Healthcare

In this briefing:

1. API Tilts at Sigma Healthcare: Expect More
2. S&P 500 Revisiting 2,600 Support
3. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare
4. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

1. API Tilts at Sigma Healthcare: Expect More

Friday morning, wholesale and retail pharmacy health/beauty and lifestyle products operator Australian Pharmaceutical Industries (API AU) announced that it had become a substantial shareholder in wholesale and retail pharmacy health/beauty and lifestyle products operator Sigma Healthcare Ltd (SIG AU) by purchasing 137.26mm shares. Roughly 52.5mm of those shares were purchased between A$0.53 and A$0.63/share between 5 September (the day before the half-year report came out) and 10 October and the other ~84.8mm shares were purchased Thursday 13 December at A$0.64, bringing the total position to 12.95%. 

It turns out that on 11 October, API made an indicative non-binding proposal to Sigma through a Scheme of Arrangement whereby Sigma shareholders would receive 0.31 shares of API and A$0.23 in cash for each share of Sigma held. 

That offer is now made public.

Worth A$0.686 per Sigma share as of announcement, the Indicative Proposal comes at a 69% premium to the close of trading on 13 December and a 46.8% premium to the one-month average. It is, however, a 10% premium to where API was buying shares on market in September and October. API shares were up a further 8+% on Friday, lifting terms further.

Sigma traded up 43% Friday to A$0.58 against terms which are now ~A$0.723, so there is still 24.7% upside to terms and there might be further upside on further synergy bullishness.

The Scheme Proposal is based on publicly available information, is subject to a number of conditions precedent, ACCC approval, due diligence, and confirmation of what they see as cost synergies.

This deal is somewhat opportunistic after recent troubles at Sigma, and I expect the ongoing strategic review at Sigma (assisted by Accenture) will come out saying that on a standalone basis after fixing itself up it is worth more than where it has been trading. The question is whether a merger would accelerate both the internal efforts at Sigma and improve competitiveness through cost synergies.

Allan Gray was the seller of the 8% stake yesterday it appears. The CIO is quoted in the API announcement as saying they support consolidation in the pharmaceutical wholesaling sector and are “positively disposed to efforts to expedite this consolidation.” They support it to such an extent that they decided to cut in half their participation in the economics of such efforts at expediting this consolidation. 

First time indicative opportunistic offers in Australia can be an arbitrageurs’ graveyard. 

2. S&P 500 Revisiting 2,600 Support

The S&P 500 was not able to break through the 2,817 and 100-day moving average resistance levels last week, and has now fallen abruptly back to test 2,600 support. For now our outlook remains cautious and we continue to expect heightened volatility and horizontal consolidation between the aforementioned support and resistance levels. Absent any real clarity in regards to Fed policy or U.S.-China trade relations, the S&P 500 is vulnerable to a breakdown.  We highlight opportunities within Pharmaceuticals and Waste Services, two areas of the market with defensive characteristics that currently exhibit timely technicals.

3. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare

• I initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. Yield peaked at 16.66% on Nov 22. It now stays at 8.75%.
• The ongoing FSS investigation is hammering both. Healthcare is hurting a bit more because it is more directly exposed. The market is overreacting to it. Given what has happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.
• I’d hold onto this position longer to regain a mid-teen yield. Current ratio is slightly above 20D MA, but still below yearly median. 
• Healthcare’s KOSPI move is still lurking. Temasek’s Healthcare selling was done lately. Celltrion merger is also rising to the surface. We have more factors pushing up the ratio in favor of Healthcare.

4. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

Wuxi Apptec’s USD 1 billion IPO was priced at HKD 68/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. 

 Our previous coverage on Wuxi Apptec listing

• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
• WuXi Apptec (药明康德) IPO:Upside at Middle and Low End
• Wuxi Apptec (药明康德) IPO: Pricing Update Before Book Close

In this briefing:

1. Hansoh Pharma (翰森制药) IPO: A Leading Generic Player with Regulatory Overhang (Part 1)
2. Small Cap Diary: MEGA, Eastwater
3. Taisho Frontrunner to Acquire BMS’s French OTC Business
4. Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion
5. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

1. Hansoh Pharma (翰森制药) IPO: A Leading Generic Player with Regulatory Overhang (Part 1)

Hansoh Pharma, a leading generic pharmaceutical manufacturer, filed an application to list on the Hong Kong Stock Exchange. In this insight, we will cover the following topics:

• Hansoh Pharma’s core products and major pipeline drug candidates.
• The industry backdrop.
• The company’s shareholders and investors.

• 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)

2. Small Cap Diary: MEGA, Eastwater

Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.

Here’s some highlights:

• MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
• Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
• East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
• The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.

3. Taisho Frontrunner to Acquire BMS’s French OTC Business

Event – Bristol Myers Squibb Co (BMY US)‘s  French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b

Our Take

• If Taisho Pharmaceutical Holdin (4581 JP)  indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
• UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
• Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products

Valuation

Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:

• Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
• Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
• Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)

4. Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion

Metropolis Health Services Limited (MHL IN) (MHL) plans to raise US$100m+ in its Indian IPO. MHL is one of the largest diagnostic chains in the country. Carlyle invested in the company in 2015. 

MHL has registered steady growth and margins over the past few years. It has also aggressively expanded its network over the past few years, although revenue growth hasn’t matched the network expansion.

MHL’s recent financial performance has been in-line with its listed peers, Dr Lal Pathlabs (DLPL IN) and Thyrocare Technologies (THYROCAR IN), while the company continues to lead its two listed peers in terms of revenue generated per test.

5. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

In this briefing:

1. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma
2. Last Week’s GER IPO Research: Tencent Music, IPO Trading Strategy Deep Dive, WuXi, Junshi & Xinyi
3. API/Sigma Merger: Sigma Shareholders Need a Better Offer
4. Softbank Corp, Takeda, and Newton’s Three Laws of Motion
5. API Tilts at Sigma Healthcare: Expect More

1. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma

Below is a recap of the key event-driven research produced by the Global Equity Research team. This week Arun develops a differentiated view on the deal between Anta Sports Products (2020 HK) and Amer Sports Oyj (AMEAS FH) which he thinks is worse for the former and better for the latter. In addition, we check the bump possibilities for Trade Me (TME AU) which we think is limited by valuation. Further, we find some validity in the short-seller case on Hengan Intl Group (1044 HK) and believe a bump is needed for Australian Pharma Industries (API AU) to close the deal on Sigma Healthcare (SIG AU)

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

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

2. Last Week’s GER IPO Research: Tencent Music, IPO Trading Strategy Deep Dive, WuXi, Junshi & Xinyi

Another busy week for IPO research from the GER team. This week, we recap the Tencent Music Entertainment (TME US) IPO which we noted is more fairly valued post its day one rally. Secondly, we dig into Chinese domiciled IPOs that are listed in the States and find some interesting trends on maximizing the ‘pop’, knowing when to get out and an assessment of longer-term performance. Arun nails his DCF valuation on WuXi AppTec Co. Ltd. (2359 HK) which closed at his base-case valuation while he recommends getting involved at the low-end for Shanghai Junshi Bioscience Co. Ltd. (1387344D CH) . Finally, Xinyi Energy Holdings Ltd (1671746D HK) spares further wrath as it postpones its IPO – Venkat digs into the reasons why he is cautious on the company. 

Quote of the week: 

Please note the post-apocalyptical fiction section has been moved to current affairs

– Sign in front of a UK bookstore

Video of the week: Santas hit the slopes in Maine

This is our last wrap of 2018 – we wish you a safe and happy festive period – and we will back in 2019!

Best wishes – Rickin, Venkat and Arun

3. API/Sigma Merger: Sigma Shareholders Need a Better Offer

Australian Pharma Indus (API AU), a pharmaceutical wholesaler, has lobbed an indicative cash-scrip proposal for its competitor, Sigma Healthcare (SIG AU). Under the proposal, Sigma shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share, implying $0.686 per Sigma share. If the proposal is successful, API/Sigma shareholders would own 63%/37% of the merged API-Sigma.

4. Softbank Corp, Takeda, and Newton’s Three Laws of Motion

It has been a huge Q4 for Japan capital markets and banking, and the result is some fat fees for global investment bankers on the Takeda/Shire deal, and a Softbank Corp IPO which I’d be totally OK not owning. A result of this activity is the fun in index land.

And there is a lot of fun to be had.

Some of that fun has been described in Softbank Corp IPO – Dividends, Index Buying, and Offer Structure. More was described in the various insights in the Takeda/Shire series, most recently in Takeda/Shire VI: Now For The Real Fun.

But it is worth revisiting because it involves, over the five weeks starting just before the Christmas holidays, across the two deals, probably…

US$35 billion of index flows…

Timing and impact is discussed herein.

5. API Tilts at Sigma Healthcare: Expect More

Friday morning, wholesale and retail pharmacy health/beauty and lifestyle products operator Australian Pharmaceutical Industries (API AU) announced that it had become a substantial shareholder in wholesale and retail pharmacy health/beauty and lifestyle products operator Sigma Healthcare Ltd (SIG AU) by purchasing 137.26mm shares. Roughly 52.5mm of those shares were purchased between A$0.53 and A$0.63/share between 5 September (the day before the half-year report came out) and 10 October and the other ~84.8mm shares were purchased Thursday 13 December at A$0.64, bringing the total position to 12.95%. 

It turns out that on 11 October, API made an indicative non-binding proposal to Sigma through a Scheme of Arrangement whereby Sigma shareholders would receive 0.31 shares of API and A$0.23 in cash for each share of Sigma held. 

That offer is now made public.

Worth A$0.686 per Sigma share as of announcement, the Indicative Proposal comes at a 69% premium to the close of trading on 13 December and a 46.8% premium to the one-month average. It is, however, a 10% premium to where API was buying shares on market in September and October. API shares were up a further 8+% on Friday, lifting terms further.

Sigma traded up 43% Friday to A$0.58 against terms which are now ~A$0.723, so there is still 24.7% upside to terms and there might be further upside on further synergy bullishness.

The Scheme Proposal is based on publicly available information, is subject to a number of conditions precedent, ACCC approval, due diligence, and confirmation of what they see as cost synergies.

This deal is somewhat opportunistic after recent troubles at Sigma, and I expect the ongoing strategic review at Sigma (assisted by Accenture) will come out saying that on a standalone basis after fixing itself up it is worth more than where it has been trading. The question is whether a merger would accelerate both the internal efforts at Sigma and improve competitiveness through cost synergies.

Allan Gray was the seller of the 8% stake yesterday it appears. The CIO is quoted in the API announcement as saying they support consolidation in the pharmaceutical wholesaling sector and are “positively disposed to efforts to expedite this consolidation.” They support it to such an extent that they decided to cut in half their participation in the economics of such efforts at expediting this consolidation. 

First time indicative opportunistic offers in Australia can be an arbitrageurs’ graveyard. 

In this briefing:

1. Small Cap Diary: MEGA, Eastwater
2. Taisho Frontrunner to Acquire BMS’s French OTC Business
3. Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion
4. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
5. Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17)

1. Small Cap Diary: MEGA, Eastwater

Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.

Here’s some highlights:

• MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
• Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
• East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
• The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.

2. Taisho Frontrunner to Acquire BMS’s French OTC Business

Event – Bristol Myers Squibb Co (BMY US)‘s  French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b

Our Take

• If Taisho Pharmaceutical Holdin (4581 JP)  indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
• UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
• Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products

Valuation

Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:

• Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
• Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
• Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)

3. Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion

Metropolis Health Services Limited (MHL IN) (MHL) plans to raise US$100m+ in its Indian IPO. MHL is one of the largest diagnostic chains in the country. Carlyle invested in the company in 2015. 

MHL has registered steady growth and margins over the past few years. It has also aggressively expanded its network over the past few years, although revenue growth hasn’t matched the network expansion.

MHL’s recent financial performance has been in-line with its listed peers, Dr Lal Pathlabs (DLPL IN) and Thyrocare Technologies (THYROCAR IN), while the company continues to lead its two listed peers in terms of revenue generated per test.

4. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

5. Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17)

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

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

In this briefing:

1. S&P 500 Revisiting 2,600 Support
2. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare
3. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut
4. Sonic Healthcare Placement – Accretive Acquisition, Placement Discount Should Help

1. S&P 500 Revisiting 2,600 Support

The S&P 500 was not able to break through the 2,817 and 100-day moving average resistance levels last week, and has now fallen abruptly back to test 2,600 support. For now our outlook remains cautious and we continue to expect heightened volatility and horizontal consolidation between the aforementioned support and resistance levels. Absent any real clarity in regards to Fed policy or U.S.-China trade relations, the S&P 500 is vulnerable to a breakdown.  We highlight opportunities within Pharmaceuticals and Waste Services, two areas of the market with defensive characteristics that currently exhibit timely technicals.

2. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare

• I initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. Yield peaked at 16.66% on Nov 22. It now stays at 8.75%.
• The ongoing FSS investigation is hammering both. Healthcare is hurting a bit more because it is more directly exposed. The market is overreacting to it. Given what has happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.
• I’d hold onto this position longer to regain a mid-teen yield. Current ratio is slightly above 20D MA, but still below yearly median. 
• Healthcare’s KOSPI move is still lurking. Temasek’s Healthcare selling was done lately. Celltrion merger is also rising to the surface. We have more factors pushing up the ratio in favor of Healthcare.

3. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

Wuxi Apptec’s USD 1 billion IPO was priced at HKD 68/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. 

 Our previous coverage on Wuxi Apptec listing

• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
• WuXi Apptec (药明康德) IPO:Upside at Middle and Low End
• Wuxi Apptec (药明康德) IPO: Pricing Update Before Book Close

4. Sonic Healthcare Placement – Accretive Acquisition, Placement Discount Should Help

Sonic Healthcare (SHL AU) plans to raise US$434m (A$600m) via an institutional placement to part fund its US$540m acquisition of Aurora Diagnostic.

As per the company, the acquisition is likely to be earnings accretive and will increase the revenue contribution of US operations to around 26%. While the deal appears attractive, SHL hasn’t provided many details about the past financial performance for Aurora. Some of the earlier filings by Aurora seem to indicate that revenue has been growing much faster than EBITDA. 

In this briefing:

1. Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion
2. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
3. Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17)
4. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma
5. Last Week’s GER IPO Research: Tencent Music, IPO Trading Strategy Deep Dive, WuXi, Junshi & Xinyi

1. Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion

Metropolis Health Services Limited (MHL IN) (MHL) plans to raise US$100m+ in its Indian IPO. MHL is one of the largest diagnostic chains in the country. Carlyle invested in the company in 2015. 

MHL has registered steady growth and margins over the past few years. It has also aggressively expanded its network over the past few years, although revenue growth hasn’t matched the network expansion.

MHL’s recent financial performance has been in-line with its listed peers, Dr Lal Pathlabs (DLPL IN) and Thyrocare Technologies (THYROCAR IN), while the company continues to lead its two listed peers in terms of revenue generated per test.

2. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

3. Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17)

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

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

4. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma

Below is a recap of the key event-driven research produced by the Global Equity Research team. This week Arun develops a differentiated view on the deal between Anta Sports Products (2020 HK) and Amer Sports Oyj (AMEAS FH) which he thinks is worse for the former and better for the latter. In addition, we check the bump possibilities for Trade Me (TME AU) which we think is limited by valuation. Further, we find some validity in the short-seller case on Hengan Intl Group (1044 HK) and believe a bump is needed for Australian Pharma Industries (API AU) to close the deal on Sigma Healthcare (SIG AU)

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

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

5. Last Week’s GER IPO Research: Tencent Music, IPO Trading Strategy Deep Dive, WuXi, Junshi & Xinyi

Another busy week for IPO research from the GER team. This week, we recap the Tencent Music Entertainment (TME US) IPO which we noted is more fairly valued post its day one rally. Secondly, we dig into Chinese domiciled IPOs that are listed in the States and find some interesting trends on maximizing the ‘pop’, knowing when to get out and an assessment of longer-term performance. Arun nails his DCF valuation on WuXi AppTec Co. Ltd. (2359 HK) which closed at his base-case valuation while he recommends getting involved at the low-end for Shanghai Junshi Bioscience Co. Ltd. (1387344D CH) . Finally, Xinyi Energy Holdings Ltd (1671746D HK) spares further wrath as it postpones its IPO – Venkat digs into the reasons why he is cautious on the company. 

Quote of the week: 

Please note the post-apocalyptical fiction section has been moved to current affairs

– Sign in front of a UK bookstore

Video of the week: Santas hit the slopes in Maine

This is our last wrap of 2018 – we wish you a safe and happy festive period – and we will back in 2019!

Best wishes – Rickin, Venkat and Arun

In this briefing:

1. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut
2. Sonic Healthcare Placement – Accretive Acquisition, Placement Discount Should Help

1. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

Wuxi Apptec’s USD 1 billion IPO was priced at HKD 68/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. 

 Our previous coverage on Wuxi Apptec listing

• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
• WuXi Apptec (药明康德) IPO:Upside at Middle and Low End
• Wuxi Apptec (药明康德) IPO: Pricing Update Before Book Close

2. Sonic Healthcare Placement – Accretive Acquisition, Placement Discount Should Help

Sonic Healthcare (SHL AU) plans to raise US$434m (A$600m) via an institutional placement to part fund its US$540m acquisition of Aurora Diagnostic.

As per the company, the acquisition is likely to be earnings accretive and will increase the revenue contribution of US operations to around 26%. While the deal appears attractive, SHL hasn’t provided many details about the past financial performance for Aurora. Some of the earlier filings by Aurora seem to indicate that revenue has been growing much faster than EBITDA. 

In this briefing:

1. API/Sigma Merger: Sigma Shareholders Need a Better Offer
2. Softbank Corp, Takeda, and Newton’s Three Laws of Motion
3. API Tilts at Sigma Healthcare: Expect More
4. S&P 500 Revisiting 2,600 Support
5. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare

1. API/Sigma Merger: Sigma Shareholders Need a Better Offer

Australian Pharma Indus (API AU), a pharmaceutical wholesaler, has lobbed an indicative cash-scrip proposal for its competitor, Sigma Healthcare (SIG AU). Under the proposal, Sigma shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share, implying $0.686 per Sigma share. If the proposal is successful, API/Sigma shareholders would own 63%/37% of the merged API-Sigma.

2. Softbank Corp, Takeda, and Newton’s Three Laws of Motion

It has been a huge Q4 for Japan capital markets and banking, and the result is some fat fees for global investment bankers on the Takeda/Shire deal, and a Softbank Corp IPO which I’d be totally OK not owning. A result of this activity is the fun in index land.

And there is a lot of fun to be had.

Some of that fun has been described in Softbank Corp IPO – Dividends, Index Buying, and Offer Structure. More was described in the various insights in the Takeda/Shire series, most recently in Takeda/Shire VI: Now For The Real Fun.

But it is worth revisiting because it involves, over the five weeks starting just before the Christmas holidays, across the two deals, probably…

US$35 billion of index flows…

Timing and impact is discussed herein.

3. API Tilts at Sigma Healthcare: Expect More

Friday morning, wholesale and retail pharmacy health/beauty and lifestyle products operator Australian Pharmaceutical Industries (API AU) announced that it had become a substantial shareholder in wholesale and retail pharmacy health/beauty and lifestyle products operator Sigma Healthcare Ltd (SIG AU) by purchasing 137.26mm shares. Roughly 52.5mm of those shares were purchased between A$0.53 and A$0.63/share between 5 September (the day before the half-year report came out) and 10 October and the other ~84.8mm shares were purchased Thursday 13 December at A$0.64, bringing the total position to 12.95%. 

It turns out that on 11 October, API made an indicative non-binding proposal to Sigma through a Scheme of Arrangement whereby Sigma shareholders would receive 0.31 shares of API and A$0.23 in cash for each share of Sigma held. 

That offer is now made public.

Worth A$0.686 per Sigma share as of announcement, the Indicative Proposal comes at a 69% premium to the close of trading on 13 December and a 46.8% premium to the one-month average. It is, however, a 10% premium to where API was buying shares on market in September and October. API shares were up a further 8+% on Friday, lifting terms further.

Sigma traded up 43% Friday to A$0.58 against terms which are now ~A$0.723, so there is still 24.7% upside to terms and there might be further upside on further synergy bullishness.

The Scheme Proposal is based on publicly available information, is subject to a number of conditions precedent, ACCC approval, due diligence, and confirmation of what they see as cost synergies.

This deal is somewhat opportunistic after recent troubles at Sigma, and I expect the ongoing strategic review at Sigma (assisted by Accenture) will come out saying that on a standalone basis after fixing itself up it is worth more than where it has been trading. The question is whether a merger would accelerate both the internal efforts at Sigma and improve competitiveness through cost synergies.

Allan Gray was the seller of the 8% stake yesterday it appears. The CIO is quoted in the API announcement as saying they support consolidation in the pharmaceutical wholesaling sector and are “positively disposed to efforts to expedite this consolidation.” They support it to such an extent that they decided to cut in half their participation in the economics of such efforts at expediting this consolidation. 

First time indicative opportunistic offers in Australia can be an arbitrageurs’ graveyard. 

4. S&P 500 Revisiting 2,600 Support

The S&P 500 was not able to break through the 2,817 and 100-day moving average resistance levels last week, and has now fallen abruptly back to test 2,600 support. For now our outlook remains cautious and we continue to expect heightened volatility and horizontal consolidation between the aforementioned support and resistance levels. Absent any real clarity in regards to Fed policy or U.S.-China trade relations, the S&P 500 is vulnerable to a breakdown.  We highlight opportunities within Pharmaceuticals and Waste Services, two areas of the market with defensive characteristics that currently exhibit timely technicals.

5. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare

• I initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. Yield peaked at 16.66% on Nov 22. It now stays at 8.75%.
• The ongoing FSS investigation is hammering both. Healthcare is hurting a bit more because it is more directly exposed. The market is overreacting to it. Given what has happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.
• I’d hold onto this position longer to regain a mid-teen yield. Current ratio is slightly above 20D MA, but still below yearly median. 
• Healthcare’s KOSPI move is still lurking. Temasek’s Healthcare selling was done lately. Celltrion merger is also rising to the surface. We have more factors pushing up the ratio in favor of Healthcare.

In this briefing:

1. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
2. Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17)
3. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma
4. Last Week’s GER IPO Research: Tencent Music, IPO Trading Strategy Deep Dive, WuXi, Junshi & Xinyi
5. API/Sigma Merger: Sigma Shareholders Need a Better Offer

1. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

2. Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17)

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

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

3. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma

Below is a recap of the key event-driven research produced by the Global Equity Research team. This week Arun develops a differentiated view on the deal between Anta Sports Products (2020 HK) and Amer Sports Oyj (AMEAS FH) which he thinks is worse for the former and better for the latter. In addition, we check the bump possibilities for Trade Me (TME AU) which we think is limited by valuation. Further, we find some validity in the short-seller case on Hengan Intl Group (1044 HK) and believe a bump is needed for Australian Pharma Industries (API AU) to close the deal on Sigma Healthcare (SIG AU)

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

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

4. Last Week’s GER IPO Research: Tencent Music, IPO Trading Strategy Deep Dive, WuXi, Junshi & Xinyi

Another busy week for IPO research from the GER team. This week, we recap the Tencent Music Entertainment (TME US) IPO which we noted is more fairly valued post its day one rally. Secondly, we dig into Chinese domiciled IPOs that are listed in the States and find some interesting trends on maximizing the ‘pop’, knowing when to get out and an assessment of longer-term performance. Arun nails his DCF valuation on WuXi AppTec Co. Ltd. (2359 HK) which closed at his base-case valuation while he recommends getting involved at the low-end for Shanghai Junshi Bioscience Co. Ltd. (1387344D CH) . Finally, Xinyi Energy Holdings Ltd (1671746D HK) spares further wrath as it postpones its IPO – Venkat digs into the reasons why he is cautious on the company. 

Quote of the week: 

Please note the post-apocalyptical fiction section has been moved to current affairs

– Sign in front of a UK bookstore

Video of the week: Santas hit the slopes in Maine

This is our last wrap of 2018 – we wish you a safe and happy festive period – and we will back in 2019!

Best wishes – Rickin, Venkat and Arun

5. API/Sigma Merger: Sigma Shareholders Need a Better Offer

Australian Pharma Indus (API AU), a pharmaceutical wholesaler, has lobbed an indicative cash-scrip proposal for its competitor, Sigma Healthcare (SIG AU). Under the proposal, Sigma shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share, implying $0.686 per Sigma share. If the proposal is successful, API/Sigma shareholders would own 63%/37% of the merged API-Sigma.

In this briefing:

1. Softbank Corp, Takeda, and Newton’s Three Laws of Motion
2. API Tilts at Sigma Healthcare: Expect More
3. S&P 500 Revisiting 2,600 Support
4. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare
5. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

1. Softbank Corp, Takeda, and Newton’s Three Laws of Motion

It has been a huge Q4 for Japan capital markets and banking, and the result is some fat fees for global investment bankers on the Takeda/Shire deal, and a Softbank Corp IPO which I’d be totally OK not owning. A result of this activity is the fun in index land.

And there is a lot of fun to be had.

Some of that fun has been described in Softbank Corp IPO – Dividends, Index Buying, and Offer Structure. More was described in the various insights in the Takeda/Shire series, most recently in Takeda/Shire VI: Now For The Real Fun.

But it is worth revisiting because it involves, over the five weeks starting just before the Christmas holidays, across the two deals, probably…

US$35 billion of index flows…

Timing and impact is discussed herein.

2. API Tilts at Sigma Healthcare: Expect More

Friday morning, wholesale and retail pharmacy health/beauty and lifestyle products operator Australian Pharmaceutical Industries (API AU) announced that it had become a substantial shareholder in wholesale and retail pharmacy health/beauty and lifestyle products operator Sigma Healthcare Ltd (SIG AU) by purchasing 137.26mm shares. Roughly 52.5mm of those shares were purchased between A$0.53 and A$0.63/share between 5 September (the day before the half-year report came out) and 10 October and the other ~84.8mm shares were purchased Thursday 13 December at A$0.64, bringing the total position to 12.95%. 

It turns out that on 11 October, API made an indicative non-binding proposal to Sigma through a Scheme of Arrangement whereby Sigma shareholders would receive 0.31 shares of API and A$0.23 in cash for each share of Sigma held. 

That offer is now made public.

Worth A$0.686 per Sigma share as of announcement, the Indicative Proposal comes at a 69% premium to the close of trading on 13 December and a 46.8% premium to the one-month average. It is, however, a 10% premium to where API was buying shares on market in September and October. API shares were up a further 8+% on Friday, lifting terms further.

Sigma traded up 43% Friday to A$0.58 against terms which are now ~A$0.723, so there is still 24.7% upside to terms and there might be further upside on further synergy bullishness.

The Scheme Proposal is based on publicly available information, is subject to a number of conditions precedent, ACCC approval, due diligence, and confirmation of what they see as cost synergies.

This deal is somewhat opportunistic after recent troubles at Sigma, and I expect the ongoing strategic review at Sigma (assisted by Accenture) will come out saying that on a standalone basis after fixing itself up it is worth more than where it has been trading. The question is whether a merger would accelerate both the internal efforts at Sigma and improve competitiveness through cost synergies.

Allan Gray was the seller of the 8% stake yesterday it appears. The CIO is quoted in the API announcement as saying they support consolidation in the pharmaceutical wholesaling sector and are “positively disposed to efforts to expedite this consolidation.” They support it to such an extent that they decided to cut in half their participation in the economics of such efforts at expediting this consolidation. 

First time indicative opportunistic offers in Australia can be an arbitrageurs’ graveyard. 

3. S&P 500 Revisiting 2,600 Support

The S&P 500 was not able to break through the 2,817 and 100-day moving average resistance levels last week, and has now fallen abruptly back to test 2,600 support. For now our outlook remains cautious and we continue to expect heightened volatility and horizontal consolidation between the aforementioned support and resistance levels. Absent any real clarity in regards to Fed policy or U.S.-China trade relations, the S&P 500 is vulnerable to a breakdown.  We highlight opportunities within Pharmaceuticals and Waste Services, two areas of the market with defensive characteristics that currently exhibit timely technicals.

4. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare

• I initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. Yield peaked at 16.66% on Nov 22. It now stays at 8.75%.
• The ongoing FSS investigation is hammering both. Healthcare is hurting a bit more because it is more directly exposed. The market is overreacting to it. Given what has happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.
• I’d hold onto this position longer to regain a mid-teen yield. Current ratio is slightly above 20D MA, but still below yearly median. 
• Healthcare’s KOSPI move is still lurking. Temasek’s Healthcare selling was done lately. Celltrion merger is also rising to the surface. We have more factors pushing up the ratio in favor of Healthcare.

5. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

Wuxi Apptec’s USD 1 billion IPO was priced at HKD 68/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. 

 Our previous coverage on Wuxi Apptec listing

• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
• WuXi Apptec (药明康德) IPO:Upside at Middle and Low End
• Wuxi Apptec (药明康德) IPO: Pricing Update Before Book Close