Industrials

In this briefing:

1. TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau
2. U.S. Equity Strategy: Be Long & Carry On
3. Japan Display: Deal to Raise JPY110bn from China-Taiwan Consortium and Japanese Investment Fund
4. China Three Gorges’ Rebuttable Presumption
5. Haitian: Trade War Fears Fade, Full Stream Ahead

1. TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau

Visitors to Macao will notice the gaudy designs of new properties like Studio City and the City of Dreams owned by Melco. Few will know that the Melco of today traces its roots back almost 100 years when it was named The Macau Electric Lighting Company. Melco was listed in Hong Kong in 1927 when it was still managing the electricity supply service for the island of Macau, which it had done since 1906. After the CEM was established in 1972 to supply power in Macau, Melco changed its name to Melco International Development Limited and became a subsidiary of Stanley Ho’s real estate holding company, Shun Tak Holdings (242 HK). With the burden of supplying electricity off its shoulders, the company did what any logical Hong Kong firm would do when its business disappears, it bought real estate.

To this day, Melco International Development (200 HK) still maintains ownership of one of these classic Hong Kong destinations which I will take a closer look at in my note. In the rest of this insight I will:

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

2. U.S. Equity Strategy: Be Long & Carry On

Both the cap- and equal-weighted S&P 500 are trading at highs not seen since early October 2018 – a positive indication in itself. Additionally, key risk-on areas we highlighted in last week’s Compass (small-caps, Financials/Banks, and Transports) have outperformed off the recent lows – a welcomed sight for risk sentiment, and confirms out positive outlook. In today’s report we highlight attractive bottom-fishing opportunities within the Financials Sector, and attractive Groups and stocks within Large- and Small-Cap Railroads, and Internet Software

3. Japan Display: Deal to Raise JPY110bn from China-Taiwan Consortium and Japanese Investment Fund

• It was reported over the weekend that the troubled display supplier to iPhone maker Apple, Japan Display (JDI) has almost finalized a deal to raise more than JPY110bn (US$990m) from a China-Taiwan consortium and Japanese public-private fund INCJ Ltd.
• The China-Taiwan consortium is expected to secure some 50% stake in Japan Display while the top shareholder INCJ’s current stake of 25.3% is expected to be halved.
• The consortium is aiming to restructure JDI’s remaining debt payments of about JPY100bn from Apple for the construction of its plant while it also aims to procure parts for the latest iPhone. In addition, the consortium is also trying to modify a contract stipulating that Apple can seize plants if JDI’s cash and deposits fall below a certain amount.
• The consortium along with JDI is planning to build an OLED panel plant in China with JDI providing the technological know-how while the consortium partners invest in capital expenditures and equity.
• Japan Display has been struggling to navigate its display business due to the slowdown in iPhone sales, falling behind competition on OLED technology and facing stiff price competition from Chinese panel makers.
• We expect the proposed OLED plant in China could help the company stabilize its panel business with Chinese smartphone makers Huawei and Xiaomi who prefer to source panels locally from domestic panel makers such as BOE Technology and Tianma.

4. China Three Gorges’ Rebuttable Presumption

In my initial insight on China Power New Energy Development Co (735 HK, “CPNED”)‘s privatisation by China Power New Energy Limited (the Offeror) by way of a Scheme, I concluded China Three Gorges, CPNED’s largest shareholder with 27.10%, will likely be required to abstain at the Court Meeting as it is presumed to be a connected party to the Offeror as per the Takeovers Code.

But the announcement states that CTG has given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

It seems illogical to mention in the irrevocable CTG will vote for the Scheme when in actuality it cannot vote. So, which one is it?

The short answer is: CTG cannot currently vote. 

But understanding this requires diving into the minutiae of Hong Kong’s Takeovers Code. So I do.

5. Haitian: Trade War Fears Fade, Full Stream Ahead

We expect Haitian’s margins go up in 2019, because 1) steel price in China is expected to decrease by 10% yoy with the re-balance of sector demand-supply, 2) Haitian’s newly launched third generation PIMM, and increasing sales propotion of high margin products, would improve the company’s overall margin.

Market demand is warming up in March, according to the management. The third generation PIMM is expected to trigger clients’ demand on upgrading their existing machines. High margin products, all-electric PIMM and large two-plate PIMM, would further increasing their sales and profit contribution. Overseas revenue growth would continue going faster than domestic revenue growth, with its new plants in Germany and Turkey coming on stream. We estimate Haitian’s net profit growth to reach 15% yoy in 2019E, vs. a 4% yoy decline in 2018.

Market concern on potential risk from Trade War, which had triggered Haitian’s valuation de-rating, should fade. As we expected, Haitian’s business wasn’t hurt by the Trade War in 2018, as the company has only 3% of overall revenue from US market. And the negotiations between US and China are on the right way to terminate the Trade War. Valuation re-rating might come with earnings improvement.

In this briefing:

1. Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact
2. WICE: Expansion Phase Still Go On
3. Summit Ascent’s Slippery Slope
4. HK Connect Discovery – March Snapshot (WH Group, Air China)
5. Polycab India Limited IPO – Probably Near Peak Margins, Improvements Unexplained

1. Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact

Yesterday, post-market close, Japan Post Holdings (6178 JP)(JPH) announced that it will sell 185m shares (including over-allotment) or 30.8% of Japan Post Insurance (7181 JP)(JPI) amounting to US$4bn. JPI plans to buy back up to 50m shares out of these, leaving around US$3.1bn worth of stock to be placed. Out of these 185m shares, 30% will be placed with foreigners.

The selldown is part of the government’s plan for privatization under which JPH is supposed to reduce its stake in JPI and Japan Post Bank (7182 JP)(JPB) to around 50%. This was highlighted in the IPO of the three entities in 2015. Thus, the deal is not totally unexpected but the timing of it was never certain. For people interested in more about the history and background, we’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll comment on some of the deal dynamics and index weighting impact.

2. WICE: Expansion Phase Still Go On

We maintain BUY rating for WICE with a new target price of Bt5.20 (previous target price: 7.50), based on 29xPE’19E, its one year average trading range or 20% discount to Thai transportation sector.

The story:

• Cross broader business plays the key growth driver in 2019
• We revised down earnings in 2019-21E due to lower-than-expected margins

Risks:

• Stronger Baht vs major foreign currencies such as US dollar causes lower income in Baht terms as the main reporting currency is Baht
• Higher than expected in fluctuation in freight rates
• Intensity of freight forwarding businesses in both domestic and overseas

3. Summit Ascent’s Slippery Slope

Back in September 2017, Lawrence Ho, Summit Ascent Holdings (102 HK)‘s major shareholder, reduced his stake to 18.75% from 27.06% (at between $1.13-$1.60/share, but mainly at the low end of this range), according to Hong Kong Exchange disclosure of interest filings. The share price of this Russian integrated gaming play declined 34% to $1.06/share in the following five trading days. Who bought those shares was not disclosed – CCASS shows these shares moving out of VC Brokerage into at least 10 different brokerage accounts.

Shortly after, Howard Klein quoted one insider in his insight Melco Resorts: A Gem Hiding in Plain Sight Offers an Entry Point After a Recent Dip that the sell-down wasn’t likely a sign “Ho has lost confidence in the area.“

On the 15 December, Ho announced a complete exit from Summit, selling 17.37% of shares out. Concurrently Ho resigned from his NED and chairman positions. Those shares moved from VC Brokerage to Sun Hung Kai Investments on the 20 December 2017. Shares traded unchanged on the news. 

At the same time, First Steamship (2601 TT) disclosed it held 12.67% on the 18 December 2017. Concurrently, Kuo Jen Hao was appointed as NED and Chairman of the Board, with effect from 28 December 2017.  Kuo is also the chairman and the general manager of First Steamship. First Steamship gradually increased its stake to 19.11% as at 24 October 2018.

The New News

Yesterday, Summit Ascent announced it has been informed that First Steamship and Kuo are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 24%.

With increased liquidity surrounding the news, this looks like a great opportunity to exit.

4. HK Connect Discovery – March Snapshot (WH Group, Air China)

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turned from outflow in February to inflow in March. Chinese investors were also buying Consumer Staples and Consumer Discretionary stocks.

Our March Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
• HK Connect Discovery Weekly: Eligibility Adjustment (2019-03-15)
• HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

5. Polycab India Limited IPO – Probably Near Peak Margins, Improvements Unexplained

Polycab India (POLY IN) plans to raise around US$190m in its IPO through a mix of selling primary and secondary shares. It is the largest manufacturer of wires and cables in India with a 12% market share, as per CRISIL research. The company also recently entered the consumer electrical segments. 

I covered the company background and past financial performance in my previous insight, Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question.

In this insight, I’ll run the deal through our IPO framework, and comment on valuation and updates since the previous filing.

In this briefing:

1. Hanjin Kal Short Idea: Current Situation & Trade Approach
2. AGC Placement Quick Take – Relatively Smaller Deal, Share Price Correction Should Help
3. Japan Post Insurance Offering – Now It Gets Real
4. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction
5. Lynas Investor Briefing – Looks Like More Capex Ahead

1. Hanjin Kal Short Idea: Current Situation & Trade Approach

This post examines the current price pushing factors being laid on Hanjin Group holdco Hanjin Kal after the second generation owner’s sudden death. It then discusses the limitations of these price pushing factors.

2. AGC Placement Quick Take – Relatively Smaller Deal, Share Price Correction Should Help

AGC Inc (5201 JP) plans to raise US$215m (including over allotment) via a secondary offering of share, this represents 2.9% of the outstanding shares.  

The deal scores a mixed score on our framework, aided by its cheaper valuation while it scoring is hampered by its under performance versus it regional peers. However, the shares have been correcting since the deal was announced and the deal represents just a few days of ADV.

3. Japan Post Insurance Offering – Now It Gets Real

The Background

Almost 150 years ago in 1871, a modern postal service was established in Japan by the new Meiji government. The following year, a government-sponsored nationwide network of postal services was launched. Postal money orders started in 1875 and other money and payment services started in the following two decades. In the first decade of the 20th century, domestic money transfers and pension payment receipt were launched. In 1916 postal life insurance sales began. Life annuity sales began a decade later. The Japanese postal system of teigaku deposits started in 1941. In 1949, postal operations were established as the Ministry of Posts alongside the Ministry of Electric Communications (Telecommunications), and eventually both were subsumed into the Ministry of Posts & Telecommunications. In 2001, the business of the Japanese postal system was separated into the Japan Postal Agency, a short-lived entity set up under “central government restructuring” which took place that year. In 2003, the postal system was set up as the Japan Post Corporation under a law which established it as a statutory public corporation (in England, the Bank of England, the BBC, and the Civil Aviation Authority are such companies). 

The issue of privatisation – i.e. making it responsible for its own accounts, which would take things one step further rather than being a government budget item – had long been mooted but constantly rejected because it might cost jobs and reduce services. Finally after several Lower House LDP politicians voted against Koizumi’s proposal to split the Japan Post Corporation into four parts in summer 2005 and the Upper House knocked it down, Koizumi dissolved both houses of the Diet and called a snap election saying that it was a referendum on postal privatization. He won easily and the bill was passed a month later. Things were iffy as a privatized company for a few years until after the 2011 Tohoku Earthquake, after which the government needed to find sources of extra funds to finance reconstruction. In 2012, the government announced it would sell shares to the public within three years.  

Three years ago and change, the government of Japan launched the promised public offering for Japan Post Holdings (6178 JP) (“JPH”), which acted as a holding company for Japan Post Bank (7182 JP) (“JPB”), and affiliated insurance arm Japan Post Insurance (7181 JP) (“JPI”). At the time, the triple-IPO at ¥1.4 trillion was the largest one-day offering in almost two decades, and the situation created some significant and interesting short-term trading opportunities. 

In the end, there was always going to be “overhang” because the explicit goal of the privatization policy was to get JPH’s ownership of JPB and JPI below 50%. In doing so, the bank and insurance operations could then go out and compete with other banks and insurers; currently they are to a large extent restricted from offering new products and entering new markets.

The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%. 

After the close Friday, the company announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That was 6.2% of shares outstanding. 

The dynamics of this ToSTNeT-3 buyback were discussed in Japan Post Insurance – The ToSTNeT-3 Buyback. The ToSTNeT-3 buyback was, at its basest, an interesting garbitrage trade for a limited number of traders but the resulting dynamics are important. They influence the supply in the Offering, the dynamics of demand, and may influence trading patterns into pricing. 

There are several things going on here. There is a huge offering, a buyback, earnings accretion, a float change, substantial sale to foreigners this time, and index changes. Sooner and later, it will mean a substantial move towards getting closer to 50%, and the fact that this is now investable for lots of institutional investors.

It is worth looking at these aspects independently to better understand demand for the offering as a whole. 

Read on for more.

4. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction

Japan Post Holdings (6178 JP) (JPH) plans to raise up to US$3.3bn via selling its stake in Japan Post Insurance (7181 JP) (JPI). The size of the deal has been adjusted downwards owing to the buyback conducted today morning.

I’ve covered some of the background and index weightage impact in my earlier insight: Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact. For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll run the deal through our framework and analyze the performance of some of the other sizeable deals in the recent past.

5. Lynas Investor Briefing – Looks Like More Capex Ahead

At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update. 

In this briefing:

1. IPH Goes Hostile on Xenith
2. Toshiba: King Street Round Two
3. Nsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price

1. IPH Goes Hostile on Xenith

Iph Ltd (IPH AU) has gate crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a proposal (by way of a Scheme) for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, 23.3% above the implied QANTM merger consideration.

Last November, Xenith and QANTM , both leading providers of IP origination services in Australia, announced a merger via an all-scrip scheme of arrangement, whereby Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group with a then pro-forma capitalisation of A$285mn. Pre-cost synergies are estimated at A$7mn/annum at the end of  year three.

Xenith’s board unanimously recommended the merger to its shareholders.

IPH did not blink and on the same day as the Xenith/QANTM announcement, lobbed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a a A$0.05 dividend) by way of a scheme, or a 42% premium to last close.

QANTM’s board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. IPH countered those claims, spurring QANTM to counter those countered claims.

On the 13 February 2019, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support the QANTM scheme and intends to vote against it. In response, both Xenith and QANTM announced that neither had received a proposal from IPH. Xenith’s shares increased 20.3% to close at A$1.69/share.

The provisional date for ACCC s clearance of the QANTM/Xenith merger is the 21 March. The provisional date for IPH/Xenith is the 2 May. The QANTM/Xenith Scheme meeting is scheduled for 3 April with a 24 April implementation date. IPH’s proposal has an indicative implementation date of mid-July.

IPH’s proposal currently offers an implied value of $1.98 (65% in cash) against $1.85 for QANTM’s all-scrip offer.

The key risk to IPH’s proposal is ACCC’s consent. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies. IPH is the oldest, and the largest (in terms of revenue). However privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.

With IPH’s blocking stake, the QANTM/Xenith scheme will fail. Xenith should engage with IPH.

2. Toshiba: King Street Round Two

Yesterday, King Street sent a letter to Toshiba Corp (6502 JP) CEO Nobuaki Kurumatani, applying pressure by threatening to nominate alternative directors to the company’s board. The full contents of the letter can be found here.

King Street’s requirements for the new board are stated as:

Among other things, the new Board must:

(i) ensure management applies rigorous financial discipline to capital allocation decisions, including use of excess cash, determination of optimal capital structure and capital expenditure return requirements;

(ii) drive management to re-examine Toshiba’s business portfolio with a critical eye on competitive position, sector landscape, synergies available and profitable growth prospects;

(iii) direct management to evaluate non-operating and underperforming businesses and assets (while respecting that Toshiba may need to be engaged in certain activities important to Japan’s national security interests);

(iv) ensure that management attains global peer profitability levels at each business segment based on projections supported by robust, bottoms-up analysis; and

(v) instill a culture of accountability and ownership at all levels of the organization.

By and large these demands amount to, “follow the instructions in our previous presentation“. That presentation, while thorough in some respects struck us as being naively optimistic, as we noted in Toshiba: King Street Assumptions Look Exceedingly Optimistic.

Travis Lundy also commented on the presentation in Toshiba: King Street’s Buyback Proposals Lack Required Detail and Toshiba: King Street’s Valuation Analysis Is… Punchy?

Given developments in the intervening time period including a sell-down of about 27% of King Street’s initial stake at a price of ¥3,925 (some 64% below the “well over ¥11,000” per share they feel Toshiba is worth) according to Bloomberg, and a downward revision to OP guidance from ¥60bn to ¥20bn, we feel that there is little reason to change our assessment.

3. Nsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price

Over the last 12 months, these shares have been a dreadful performer (as have the other ball bearing makers), both in absolute terms (-36%) and on a relative basis (underperformed TOPIX by 30%). Operating profits for the full year have recently been revised down (for the second time). The operating environment has deteriorated markedly into 4Q. It would appear to us that the market, and analysts, are aware of the current poor trading conditions. The question is when will conditions start to improve. The first half of next year will be very poor indeed with profits down perhaps 35% year-on-year. And it now appears that some analyst’s numbers do not assume recovery for any of next fiscal year, which we believe as too harsh.

Clearly the first half of next year (3/20) is going to show very poor year on year comparisons. This will be unavoidable given a good first half this year and business conditions now. The company itself is now forecasting a 4Q operating profit of Y16.7bn (-40%) having made Y24.8bn in 1Q, Y20.2bn in 2Q and Y21.3bn in 3Q. Assuming this level carries on into the first half of next year before starting a gradual recovery in the second half, then first half operating profit may well come in at about Y32-33bn, a 35% year-on-year fall. The consensus for the full year is currently about Y70bn with the lowest number being Y64bn. Sell recommendations have also begun to appear. To us this appear to be a bit after the event given where earnings are now and where the shares are trading.

The shares currently yield 4.2% and the pay-out ratio this year is 36%. Management’s target is for 30% but at the same time they are reluctant to cut the dividend going forward. This may well prove some support. Meanwhile the company owns 7% of itself and on our calculation is trading on an EV/ebitda of just under 4x. Finally, its book value (0.9x) relative to the market’s book value is now at a very depressed level (see chart below) which suggests to us that although there may be some short term down side risk, we would look to buy on a longer term.

In this briefing:

1. IPH Goes Hostile on Xenith
2. Toshiba: King Street Round Two
3. Nsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price
4. LG Corp Daily Cycle Pivot and Re Test of Base Line Support

1. IPH Goes Hostile on Xenith

Iph Ltd (IPH AU) has gate crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a proposal (by way of a Scheme) for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, 23.3% above the implied QANTM merger consideration.

Last November, Xenith and QANTM , both leading providers of IP origination services in Australia, announced a merger via an all-scrip scheme of arrangement, whereby Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group with a then pro-forma capitalisation of A$285mn. Pre-cost synergies are estimated at A$7mn/annum at the end of  year three.

Xenith’s board unanimously recommended the merger to its shareholders.

IPH did not blink and on the same day as the Xenith/QANTM announcement, lobbed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a a A$0.05 dividend) by way of a scheme, or a 42% premium to last close.

QANTM’s board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. IPH countered those claims, spurring QANTM to counter those countered claims.

On the 13 February 2019, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support the QANTM scheme and intends to vote against it. In response, both Xenith and QANTM announced that neither had received a proposal from IPH. Xenith’s shares increased 20.3% to close at A$1.69/share.

The provisional date for ACCC s clearance of the QANTM/Xenith merger is the 21 March. The provisional date for IPH/Xenith is the 2 May. The QANTM/Xenith Scheme meeting is scheduled for 3 April with a 24 April implementation date. IPH’s proposal has an indicative implementation date of mid-July.

IPH’s proposal currently offers an implied value of $1.98 (65% in cash) against $1.85 for QANTM’s all-scrip offer.

The key risk to IPH’s proposal is ACCC’s consent. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies. IPH is the oldest, and the largest (in terms of revenue). However privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.

With IPH’s blocking stake, the QANTM/Xenith scheme will fail. Xenith should engage with IPH.

2. Toshiba: King Street Round Two

Yesterday, King Street sent a letter to Toshiba Corp (6502 JP) CEO Nobuaki Kurumatani, applying pressure by threatening to nominate alternative directors to the company’s board. The full contents of the letter can be found here.

King Street’s requirements for the new board are stated as:

Among other things, the new Board must:

(i) ensure management applies rigorous financial discipline to capital allocation decisions, including use of excess cash, determination of optimal capital structure and capital expenditure return requirements;

(ii) drive management to re-examine Toshiba’s business portfolio with a critical eye on competitive position, sector landscape, synergies available and profitable growth prospects;

(iii) direct management to evaluate non-operating and underperforming businesses and assets (while respecting that Toshiba may need to be engaged in certain activities important to Japan’s national security interests);

(iv) ensure that management attains global peer profitability levels at each business segment based on projections supported by robust, bottoms-up analysis; and

(v) instill a culture of accountability and ownership at all levels of the organization.

By and large these demands amount to, “follow the instructions in our previous presentation“. That presentation, while thorough in some respects struck us as being naively optimistic, as we noted in Toshiba: King Street Assumptions Look Exceedingly Optimistic.

Travis Lundy also commented on the presentation in Toshiba: King Street’s Buyback Proposals Lack Required Detail and Toshiba: King Street’s Valuation Analysis Is… Punchy?

Given developments in the intervening time period including a sell-down of about 27% of King Street’s initial stake at a price of ¥3,925 (some 64% below the “well over ¥11,000” per share they feel Toshiba is worth) according to Bloomberg, and a downward revision to OP guidance from ¥60bn to ¥20bn, we feel that there is little reason to change our assessment.

3. Nsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price

Over the last 12 months, these shares have been a dreadful performer (as have the other ball bearing makers), both in absolute terms (-36%) and on a relative basis (underperformed TOPIX by 30%). Operating profits for the full year have recently been revised down (for the second time). The operating environment has deteriorated markedly into 4Q. It would appear to us that the market, and analysts, are aware of the current poor trading conditions. The question is when will conditions start to improve. The first half of next year will be very poor indeed with profits down perhaps 35% year-on-year. And it now appears that some analyst’s numbers do not assume recovery for any of next fiscal year, which we believe as too harsh.

Clearly the first half of next year (3/20) is going to show very poor year on year comparisons. This will be unavoidable given a good first half this year and business conditions now. The company itself is now forecasting a 4Q operating profit of Y16.7bn (-40%) having made Y24.8bn in 1Q, Y20.2bn in 2Q and Y21.3bn in 3Q. Assuming this level carries on into the first half of next year before starting a gradual recovery in the second half, then first half operating profit may well come in at about Y32-33bn, a 35% year-on-year fall. The consensus for the full year is currently about Y70bn with the lowest number being Y64bn. Sell recommendations have also begun to appear. To us this appear to be a bit after the event given where earnings are now and where the shares are trading.

The shares currently yield 4.2% and the pay-out ratio this year is 36%. Management’s target is for 30% but at the same time they are reluctant to cut the dividend going forward. This may well prove some support. Meanwhile the company owns 7% of itself and on our calculation is trading on an EV/ebitda of just under 4x. Finally, its book value (0.9x) relative to the market’s book value is now at a very depressed level (see chart below) which suggests to us that although there may be some short term down side risk, we would look to buy on a longer term.

4. LG Corp Daily Cycle Pivot and Re Test of Base Line Support

LG Corp (003550 KS) is resting on critical daily cycle pivot support; if broken would see momentum spill over into the weekly cycle with a bias to re test base line support.

Daily RSI has already broken the wedge support equivalent in price and very often a good leading indicator. LGC is currently resting just above key pivot support, that once broken would induce a slide back to more attractive and a better risk to reward zone.

In this briefing:

1. Another MGO For HKICIM As HNA Sells Stake Back To Blackstone

1. Another MGO For HKICIM As HNA Sells Stake Back To Blackstone

Late Friday night, Hong Kong International Construction Investment Management Group Co., (687 HK) (“HKICIM”) announced HNA Finance had entered into a SPA in which Times Holdings, a Blackstone-controlled vehicle, had conditionally agreed to buy 69.54% of HKICIM’s issued shares for HK$3/share in an HK$7bn transaction. Should the SPA complete, Times will make a mandatory unconditional offer – also at $3.00/share (14.5% premium to last close) – for the remaining 30.46% of shares out.

This proposal arrives nearly three years after HNA bought a 66% in Tysan Holdings  – as HKICIM was previously known – from Blackstone for HK$4.53 per share, triggering an MGO.

This share sale underlines HNA Group’s ongoing strategy to ease its debt burden and align its core business focus towards aviation, not construction and property.

HKICIM made headlines in the past not just for its eye-watering property acquisitions at Kai Tak (up to HK$13.5k/sqft in March 2017), the former site of Hong Kong’s international airport; but that HNA was also oddly motivated to acquire these parcels of land at record breaking prices to “snatch land and pricing power from the city’s real estate cartel“.

HKICIM sold its last Kai Tak site to Wheelock & (20 HK) last month (for a loss of $740mn), leaving the company with an estimated net cash position of ~$6.0bn (using FY18 interim numbers) or ~$1.80/share, it’s foundation piling operations, a development site in Hong Kong and a residential and commercial property development project in Shenyang.

The closing of the SPA is subject to the satisfaction or waiver of various conditions. However, the short time frame (13 business days from this announcement) in which to secure, fulfill or waive these conditions suggest minimal deal risk.

This will trade tight to, if not through terms, with an anticipated completion late April. There will be no bump to the Offer. Times does not intend to avail itself to compulsory acquisition and intends to maintain HKICIM’s listing; while both Times and HKICIM will take appropriate steps to maintain a sufficient public float after the close of the Offer.

In this briefing:

1. AGC Placement Quick Take – Relatively Smaller Deal, Share Price Correction Should Help
2. Japan Post Insurance Offering – Now It Gets Real
3. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction
4. Lynas Investor Briefing – Looks Like More Capex Ahead
5. DHICO Rights Offer: Current Status & Trade Approach

1. AGC Placement Quick Take – Relatively Smaller Deal, Share Price Correction Should Help

AGC Inc (5201 JP) plans to raise US$215m (including over allotment) via a secondary offering of share, this represents 2.9% of the outstanding shares.  

The deal scores a mixed score on our framework, aided by its cheaper valuation while it scoring is hampered by its under performance versus it regional peers. However, the shares have been correcting since the deal was announced and the deal represents just a few days of ADV.

2. Japan Post Insurance Offering – Now It Gets Real

The Background

Almost 150 years ago in 1871, a modern postal service was established in Japan by the new Meiji government. The following year, a government-sponsored nationwide network of postal services was launched. Postal money orders started in 1875 and other money and payment services started in the following two decades. In the first decade of the 20th century, domestic money transfers and pension payment receipt were launched. In 1916 postal life insurance sales began. Life annuity sales began a decade later. The Japanese postal system of teigaku deposits started in 1941. In 1949, postal operations were established as the Ministry of Posts alongside the Ministry of Electric Communications (Telecommunications), and eventually both were subsumed into the Ministry of Posts & Telecommunications. In 2001, the business of the Japanese postal system was separated into the Japan Postal Agency, a short-lived entity set up under “central government restructuring” which took place that year. In 2003, the postal system was set up as the Japan Post Corporation under a law which established it as a statutory public corporation (in England, the Bank of England, the BBC, and the Civil Aviation Authority are such companies). 

The issue of privatisation – i.e. making it responsible for its own accounts, which would take things one step further rather than being a government budget item – had long been mooted but constantly rejected because it might cost jobs and reduce services. Finally after several Lower House LDP politicians voted against Koizumi’s proposal to split the Japan Post Corporation into four parts in summer 2005 and the Upper House knocked it down, Koizumi dissolved both houses of the Diet and called a snap election saying that it was a referendum on postal privatization. He won easily and the bill was passed a month later. Things were iffy as a privatized company for a few years until after the 2011 Tohoku Earthquake, after which the government needed to find sources of extra funds to finance reconstruction. In 2012, the government announced it would sell shares to the public within three years.  

Three years ago and change, the government of Japan launched the promised public offering for Japan Post Holdings (6178 JP) (“JPH”), which acted as a holding company for Japan Post Bank (7182 JP) (“JPB”), and affiliated insurance arm Japan Post Insurance (7181 JP) (“JPI”). At the time, the triple-IPO at ¥1.4 trillion was the largest one-day offering in almost two decades, and the situation created some significant and interesting short-term trading opportunities. 

In the end, there was always going to be “overhang” because the explicit goal of the privatization policy was to get JPH’s ownership of JPB and JPI below 50%. In doing so, the bank and insurance operations could then go out and compete with other banks and insurers; currently they are to a large extent restricted from offering new products and entering new markets.

The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%. 

After the close Friday, the company announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That was 6.2% of shares outstanding. 

The dynamics of this ToSTNeT-3 buyback were discussed in Japan Post Insurance – The ToSTNeT-3 Buyback. The ToSTNeT-3 buyback was, at its basest, an interesting garbitrage trade for a limited number of traders but the resulting dynamics are important. They influence the supply in the Offering, the dynamics of demand, and may influence trading patterns into pricing. 

There are several things going on here. There is a huge offering, a buyback, earnings accretion, a float change, substantial sale to foreigners this time, and index changes. Sooner and later, it will mean a substantial move towards getting closer to 50%, and the fact that this is now investable for lots of institutional investors.

It is worth looking at these aspects independently to better understand demand for the offering as a whole. 

Read on for more.

3. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction

Japan Post Holdings (6178 JP) (JPH) plans to raise up to US$3.3bn via selling its stake in Japan Post Insurance (7181 JP) (JPI). The size of the deal has been adjusted downwards owing to the buyback conducted today morning.

I’ve covered some of the background and index weightage impact in my earlier insight: Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact. For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll run the deal through our framework and analyze the performance of some of the other sizeable deals in the recent past.

4. Lynas Investor Briefing – Looks Like More Capex Ahead

At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update. 

5. DHICO Rights Offer: Current Status & Trade Approach

This post looks at the current trading status of DHICO rights offer on each of the major movement days. It still seems that the share price should be kept high to give the Mar 25~26 arb traders an opportunity to short. This explains recent strong prices. It is presumed that shorting hasn’t been fully done. About half is still to be shorted. This suggests that strong prices should be kept a little longer. Once this is done, we will likely see a strong downward pressure until the price hits ₩6,250. This sets the floor price at ₩5,000. This will be good time to do one-way shorting.

In this briefing:

1. Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines

1. Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines

Last Week in Event SPACE …

• Not a bad reward/risk as Manikay greenmails KKR’s MYOB Group Ltd (MYO AU) offer.
• If the Malaysian government impasse cannot be resolved, Lynas Corp Ltd (LYC AU) will be left holding just a bunch of rocks.
• Antitrust issues are not deal breakers, while the strategic logic of the Versum Materials (VSM US) acquisition for Merck KGaA (MRK GY) is compelling.
• The ongoing circularity creep as Jardine Matheson Hldgs (JM SP) increases its stake in Jardine Strategic Hldgs (JS SP).
• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

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

MYOB Group Ltd (MYO AU) (Mkt Cap: $1.4bn; Liquidity: $10mn)

While not new news, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has now reached a stake of 11%. The last chunks purchased appear to have been done at (or around) A$3.40/share, which is equal to terms. The Manikay letter to the Board asks the Board to consider the market movements since December and posits a fair value in excess of A$4.00/share.

• Manikay says that it is interested in becoming a long-term shareholder. But the letter seems to level its criticism of the deal price most pointedly at the fact that the deal was offered and agreed to just a few days off a two-year low in the S&P/ASX200 Index and since then the index has rebounded to within 1.5% of an 11-year high.
• A “market context” bump is not a bad case in and of itself because of where peers have moved and where the market has moved, and we won’t know whether that point is taken up by the IER in the Scheme Document. 
• This strikes Travis Lundy as not a bad reward/risk to buy up to 1-2% through terms. The back end “undisturbed price” has risen and the recent earnings release shows online penetration continues to grow. 

(link to Travis’ insight: MYOB Setting Up As A Riskier Trade)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $758mn; Liquidity: $6mn)

Irrespective of whether the Malaysian rare earth processing licence provided to Lynas was without adequate due process (as has been speculated) or whether the facility is indeed an environmental concern; the fact remains the Malaysian government has reneged on the previously agreed-upon three-step licence process – imposing unachievable pre-conditions by the licence renewal date this September – and that is wrong.

• Ongoing negotiation with the Malaysian government is the only course of action by which Lynas will achieve the renewal of its operating licence (unencumbered or with “acceptable” caveats). The agreed management pathway for NUF provides scope for a positive outcome from extensive consultation. 
• But even if a viable resolution is reached, it would only serve to temporarily manage Lynas out of its current predicament – given the vocal domestic opposition, the long-term prognosis is likely the shuttering and removal of the LAMP.
• Shares are down 45% from the pre-general election (for Malaysia) peak and ~24% down from when the Review Committee was first mooted in September 2018, and roughly a similar % compared to the 3 December closing price, the day before the pre-conditions were introduced. That still appears too optimistic. Resolving the Malaysian government roadblock will quite likely be a stop-gap measure, at best.

(link to my insight: Lynas: Between a Hard Place and Just Rock)

POSCO Chemtech (003670 KS) (Mkt Cap: $758mn; Liquidity: $6mn)

Posco Chemtech is to merge with POSCO ESM through a stock swap at a ratio of 1 to 0.2172865. The merger will be effective as of April 1. The merged company is planning to move from KOSDAQ to KOSPI. These proposals will be put to the vote at the upcoming AGM scheduled for March 18. 

• KOSPI 200’s re-balancing reference date is after the close of the last trading day in April and the change takes effect on the next trading day after the 2nd Thursday of June. If the KRX approves it before the end of April, Chemtech’s KOSPI inclusion will happen this June. If not, it will have to wait until next year. 
• New passive money flowing into Chemtech is estimated at ₩68bn. This represents 1.69% of market cap and 4.82% of float market cap. This is less than twice total daily trade value.

(link to Sanghyun Park‘s insight: POSCO Chemtech: Merger, Renaming, KOSPI Move & Joining KOSPI 200)

Versum Materials (VSM US) (Mkt Cap: $5.3bn; Liquidity: $75mn)

In a follow-up note John DeMasi provides an update of events, looking into VSM’s corporate governance documents, reviewing relevant landmark Delaware takeover case law, and elaborating on a possible path to control of Versum for  Merck KGaA (MRK GR). 

• Merck has now filed form DFAN14A filed with the SEC. The talking points/Q&A confirm that the VSM/Entegris Inc (ENTG US) deal caught Merck by surprise as they had not been contacted by Versum as part of any market check.
• Other important takeaways include number 7, where Merck stress (yet again) they are fully committed to pursuing their proposal; number 11, where they don’t rule out raising their price; and number 21, where they answer whether they have purchased any VSM shares with “The number of shares of Versum common stock held by Merck … does not exceed a level that would require disclosure.”
• Merck continues to speak and act like a bidder who is not going away, and its upcoming roadshow in New York with shareholders underscores its commitment to the deal, adding to the pressure on the Versum Board. 

(link to John’s insight: Versum Materials – Merck KGaA Not Going Away (Part II))

Briefly …

Bristol Myers Squibb Co (BMY US) has responded to Starboard Value’s (& other critics) opposition of its perceived overpaying for Celgene Corp (CELG US) with a comprehensive and substantive presentation, increasing the likelihood this deal gets up. (link to ANTYA Investments Inc.‘s insight: Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable)

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

JM has bought 662k shares in JS since the beginning of March, averaging 47.5% of daily volume, narrowing the simple ratio (JM/JS). JM has consistently bought back shares in JS over the years. Since December 2011, buybacks have taken place at an average price/book (for JS) of 0.75x (it is currently at 0.70x according to CapIQ) and at an average JM/JS ratio of 1.75x. The current ratio is 1.70x, bang in line with its 7+ year average. The 20-year average is 1.82x.

• Presumably the Keswick family’s long-term plan is collapsing the circularity. But given the significant costs involved – either JM privatizing JS or vice versa – for now, the family will likely opt for the circularity creep, by continuing to chip away at minority ownership as JS takes its dividends in-specie, JM acquires JS, gradually increasing the inter holdings of the two entities.
• JS is also trading “cheap”, at a 42% discount to NAV, adjusted for cross-holdings. JS is now around 25% points “cheaper” than JM (which has a discount to NAV of 17%), compared to a one-year average of ~24%.  A year ago, the % difference was 6%.
• JM has bought 1.8mn shares YTD compared to 2.5mn for the same period last year, while 4.9mn shares were acquired in 2018, compared to 7.6mn, 8.2mn, and 2.1mn in 2015-2017 respectively. The very long-term ratio is marginally in favour of JM, yet the more recent yearly average suggests it is line. JS looks cheap on a discount to NAV basis and it makes sense for JM to continue to acquire shares, favouring JS near-term. I also tilt in favour of this outcome.

(link to my insight: StubWorld: Matheson’s Strategic Buying of Strategic)

Briefly …

• Sanghyun estimates HDC Holdings (012630 KS) and its major sub HDC Engineering & Construction (294870 KS) are at 247% of σ on a 20D MA for the first time since mid Nov last year, and recommends to go long the Sub and short Holdco. (link to Sanghyun’s insight: HDC Holdco Trade: Holdco Re-Rating Should Be Transferred to Sub, Time to Long Sub/Short Holdco)
• Orion Holdings (001800 KS) /Orion Corp (271560 KS) is now above +2σ on a 20D MA and is currently at a 120D high. Sanghyun recommends it is time to go long Sub and short Holdco. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 46% compared to a the 12-year average of 48%. The parent is, though, very illiquid. (link to Sanghyun’s insight: Orion Holdco/Sub Trade: Holdco’s Price Catching up Was Overworked, Time for Sub to Catch Up)
• Youngone Holdings (009970 KS)‘s 50.5%-held sub Youngone Corp (111770 KS) accounts for 70% of NAV. On a 20D MA, they are now at 312% of σ while the current price ratio is at a 120D high. Sanghyun recommended a set-up. The parent is up 9% this week vs 12% down for the sub. The NAV discount is now out of whack – plugging Sanghyun’s numbers I get a discount to NAV of 35% vs. an average of 48%. The parent is very illiquid. (link to Sanghyun’s insight: Youngone Holdco/Sub Trade: Price Divergence Got Too Wide)

• ISS and Glass Lewis are understood to have recommended the offer for Hopewell Holdings (54 HK).

• Restaurant Brands Nz (RBD NZ) has announced “Consent has now been granted in respect of the Partial Takeover by certain subsidiaries of Yum! Brands“. The remaining condition is receipt of acceptance from 75% of shareholders. Acceptances currently total 40.68%.

• The circular for China Goldjoy (1282 HK) has been delayed to the 26 March from 5 March.
• The Yungtay Engineering (1507 TT) Tender close has been extended to April 22 – big extension. Hmmm….
• NASDAQ raised its bid for Oslo Bors VPS Holding ASA (OSLO NS) to NOK 158 and lowered its minimum acceptance condition from 90% to two-thirds. The offer period is extended to 29 March. The Long Stop is extended to 4 Mar 2020.
• Panalpina Welttransport Holding (PWTN SW) has decided to call an EGM for April 5th, and approves the One Share One Vote amendment to the Articles of Association.
• Anta-Led Group Says 94.38% of Amer Sports Oyj (AMEAS FH) shares tendered.
• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s possible MGO at $3.00/share.
• Michelin has acquired a 88% stake in Multistrada Arah Sarana Tbk (MASA IJ) and will make a mandatory offer for remaining shares.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

In this briefing:

1. Japan Post Insurance Offering – Now It Gets Real
2. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction
3. Lynas Investor Briefing – Looks Like More Capex Ahead
4. DHICO Rights Offer: Current Status & Trade Approach
5. Last Week in GER Research: Huya, Bilibili and Qutoutiao

1. Japan Post Insurance Offering – Now It Gets Real

The Background

Almost 150 years ago in 1871, a modern postal service was established in Japan by the new Meiji government. The following year, a government-sponsored nationwide network of postal services was launched. Postal money orders started in 1875 and other money and payment services started in the following two decades. In the first decade of the 20th century, domestic money transfers and pension payment receipt were launched. In 1916 postal life insurance sales began. Life annuity sales began a decade later. The Japanese postal system of teigaku deposits started in 1941. In 1949, postal operations were established as the Ministry of Posts alongside the Ministry of Electric Communications (Telecommunications), and eventually both were subsumed into the Ministry of Posts & Telecommunications. In 2001, the business of the Japanese postal system was separated into the Japan Postal Agency, a short-lived entity set up under “central government restructuring” which took place that year. In 2003, the postal system was set up as the Japan Post Corporation under a law which established it as a statutory public corporation (in England, the Bank of England, the BBC, and the Civil Aviation Authority are such companies). 

The issue of privatisation – i.e. making it responsible for its own accounts, which would take things one step further rather than being a government budget item – had long been mooted but constantly rejected because it might cost jobs and reduce services. Finally after several Lower House LDP politicians voted against Koizumi’s proposal to split the Japan Post Corporation into four parts in summer 2005 and the Upper House knocked it down, Koizumi dissolved both houses of the Diet and called a snap election saying that it was a referendum on postal privatization. He won easily and the bill was passed a month later. Things were iffy as a privatized company for a few years until after the 2011 Tohoku Earthquake, after which the government needed to find sources of extra funds to finance reconstruction. In 2012, the government announced it would sell shares to the public within three years.  

Three years ago and change, the government of Japan launched the promised public offering for Japan Post Holdings (6178 JP) (“JPH”), which acted as a holding company for Japan Post Bank (7182 JP) (“JPB”), and affiliated insurance arm Japan Post Insurance (7181 JP) (“JPI”). At the time, the triple-IPO at ¥1.4 trillion was the largest one-day offering in almost two decades, and the situation created some significant and interesting short-term trading opportunities. 

In the end, there was always going to be “overhang” because the explicit goal of the privatization policy was to get JPH’s ownership of JPB and JPI below 50%. In doing so, the bank and insurance operations could then go out and compete with other banks and insurers; currently they are to a large extent restricted from offering new products and entering new markets.

The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%. 

After the close Friday, the company announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That was 6.2% of shares outstanding. 

The dynamics of this ToSTNeT-3 buyback were discussed in Japan Post Insurance – The ToSTNeT-3 Buyback. The ToSTNeT-3 buyback was, at its basest, an interesting garbitrage trade for a limited number of traders but the resulting dynamics are important. They influence the supply in the Offering, the dynamics of demand, and may influence trading patterns into pricing. 

There are several things going on here. There is a huge offering, a buyback, earnings accretion, a float change, substantial sale to foreigners this time, and index changes. Sooner and later, it will mean a substantial move towards getting closer to 50%, and the fact that this is now investable for lots of institutional investors.

It is worth looking at these aspects independently to better understand demand for the offering as a whole. 

Read on for more.

2. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction

Japan Post Holdings (6178 JP) (JPH) plans to raise up to US$3.3bn via selling its stake in Japan Post Insurance (7181 JP) (JPI). The size of the deal has been adjusted downwards owing to the buyback conducted today morning.

I’ve covered some of the background and index weightage impact in my earlier insight: Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact. For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll run the deal through our framework and analyze the performance of some of the other sizeable deals in the recent past.

3. Lynas Investor Briefing – Looks Like More Capex Ahead

At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update. 

4. DHICO Rights Offer: Current Status & Trade Approach

This post looks at the current trading status of DHICO rights offer on each of the major movement days. It still seems that the share price should be kept high to give the Mar 25~26 arb traders an opportunity to short. This explains recent strong prices. It is presumed that shorting hasn’t been fully done. About half is still to be shorted. This suggests that strong prices should be kept a little longer. Once this is done, we will likely see a strong downward pressure until the price hits ₩6,250. This sets the floor price at ₩5,000. This will be good time to do one-way shorting.

5. Last Week in GER Research: Huya, Bilibili and Qutoutiao

Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below 

In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below. 

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

In this briefing:

1. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction
2. Lynas Investor Briefing – Looks Like More Capex Ahead
3. DHICO Rights Offer: Current Status & Trade Approach
4. Last Week in GER Research: Huya, Bilibili and Qutoutiao
5. Japan Post Insurance – The ToSTNeT-3 Buyback

1. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction

Japan Post Holdings (6178 JP) (JPH) plans to raise up to US$3.3bn via selling its stake in Japan Post Insurance (7181 JP) (JPI). The size of the deal has been adjusted downwards owing to the buyback conducted today morning.

I’ve covered some of the background and index weightage impact in my earlier insight: Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact. For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll run the deal through our framework and analyze the performance of some of the other sizeable deals in the recent past.

2. Lynas Investor Briefing – Looks Like More Capex Ahead

At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update. 

3. DHICO Rights Offer: Current Status & Trade Approach

This post looks at the current trading status of DHICO rights offer on each of the major movement days. It still seems that the share price should be kept high to give the Mar 25~26 arb traders an opportunity to short. This explains recent strong prices. It is presumed that shorting hasn’t been fully done. About half is still to be shorted. This suggests that strong prices should be kept a little longer. Once this is done, we will likely see a strong downward pressure until the price hits ₩6,250. This sets the floor price at ₩5,000. This will be good time to do one-way shorting.

4. Last Week in GER Research: Huya, Bilibili and Qutoutiao

Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below 

In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below. 

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

5. Japan Post Insurance – The ToSTNeT-3 Buyback

Japan Post Insurance (7181 JP)announced on April 4th after the close that Japan Post Holdings (6178 JP) would offer 168.1mm shares of Japan Post Insurance to the public, with another 16.9mm shares offered in an over-allotment. This is big news as it is almost 31% of the shares outstanding of Japan Post Insurance and will dramatically increase its float. 

One can say it is a big deal – ¥450bn (~US$4bn) of stock and at announcement it was equivalent to the last 477 days of traded volume. More importantly, this ALMOST like an IPO in that the placement is almost 3x the original IPO size (66mm shares) and will get a lot of foreign investor attention. 

In addition, JPI announced it would conduct a buyback for up to 50 million shares (with a spending limit of ¥100 billion) on the ToSTNeT-3 off-hours auction-like trading system on days between April 8th and April 12th. 

In its announcement of the decision to sell shares, Japan Post Holdings said that if JPI did indeed conduct the buyback, it might participate, in which case the size of the offering “may decrease.”

The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%. 

After the close Friday, JPI announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That is 6.2% of shares outstanding. 

Understanding the dynamics and the rules here AND about the offering may tell you something about how this will work.