getting done.

(link to Travis’ insight: KDDI Deal for Kabu.com (8703 JP) Coming?)  

Kosaido Co Ltd (7868 JP) (Mkt Cap: $1.4bn; Liquidity: $3.7mn)

Printing and HR services company and funeral parlor operator Kosaido announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement. 

• While the pretense will be that the deal is designed to grow the funeral parlor business (which, given the demographics, should be a decent business over time), this is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.

• It is a decent premium but an underwhelming valuation. Because of the premium, and its smallcap nature, Travis expect this gets done. If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

• This is a small deal. It is meaningless in the grand scheme of things. But it is a deal which should not have been done at this price because better governance would have meant the stock traded at better than 0.4x book before the announcement. 

(link to Travis’ insight: Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?)  

Celgene Corp (CELG US) (Mkt Cap: $60.5bn; Liquidity: $762mn)

Bristol Myers Squibb Co (BMY US) announced earnings for 4Q18 this morning followed by a conference call. Most metrics beat street expectations but the withdrawal of its application for Opdivo + low-dose Yervoy for first-line (NSCLC) lung cancer patients with high tumour mutation burdens after discussions with the FDA weighed on shares of BMY today. But for arbs who have the CELG/BMY spread set up, the positive comments on the Celgene acquisition provided further assurance of BMY’s commitment to the deal.

• There was, however, no discussion, in the prepared remarks or the Q&A, of the status of antitrust filings (nor was the question asked in the Q&A). The U.S. Hart-Scott-Rodino antitrust filing should have been made with the FTC/DoJ by January 16^th, 2019 according to the terms of the merger agreement, although this has not been publicly confirmed. The EU Competition web site does not show a competition filing having been made, and I would not have expected one so soon after the announcement of the deal.
• Closing prices equate to annualised rates of return of ~20% / ~26.5%, respectively, by John DeMasi‘s calcs, which is very attractive.

links to
John’s insight: Bristol-Myers Beats the Drum for Celgene in 4Q18 Earnings Call)
ANTYA Investments Inc‘s insight: Bristol Myers Squib – Reaffirming Its View on Celgene Corp 

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Travis succinctly summarised the ongoing saga of governance and control that is the Renault/Nissan Alliance and speculates on the next chapter.

• Carlos Ghosn is likely in more trouble. The release last Friday by Nissan and Mitsubishi makes clear that Ghosn effectively signed contracts to pay himself a very large sum of money from the funds of the Nissan-Mitsubishi Alliance treasury in ways which contravened the rules established for that Joint Venture.
• The other news was that French visitors to Tokyo allegedly informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently, the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. This is, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement.
• Nissan CAN react to any Renault breach of Nissan’s governance by purchasing shares to render Renault’s shares voteless. It can, for example, purchase economic exposure to Renault shares in the form of a cash-settled derivative, where it had neither voting rights nor the access to obtain them. It can do so quickly enough to react to anything that Renault can do by surprise, but it would be a clear breach of the Alliance Agreement to do so quickly.
• Travis reckons Renault and Nissan will not deliberately blow up their Alliance – they will work through their issues slowly and painfully. This will cause uncertainty among investors. IF the two companies ever sort out their relationship and decide to merge, the combined entity is cheap. Very cheap. If they blow up their Alliance, they are both going to turn out to be expensive.

(link to Travis’ insight: Nissan/Renault: French State Intervention Continues)  

TOC Co Ltd (8841 JP) (Mkt Cap: $778mn; Liquidity: $1.3mn)

Earlier this week, TOC announced a ToSTNeT-3 Buyback, to buy up to 4.6mn shares or 4.49% of shares outstanding at ¥778/share. With this latest buyback, TOC has bought back 30% of shares outstanding in the past 14 months after selling a large asset before that. This has resulted in 49.5% of the votes held by the Ohtani family and their namesake companies, another 30% will be held by cross-holders who are loyal to the family, about 8-9% of the company will be owned by passive investors, and 11-13% of shares will be held by everyone else. 

• The company’s largest and most famous asset is a near-50-year-old building. There have been suggestions of redevelopment (discussed in more depth here).  The two family members controlling almost 50% of the shares (plus the New Otani Company parent) are 72 and 66yrs old respectively. A 10-year redevelopment project might outlast them. The project might be better off in other hands. 
• The company has very long-held real estate assets – some of which are fully-depreciated and have very low land price book values. The share price is trading below Tangible Book Value. The shares trade at roughly 8x EBIT, which is very inexpensive for deeply undervalued and still earning real estate assets.
• The stock is illiquid, trading US$1.25mm/day on a three-month average, and sometimes a lot less, but there is considerable asset backing to these shares. Travis would want to be long here. 

(link to Travis’ insight: Another Semi-BIGLY Buyback at TOC: STILL an MBO Candidate)  

Intouch Holdings (INTUCH TB) / Advanced Info Service (ADVANC TB)

Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gained ~10% earlier in the week in response to rumours of a government takeout of Thaicom. I estimate the discount to NAV at ~23%, versus an average of 28%, around its narrowest inside a year. The implied stub is at its narrowest inside a year. It was a decent move, translating to a Bt15.2bn lift in Intouch’s market cap, ~4.5x the value of the holding in Thaicom. That alone would suggest Intouch had been overbought. 

• That the Thai State-run CAT Telecom may take over Thaicom has a ring of truth to it. The military/government uses Thaicom, the only satellite operator in Thailand, and perhaps it is not (finally) comfortable with Singapore’s indirect interest in Thaicom via Singtel (ST SP)‘s stake in Intouch. It is an election year.

• The rumoured price tag is Bt8.50/share or ~28% premium to the undisturbed price. Even a takeover premium north of 50% has no material impact on Intouch, as Thaicom accounts for 2% of NAV/GAV. However, selling Thaicom will further clean up what is already a very straightforward single-stock Holdco structure. 

• Optically Intouch has run its course in response to these Thaicom rumours – Intouch has denied any definitive approach/agreement – however, if a sale unfolds, this may help nudge the discount marginally lower from here.

• Should CAT buy out Intouch’s stake, would it be required to make an Offer for all remaining shares? As the stake is above one of the key thresholds, (that is, 25%, 50% or 75% of its the total voting rights) it would be required to conduct a mandatory tender offer. But CAT may be afforded a partial offer, if Thaicom shareholders approve.

(link to my insight: StubWorld: Intouch Gains On Possible Sale of Thaicom)  

Briefly …

Sanghyun Park recommended an Orion Holdings (001800 KS) unwind trade after Orion Corp (271560 KS)‘s mid-week underperformance. By my calcs, Orin is trading at a 49% discount to NAV against a one year average of 48%.
(link to Sanghyun’s insight: Orion Holdco Trade: Current Status & Trade Approach)  

Samsung Electronics (005930 KS)

With SamE’s1P discount to Common at 16.61%, the lowest since mid-November last year, Sanghyun recommends to go long Common and short 1P with a short term horizon.

(link to Sanghyun’s insight: Samsung Electronics Share Class: Close Prev Position & Initiate New One Reversely)  

• LEAP Holdings Group Ltd (1499 HK) announced an MGO at $0.1585/share vs. the last close of $0.39, but above Anthony Wong’s (the seller) in-price of $0.1236/share. Like Wong, this new Offeror has no experience in LEAP’s business. The Offeror is primarily a vehicle owned by Xu Mingxing, who has experience in blockchain technology. However, a more detailed overview of the Offeror can be found on page 14 of the HKEx link, which provides details of no less than 15 individuals with stakes into the Offeror.

• M1 Ltd (M1 SP)‘s deal price now declared FINAL. Closing extended by two weeks to February 18th.
• The major shareholder of Qianhai Health Holdings (911 HK) has entered into a SPA, the completion of which would trigger a mandatory conditional offer at HK$0.25/share, a 0.3% premium to last close.
• Xingfa Aluminium (98 HK) is currently suspended pursuant to the Code. China Lesso Group Holdings (2128 HK), the second largest shareholder, acquired its shares in April last year. Xingfa was also subject to a (failed) scheme in 2017. 

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.   

• Source: HKEx

In this briefing:

1. Olympus Corporation (7733 JP): Overvalued with Too Many Controversies
2. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts
3. 31 January TOPIX & JPX Nikkei 400 Major Index Changes
4. Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch
5. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu

1. Olympus Corporation (7733 JP): Overvalued with Too Many Controversies

Olympus Corporation is currently trading at JPY4,525 per share which we believe is overvalued based on our EV/EBIT valuation. The company generates nearly 80.0% of its revenue from its Medical Business where it is the global market leader for gastrointestinal endoscopes. Despite Olympus’ market share and technology leadership, the segment has been hit by investigations related to its duodenoscopies and has been fined for violating safety regulations. In addition, the Medical Division is also subject to several bribery-related investigations by the US Department of Justice and could risk losing its market share if the allegations are proven given the industry is highly competitive. Meanwhile its Imaging Business which offers cameras and lenses, is operating in a contracting market, where the segment continues to see declining revenues and is loss making.

To add to all of the above, the company is under scrutiny for governance-related issues such as lack of board diversity as well as poor corporate culture. On the positive side, the management has announced a plan to transform its business, including appointing three new (non-Japanese) directors to its board, all due to the pressure from its largest shareholder ValueAct Capital. The Management has mentioned that they will be proposing one of the partners of ValueAct as one of the three new directors at its shareholder meeting in April 2019, which is encouraging. However, that being said, we are yet to witness any tangible improvement in the way the company has conducted itself since the exposure of its accounting fraud in 2011 and has not been able to stay free of controversy. Hence, in our opinion the hefty premium at which the shares are currently trading is not justified suggesting to us that the potential turnaround in governance quality is being priced in too fully at this point. It is uncertain what other skeletons may be in Olympus’ closets and it seems premature to afford the stock a premium valuation.

2. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts

In this version of the GER weekly events wrap, we assess the recent lock-up expiry for Pinduoduo (PDD US) which may have led to a short squeeze. Secondly, we assess the debt tender for Softbank Group (9984 JP) which may be supporting the equity. Finally, we provide updates on bids for M1 Ltd (M1 SP) and Healthscope Ltd (HSO AU) as well as update a list of upcoming M&A and equity bottom-up catalysts. 

The rest of our event-driven research can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

3. 31 January TOPIX & JPX Nikkei 400 Major Index Changes

On December 17th 2018, the TSE announced a somewhat strange and unexpected treatment of the TSE-calculated indices for two companies where shares were issued to shareholders of a foreign company where the Japanese company had acquired the foreign company through a Scheme of Arrangement under foreign jurisdiction. 

The two companies were LIFULL (2120 JP) and Takeda Pharmaceutical (4502 JP).

The announcements for TOPIX and JPX Nikkei 400 were made then, and despite the events being entirely similar in construct, but different in month of Scheme Effective Date, they were put in the same month for Mitula and the first tranche of the Takeda inclusion, which was split between two months because of its large impact. 

The large IPO last month of Softbank Corp (9434 JP) means there is another large inclusion going effective as of the open of trading on 31 January. 

Wednesday is going to be a big day.

If everyone trades their required index amount on the day, it should be a trillion yen plus of flows.

4. Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch

Last Week in Event SPACE …

• The eventual unwind of tension may involve an increase in Nissan Motor (7201 JP)‘s stake in Renault SA (RNO FP) and a decrease in Renault’s stake in Nissan.
• After being in the works for two years (or more), a Mitsubishi UFJ Financial (8306 JP) / Bank Danamon Indonesia Tbk (BDMN IJ) deal has finally come to fruition. 
• Where there is smoke there is often fire. This smells like smoke in the rumoured negotiations between KDDI Corp (9433 JP) and Kabu.Com Securities (8703 JP).
• Bristol Myers Squibb Co (BMY US) talk up the Celgene Corp (CELG US) deal, but remain tight-lipped on regulatory filings. 

• Intouch Holdings (INTUCH TB) pops on rumours of a government-backed takeover of Thaicom Pcl (THCOM TB).

• Plus 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)

Bank Danamon Indonesia (BDMN IJ) (Mkt Cap: $6.2bn; Liquidity: $3.1mn)

In December 2017, Mitsubishi UFJ Financial (8306 JP) launched a complicated three-step process to acquire up to 40%, then up to 73.8% (or more) in BDMN, five years after DBS’ aborted attempt to obtain a majority in the same bank. Mid-week, local papers announced the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019.

• It looks like this is almost completely bedded down. MUFG has a good relationship with Indonesian regulators and it would not have arrived at this Step 3 without pretty clear pre-approval indicated. 
• The result is an effective Tender Offer Trade at IDR 9,590/share for the float of BDMN. With shares up 8% the day of the announcement, there was another 6+% left for payment in three months and a week which comes out to 25.4% annualized in IDR terms through the close. Travis thought this is an excellent return for the risk here.
• Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. The upshot is that if you tender, you will get the Tender Offer consideration. And if EVERY public shareholder tenders, MUFG will have to conduct a selldown of 7.5% within a very short period, and a selldown of 20% within 2 years or up to 5 years (a virtual IPO when it comes), in order to meet the free float requirements.

(link to Travis Lundy‘s insight: BDMN/BBNP Merger Leads to BDMN Buyout Arb)  

Propertylink Group (PLG AU) (Mkt Cap: $497mn; Liquidity: $2.3mn)

ESR has now declared its Offer for Propertylink “to be best and final“, and the Offer has been extended until the 28 February (unless further extended).  After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash. The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG,  together with unanimous PLG board support.

• The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) its 19.5% stake in PLG. 
• Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“. 
• Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Currently trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.

(link to my insight: Propertylink – CNI Shareholders To Vote On ESR’s Final Offer)  

 Shinmaywa Industries (7224 JP) (Mkt Cap: $1.2bn; Liquidity: $0.5mn) 

The company announced a Tender Offer to buy back 26.666mm of its own shares at a roughly 10.5% premium to last trade.  That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding.  Shinmaywa prepared this well because they rearranged their holding grouping to be all held under corporate entities (in many situations, they hold under personal names). For some of us, that should have been a clue.

• The main purpose of this effort is to get rid of Murakami-san, but Travis’ back of the napkin suggests just a 25% gain for Murakami, which is small beer for an investor bullish on the company’s prospects. 
• The outright long prospects do not impress.  There are a lot of companies in the market with 3+% dividend rates and low PERs which are illiquid. The company will go into a net debt situation. That will likely cap future buybacks to the limit of spending this year’s net income. That would be big, but Travis expects with a high dividend, buybacks will be less likely. 
• Overall the business is OK, but it is unlikely to grow dramatically enough to warrant an ROE and margins which would make a price of 1.3-1.5x book appropriate in the near-term.  Travis expects the tender offer to go through, and expects the price to be a bit “sticky” at this level near-term.

(link to Travis’ insight: Shinmaywa Own Share Tender Offer at Premium)

New Sports Group (299 HK) (Mkt Cap: $233mn; Liquidity: $0.5mn)

Huarong-CMB network [HCN] play New Sports announced a cash or scrip offer, with the cash alternative of $0.435/share priced at a premium of 3.57% to last close. The Offeror (China Goldjoy (1282 HK) – another HCN play) has entered into an SPA to acquire 37.18% of shares out. Upon successful completion of the SPA, Goldjoy will hold 66.44% and be required to make an unconditional general offer for all remaining shares.

• The key condition to the SPA is Goldjoy’s shareholder approval. This should be a simple majority and the major shareholder, Yao Jianhui, has 41.9% in Goldjoy according to HKEx and page 23 of the Offer announcement.
• Despite the potential issues faced by New Sports, this is a very real deal, with financing in place for the cash option.

(link to my insight: Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar)  

Kabu.Com Securities (8703 JP) (Mkt Cap: $1.4bn; Liquidity: $3.7mn)

The Nikkei surprised everyone with an article saying KDDI Corp (9433 JP) was holding negotiations to acquire a stake of up to just under 50% in Kabu.com, which is the online brokerage entity of Mitsubishi UFJ Financial Group (8306 JP) with 1.1mn customers. 

• The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” KDDI needs non-telecom revenue channels.  KDDI has a bank, and life insurance, and some investment in asset management channels. It needs more, and better. A broker with a bank attached is a pretty good way to get long-term investment and savings products to customers.
• Kabu.com is not the best one out there in terms of bang for buck. But KDDI already has a JV with kabu.com majority shareholder MUFG and another with kabu.com. If you could buy an online broker, you might choose to buy Rakuten or SBI, but you can’t. You have to buy the rest of the company with them.
• Kabu.com shares were bid limit up all day long after the Nikkei article and closed at ¥462, which is a 10+ year closing high.  You have to believe that KDDI is willing to pay a knock-out price to get this trade done. They may, but that is the bet. But Travis sees no impediment to the deal getting done.

(link to Travis’ insight: KDDI Deal for Kabu.com (8703 JP) Coming?)  

Kosaido Co Ltd (7868 JP) (Mkt Cap: $1.4bn; Liquidity: $3.7mn)

Printing and HR services company and funeral parlor operator Kosaido announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement. 

• While the pretense will be that the deal is designed to grow the funeral parlor business (which, given the demographics, should be a decent business over time), this is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.

• It is a decent premium but an underwhelming valuation. Because of the premium, and its smallcap nature, Travis expect this gets done. If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

• This is a small deal. It is meaningless in the grand scheme of things. But it is a deal which should not have been done at this price because better governance would have meant the stock traded at better than 0.4x book before the announcement. 

(link to Travis’ insight: Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?)  

Celgene Corp (CELG US) (Mkt Cap: $60.5bn; Liquidity: $762mn)

Bristol Myers Squibb Co (BMY US) announced earnings for 4Q18 this morning followed by a conference call. Most metrics beat street expectations but the withdrawal of its application for Opdivo + low-dose Yervoy for first-line (NSCLC) lung cancer patients with high tumour mutation burdens after discussions with the FDA weighed on shares of BMY today. But for arbs who have the CELG/BMY spread set up, the positive comments on the Celgene acquisition provided further assurance of BMY’s commitment to the deal.

• There was, however, no discussion, in the prepared remarks or the Q&A, of the status of antitrust filings (nor was the question asked in the Q&A). The U.S. Hart-Scott-Rodino antitrust filing should have been made with the FTC/DoJ by January 16^th, 2019 according to the terms of the merger agreement, although this has not been publicly confirmed. The EU Competition web site does not show a competition filing having been made, and I would not have expected one so soon after the announcement of the deal.
• Closing prices equate to annualised rates of return of ~20% / ~26.5%, respectively, by John DeMasi‘s calcs, which is very attractive.

links to
John’s insight: Bristol-Myers Beats the Drum for Celgene in 4Q18 Earnings Call)
ANTYA Investments Inc‘s insight: Bristol Myers Squib – Reaffirming Its View on Celgene Corp 

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Travis succinctly summarised the ongoing saga of governance and control that is the Renault/Nissan Alliance and speculates on the next chapter.

• Carlos Ghosn is likely in more trouble. The release last Friday by Nissan and Mitsubishi makes clear that Ghosn effectively signed contracts to pay himself a very large sum of money from the funds of the Nissan-Mitsubishi Alliance treasury in ways which contravened the rules established for that Joint Venture.
• The other news was that French visitors to Tokyo allegedly informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently, the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. This is, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement.
• Nissan CAN react to any Renault breach of Nissan’s governance by purchasing shares to render Renault’s shares voteless. It can, for example, purchase economic exposure to Renault shares in the form of a cash-settled derivative, where it had neither voting rights nor the access to obtain them. It can do so quickly enough to react to anything that Renault can do by surprise, but it would be a clear breach of the Alliance Agreement to do so quickly.
• Travis reckons Renault and Nissan will not deliberately blow up their Alliance – they will work through their issues slowly and painfully. This will cause uncertainty among investors. IF the two companies ever sort out their relationship and decide to merge, the combined entity is cheap. Very cheap. If they blow up their Alliance, they are both going to turn out to be expensive.

(link to Travis’ insight: Nissan/Renault: French State Intervention Continues)  

TOC Co Ltd (8841 JP) (Mkt Cap: $778mn; Liquidity: $1.3mn)

Earlier this week, TOC announced a ToSTNeT-3 Buyback, to buy up to 4.6mn shares or 4.49% of shares outstanding at ¥778/share. With this latest buyback, TOC has bought back 30% of shares outstanding in the past 14 months after selling a large asset before that. This has resulted in 49.5% of the votes held by the Ohtani family and their namesake companies, another 30% will be held by cross-holders who are loyal to the family, about 8-9% of the company will be owned by passive investors, and 11-13% of shares will be held by everyone else. 

• The company’s largest and most famous asset is a near-50-year-old building. There have been suggestions of redevelopment (discussed in more depth here).  The two family members controlling almost 50% of the shares (plus the New Otani Company parent) are 72 and 66yrs old respectively. A 10-year redevelopment project might outlast them. The project might be better off in other hands. 
• The company has very long-held real estate assets – some of which are fully-depreciated and have very low land price book values. The share price is trading below Tangible Book Value. The shares trade at roughly 8x EBIT, which is very inexpensive for deeply undervalued and still earning real estate assets.
• The stock is illiquid, trading US$1.25mm/day on a three-month average, and sometimes a lot less, but there is considerable asset backing to these shares. Travis would want to be long here. 

(link to Travis’ insight: Another Semi-BIGLY Buyback at TOC: STILL an MBO Candidate)  

Intouch Holdings (INTUCH TB) / Advanced Info Service (ADVANC TB)

Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gained ~10% earlier in the week in response to rumours of a government takeout of Thaicom. I estimate the discount to NAV at ~23%, versus an average of 28%, around its narrowest inside a year. The implied stub is at its narrowest inside a year. It was a decent move, translating to a Bt15.2bn lift in Intouch’s market cap, ~4.5x the value of the holding in Thaicom. That alone would suggest Intouch had been overbought. 

• That the Thai State-run CAT Telecom may take over Thaicom has a ring of truth to it. The military/government uses Thaicom, the only satellite operator in Thailand, and perhaps it is not (finally) comfortable with Singapore’s indirect interest in Thaicom via Singtel (ST SP)‘s stake in Intouch. It is an election year.

• The rumoured price tag is Bt8.50/share or ~28% premium to the undisturbed price. Even a takeover premium north of 50% has no material impact on Intouch, as Thaicom accounts for 2% of NAV/GAV. However, selling Thaicom will further clean up what is already a very straightforward single-stock Holdco structure. 

• Optically Intouch has run its course in response to these Thaicom rumours – Intouch has denied any definitive approach/agreement – however, if a sale unfolds, this may help nudge the discount marginally lower from here.

• Should CAT buy out Intouch’s stake, would it be required to make an Offer for all remaining shares? As the stake is above one of the key thresholds, (that is, 25%, 50% or 75% of its the total voting rights) it would be required to conduct a mandatory tender offer. But CAT may be afforded a partial offer, if Thaicom shareholders approve.

(link to my insight: StubWorld: Intouch Gains On Possible Sale of Thaicom)  

Briefly …

Sanghyun Park recommended an Orion Holdings (001800 KS) unwind trade after Orion Corp (271560 KS)‘s mid-week underperformance. By my calcs, Orin is trading at a 49% discount to NAV against a one year average of 48%.
(link to Sanghyun’s insight: Orion Holdco Trade: Current Status & Trade Approach)  

Samsung Electronics (005930 KS)

With SamE’s1P discount to Common at 16.61%, the lowest since mid-November last year, Sanghyun recommends to go long Common and short 1P with a short term horizon.

(link to Sanghyun’s insight: Samsung Electronics Share Class: Close Prev Position & Initiate New One Reversely)  

• LEAP Holdings Group Ltd (1499 HK) announced an MGO at $0.1585/share vs. the last close of $0.39, but above Anthony Wong’s (the seller) in-price of $0.1236/share. Like Wong, this new Offeror has no experience in LEAP’s business. The Offeror is primarily a vehicle owned by Xu Mingxing, who has experience in blockchain technology. However, a more detailed overview of the Offeror can be found on page 14 of the HKEx link, which provides details of no less than 15 individuals with stakes into the Offeror.

• M1 Ltd (M1 SP)‘s deal price now declared FINAL. Closing extended by two weeks to February 18th.
• The major shareholder of Qianhai Health Holdings (911 HK) has entered into a SPA, the completion of which would trigger a mandatory conditional offer at HK$0.25/share, a 0.3% premium to last close.
• Xingfa Aluminium (98 HK) is currently suspended pursuant to the Code. China Lesso Group Holdings (2128 HK), the second largest shareholder, acquired its shares in April last year. Xingfa was also subject to a (failed) scheme in 2017. 

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.   

• Source: HKEx

5. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu

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 71.9% for IPOs and 63.8% for Placements 

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

No new IPO filings

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

• Asia’s thirst for beer adds fizz to mega-brewer’s plans for IPO
• Chinese cryptocurrency exchanges seek reverse mergers in Hong Kong
• Market, bankers pin hope on Chalet Hotels for breaking lull in IPO launches
• Hong Kong exchange head clarifies listing rules as IPO hopes dim for cryptocurrency giant Bitmain

Smartkarma Community’s this week Analysis on Upcoming IPO

• CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)
• Maoyan Entertainment IPO Valuation: Press the Skip Button
• Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
• Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials

List of pre-IPO Coverage on Smartkarma