Industrials

• SHL Japan Ltd (4327 JP) has recommended SHL Group’s tender offer of JPY3,550 per share, a 32.2% premium to the undisturbed price (1 March).
• The transaction is a two-step acquisition through a cash tender offer and subsequent squeeze-out. The lower limit of the tender offer is set at a 36.62% ownership ratio.
• Achieving the minimum 36.62% ownership ratio requires a 32% acceptance rate from minorities excluding irrevocables. This is not onerous as the tender price represents an all-time share price. 

• As per Downer (DOW AU)‘s website: “Our purpose is to create and sustain the modern environment by building trusted relationships with our customers“. They should extend that trust to shareholders.
• Having already announced accounting irregularities back in December, Downer further cut profit forecasts – and interim dividend – this week. After shares cratered 24%, Downer’s CFO promptly tendered his resignation.
• Allan Grey, which holds 6% in Downer, reckons the company has been inept and that a “culture reset” was in order. 

• Meilan Airport issued a profit warning last night expecting a net loss of not more than RMB280 million for 2022. 
• While the magnitude of loss surprised us, positive share price reaction suggests investors are ready to look beyond.
• We incorporate both higher passenger throughput and financial expenses estimate in our model and trim our net profit forecast for 2023 from RMB600 million to RMB500 million. Maintain Buy. 

• In this insight, we take a look at Quiddity’s final predictions for index changes for UK’s F100 and F250 indices for the March 2023 Rebalance.
• The index changes are likely to be confirmed after market close today and there could be more intra-review changes later this month.
• In this insight, we take a look at the recent price performance of names that can potentially be involved in index changes and our flow expectations for each name.

• Downer EDI Ltd (DOW AU) shares are battered on the back of two quick successive profit warnings, accounting restatements and dividend cuts.
• A worrying deterioration in cash generation and an increase in leverage add to the nervousness. Management flux adds to the uncertainty and the chance of a third profit warning.
• While Downer’s multiples are in line with peers, momentum is against it and there are question marks if the earnings have been flattered by the misuse of exceptional items.

• SHL Japan Ltd (4327 JP) has recommended SHL Group’s tender offer of JPY3,550 per share, a 32.2% premium to the undisturbed price (1 March).
• The transaction is a two-step acquisition through a cash tender offer and subsequent squeeze-out. The lower limit of the tender offer is set at a 36.62% ownership ratio.
• Achieving the minimum 36.62% ownership ratio requires a 32% acceptance rate from minorities excluding irrevocables. This is not onerous as the tender price represents an all-time share price. 

• As per Downer (DOW AU)‘s website: “Our purpose is to create and sustain the modern environment by building trusted relationships with our customers“. They should extend that trust to shareholders.
• Having already announced accounting irregularities back in December, Downer further cut profit forecasts – and interim dividend – this week. After shares cratered 24%, Downer’s CFO promptly tendered his resignation.
• Allan Grey, which holds 6% in Downer, reckons the company has been inept and that a “culture reset” was in order. 

• Meilan Airport issued a profit warning last night expecting a net loss of not more than RMB280 million for 2022. 
• While the magnitude of loss surprised us, positive share price reaction suggests investors are ready to look beyond.
• We incorporate both higher passenger throughput and financial expenses estimate in our model and trim our net profit forecast for 2023 from RMB600 million to RMB500 million. Maintain Buy. 

• In this insight, we take a look at Quiddity’s final predictions for index changes for UK’s F100 and F250 indices for the March 2023 Rebalance.
• The index changes are likely to be confirmed after market close today and there could be more intra-review changes later this month.
• In this insight, we take a look at the recent price performance of names that can potentially be involved in index changes and our flow expectations for each name.

• Downer EDI Ltd (DOW AU) shares are battered on the back of two quick successive profit warnings, accounting restatements and dividend cuts.
• A worrying deterioration in cash generation and an increase in leverage add to the nervousness. Management flux adds to the uncertainty and the chance of a third profit warning.
• While Downer’s multiples are in line with peers, momentum is against it and there are question marks if the earnings have been flattered by the misuse of exceptional items.

• Arwana Citramulia released a solid set of numbers for FY2022 but we expect growth to continue for the next two years driven by new capacity in higher margin products.
• The company’s new capacity will be focused on expanding its porcelain tile business but it will also expand its higher-margin DigI UNO ceramic product, which will be positive for margins.
• Arwana Citramulia (ARNA IJ) remains a top-quality and high-growth industrial choice in Indonesia. Valuations are attractive with a single-digit PER and high teens EOS growth for the next two years.

• The review period for the March rebalance ended yesterday. Announcement of the changes will be made on 10 March and will be implemented at the close on 17 March.
• Mineral Resources (MIN AU) is a potential index inclusion if it is added to the index universe with lithium revenues nearing the 50% threshold.
• ioneer Ltd (INR AU) is very close to the 98% deletion threshold and could be removed from the index at the March rebalance.

• ACCO affirmed our industry concerns when it reported fourth quarter results that were lower than consensus estimates and resulted in free cash flow falling shy of the Company’s forecasts.
• ACCO has a business that can generate significant amount of free cash flow the second half of each year depending on how much volume it can sell
• ACCO is undertaking a restructuring effort to improve efficiencies to generate greater free cash flow from a tougher retail environment.

XP Power (XP) battled through FY22 to meet strong customer demand despite numerous supply chain challenges. H2 performance was significantly better than H1 as supply chain pressures started to ease, and XP enters FY23 with a record £308m order book. The company is targeting 10% organic revenue growth across the cycle and a return to historic profitability levels; we expect XP to make progress towards these targets in FY23 and FY24 while reducing gearing.

• Arwana Citramulia released a solid set of numbers for FY2022 but we expect growth to continue for the next two years driven by new capacity in higher margin products.
• The company’s new capacity will be focused on expanding its porcelain tile business but it will also expand its higher-margin DigI UNO ceramic product, which will be positive for margins.
• Arwana Citramulia (ARNA IJ) remains a top-quality and high-growth industrial choice in Indonesia. Valuations are attractive with a single-digit PER and high teens EOS growth for the next two years.

• The review period for the March rebalance ended yesterday. Announcement of the changes will be made on 10 March and will be implemented at the close on 17 March.
• Mineral Resources (MIN AU) is a potential index inclusion if it is added to the index universe with lithium revenues nearing the 50% threshold.
• ioneer Ltd (INR AU) is very close to the 98% deletion threshold and could be removed from the index at the March rebalance.

• ACCO affirmed our industry concerns when it reported fourth quarter results that were lower than consensus estimates and resulted in free cash flow falling shy of the Company’s forecasts.
• ACCO has a business that can generate significant amount of free cash flow the second half of each year depending on how much volume it can sell
• ACCO is undertaking a restructuring effort to improve efficiencies to generate greater free cash flow from a tougher retail environment.

XP Power (XP) battled through FY22 to meet strong customer demand despite numerous supply chain challenges. H2 performance was significantly better than H1 as supply chain pressures started to ease, and XP enters FY23 with a record £308m order book. The company is targeting 10% organic revenue growth across the cycle and a return to historic profitability levels; we expect XP to make progress towards these targets in FY23 and FY24 while reducing gearing.

• European markets have begun to outperform their US peers over last few months
• The differences in market sentiment have driven both the implied and realised vol spread wider 
• Trade a relative vol spread that should hold up in multiple market scenarios

• Schneider Electric Infrastructure (SCHN IN) is engaged in manufacturing of products and systems for electricity distribution, such as distribution transformers, medium voltage switchgears, etc.
• After plagued with losses for most of last decade, the company has entered into positive net worth and profit territory. 
• However, forensics do indicate concerns on aspects such as borrowing rates, inventory verification, contingent liability, etc. including few governance woes.

• All financial performance indicators at a record high in 2022 (growth, operating income, margin, recurring net income, free cash flow, ROCE)
• Transformation going according to plan, group’s profile towards fast-growing markets
• Valuation remains cheap on our model – still upside from here. TP: €72

• Before market open on February 23, HNI reported 4Q22 results that were better than we expected on both the top line (a modest beat) and margins (a significant beat).
• Results were also ahead of consensus. HNI reported 4Q22 sales of $569 million versus $603 million in 4Q21, ahead of our estimate by $7.5 million and consensus by $9 million.
• Adjusted EPS was $0.63, or $0.17 ahead of our estimate of $0.46 (also consensus).

• We are initiating research coverage of Kimball International. For shareholders and potential investors, Kimball’s relevant history began in 1949 when Arnold Habig led the acquisition and reorganization of Midwest Manufacturing, a struggling manufacturer based in Jasper, Indiana.
• Kimball management initiated its current strategy in 2014, focusing exclusively on commercial furniture.
• Its strategy differs from other commercial furniture manufacturers by emphasizing ancillary products (88% of TTM revenues as of 2Q23) and concentrating on secondary geographic markets (79% of TTM revenues as of 2Q23).

• UBTech Robotics (1683374D HK) is looking to raise about US$700m in its upcoming HK IPO. The deal will be run by Guotai Junan.  
• UBTech Robotics is engaged in artificial intelligence (AI)-empowered robotics in China, dedicated to the innovation of humanoid robots and development and sales of smart service robotic solutions. 
• It has a full stack of proprietary robotic, AI and integrated robotic and AI technologies for application in a range of enterprise-level and consumer-level use scenarios across various sectors.

• European markets have begun to outperform their US peers over last few months
• The differences in market sentiment have driven both the implied and realised vol spread wider 
• Trade a relative vol spread that should hold up in multiple market scenarios

• Schneider Electric Infrastructure (SCHN IN) is engaged in manufacturing of products and systems for electricity distribution, such as distribution transformers, medium voltage switchgears, etc.
• After plagued with losses for most of last decade, the company has entered into positive net worth and profit territory. 
• However, forensics do indicate concerns on aspects such as borrowing rates, inventory verification, contingent liability, etc. including few governance woes.

• All financial performance indicators at a record high in 2022 (growth, operating income, margin, recurring net income, free cash flow, ROCE)
• Transformation going according to plan, group’s profile towards fast-growing markets
• Valuation remains cheap on our model – still upside from here. TP: €72

• Before market open on February 23, HNI reported 4Q22 results that were better than we expected on both the top line (a modest beat) and margins (a significant beat).
• Results were also ahead of consensus. HNI reported 4Q22 sales of $569 million versus $603 million in 4Q21, ahead of our estimate by $7.5 million and consensus by $9 million.
• Adjusted EPS was $0.63, or $0.17 ahead of our estimate of $0.46 (also consensus).

• We are initiating research coverage of Kimball International. For shareholders and potential investors, Kimball’s relevant history began in 1949 when Arnold Habig led the acquisition and reorganization of Midwest Manufacturing, a struggling manufacturer based in Jasper, Indiana.
• Kimball management initiated its current strategy in 2014, focusing exclusively on commercial furniture.
• Its strategy differs from other commercial furniture manufacturers by emphasizing ancillary products (88% of TTM revenues as of 2Q23) and concentrating on secondary geographic markets (79% of TTM revenues as of 2Q23).

• UBTech Robotics (1683374D HK) is looking to raise about US$700m in its upcoming HK IPO. The deal will be run by Guotai Junan.  
• UBTech Robotics is engaged in artificial intelligence (AI)-empowered robotics in China, dedicated to the innovation of humanoid robots and development and sales of smart service robotic solutions. 
• It has a full stack of proprietary robotic, AI and integrated robotic and AI technologies for application in a range of enterprise-level and consumer-level use scenarios across various sectors.

• The Fujitec Co Ltd (6406 JP) EGM where activist Oasis Management wanted to spill the independent board members took place Friday.
• Results were mixed, but generally a success for Oasis, with 9 of the 13 votes won. Preliminary analysis of “uncertain voter” split interesting, and “Glass Lewis Effect” stronger than expected.
• The real shocker, however, was a footnote at the end of the announcement. This could (and should) have further repercussions. 

• Short-Term borrowing plays an important role in the Adani group
• Rescinding of Adani Enterprises FPO and meltdown in share prices heightened liquidity concerns of the group
• This analyst estimates the liquidity gap to be around US$ 8 bn for FY2023 which needs to be bridged by long-term funds and/or cash flow from operations

• China Hainan Rubber Industry (601118 CH) has despatched the offer document relating to its Halcyon Agri (HACL SP) MGO at US$0.315 or S$0.413 per share. The offer closes on 24 March.
• The MGO has a 50%+ minimum acceptance condition which requires around 40% of minorities’ acceptance rate (47% excluding the Gondobintoro Family).
• We think that this is achievable as the offer is attractive. At the last close and for an early-April payment, the gross and annualised spread is 0.7% and 7.3%, respectively.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 21Vianet Group (VNET US), Alliance Aviation Services (AQZ AU), 111 Inc (YI US), Golden Energy & Resources (GER SP), Origin Energy (ORG AU), Toyo Construction (1890 JP).    
• Lowest spreads – Ihara Science (5999 JP), Tyro Payments (TYR AU), Nitro Software Ltd (NTO AU), Boustead Projects (BOCJ SP), Nissin Electric (6641 JP), Techno Associe (8249 JP). 

• A weekly summary of key developments across ECM and Event-Driven names tracked by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Thailand, Korea, India and Chinese ADRs.
• ECM developments – Pertamina Geothermal Energy (PGEO IJ) has a flat debut and Star Entertainment Group (SGR AU) aims to raise A$800 million to fix its balance sheet.
• Event-Driven developments – Sembcorp Marine (SMM SP), Halcyon Agri (HACL SP), Fujitec Co Ltd (6406 JP), Jiangnan (1366 HK), Techtronic Industries (669 HK), Origin Energy (ORG AU), Nitro, Pushpay. 

• The decline in 2H22 profit (53.1% YoY and 43.8% HoH) for Pacific Basin Shipping (2343 HK) is a matter of the past. Market rates have already rebounded from the trough.  
• Demand recovery on China re-opening, good forward cargo cover, reduction in operating costs, strengthened financial position and diversified customer base are Pacific Basin’s key merits. 
• Lower profit for FY23 should be well anticipated by the market, yet it still generates ROE of 20.9%, making its 1.0x P/B inexpensive. Moreover, yield will stay at 10% level. 

• The Offer Document for China Hainan Rubber Industry (601118 CH)‘s mandatory Offer for Halcyon Agri (HACL SP) has been dispatched. 
• Hainan Rubber holds 36% and needs 14% out of 34.8% available – or ~40% to tender.  The first close is the 24 March.
• There is no IFA opinion in the Offer Doc. This will be present in the Circular which is expected to be sent out by the 10th March, at the latest.

• Sembcorp Marine shows interesting bull support at 0.12 where price and trendline meet but does face global cycle headwinds in March. Sell near term above 14.
• MACD trendline support under pressure and a must hold level for the bull case. An MACD would spell trouble for price.
• Current weakness if viewed as a pullback after the May to June bull triangle breakout. 11 is the key pivot level to hold.

• The Fujitec Co Ltd (6406 JP) EGM where activist Oasis Management wanted to spill the independent board members took place Friday.
• Results were mixed, but generally a success for Oasis, with 9 of the 13 votes won. Preliminary analysis of “uncertain voter” split interesting, and “Glass Lewis Effect” stronger than expected.
• The real shocker, however, was a footnote at the end of the announcement. This could (and should) have further repercussions. 

• Short-Term borrowing plays an important role in the Adani group
• Rescinding of Adani Enterprises FPO and meltdown in share prices heightened liquidity concerns of the group
• This analyst estimates the liquidity gap to be around US$ 8 bn for FY2023 which needs to be bridged by long-term funds and/or cash flow from operations

• China Hainan Rubber Industry (601118 CH) has despatched the offer document relating to its Halcyon Agri (HACL SP) MGO at US$0.315 or S$0.413 per share. The offer closes on 24 March.
• The MGO has a 50%+ minimum acceptance condition which requires around 40% of minorities’ acceptance rate (47% excluding the Gondobintoro Family).
• We think that this is achievable as the offer is attractive. At the last close and for an early-April payment, the gross and annualised spread is 0.7% and 7.3%, respectively.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 21Vianet Group (VNET US), Alliance Aviation Services (AQZ AU), 111 Inc (YI US), Golden Energy & Resources (GER SP), Origin Energy (ORG AU), Toyo Construction (1890 JP).    
• Lowest spreads – Ihara Science (5999 JP), Tyro Payments (TYR AU), Nitro Software Ltd (NTO AU), Boustead Projects (BOCJ SP), Nissin Electric (6641 JP), Techno Associe (8249 JP). 

• A weekly summary of key developments across ECM and Event-Driven names tracked by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Thailand, Korea, India and Chinese ADRs.
• ECM developments – Pertamina Geothermal Energy (PGEO IJ) has a flat debut and Star Entertainment Group (SGR AU) aims to raise A$800 million to fix its balance sheet.
• Event-Driven developments – Sembcorp Marine (SMM SP), Halcyon Agri (HACL SP), Fujitec Co Ltd (6406 JP), Jiangnan (1366 HK), Techtronic Industries (669 HK), Origin Energy (ORG AU), Nitro, Pushpay. 

• The decline in 2H22 profit (53.1% YoY and 43.8% HoH) for Pacific Basin Shipping (2343 HK) is a matter of the past. Market rates have already rebounded from the trough.  
• Demand recovery on China re-opening, good forward cargo cover, reduction in operating costs, strengthened financial position and diversified customer base are Pacific Basin’s key merits. 
• Lower profit for FY23 should be well anticipated by the market, yet it still generates ROE of 20.9%, making its 1.0x P/B inexpensive. Moreover, yield will stay at 10% level. 

• The Offer Document for China Hainan Rubber Industry (601118 CH)‘s mandatory Offer for Halcyon Agri (HACL SP) has been dispatched. 
• Hainan Rubber holds 36% and needs 14% out of 34.8% available – or ~40% to tender.  The first close is the 24 March.
• There is no IFA opinion in the Offer Doc. This will be present in the Circular which is expected to be sent out by the 10th March, at the latest.

• Sembcorp Marine shows interesting bull support at 0.12 where price and trendline meet but does face global cycle headwinds in March. Sell near term above 14.
• MACD trendline support under pressure and a must hold level for the bull case. An MACD would spell trouble for price.
• Current weakness if viewed as a pullback after the May to June bull triangle breakout. 11 is the key pivot level to hold.

• A Bloomberg article out Friday evening suggests the JIP Consortium funding plan submitted as the final package to Toshiba Corp (6502 JP) is no longer secure.
• Apparently Orix Corp (8591 JP), which with ROHM Co Ltd (6963 JP) was planning to invest equity and pref for total ¥300bn, wants to lower its investment to ¥200bn.
• Other equity tranche participants apparently want to reduce exposure as well. 

• There is no good reason to buy Japan Post Bank (7182 JP)‘s dip until the offering. It’s unlikely to earn the ROE to deserve the PBR it has versus peers.
• Brookfield and EIG/MidOcean’s revised NBIO will garner Origin Energy (ORG AU) board support; however, the terms are weird and unfair to investors holding fewer than 100k shares. 
• SATS (SATS SP) rights offer is not actually a surprise. Not at all. Passive funds will exercise. 

• At the Fujitec Co Ltd (6406 JP) EGM, Oasis successfully secured approval for four out of six candidates for outside directors. The tight vote shows that shareholders desire change.
• Oasis fell short of its nominations constituting up to two-thirds of the Board. However, Oasis-aligned directors will represent 67% of outside directors which still can drive meaningful change.
• The EGM results will spur optimism that Fujitec can close the performance gap with peers, resulting in a rerating. Fujitec remains attractive on a cash-adjusted P/E basis.    

• Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
• On the IPO front, Pertamina Geothermal Energy‘s listing kicked of what is shaping up to be  a busy 2023 for ASEAN IPOs
• There were a few placements across the region but the biggest news was of Japan Post Bank (7182 JP)‘s planned selldown by Japan Post Holdings (6178 JP) 

• Weekly summary of vol changes and moves across Global Markets
• Analysing ATM volatility and skew changes over the last 5 days
• We suggest a few trades to take advantage of the implied vol surfaces

• There are 42 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Three new deals was discussed on Smartkarma this past week: New Century Resources (NCZ AU)off-market Offer;AAG Energy Holdings’ (2686 HK) ‘s Scheme; and Jiangnan (1366 HK)‘s MBO.
• Key updates took place for: Nitro Software Ltd (NTO AU), Origin Energy (ORG AU), Pushpay Holdings (PPH NZ), Sembcorp Marine (SMM SP), and Boustead Projects (BOCJ SP).

• TransDigm managed to have another strong quarter and delivered an all-around beat.
• It was another strong quarter with healthy growth in commercial revenues and bookings.
• We also have a dedicated analysis of the company’s Environmental, Social, and Governance (ESG) risk scores in order to evaluate the sustainability risk.

• Enphase delivered a strong quarter driven by amazing revenues through its microinverters.
• The company witnessed amazing growth in the gross margin as well as in the operating income.
• The overall supply environment of the microinverters remains stable throughout the quarter.

• A Bloomberg article out Friday evening suggests the JIP Consortium funding plan submitted as the final package to Toshiba Corp (6502 JP) is no longer secure.
• Apparently Orix Corp (8591 JP), which with ROHM Co Ltd (6963 JP) was planning to invest equity and pref for total ¥300bn, wants to lower its investment to ¥200bn.
• Other equity tranche participants apparently want to reduce exposure as well. 

• There is no good reason to buy Japan Post Bank (7182 JP)‘s dip until the offering. It’s unlikely to earn the ROE to deserve the PBR it has versus peers.
• Brookfield and EIG/MidOcean’s revised NBIO will garner Origin Energy (ORG AU) board support; however, the terms are weird and unfair to investors holding fewer than 100k shares. 
• SATS (SATS SP) rights offer is not actually a surprise. Not at all. Passive funds will exercise. 

• At the Fujitec Co Ltd (6406 JP) EGM, Oasis successfully secured approval for four out of six candidates for outside directors. The tight vote shows that shareholders desire change.
• Oasis fell short of its nominations constituting up to two-thirds of the Board. However, Oasis-aligned directors will represent 67% of outside directors which still can drive meaningful change.
• The EGM results will spur optimism that Fujitec can close the performance gap with peers, resulting in a rerating. Fujitec remains attractive on a cash-adjusted P/E basis.    

• Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
• On the IPO front, Pertamina Geothermal Energy‘s listing kicked of what is shaping up to be  a busy 2023 for ASEAN IPOs
• There were a few placements across the region but the biggest news was of Japan Post Bank (7182 JP)‘s planned selldown by Japan Post Holdings (6178 JP) 

• Weekly summary of vol changes and moves across Global Markets
• Analysing ATM volatility and skew changes over the last 5 days
• We suggest a few trades to take advantage of the implied vol surfaces

• There are 42 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Three new deals was discussed on Smartkarma this past week: New Century Resources (NCZ AU)off-market Offer;AAG Energy Holdings’ (2686 HK) ‘s Scheme; and Jiangnan (1366 HK)‘s MBO.
• Key updates took place for: Nitro Software Ltd (NTO AU), Origin Energy (ORG AU), Pushpay Holdings (PPH NZ), Sembcorp Marine (SMM SP), and Boustead Projects (BOCJ SP).

• TransDigm managed to have another strong quarter and delivered an all-around beat.
• It was another strong quarter with healthy growth in commercial revenues and bookings.
• We also have a dedicated analysis of the company’s Environmental, Social, and Governance (ESG) risk scores in order to evaluate the sustainability risk.

• Enphase delivered a strong quarter driven by amazing revenues through its microinverters.
• The company witnessed amazing growth in the gross margin as well as in the operating income.
• The overall supply environment of the microinverters remains stable throughout the quarter.