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In this briefing:
- U.S. Equity Strategy: Be Long & Carry On
- Japan Display: Deal to Raise JPY110bn from China-Taiwan Consortium and Japanese Investment Fund
- China Three Gorges’ Rebuttable Presumption
- Haitian: Trade War Fears Fade, Full Stream Ahead
- Yinson Tenders a Lifeboat for Ezion
1. 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
2. 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.
3. 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.
4. 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.
5. Yinson Tenders a Lifeboat for Ezion
Long-suffering lifeboat market play Ezion Holdings (EZI SP) has received a bail-out from Malaysia’s Yinson Holdings (YNS MK).
Yinson’s proposal is two-fold:
- A conditional debt conversion agreement to capitalise all of the “relevant debt” of US$916mn via the allotment and issue of up to approximately 22,573,570,909 new ordinary shares of Ezion at an issue price of S$0.055/share (27.9% premium to last close).
- A conditional option agreement for the proposed grant by Ezion of 3,360,495,867 non-listed and transferable share options to Yinson at the exercise price of S$0.0605 per option Share.
This shareholder structure will take the following shape, with Yinson holding 85.9% of shares out after the conversion and 87.5% after both the conversion and the exercise of the share options.
Current | After | After Conversion | ||||
Current shares out | 3,728 | 100% | 3,728 | 14% | 3,728 | 13% |
Debt conversion | 0% | 22,574 | 86% | 22,574 | 76% | |
Option shares | 0% | 0% | 3,360 | 11% | ||
Total shares (mn) | 3,728 | 26,302 | 29,662 |
However … as per the more detailed Bursa announcement:
It is the intention of YEPL (wholly-owned sub of Yinson) to acquire up to US$916mn of the Relevant Debts for a consideration to be agreed with the Designated Lenders. Tentatively, YHB (Yinson) expected its cash outlay shall be in the region of USD200mn and some EHL (Ezion) Shares that will give YEPL a shareholding of not less than 70% in EHL at the point of the completion of the Proposed Debt conversion and Subscription. In any event, assuming all convertible securities of EHL are converted, YHB expects its eventual shareholding in EHL shall be a controlling stake of at least 51%.
Ezion is also in negotiation with the major secured lenders to restructure its existing debts which would result in the conversion of certain debts to redeemable convertible preferences shares to be issued by Ezion.
As this is effectively a hybrid takeover, there exist a number of conditions required to complete this proposal. Of importance is the waiver from the Securities Industry Council of Singapore for Yinson not to make a mandatory general offer for Ezion under Rule 14.1 of the Takeover Code, as the share subscription takes Yinson’s stake >30%.
Conditions of the Debt Conversion/Proposed Subscription and Share Options | |
For the Debt Conversion & Subscription | |
Conditions | Satisfactory due diligence by Yinson. |
Waiver from SIC not to make a MGO. | |
Independent shareholders of Ezion approving the whitewash waiver. Simple majority vote. | |
The approval by Ezion shareholders for the allotment and issue of the subscription shares. Simple majority vote. | |
Other | The long stop date is 6 months from the conditional debt conversion agreement (31 March 2019). |
For the Share Options | |
Conditions | The approval by Ezion shareholders for the option shares. Simple majority vote. |
Other | The long stop date is 6 months from the conditional option agreement (31 March 2019). |
The exercise period is five years from the issuance of the options. | |
Gross proceeds will be S$203mn assuming full exercise. To be applied to business expansion or new business opportunities | |
Inter-conditionality | The grant of options is conditional upon and shall take place simultaneously with the debt conversion and subscription |
On Ezion
Ezion develops, owns, and charters offshore assets to support offshore energy markets, via three key segments:
- Lifeboats/liftboats – these are self-propelled rigs involved in the production and maintenance of the O&G and windfarm industry. This segment accounted for 57.9% of revenue in FY18.
- Jack-up rigs – engaged in non-self propelled rigs involved in the production and maintenance of the O&G and windfarm industry. The segment accounted for 34.1% of revenue in FY18.
- And offshore support logistic services, accounting for 7.5% of revenue in FYT18.
Ezion is primarily Asian focused with revenue split between Singapore, India, and the rest of Asia as to 8%, 5.3% and 54%. The Middle East and Africa account for 15.6% and 15.2% respectively.
Fundamentals
US$mn | FY16 | FY17 | FY18 |
Revenues | |||
Liftboats | 127 | 96 | 69 |
Jack-Up Rigs | 158 | 76 | 41 |
Offshore Support Logistic Services | 33 | 20 | 9 |
Others | 1 | 1 | 1 |
Total Revenue | 318 | 193 | 119 |
EBITDA | |||
Liftboats | 77 | 68 | 21 |
Jack-Up Rigs | 112 | 60 | 16 |
Offshore Support Logistic Services | 22 | 16 | (1) |
Others | 1 | 1 | 1 |
Total EBITDA | 212 | 144 | 37 |
NPBT | |||
Liftboats | 62 | (16) | (54) |
Jack-Up Rigs | (54) | (745) | (297) |
Offshore Support Logistic Services | (13) | (156) | (53) |
Others | 1 | 1 | 7 |
Unallocated Expenses | (24) | (82) | 94 |
Total NPBT | (29) | (999) | (303) |
Assets | |||
Liftboats | 811 | 772 | 807 |
Jack-Up Rigs | 1,382 | 556 | 226 |
Offshore Support Logistic Services | 415 | 315 | 119 |
Others | 79 | 81 | 32 |
Unallocated Assets | 165 | 70 | 108 |
Total assets | 2,851 | 1,794 | 1,291 |
Total equity | 1,315 | 305 | (255) |
Net debt | 1,282 | 1,358 | 1,358 |
- Revenue declined by US$125mn in FY17 due to a reduction in charter rates and delays in re-deployment of the Ezion’s liftboats due to working capital constraints. The loss before tax was exacerbated by impairment losses totalling US$897mn.
- Revenue declined by US$74mn in FY17 due to a drop in the utilisation rates of liftboats and jack-up rigs. FY18 also saw an increase in impairments loses of US$84.5mn, while loses in associate and jointly controlled entities increased to US$39mn in FY18 from US$16mn in FY17.
Effect on NTA from the conversion/options
Assuming the subscription and options were completed on 31 December 2018, the effects of the Ezion’s NTL/NTA per share would be as follows:
Before subscription | After subscription | |
(NTL)/NTA (US$mn) | (254.7) | 811.2 |
(NTL)/NTA per share (US$) | (0.0687) | 0.0274 |
Peer Comparisons
Trading Comps | Mkt Cap (SGDm) | PER | PBV | EV/EBITDA |
Yinson Holdings Berhad | 1,647 | 21.7x | 1.5x | 9.1x |
ASL Marine Holdings Ltd. | 33 | NM | 0.1x | 15.3x |
Dyna-Mac Holdings Limited | 105 | 69.6x | 1.0x | 10.5x |
Mermaid Maritime Public Company | 113 | NM | 0.3x | -10.3x |
Nam Cheong Limited | 57 | 0.1x | NM | 11.1x |
China Oilfield Services Limited | 7,230 | 1067.0x | 1.0x | 11.2x |
Aban Offshore Limited | 67 | NM | 17.7x | 27.2x |
Max | 7,230 | 1067.0x | 17.7x | 27.2x |
Median | 105 | 45.7x | 1.0x | 11.1x |
Min | 33 | 0.1x | 0.1x | -10.3x |
Mean | 1,322 | 289.6x | 3.6x | 10.6x |
Ezion Holdings Limited | Market Cap (SGDm) | PER | PBV | EV/EBITDA |
Current Price SGD 0.04 | 160 | NM | NM | -5.8x |
Substantial Shareholders of Ezion
Shares (mn) | % | |
Chan Fooi Peng | 184.7 | 5.0 |
Chew Thiam Peng (CEO) | 190.3 | 5.1 |
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