Industrials

In this briefing:

1. DHICO Rights Offer: Arb Yields for Early Arb Traders & Trade Approach for Late Arb Traders
2. Small Cap Diary: Rajthanee Hospital, CAZ
3. New J Hutton – Exploration Report (Weeks Ending 22/03/22)
4. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)
5. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

1. DHICO Rights Offer: Arb Yields for Early Arb Traders & Trade Approach for Late Arb Traders

• As well expected, DHICO was heavily shorted yesterday, ex-rights day. We had a heavy buying movement by short-term arb traders at both local and foreign on DHICO right before ex-rights. As shown in the second table, yesterday’s shorting was mostly done by short-term traders again both local and foreign alike.
• These early arb traders had presumably bought DHICO shares at ₩8,076 on Mar 25~26. They then disposed shares at ₩6,974 yesterday. They then shorted the same amount of shares additionally at ₩6,983. As a result, at ceiling price ₩5,550 their yield is virtually fixed at 4.10%. If the offering price goes down to the bottom of ₩5,000 which is a very high possibility at this point, their yield will go up as high as 10.91%.
• For those who haven’t made early moves, there are now two options to play this event. You can either trade now and hope that subscription right price won’t hit breaking price level or wait until Apr 19~25 subscription rights period for a perfectly risk-free entry point. At the current price ₩6,800, breaking price for subscription rights is still at a comfortable level. That is, I’d make trades right now by shorting DHICO shares.

→ DHICO price just got down nearly 3%. At this reduced price, below are updated numbers for late arb traders’ arb yield. To me, it still seems we won’t be in a losing position if we make trades now. But we’d better hurry up.

2. Small Cap Diary: Rajthanee Hospital, CAZ

We visited two small-cap companies from totally different industries today. These are the key highlights.

• Rajthanee Hospital, a small hospital chain based in Ayuthya, achieved 15.7% revenue growth CAGR since 2016 on the back of its proximity to industrial estates.
• CAZ has seen its backlog double to Bt2.5bn largely due to its good relations with major clients (PTT) and partners (Samsung and other Korean chaebol), which dole out projects in the oil & gas sector to it.
• Internally, CAZ follows a sophisticated cost control method sporting bar codes and GPS to track materials and dedicated cost-control staff.

3. New J Hutton – Exploration Report (Weeks Ending 22/03/22)

• Uranium Price has fallen 7% over the past two months
• Actively looking for uranium short positions
• Provide summarised watch list
• Wisdom from Samuel Longhorne Clemens
• Yellow Cake PLC (YCA LN), Berkeley Energy (BKY AU), Cameco Corp (CCO CN), Kazatomprom Natsionalnaya At (KZAP KZ), Jangada Mines PLC (JAN LN), Europa Metals Ltd (EUZ LN), Buxton Resources (BUX AU), Musgrave Minerals (MGV AU), Myanmar Metals (MYL AU), Archer Exploration (AXE AU), Canyon Resources (CAY AU), Catalyst Metals (CYL AU), Core Exploration (CXO AU), Exore Resources (ASX: ERX), Stavely Minerals (SVY AU), Tietto Minerals Ltd (TIE AU), Horizonte Minerals PLC (HZM LN), Bellevue Gold (ASX: BGL), Allegiance Coal (AHQ AU), First Au (ASX: FAU), Base Resources (BSE AU), Breaker Resources Nl (BRB AU)  

4. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.

5. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

In this briefing:

1. Kosaido (7868 JP) TOB Extended
2. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating
3. MODEC: Add
4. Panalpina To Have EGM to Approve One Share One Vote

1. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

2. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating

This week in StubWorld …

• Select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW Ltd (8 HK)‘s stub ops.

Preceding my comments on PCCW and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

3. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

4. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

In this briefing:

1. Small Cap Diary: Rajthanee Hospital, CAZ
2. New J Hutton – Exploration Report (Weeks Ending 22/03/22)
3. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)
4. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
5. Cracking the Keyence Conundrum

1. Small Cap Diary: Rajthanee Hospital, CAZ

We visited two small-cap companies from totally different industries today. These are the key highlights.

• Rajthanee Hospital, a small hospital chain based in Ayuthya, achieved 15.7% revenue growth CAGR since 2016 on the back of its proximity to industrial estates.
• CAZ has seen its backlog double to Bt2.5bn largely due to its good relations with major clients (PTT) and partners (Samsung and other Korean chaebol), which dole out projects in the oil & gas sector to it.
• Internally, CAZ follows a sophisticated cost control method sporting bar codes and GPS to track materials and dedicated cost-control staff.

2. New J Hutton – Exploration Report (Weeks Ending 22/03/22)

• Uranium Price has fallen 7% over the past two months
• Actively looking for uranium short positions
• Provide summarised watch list
• Wisdom from Samuel Longhorne Clemens
• Yellow Cake PLC (YCA LN), Berkeley Energy (BKY AU), Cameco Corp (CCO CN), Kazatomprom Natsionalnaya At (KZAP KZ), Jangada Mines PLC (JAN LN), Europa Metals Ltd (EUZ LN), Buxton Resources (BUX AU), Musgrave Minerals (MGV AU), Myanmar Metals (MYL AU), Archer Exploration (AXE AU), Canyon Resources (CAY AU), Catalyst Metals (CYL AU), Core Exploration (CXO AU), Exore Resources (ASX: ERX), Stavely Minerals (SVY AU), Tietto Minerals Ltd (TIE AU), Horizonte Minerals PLC (HZM LN), Bellevue Gold (ASX: BGL), Allegiance Coal (AHQ AU), First Au (ASX: FAU), Base Resources (BSE AU), Breaker Resources Nl (BRB AU)  

3. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.

4. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

5. Cracking the Keyence Conundrum

Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP)  really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.

With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1 2 34

Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).

In this briefing:

1. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score
2. Lynas (LYC AU): Wesfarmers’ Unattractive Bid
3. Fujitec (6406) Value Buy
4. DHICO Rights Offer: Ceiling Price at ₩5,550 & Today Is Last Day Before Ex-Rights
5. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

1. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score

• Our proprietary corporate governance scoring system now covers over 1,800 stocks including 70 Electricity, Alternative Energy, Distribution, Water and Utilities companies in Emerging Markets.
• This report includes the Energy and Utilities names currently under coverage.
  The lowest score in this group is Korea Gas (44/100).
• We have found that scores below 50/100 indicate poor corporate governance and higher risk of fraud.
• Korean companies often have lower scores as a result of a lack of board independence and convoluted corporate structure.
• Of the groupings presented here Alternative Energy has the highest average score at 64/100.
  We welcome requests from clients of names they want to see added to the universe.

2. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.

3. Fujitec (6406) Value Buy

The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.

4. DHICO Rights Offer: Ceiling Price at ₩5,550 & Today Is Last Day Before Ex-Rights

• DHICO rights offer 1st round pricing was fixed at ₩5,550. This ₩5,550 will serve as the ceiling. It is nearly guaranteed that the final offer price will be fixed somewhere between ₩5,000 and ₩5,550. It can not go lower than the face value ₩5,000.
• Today (Mar 26) is the last day to get subscription rights. Subscription rights will be then tradable on Apr 19~25. The 4 bookrunners will buy all forfeited shares at a 15% discount to final offering price. There is no cancellation risk.
• Local arb traders made their move yesterday. Foreign arb traders entered as well. Past tendency shows buying earlier would pay off more handsomely than waiting longer. DHICO’s fundamentals isn’t showing any positive sign yet. Deal structure isn’t helping improve street sentiments either. This event needs a lot of arb traders to hit the target. This is another relief point for those making early trades.

5. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

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

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

In this insight, we highlight the WH Group, which led the inflows last week. 

In this briefing:

1. New J Hutton – Exploration Report (Weeks Ending 22/03/22)
2. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)
3. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
4. Cracking the Keyence Conundrum
5. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score

1. New J Hutton – Exploration Report (Weeks Ending 22/03/22)

• Uranium Price has fallen 7% over the past two months
• Actively looking for uranium short positions
• Provide summarised watch list
• Wisdom from Samuel Longhorne Clemens
• Yellow Cake PLC (YCA LN), Berkeley Energy (BKY AU), Cameco Corp (CCO CN), Kazatomprom Natsionalnaya At (KZAP KZ), Jangada Mines PLC (JAN LN), Europa Metals Ltd (EUZ LN), Buxton Resources (BUX AU), Musgrave Minerals (MGV AU), Myanmar Metals (MYL AU), Archer Exploration (AXE AU), Canyon Resources (CAY AU), Catalyst Metals (CYL AU), Core Exploration (CXO AU), Exore Resources (ASX: ERX), Stavely Minerals (SVY AU), Tietto Minerals Ltd (TIE AU), Horizonte Minerals PLC (HZM LN), Bellevue Gold (ASX: BGL), Allegiance Coal (AHQ AU), First Au (ASX: FAU), Base Resources (BSE AU), Breaker Resources Nl (BRB AU)  

2. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.

3. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

4. Cracking the Keyence Conundrum

Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP)  really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.

With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1 2 34

Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).

5. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score

• Our proprietary corporate governance scoring system now covers over 1,800 stocks including 70 Electricity, Alternative Energy, Distribution, Water and Utilities companies in Emerging Markets.
• This report includes the Energy and Utilities names currently under coverage.
  The lowest score in this group is Korea Gas (44/100).
• We have found that scores below 50/100 indicate poor corporate governance and higher risk of fraud.
• Korean companies often have lower scores as a result of a lack of board independence and convoluted corporate structure.
• Of the groupings presented here Alternative Energy has the highest average score at 64/100.
  We welcome requests from clients of names they want to see added to the universe.

In this briefing:

1. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating
2. MODEC: Add
3. Panalpina To Have EGM to Approve One Share One Vote

1. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating

This week in StubWorld …

• Select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW Ltd (8 HK)‘s stub ops.

Preceding my comments on PCCW and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

2. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

3. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

In this briefing:

1. MODEC: Add
2. Panalpina To Have EGM to Approve One Share One Vote

1. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

2. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

In this briefing:

1. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)
2. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
3. Cracking the Keyence Conundrum
4. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score
5. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

1. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.

2. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

3. Cracking the Keyence Conundrum

Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP)  really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.

With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1 2 34

Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).

4. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score

• Our proprietary corporate governance scoring system now covers over 1,800 stocks including 70 Electricity, Alternative Energy, Distribution, Water and Utilities companies in Emerging Markets.
• This report includes the Energy and Utilities names currently under coverage.
  The lowest score in this group is Korea Gas (44/100).
• We have found that scores below 50/100 indicate poor corporate governance and higher risk of fraud.
• Korean companies often have lower scores as a result of a lack of board independence and convoluted corporate structure.
• Of the groupings presented here Alternative Energy has the highest average score at 64/100.
  We welcome requests from clients of names they want to see added to the universe.

5. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.

In this briefing:

1. MODEC: Add
2. Panalpina To Have EGM to Approve One Share One Vote
3. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

1. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

2. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

3. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

• DSME has this ₩2.3tril worth of CBs that carry a 30 year maturity. Korea Eximbank is the holder. HHI wants no change. Eximbank wants out as soon as possible. Current price of ₩32,600 is nearly a 20% discount to the conversion price of ₩40,350. It’d be still better for Eximbank to do conversion/sale even at this price. This is 27.54%. It will create huge overhang.
• HHI should be given much higher priority than DSME even when they are under the same roof. DSME acquisition is supposed to help HHI first, not the other way around. HHI shouldn’t be much incentivized to help turn around DSME in the short-term. Not only that, pressing down DSME price would probably be the only way for HHI to prevent Eximbank’s stake dumping.
• In a longer time horizon, things would depend on the outlook of the entire shipbuilding sector. To minimize risks, I’d go for long/short with HHI. What should be at least clear at this point is that HHI should be outperforming DSME in whatever fundamentals situations we are dealing with.

In this briefing:

1. Panalpina To Have EGM to Approve One Share One Vote
2. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

1. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

2. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

• DSME has this ₩2.3tril worth of CBs that carry a 30 year maturity. Korea Eximbank is the holder. HHI wants no change. Eximbank wants out as soon as possible. Current price of ₩32,600 is nearly a 20% discount to the conversion price of ₩40,350. It’d be still better for Eximbank to do conversion/sale even at this price. This is 27.54%. It will create huge overhang.
• HHI should be given much higher priority than DSME even when they are under the same roof. DSME acquisition is supposed to help HHI first, not the other way around. HHI shouldn’t be much incentivized to help turn around DSME in the short-term. Not only that, pressing down DSME price would probably be the only way for HHI to prevent Eximbank’s stake dumping.
• In a longer time horizon, things would depend on the outlook of the entire shipbuilding sector. To minimize risks, I’d go for long/short with HHI. What should be at least clear at this point is that HHI should be outperforming DSME in whatever fundamentals situations we are dealing with.