Industrials

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
3. Weekly Oil Views: Crude Rises to 3-Month High but Further Upside May Be Limited
4. Hopewell’s Egregiously Bad Offer, But What Can You Do?
5. Doosan E&C Rights Offer: Conditions & Timetable

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.

3. Weekly Oil Views: Crude Rises to 3-Month High but Further Upside May Be Limited

Another week of US-China negotiations and another big boost to market sentiment. Stock markets as well as crude rallied last week on the back of news from Washington that the US and China were preparing to sign a framework deal in the form of several MoUs covering trade and structural issues.

But there are other economic concerns around the globe, and a preliminary deal between the US and China is not going to curb all the headwinds. Further upside to crude may also be limited because much of the anticipated rapprochement between the two countries has already been factored in. WTI prices stabilising well above the $50/barrel threshold are also likely to support strong growth in US production, which hit the 12 million b/d mark last week.

Nonetheless, there are factors on the supply front that could trigger a spike beyond $70/barrel for Brent, especially if combined with a turnaround in economic and oil demand growth expectations.

If that happens, we believe the Saudis will ease up on over-compliance with their own production cuts, either voluntarily or under renewed pressure from US President Donald Trump.

4. Hopewell’s Egregiously Bad Offer, But What Can You Do?

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  The IFA (China Tonghai Capital) considers the $38.80/share Offer to be fair & reasonable. The Scheme is conditional on ≥75% for, ≤10% against from disinterested shareholders. As Hopewell is HK-incorporated, there is no “head count ” test.  The full timetable is as follows:

After hearing conflicting opinions on what constitutes a blocking stake, a chat with the banker confirmed the blocking stake, as per the Companies Ordinance, is tied to 63.07% of shares out (i.e. Scheme shareholders – see page 95); whereas the Takeovers Code is tied to 59.42% of shares out. Effectively there are two assessments on the blocking stake and the more stringent (the 59.42% out in this case) prevails. 

With the Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years (the Glorious Property (845 HK) offer, which incidentally was voted down), the IFA creatively argues that extenuating factors such as the premium to historical price needs to also be taken into account. Hardly original, but that is where investors must decide whether this is as good as it’s going to get – given the Wu family’s control, there will not be a competing offer – or to hold out for a superior price longer term. This is a final offer and it will not be increased.

What the IFA fails to discuss is that the widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.

Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. And that is the disingenuous conclusion from the IFA that the premium to last close and with reference to historical pricing, is in effect the overriding reason to conclude the Offer is reasonable. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.

A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ).

Trading at a wide gross/annualised return of 7%/37.5%, reflecting the risk to completion, and the significant downside should the scheme be voted down. Tough one – the premium to last close and with reference to the 10-year price performance, should be sufficient to get it over the line, and the basis for this “bullish” insight. But only for the brave.

5. Doosan E&C Rights Offer: Conditions & Timetable

• Doosan E&C’s rights offer is pretty much in line with the street’s initial expectation. They raise an estimated ₩420bil at an offer price of ₩1,255. The recently amended KRX rule allows an issuer to freely set an offer price. They set it at ₩1,255 based on the Feb 13~20 prices with a 15% discount.
• Final price will be fixed on Apr 30. Whichever higher of ₩1,255 or Apr 26~30 VWAP at a 40% discount will be a final offering price. So, offering price must be at least ₩1,255. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C stake. With a 20% oversubscription, nearly ₩300bil will likely come from DHICO. This is like DHICO is helping E&C at an even heftier price. This is why the market is being much softer on E&C relative to DHICO.

In this briefing:

1. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach
2. Weekly Oil Views: Crude Rises to 3-Month High but Further Upside May Be Limited
3. Hopewell’s Egregiously Bad Offer, But What Can You Do?
4. Doosan E&C Rights Offer: Conditions & Timetable
5. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable

1. 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.

2. Weekly Oil Views: Crude Rises to 3-Month High but Further Upside May Be Limited

Another week of US-China negotiations and another big boost to market sentiment. Stock markets as well as crude rallied last week on the back of news from Washington that the US and China were preparing to sign a framework deal in the form of several MoUs covering trade and structural issues.

But there are other economic concerns around the globe, and a preliminary deal between the US and China is not going to curb all the headwinds. Further upside to crude may also be limited because much of the anticipated rapprochement between the two countries has already been factored in. WTI prices stabilising well above the $50/barrel threshold are also likely to support strong growth in US production, which hit the 12 million b/d mark last week.

Nonetheless, there are factors on the supply front that could trigger a spike beyond $70/barrel for Brent, especially if combined with a turnaround in economic and oil demand growth expectations.

If that happens, we believe the Saudis will ease up on over-compliance with their own production cuts, either voluntarily or under renewed pressure from US President Donald Trump.

3. Hopewell’s Egregiously Bad Offer, But What Can You Do?

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  The IFA (China Tonghai Capital) considers the $38.80/share Offer to be fair & reasonable. The Scheme is conditional on ≥75% for, ≤10% against from disinterested shareholders. As Hopewell is HK-incorporated, there is no “head count ” test.  The full timetable is as follows:

After hearing conflicting opinions on what constitutes a blocking stake, a chat with the banker confirmed the blocking stake, as per the Companies Ordinance, is tied to 63.07% of shares out (i.e. Scheme shareholders – see page 95); whereas the Takeovers Code is tied to 59.42% of shares out. Effectively there are two assessments on the blocking stake and the more stringent (the 59.42% out in this case) prevails. 

With the Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years (the Glorious Property (845 HK) offer, which incidentally was voted down), the IFA creatively argues that extenuating factors such as the premium to historical price needs to also be taken into account. Hardly original, but that is where investors must decide whether this is as good as it’s going to get – given the Wu family’s control, there will not be a competing offer – or to hold out for a superior price longer term. This is a final offer and it will not be increased.

What the IFA fails to discuss is that the widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.

Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. And that is the disingenuous conclusion from the IFA that the premium to last close and with reference to historical pricing, is in effect the overriding reason to conclude the Offer is reasonable. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.

A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ).

Trading at a wide gross/annualised return of 7%/37.5%, reflecting the risk to completion, and the significant downside should the scheme be voted down. Tough one – the premium to last close and with reference to the 10-year price performance, should be sufficient to get it over the line, and the basis for this “bullish” insight. But only for the brave.

4. Doosan E&C Rights Offer: Conditions & Timetable

• Doosan E&C’s rights offer is pretty much in line with the street’s initial expectation. They raise an estimated ₩420bil at an offer price of ₩1,255. The recently amended KRX rule allows an issuer to freely set an offer price. They set it at ₩1,255 based on the Feb 13~20 prices with a 15% discount.
• Final price will be fixed on Apr 30. Whichever higher of ₩1,255 or Apr 26~30 VWAP at a 40% discount will be a final offering price. So, offering price must be at least ₩1,255. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C stake. With a 20% oversubscription, nearly ₩300bil will likely come from DHICO. This is like DHICO is helping E&C at an even heftier price. This is why the market is being much softer on E&C relative to DHICO.

5. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable

• This is a total ₩608.4bil rights offer. This is larger than initially expected. A projected ₩543bil will be raised through common share issuance. The other ₩65bil will be raised in the form of RCPS. This is a combined 72.56% capital increase with a 42.05% share dilution.
• 80% will be allocated to the stockholders. Per share allocation for the stockholders is 0.58. Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights will be listed and trade on Apr 19~25 only for Common. May 2 is for final pricing. New Common shares will be listed on May 29.
• Offering size is much larger than initially expected. In the short-term, DHICO shares will likely take a harsh beating. At this point, we’d better stay away from it for now.

In this briefing:

1. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short
2. A Trading Strategy for EcoproBM Post IPO
3. Delta Thailand’s Tender Offer: Updated Timetable
4. Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation
5. Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime

1. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

Central banks around the world have signaled their willingness to return back to the Easy Money Playbook in their quest to re-stimulate economic growth and inflation. This significant shift in market expectations has been the key factor driving the recent rally in Gold (GOLD COMDTY) prices, and it appears to have legs.  As such, we are closing our Spdr Gold Shares (GLD US) short.

2. A Trading Strategy for EcoproBM Post IPO

• In this report, we provide a trading strategy for Ecopro BM Co Ltd (247540 KS) IPO, which is expected to start trading on March 5th. The IPO price has been determined at 48,000 won, which is 19% higher than the mid-point of the original IPO price range of 37,500 won to 42,900 won. The institutional investors’ demand for the Ecopro BM IPO was extremely strong at 988 to 1. 
• In our previous report Ecopro BM IPO: Valuation Analysis, we proposed the base case to high end of the company’s value to be between 56,000 won and 67,800 won. Given the enormous institutional demand for this IPO, it appears that our base case valuation (56,000 won), which is 17% higher than the IPO price, may be too conservative. 
• A more likely scenario now is that the stock reaches about 65,000 won to 70,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again. 

3. Delta Thailand’s Tender Offer: Updated Timetable

With Form 247-3 (Intention to Make a Tender Offer) and the FY18 dividend  (Bt2.30/share) for Delta Electronics Thai (DELTA TB) having been announced, this insight briefly provides an updated indicative timetable for investors.

The next key date is the submission of Form 247-4, the Tender Offer for Securities, which will provide full details of the Offer.

This above indicative timetable assumes a conditional offer based on a minimum acceptance level of at least 50%. Payment under the offer may indeed be earlier, as explained below, which also ties in with a shareholders’ right to revoke shares tendered. 

In addition, investors should not tender once the offer opens – assuming the tender period commences on the 25 February – but wait until their shares are on the registry as at 4 March to receive the FY18 dividend.

Currently trading at a 2.2%/22% gross/annualised spread. Bear in mind the dividend is subject to 10% tax.

4. Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation

• There are still two schools of thought on the HMG restructuring. Glovis/Mobis merged entity as a holdco is the one. Only Glovis as a holdco with Mobis→HM→Kia below is the other. Since late 3Q last year, the local street started speculating on the latter.
• This has pushed up Glovis price relative to Mobis. They are now near 200% of σ in favor of Glovis on a 20D MA. Glovis made a 2+σ jump upwardly just in 4 trading days. On a 120D horizon, they are almost at the 120D high.
• At this point, neither is a hassle free way. In the latter, Glovis has to come up with nearly ₩2tril to buy Kia’s Mobis stake, highly likely through new debts. This financial burden wouldn’t be light on Glovis. Glovis may also be facing a risk of forceful holdco conversion. This will create a serious headache with Kia as a grand grand son subsidiary.
• The current speculation pushing up Glovis relative to Mobis has yet to be sufficiently substantiated/justified. This suggests Glovis is being overbought on a speculation that will very likely be short-lived. I expect there will soon be a mean reversion for Mobis. I’d go long Mobis and short Glovis at this point.

5. Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime

We have been struck by the degree of underperformance of the construction machinery names despite strong earnings performance. While the cyclical nature of the names makes judging performance purely on earnings results (or even the outlook) hazardous, in this case we believe the market has been premature and excessive in its derating of these stocks which have sold off to similar levels as the WFE names such as Tokyo Electron (8035 JP)  and Robotics names such as Fanuc Corp (6954 JP).

While it is possible that Komatsu Ltd (6301 JP), Hitachi Construction Machinery (6305 JP) and Caterpillar Inc (CAT US) have sold off partly due to their China exposure, it needs to be emphasised that 1) these companies are no longer heavily dependent on China and revenue exposure is 12% for HCM, 10% for CAT and 7% for Komatsu, and 2) while the Chinese market at  about 60k excavators is probably close to the top of its cycle, it is not a bubble like in 2010 when it 111k units and thus a collapse in demand is unlikely (though a decline is).

As the table below notes, earnings estimates for the construction machinery companies have only tapered marginally from their peaks, and while find the forecasts for continued growth into 2020 somewhat optimistic the resilience of mining demand means we are disinclined to dismiss them out of hand. On the other hand estimates for WFE and Robot names have dropped significantly, but despite this, share price performance is similar for all three categories of stocks. We discuss this stark discrepancy further below.

In this briefing:

1. Weekly Oil Views: Crude Rises to 3-Month High but Further Upside May Be Limited
2. Hopewell’s Egregiously Bad Offer, But What Can You Do?
3. Doosan E&C Rights Offer: Conditions & Timetable
4. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable
5. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

1. Weekly Oil Views: Crude Rises to 3-Month High but Further Upside May Be Limited

Another week of US-China negotiations and another big boost to market sentiment. Stock markets as well as crude rallied last week on the back of news from Washington that the US and China were preparing to sign a framework deal in the form of several MoUs covering trade and structural issues.

But there are other economic concerns around the globe, and a preliminary deal between the US and China is not going to curb all the headwinds. Further upside to crude may also be limited because much of the anticipated rapprochement between the two countries has already been factored in. WTI prices stabilising well above the $50/barrel threshold are also likely to support strong growth in US production, which hit the 12 million b/d mark last week.

Nonetheless, there are factors on the supply front that could trigger a spike beyond $70/barrel for Brent, especially if combined with a turnaround in economic and oil demand growth expectations.

If that happens, we believe the Saudis will ease up on over-compliance with their own production cuts, either voluntarily or under renewed pressure from US President Donald Trump.

2. Hopewell’s Egregiously Bad Offer, But What Can You Do?

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  The IFA (China Tonghai Capital) considers the $38.80/share Offer to be fair & reasonable. The Scheme is conditional on ≥75% for, ≤10% against from disinterested shareholders. As Hopewell is HK-incorporated, there is no “head count ” test.  The full timetable is as follows:

After hearing conflicting opinions on what constitutes a blocking stake, a chat with the banker confirmed the blocking stake, as per the Companies Ordinance, is tied to 63.07% of shares out (i.e. Scheme shareholders – see page 95); whereas the Takeovers Code is tied to 59.42% of shares out. Effectively there are two assessments on the blocking stake and the more stringent (the 59.42% out in this case) prevails. 

With the Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years (the Glorious Property (845 HK) offer, which incidentally was voted down), the IFA creatively argues that extenuating factors such as the premium to historical price needs to also be taken into account. Hardly original, but that is where investors must decide whether this is as good as it’s going to get – given the Wu family’s control, there will not be a competing offer – or to hold out for a superior price longer term. This is a final offer and it will not be increased.

What the IFA fails to discuss is that the widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.

Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. And that is the disingenuous conclusion from the IFA that the premium to last close and with reference to historical pricing, is in effect the overriding reason to conclude the Offer is reasonable. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.

A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ).

Trading at a wide gross/annualised return of 7%/37.5%, reflecting the risk to completion, and the significant downside should the scheme be voted down. Tough one – the premium to last close and with reference to the 10-year price performance, should be sufficient to get it over the line, and the basis for this “bullish” insight. But only for the brave.

3. Doosan E&C Rights Offer: Conditions & Timetable

• Doosan E&C’s rights offer is pretty much in line with the street’s initial expectation. They raise an estimated ₩420bil at an offer price of ₩1,255. The recently amended KRX rule allows an issuer to freely set an offer price. They set it at ₩1,255 based on the Feb 13~20 prices with a 15% discount.
• Final price will be fixed on Apr 30. Whichever higher of ₩1,255 or Apr 26~30 VWAP at a 40% discount will be a final offering price. So, offering price must be at least ₩1,255. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C stake. With a 20% oversubscription, nearly ₩300bil will likely come from DHICO. This is like DHICO is helping E&C at an even heftier price. This is why the market is being much softer on E&C relative to DHICO.

4. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable

• This is a total ₩608.4bil rights offer. This is larger than initially expected. A projected ₩543bil will be raised through common share issuance. The other ₩65bil will be raised in the form of RCPS. This is a combined 72.56% capital increase with a 42.05% share dilution.
• 80% will be allocated to the stockholders. Per share allocation for the stockholders is 0.58. Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights will be listed and trade on Apr 19~25 only for Common. May 2 is for final pricing. New Common shares will be listed on May 29.
• Offering size is much larger than initially expected. In the short-term, DHICO shares will likely take a harsh beating. At this point, we’d better stay away from it for now.

5. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

In this briefing:

1. Hopewell’s Egregiously Bad Offer, But What Can You Do?
2. Doosan E&C Rights Offer: Conditions & Timetable
3. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable
4. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support
5. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

1. Hopewell’s Egregiously Bad Offer, But What Can You Do?

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  The IFA (China Tonghai Capital) considers the $38.80/share Offer to be fair & reasonable. The Scheme is conditional on ≥75% for, ≤10% against from disinterested shareholders. As Hopewell is HK-incorporated, there is no “head count ” test.  The full timetable is as follows:

After hearing conflicting opinions on what constitutes a blocking stake, a chat with the banker confirmed the blocking stake, as per the Companies Ordinance, is tied to 63.07% of shares out (i.e. Scheme shareholders – see page 95); whereas the Takeovers Code is tied to 59.42% of shares out. Effectively there are two assessments on the blocking stake and the more stringent (the 59.42% out in this case) prevails. 

With the Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years (the Glorious Property (845 HK) offer, which incidentally was voted down), the IFA creatively argues that extenuating factors such as the premium to historical price needs to also be taken into account. Hardly original, but that is where investors must decide whether this is as good as it’s going to get – given the Wu family’s control, there will not be a competing offer – or to hold out for a superior price longer term. This is a final offer and it will not be increased.

What the IFA fails to discuss is that the widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.

Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. And that is the disingenuous conclusion from the IFA that the premium to last close and with reference to historical pricing, is in effect the overriding reason to conclude the Offer is reasonable. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.

A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ).

Trading at a wide gross/annualised return of 7%/37.5%, reflecting the risk to completion, and the significant downside should the scheme be voted down. Tough one – the premium to last close and with reference to the 10-year price performance, should be sufficient to get it over the line, and the basis for this “bullish” insight. But only for the brave.

2. Doosan E&C Rights Offer: Conditions & Timetable

• Doosan E&C’s rights offer is pretty much in line with the street’s initial expectation. They raise an estimated ₩420bil at an offer price of ₩1,255. The recently amended KRX rule allows an issuer to freely set an offer price. They set it at ₩1,255 based on the Feb 13~20 prices with a 15% discount.
• Final price will be fixed on Apr 30. Whichever higher of ₩1,255 or Apr 26~30 VWAP at a 40% discount will be a final offering price. So, offering price must be at least ₩1,255. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C stake. With a 20% oversubscription, nearly ₩300bil will likely come from DHICO. This is like DHICO is helping E&C at an even heftier price. This is why the market is being much softer on E&C relative to DHICO.

3. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable

• This is a total ₩608.4bil rights offer. This is larger than initially expected. A projected ₩543bil will be raised through common share issuance. The other ₩65bil will be raised in the form of RCPS. This is a combined 72.56% capital increase with a 42.05% share dilution.
• 80% will be allocated to the stockholders. Per share allocation for the stockholders is 0.58. Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights will be listed and trade on Apr 19~25 only for Common. May 2 is for final pricing. New Common shares will be listed on May 29.
• Offering size is much larger than initially expected. In the short-term, DHICO shares will likely take a harsh beating. At this point, we’d better stay away from it for now.

4. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

5. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

Central banks around the world have signaled their willingness to return back to the Easy Money Playbook in their quest to re-stimulate economic growth and inflation. This significant shift in market expectations has been the key factor driving the recent rally in Gold (GOLD COMDTY) prices, and it appears to have legs.  As such, we are closing our Spdr Gold Shares (GLD US) short.

In this briefing:

1. Doosan E&C Rights Offer: Conditions & Timetable
2. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable
3. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support
4. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short
5. A Trading Strategy for EcoproBM Post IPO

1. Doosan E&C Rights Offer: Conditions & Timetable

• Doosan E&C’s rights offer is pretty much in line with the street’s initial expectation. They raise an estimated ₩420bil at an offer price of ₩1,255. The recently amended KRX rule allows an issuer to freely set an offer price. They set it at ₩1,255 based on the Feb 13~20 prices with a 15% discount.
• Final price will be fixed on Apr 30. Whichever higher of ₩1,255 or Apr 26~30 VWAP at a 40% discount will be a final offering price. So, offering price must be at least ₩1,255. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C stake. With a 20% oversubscription, nearly ₩300bil will likely come from DHICO. This is like DHICO is helping E&C at an even heftier price. This is why the market is being much softer on E&C relative to DHICO.

2. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable

• This is a total ₩608.4bil rights offer. This is larger than initially expected. A projected ₩543bil will be raised through common share issuance. The other ₩65bil will be raised in the form of RCPS. This is a combined 72.56% capital increase with a 42.05% share dilution.
• 80% will be allocated to the stockholders. Per share allocation for the stockholders is 0.58. Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights will be listed and trade on Apr 19~25 only for Common. May 2 is for final pricing. New Common shares will be listed on May 29.
• Offering size is much larger than initially expected. In the short-term, DHICO shares will likely take a harsh beating. At this point, we’d better stay away from it for now.

3. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

4. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

Central banks around the world have signaled their willingness to return back to the Easy Money Playbook in their quest to re-stimulate economic growth and inflation. This significant shift in market expectations has been the key factor driving the recent rally in Gold (GOLD COMDTY) prices, and it appears to have legs.  As such, we are closing our Spdr Gold Shares (GLD US) short.

5. A Trading Strategy for EcoproBM Post IPO

• In this report, we provide a trading strategy for Ecopro BM Co Ltd (247540 KS) IPO, which is expected to start trading on March 5th. The IPO price has been determined at 48,000 won, which is 19% higher than the mid-point of the original IPO price range of 37,500 won to 42,900 won. The institutional investors’ demand for the Ecopro BM IPO was extremely strong at 988 to 1. 
• In our previous report Ecopro BM IPO: Valuation Analysis, we proposed the base case to high end of the company’s value to be between 56,000 won and 67,800 won. Given the enormous institutional demand for this IPO, it appears that our base case valuation (56,000 won), which is 17% higher than the IPO price, may be too conservative. 
• A more likely scenario now is that the stock reaches about 65,000 won to 70,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again. 

In this briefing:

1. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable
2. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support
3. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short
4. A Trading Strategy for EcoproBM Post IPO
5. Delta Thailand’s Tender Offer: Updated Timetable

1. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable

• This is a total ₩608.4bil rights offer. This is larger than initially expected. A projected ₩543bil will be raised through common share issuance. The other ₩65bil will be raised in the form of RCPS. This is a combined 72.56% capital increase with a 42.05% share dilution.
• 80% will be allocated to the stockholders. Per share allocation for the stockholders is 0.58. Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights will be listed and trade on Apr 19~25 only for Common. May 2 is for final pricing. New Common shares will be listed on May 29.
• Offering size is much larger than initially expected. In the short-term, DHICO shares will likely take a harsh beating. At this point, we’d better stay away from it for now.

2. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

3. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

Central banks around the world have signaled their willingness to return back to the Easy Money Playbook in their quest to re-stimulate economic growth and inflation. This significant shift in market expectations has been the key factor driving the recent rally in Gold (GOLD COMDTY) prices, and it appears to have legs.  As such, we are closing our Spdr Gold Shares (GLD US) short.

4. A Trading Strategy for EcoproBM Post IPO

• In this report, we provide a trading strategy for Ecopro BM Co Ltd (247540 KS) IPO, which is expected to start trading on March 5th. The IPO price has been determined at 48,000 won, which is 19% higher than the mid-point of the original IPO price range of 37,500 won to 42,900 won. The institutional investors’ demand for the Ecopro BM IPO was extremely strong at 988 to 1. 
• In our previous report Ecopro BM IPO: Valuation Analysis, we proposed the base case to high end of the company’s value to be between 56,000 won and 67,800 won. Given the enormous institutional demand for this IPO, it appears that our base case valuation (56,000 won), which is 17% higher than the IPO price, may be too conservative. 
• A more likely scenario now is that the stock reaches about 65,000 won to 70,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again. 

5. Delta Thailand’s Tender Offer: Updated Timetable

With Form 247-3 (Intention to Make a Tender Offer) and the FY18 dividend  (Bt2.30/share) for Delta Electronics Thai (DELTA TB) having been announced, this insight briefly provides an updated indicative timetable for investors.

The next key date is the submission of Form 247-4, the Tender Offer for Securities, which will provide full details of the Offer.

This above indicative timetable assumes a conditional offer based on a minimum acceptance level of at least 50%. Payment under the offer may indeed be earlier, as explained below, which also ties in with a shareholders’ right to revoke shares tendered. 

In addition, investors should not tender once the offer opens – assuming the tender period commences on the 25 February – but wait until their shares are on the registry as at 4 March to receive the FY18 dividend.

Currently trading at a 2.2%/22% gross/annualised spread. Bear in mind the dividend is subject to 10% tax.

In this briefing:

1. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support
2. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short
3. A Trading Strategy for EcoproBM Post IPO
4. Delta Thailand’s Tender Offer: Updated Timetable
5. Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation

1. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

2. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

Central banks around the world have signaled their willingness to return back to the Easy Money Playbook in their quest to re-stimulate economic growth and inflation. This significant shift in market expectations has been the key factor driving the recent rally in Gold (GOLD COMDTY) prices, and it appears to have legs.  As such, we are closing our Spdr Gold Shares (GLD US) short.

3. A Trading Strategy for EcoproBM Post IPO

• In this report, we provide a trading strategy for Ecopro BM Co Ltd (247540 KS) IPO, which is expected to start trading on March 5th. The IPO price has been determined at 48,000 won, which is 19% higher than the mid-point of the original IPO price range of 37,500 won to 42,900 won. The institutional investors’ demand for the Ecopro BM IPO was extremely strong at 988 to 1. 
• In our previous report Ecopro BM IPO: Valuation Analysis, we proposed the base case to high end of the company’s value to be between 56,000 won and 67,800 won. Given the enormous institutional demand for this IPO, it appears that our base case valuation (56,000 won), which is 17% higher than the IPO price, may be too conservative. 
• A more likely scenario now is that the stock reaches about 65,000 won to 70,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again. 

4. Delta Thailand’s Tender Offer: Updated Timetable

With Form 247-3 (Intention to Make a Tender Offer) and the FY18 dividend  (Bt2.30/share) for Delta Electronics Thai (DELTA TB) having been announced, this insight briefly provides an updated indicative timetable for investors.

The next key date is the submission of Form 247-4, the Tender Offer for Securities, which will provide full details of the Offer.

This above indicative timetable assumes a conditional offer based on a minimum acceptance level of at least 50%. Payment under the offer may indeed be earlier, as explained below, which also ties in with a shareholders’ right to revoke shares tendered. 

In addition, investors should not tender once the offer opens – assuming the tender period commences on the 25 February – but wait until their shares are on the registry as at 4 March to receive the FY18 dividend.

Currently trading at a 2.2%/22% gross/annualised spread. Bear in mind the dividend is subject to 10% tax.

5. Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation

• There are still two schools of thought on the HMG restructuring. Glovis/Mobis merged entity as a holdco is the one. Only Glovis as a holdco with Mobis→HM→Kia below is the other. Since late 3Q last year, the local street started speculating on the latter.
• This has pushed up Glovis price relative to Mobis. They are now near 200% of σ in favor of Glovis on a 20D MA. Glovis made a 2+σ jump upwardly just in 4 trading days. On a 120D horizon, they are almost at the 120D high.
• At this point, neither is a hassle free way. In the latter, Glovis has to come up with nearly ₩2tril to buy Kia’s Mobis stake, highly likely through new debts. This financial burden wouldn’t be light on Glovis. Glovis may also be facing a risk of forceful holdco conversion. This will create a serious headache with Kia as a grand grand son subsidiary.
• The current speculation pushing up Glovis relative to Mobis has yet to be sufficiently substantiated/justified. This suggests Glovis is being overbought on a speculation that will very likely be short-lived. I expect there will soon be a mean reversion for Mobis. I’d go long Mobis and short Glovis at this point.

In this briefing:

1. A Trading Strategy for EcoproBM Post IPO
2. Delta Thailand’s Tender Offer: Updated Timetable
3. Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation
4. Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime
5. Hyundai Autoever IPO Preview

1. A Trading Strategy for EcoproBM Post IPO

• In this report, we provide a trading strategy for Ecopro BM Co Ltd (247540 KS) IPO, which is expected to start trading on March 5th. The IPO price has been determined at 48,000 won, which is 19% higher than the mid-point of the original IPO price range of 37,500 won to 42,900 won. The institutional investors’ demand for the Ecopro BM IPO was extremely strong at 988 to 1. 
• In our previous report Ecopro BM IPO: Valuation Analysis, we proposed the base case to high end of the company’s value to be between 56,000 won and 67,800 won. Given the enormous institutional demand for this IPO, it appears that our base case valuation (56,000 won), which is 17% higher than the IPO price, may be too conservative. 
• A more likely scenario now is that the stock reaches about 65,000 won to 70,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again. 

2. Delta Thailand’s Tender Offer: Updated Timetable

With Form 247-3 (Intention to Make a Tender Offer) and the FY18 dividend  (Bt2.30/share) for Delta Electronics Thai (DELTA TB) having been announced, this insight briefly provides an updated indicative timetable for investors.

The next key date is the submission of Form 247-4, the Tender Offer for Securities, which will provide full details of the Offer.

This above indicative timetable assumes a conditional offer based on a minimum acceptance level of at least 50%. Payment under the offer may indeed be earlier, as explained below, which also ties in with a shareholders’ right to revoke shares tendered. 

In addition, investors should not tender once the offer opens – assuming the tender period commences on the 25 February – but wait until their shares are on the registry as at 4 March to receive the FY18 dividend.

Currently trading at a 2.2%/22% gross/annualised spread. Bear in mind the dividend is subject to 10% tax.

3. Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation

• There are still two schools of thought on the HMG restructuring. Glovis/Mobis merged entity as a holdco is the one. Only Glovis as a holdco with Mobis→HM→Kia below is the other. Since late 3Q last year, the local street started speculating on the latter.
• This has pushed up Glovis price relative to Mobis. They are now near 200% of σ in favor of Glovis on a 20D MA. Glovis made a 2+σ jump upwardly just in 4 trading days. On a 120D horizon, they are almost at the 120D high.
• At this point, neither is a hassle free way. In the latter, Glovis has to come up with nearly ₩2tril to buy Kia’s Mobis stake, highly likely through new debts. This financial burden wouldn’t be light on Glovis. Glovis may also be facing a risk of forceful holdco conversion. This will create a serious headache with Kia as a grand grand son subsidiary.
• The current speculation pushing up Glovis relative to Mobis has yet to be sufficiently substantiated/justified. This suggests Glovis is being overbought on a speculation that will very likely be short-lived. I expect there will soon be a mean reversion for Mobis. I’d go long Mobis and short Glovis at this point.

4. Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime

We have been struck by the degree of underperformance of the construction machinery names despite strong earnings performance. While the cyclical nature of the names makes judging performance purely on earnings results (or even the outlook) hazardous, in this case we believe the market has been premature and excessive in its derating of these stocks which have sold off to similar levels as the WFE names such as Tokyo Electron (8035 JP)  and Robotics names such as Fanuc Corp (6954 JP).

While it is possible that Komatsu Ltd (6301 JP), Hitachi Construction Machinery (6305 JP) and Caterpillar Inc (CAT US) have sold off partly due to their China exposure, it needs to be emphasised that 1) these companies are no longer heavily dependent on China and revenue exposure is 12% for HCM, 10% for CAT and 7% for Komatsu, and 2) while the Chinese market at  about 60k excavators is probably close to the top of its cycle, it is not a bubble like in 2010 when it 111k units and thus a collapse in demand is unlikely (though a decline is).

As the table below notes, earnings estimates for the construction machinery companies have only tapered marginally from their peaks, and while find the forecasts for continued growth into 2020 somewhat optimistic the resilience of mining demand means we are disinclined to dismiss them out of hand. On the other hand estimates for WFE and Robot names have dropped significantly, but despite this, share price performance is similar for all three categories of stocks. We discuss this stark discrepancy further below.

5. Hyundai Autoever IPO Preview

• Hyundai Autoever is ready to complete its IPO in March 2019. Established in 2000, Hyundai Autoever is the IT service arm of the Hyundai Motor Group. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 
• The IPO price range is between 40,000 won and 44,000 won. The IPO base deal size is from $125 million to $138 million. According to the bankers’ valuation, the expected market cap is expected to range from 840 billion won to 924 billion won. 
• The bankers used four companies including Samsung SDS, POSCO ICT, Lotte Data Comm, and Shinsegae I&C to value Hyundai Autoever. Using the annualized net profit of the comps in 2018, the bankers derived an average P/E multiple of 24x for the peers. Then the bankers took the annualized net profit of Hyundai Autoever in 2018 (52.2 billion won) and applied the peers average P/E multiple of 24x to derive the implied market cap of 1.25 trillion won. After applying additional IPO discount of 26.4% – 33.1%, the bankers derived the IPO price range of 40,000 to 44,000 won. 

In this briefing:

1. Last Week in GER Research: API/Sigma, M1, Eclipx/Mcmillan and Hansoh IPO
2. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms
3. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle
4. Horiba (6856 JP): Long-Term Buy on Pullbacks

1. Last Week in GER Research: API/Sigma, M1, Eclipx/Mcmillan and Hansoh IPO

In this version of the GER weekly research wrap, we assess the bump prospects in the Australian Pharma Industries (API AU) / Sigma Healthcare (SIG AU) potential merger. Arun updates on M1 Ltd (M1 SP) which could be delisted following an unconditional offer. In addition, we dig into the trading update for Eclipx (ECX AU) and assess the risks that Mcmillan Shakespeare (MMS AU) could walk away from the deal. Finally, we initiate on the IPO of Hansoh Pharmaceutical (HANSOH HK). A calendar of upcoming catalysts is also attached. 

More details can be found below. 

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

2. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms

After the market close last Friday, M1 Ltd (M1 SP) announced that the voluntary conditional offer (VGO) became unconditional as Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH) has an interest in M1 of 76.4%. The offer became unconditional due to Axiata Group (AXIATA MK), the single largest shareholder with a 28.7% shareholding, accepting the offer.

3. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.

4. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.