Industrials

In this briefing:

1. Hitachi Tender for Yungtay Engineering Launches
2. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990
3. StubWorld: CK Infra/Power Assets, Amorepacific, JCNC
4. Pasona : Interim Update – Still More Upside
5. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.

1. Hitachi Tender for Yungtay Engineering Launches

Hitachi Ltd (6501 JP)announced today after the close that it had received approvals from the relevant government organs for its proposed Tender Offer for Yungtay Engineering (1507 TT) and that the Tender Offer would be launched through Hitachi Elevator Taiwan Co. Ltd at TWD 60/share starting tomorrow. The statement filed by Yungtay on the TWSE website is linked here.

The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).

This one detail is different from the original announcement in October, which had set a minimum of 50.1% holding after the tender. 

The other details of the Tender Offer are the same as described in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) from when the deal was announced last October. 

Since the announcement of a deal at a 22% premium, the stock has risen gently from about TWD 56 to just below the TWD 60 Tender Offer price in ever-decreasing volume.

There has been little to no news on the stock regarding the deal in English, and only limited news in Chinese since the announcement of the deal. 

The price evolution makes it look like a pretty straightforward deal. The lowered threshold for success obviously increases the likelihood of success. Weaker markets may also contribute. 

But there is a reason why the threshold was lowered. 

2. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990

• China vehicle sales volume declined in 2018, which was the first time since 1990.
• Car dealers are negotiating commission rate with Autohome.
• We believe Autohome has more bargaining power than dealers, but will compromise to some extent.
• Our previous financial assumptions had already integrate the potential weakness in automobile industry.
• The stock price has been fully reflected the impact of the negotiation.

3. StubWorld: CK Infra/Power Assets, Amorepacific, JCNC

This week in StubWorld …

• What’s up with Ck Infrastructure Holdings (1038 HK) reducing its stake in Power Assets Holdings (6 HK)?
• Trading around its lowest implied stub inside the past five years, improving sentiment toward cosmetic stocks should support an Amorepacific Group (002790 KS) setup.

Preceding my comments on CKI/PAH, Amorepacific and JCNC 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 as a % – of at least 20%.

4. Pasona : Interim Update – Still More Upside

INTERIM UPDATE – Pasona Group (2168 JP) released their second-quarter results on January 11th. This Insight updates our recent Insight Pasona Non-Grata and re-iterates our buy recommendation. Pasona shares have risen by 15% this year to the intra-say high last Friday. Our target price remains ¥1,500 – a further 18% upside from today’s level. 

5. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.

The shares have underperformed TOPIX by 25% over the last 12 months and in terms of book, see chart below, are trading at near 5 year lows. Earnings for 3/19 were revised down after 1Q (operating profit from Y75bn to Y66bn due to write-off in the rolling stock division). The current forecast in our view is achievable and next year, in the absence of further write-off and growth in other parts of the business, we would expect operating profits to recover to the Y80bn level. This is a big conglomerate with many moving parts, some good and some not so good, but there is a price for everything and given where the shares are now, and where we think earnings are going, we are happy to buy here with the company trading at 0.9x book and the shares yielding just under 3%.

In this briefing:

1. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo
2. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
3. Nidec (6594 JP): Big Downward Revision
4. Korean Air – Six Important Catalysts
5. Beleaguered Panalpina Gets An Unsolicited Takeover Offer

1. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo

Mitsubishi has finally given up its hope of convincing Aeon to merge Ministop (9946 JP) with Lawson and is selling its stake in the largest retail group.

There will be no change to the extensive supply relationship between the two companies and Mitsubishi’s food wholesale arm, Mitsubishi Shokuhin (7451 JP).

While Aeon seems to have spurned Mitsubishi for now, it is hard to see how Aeon will progress in the convenience store sector without Mitsubishi’s help. In the short-term Ministop looks like a poor investment but Aeon may have to sell to Mitsubishi eventually and will want a good price for it.

2. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance

The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.

Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.

Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.

Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.

3. Nidec (6594 JP): Big Downward Revision

Nidec has cut FY Mar-19 sales guidance by 9.4%, operating profit guidance by 25.6% and net profit guidance by 23.8% to reflect what management calls unexpectedly weak demand, the need for large inventory adjustments, and anticipated restructuring charges. 

Management attributes this to U.S. – China trade friction, but weak demand for hard disc drives (HDDs) caused by excessive date center investment and falling NAND flash memory prices, and declining auto sales in both China and the U.S., appear to have compounded the problem. 

Nidec’s share price was up ¥60 (+0.49%) today to ¥12,395, but the announcement was made after the market closed. Management plans to discuss the situation at a press conference starting at 18:30 Tokyo time today.

4. Korean Air – Six Important Catalysts

Shares of Korean Air Lines (003490 KS) are down nearly 60% since its highs in 2010 and we believe this decline has been excessive. The stock has started to recover and we expected continued outperformance this year. We like both Korean Air (Common) (003490 KS) and Korean Air (Pref) (003495) at current levels. However, we think Korean Air (Pref) has a higher upside. We are including Korean Air (Pref) (003495) in our model stock portfolio. The following are the major catalysts that could boost Korean Air (Common) and Korean Air (Pref) shares by 20-30%+ in the next 6-12 months. 

• Increasing possibility of a breakthrough in corporate governance with potential help from KCGI & NPS
• Cheap valuation/Increasing interests from both value funds and hedge funds 
• Reduced political conflict between China & South Korea
• Turnaround of the aerospace business unit
• Huge investment plan by the Incheon International Airport to expand facilities by 2023
• Current ratio of Korean Air Pref/Common is below the 1 sigma level

5. Beleaguered Panalpina Gets An Unsolicited Takeover Offer

After investors lashed out at Panalpina Welttransport Holding (PWTN SW)‘s board late last year (after years of griping by some of the top holders), forcing the main shareholder to support the installation of a new chairman of the board, management may have thought they had some breathing room.

They did not.

Rival Kuehne + Nagel International A (KNIN VX) quickly (a couple of days later) showed interest in friendly negotations via the press, and Panalpina responded in the press that it wanted to stay independent. Danish rival DSV A/S (DSV DC) had shown interest before, then had gone after Ceva Logistics AG (CEVA SW) as discussed by David Blennerhassett in CEVA’s Days Of Independence Appear Numbered when the CMA CGM deal came out.

Now DSV has lobbed in a bid for the company.

The New News

On January 16^th Panalpina Welttransport announced that it had received an unsolicited, non-binding proposal from DSV A/S (DSV DC) to acquire the company at a price of CHF 170 per share, consisting of 1.58 DSV shares and CHF 55 in cash for each Panalpina share. 

The offer comes at a premium of 24% to Panalpina’s closing share price of CHF 137.5 as of 11 January 2019 and 31% to the 60-day VWAP of CHF 129.5 as of 11 January 2019.

Following the announcement, Panalpina’s shares surged above the terms of the offer implying that the market was anticipating a higher bid from DSV or one of its competitors. 

DSV claimed in its announcement that the “combination of DSV and Panalpina would create a leading global transport and logistics company with significant growth opportunities and potential for value creation” and that the structure of the offer will allow Panalpina’s shareholders to participate in the benefits of the combination.”

They also stated that “the combined business would generate expected revenues of more than DKK 110bn and EBITDA of more than DKK 7bn on a pro-forma 2018 basis (excluding any synergy benefits).”

DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’s Ceva Logistics AG (CEVA SW). Given the fragmented nature of the industry, DSV sees scale as a clear competitive advantage in the logistics market as operational leverage and purchasing power increase with rising freight volumes. As a result, M&A is currently an integral part of their strategy.

Media reports suggested that Switzerland’s Kuehne & Nagel was also rumored to be considering an offer for Panalpina.

Panalpina’s response is “According to its fiduciary duties, the Board of Directors of Panalpina is reviewing the proposal in conjunction with its professional advisers.”

Amid Panalpina’s struggles in ocean freight, IT system delays and below-average growth, activist investor Cevian Capital, which owns 12.3% of Panalpina has publicly urged Panalpina to be open for a takeover. 

Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46% and any deal will depend significantly on its approval. 

Given the fragmented nature of the industry, DSV sees scale as a clear competitive advantage in the logistics market as operational leverage and purchasing power increase with rising freight volumes. As a result, M&A is currently an integral part of their strategy.

This is an interesting situation. The question is whether it gets interestinger.

In this briefing:

1. CRRC: Earnings Booming With Raised New Rail Line Delivery Target
2. Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries
3. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun
4. Chengdu Expressway (成都高速) Post-IPO – Low Liquidity and Tiny Adjusted Free Float
5. Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific

1. CRRC: Earnings Booming With Raised New Rail Line Delivery Target

Based on CRC’s (China Railway Corporation) 2019 plan on rail investment, CRRC’s earnings from rail business might be better than estimated. With a 45% increase on new rail delivery mileage, and significantly increase on HSR train (Multiple Units) repair demand, we estimate CRCC’s EPS increase by another 20% yoy to RMB0.53 in 2019E, following a 17% yoy increase in 2018E.

Also, a better earnings outlook might trigger a mild valuation re-rating. The stock trades at 12.8x P/E 2019E (our estimates), attractive vs. its 15.5x historical P/E average since the merger in 2015.

2. Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries

Mitsubishi Corp (8058 JP) is looking to sell 9m shares of Ayala Corporation (AC PM) for approximately US$155m. Post-placement, Mitsubishi Corp will still hold 7.2% of Ayala Corp if the upsize option is not exercised.

The deal scores poorly on our framework owing to its the large deal size relative to its three-month ADV. The company is also slightly more leveraged than its peers. However, it was offset by cheaper valuation and a strong track record. 

But, our deal breaker here is the fact that the selldown one year after 2018’s selldown may signal that Mitsubishi Corp. may return to sell more on the market again in the near-term. While Mitsubishi, in the past, has reaffirmed that their partnership with AC will likely continue, it should not serve as a reassurance that it will continue to hold shares in AC.

3. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun

Lee Seo-Hyun (age 46), the billionaire second daughter of the Samsung Group Lee Gun-Hee, recently stepped down from her position as the CEO of Samsung C&T (028260 KS)‘s fashion business. After resigning from Samsung C&T, Lee Seo-Hyun will become a chairperson of the Samsung Foundation, focusing on corporate social responsibility activities.

Among the various fashion brands, the most problematic has been the 8 Seconds SPA brand, which has been continuing to lose money. Despite big ambitions to make 8 Seconds as one of the leading global SPA brands, this plan has fluttered, especially in the overseas markets such as China. This strongly suggests that there could be a big restructuring of the company’s fashion business in the coming months. 

Our NAV analysis of Samsung C&T suggests a range of 122k won to 139k won, which would represent an upside of 11% to 27%. In our NAV analysis, the investment stakes in affiliates were 19.2 trillion won, core business operating value was estimated at 9.9 trillion won (using 8x consensus OP in 2019), net cash of 2.2 trillion won, and Samsung Everland land value (post 50% taxes) of 1.8 trillion won. The range of value reflects the different discount for the quasi-holdco structure (20-30% discount).

4. Chengdu Expressway (成都高速) Post-IPO – Low Liquidity and Tiny Adjusted Free Float

Chengdu Expressway Company Limited (1785 HK) raised US$112m at the fixed price of HK$2.20 per share. We have previously looked at the IPO in Chengdu Expressway (成都高速) IPO Review – Well-Managed but Unexciting.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

5. Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific

• This is the complete list of Korea’s single-sub holdcos with current sigma %. Three local holdcos are currently standing out: Amorepacific Group (002790 KS): +231.84% of σ, Hanjin Kal Corp (180640 KS): -113.10% of σ and Youngone Holdings (009970 KS): +86.63% of σ.
• Amorepacific appears very tempting for stub trade. The Amore duo now has the widest price divergence on a 20D MA among Korea’s single-sub holdcos. But I would wait on this name. Locally, signals of improving fundamentals are being heard on the local cosmetics stocks. Holdco has traditionally been more susceptible to fundamentals changes. It is very possible that Amore duo leads to upwardly mean reversion in favor of Holdco in the short-term.

In this briefing:

1. Prored Partners (7034) – A Fast Growing Recent Listing in Japan.
2. HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)

1. Prored Partners (7034) – A Fast Growing Recent Listing in Japan.

Prored Partners is a business consulting company founded in 2009 by the CEO, Mr Satani (who retains 60% of the equity). Prior to setting up Prored, he worked as a business consultant at a consultancy firm subsequently acquired by PwC Consulting. The shares were registered on the Mother’s exchange at the end of July 2018. Unfortunately, it is a micro-cap (market cap Y24bn) but should be of interest to those looking for a very fast growing small cap name. It trades on 17x our forecasts for this year to 10/19.  The company has been growing at a fast pace over the last few years. We expect this strong rate of growth to continue, see below.

2. HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)

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: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.

We see the Financials sector led the outflow by mainland investors last week with 201 million USD of net selling. We also highlight a few companies this week: China Tower (788 HK), Tencent Holdings (700 HK), New China Life Insurance (1336 HK), and Ping An Good Doctor (1833 HK).

In this briefing:

1. Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
2. Itochu Confirms Intent to Deepen Hold over Descente
3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
4. Hyosung Holdings: Current Status & Trade Approach
5. Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials

1. Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?

Last week on 17 January, printing and HR services company and funeral parlor operator Kosaido Co Ltd (7868 JP) announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement. 

The company’s board of directors announced it supported the deal. 

Terms & Schedule

2. Itochu Confirms Intent to Deepen Hold over Descente

Itochu (8001 JP) continues a battle of words and equity as it attempts to gain more control over sports firm Descente (8114 JP).

Meanwhile, Descente has brought in Wacoal (3591 JP) as a white knight and made a splash in the business media about its recent success.

Itochu insists that Descente needs Itochu’s management skills, particularly to build a stronger business in China and other overseas markets, and says the only way to make Descente listen is to buy more stock – more than its current nearly 30%.

3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression. 

4. Hyosung Holdings: Current Status & Trade Approach

• Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
• Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
• I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.

5. Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials

• Ecopro BM Co Ltd (247540 KS) specializes in making cathode active materials for rechargeable batteries that are used in EVs and electrical energy storage systems (ESS). Ecopro BM Co Ltd (247540 KS) is expected to complete its IPO in late February 2019. The institutional book building starts on February 14th, 2019. The IPO deal base size ranges from $96 million to $115 million. According to the bankers’ valuation, the expected market cap after the IPO would range from 796 billion won to 957 billion won. 
• The bankers selected two stocks including  L&F Co Ltd (066970 KS) and Cosmoam&T (005070 KS) as comparable companies to Ecopro BM. An IPO discount of 27.2% to 36.4%, the bankers derived an IPO price range of 37,500 – 42,900 won. The company’s sales and profits have been surging in the past three years. In 1Q-3Q18, it generated sales of 406 billion won (up 107.6% YoY) and operating profit of 36.1 billion won (up 108.5% YoY).
• Ecopro BM Co Ltd (247540 KS) was spun off from its parent company Ecopro Co Ltd (086520 KS) in May 2016. Currently Ecopro Co Ltd (086520 KS) owns a 68.6% of Ecopro BM Co Ltd (247540 KS).
• Ecopro BM has the second largest market share in the world after Sumitomo in the NCA high nickel-based cathode materials. Ecopro BM’s major customers include Samsung SDI and Murata Manufacturing Plant (TMM) (Japan). 

In this briefing:

1. ATP30: 100% Secured Client Base Prompt 2019 Growth
2. Shinmaywa Own Share Tender Offer at Premium
3. RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP
4. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court
5. Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question

1. ATP30: 100% Secured Client Base Prompt 2019 Growth

We maintain a BUY rating for ATP30, based on a target price of Bt2.46 (previous TP: 2.48) and derived from a 30xPE’18E, which is its average trading range in the past one year and 10% discount to Thailand’s transportation sector

The story:

• Active fleet expansion still go on in 2019-20E
• Lower interest expense burden support margin expansion

Risks: Higher than expected in volatility in fuel price and probability that clients will terminate service contracts

2. Shinmaywa Own Share Tender Offer at Premium

On 21 January 2019, my favorite manufacturer of garbage trucks, vertical carousel parking infrastructure, sea planes, and jetways – Shinmaywa Industries (7224 JP) – announced a share buyback. This was not unusual. The company bought back shares last year and indicated earlier this year it would seek a relatively high return of capital to shareholders.  In the last five months of 2018, the company bought back 3.6% of shares outstanding, and cancelled those shares at the end of December 2018). 

Indeed, the company on January 9th this year announced a revised dividend forecast for the year ending March 2019. The dividend was lifted by 1 yen. 

The company also announced a new policy of shareholder returns for the year starting April 1. 

While taking into consideration strategic business investment for the future and the internal reserves required for maintaining and expanding the Company’s management foundation, we are aware that appropriate return of profit to shareholders is an important management issue. In that regard, in our Medium-term Management Plan for the three years to the end of the fiscal year ending March 31, 2021, “Change for Growing, 2020,” (the “Medium-term Management Plan”), which was announced in May 2018, we set up a basic payout ratio on a consolidated basis of 40-50% and carrying out flexible acquisition of treasury shares with a focus on improvement of capital efficiency as basic shareholder return policies.

The company acknowledged the above and announced it would seek to add a commemorative (70th anniversary of incorporation and 100th anniversary of being in business) special dividend of ¥45/share, on top of the normal interim dividend (which is likely to be ¥18-19/share) paid to shareholders as of the end of September 2019.

That was nice, but that was little preparation for the news of 21 January.

• On that day, the company announced yet another increase in dividend forecast for the current fiscal year, raising the H2 dividend – which had just been raised from ¥18/share to ¥19/share less than two weeks ago – to ¥27/share.
• The company also announced a Tender Offer to buy back 26.666mm its own shares at a roughly 10.5% premium to last trade.  

That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding. 

Regular readers of Smartkarma will know that I will have comments on situations like these. 

3. RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP

Investment Conclusion:
We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP

4. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a voluntary conditional offer (VGO) at S$2.06 cash per share from Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH). KCL-SPH said on Tuesday that they wouldn’t increase their S$2.06 offer price “under any circumstances whatsoever.”

5. Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question

Polycab India (POLY IN) plans to raise around US$280m in its IPO through a mix of selling primary and secondary shares. It is the largest manufacturer of wires and cables in India with a 12% market share, as per CRISIL research. The company has also recently entered the consumer electrical segments. 

Sales growth has been decent while margin expansion has helped the company to report much higher PATMI growth. Although, cash flow from operations has lagged earnings growth as working capital requirements have been volatile. In addition, receivables quality seems to be deteriorating. To add to that the rationale for the dealers and employees rationalization hasn’t been clearly explained.

In this insight, I’ve covered the above points, compared the company to its listed peers and commented on valuations. Should the deal be offered at multiples close to its wires and cables peers, it might still be interesting.

In this briefing:

1. Japan Post Holdings Basing Cycle with Clear Sell and Buy Levels
2. StubWorld: Intouch Gains On Possible Sale of Thaicom
3. Sell General Electric (GE US): Lots of Liabilities, Limited Cashflow – Target $1
4. Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar
5. Recruit Holdings Placement – A Tiny, Long Overdue Sell Down

1. Japan Post Holdings Basing Cycle with Clear Sell and Buy Levels

Japan Post Holdings (6178 JP) rise is moving into an exhaustive resistance zone and due for a hard give back cycle.

Tactical buy supports are compelling for a bigger upside drive given the successful macro backswing support test and ascent that very often opens the way for the macro cycle to make headway, once a corrective cycle terminates. It is this corrective cycle that shows promise for an entry point.

Japan Post Holdings (JPH) does have a short history of volatile swings and will be the challenge within an ongoing basing cycle. We have well defined levels to trade this range tactically while aligning some strong risk pivot supports to reign in risk.

Macro pivot support will define the long term trend for JPH.

2. StubWorld: Intouch Gains On Possible Sale of Thaicom

This week in StubWorld …

• Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gain ~10% in response to rumours of a government takeout of Thaicom.

Preceding my comments on Intouch and Yoosung T&S (024800 KS) 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 as a % – of at least 20%.

3. Sell General Electric (GE US): Lots of Liabilities, Limited Cashflow – Target $1

GE’s business reality is far removed from management’s up-beat message. Creative accounting enabled management to line their pockets, while the underlying business deteriorated. A bloated board sanctioned poor disclosure, leasing, restructuring provisions and asset trading that obscured the decline. In FY 2018, we expect underlying Industrial profits of US$3.4bn and unlevered sustainable cashflow of US$5.1bn, down 50%. Change is coming, but it is too little, too late…

4. Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar

My colleagues strive to cover M&A transactions in Asia-Pac – and further afield – with a market cap >US$100mn and/or when liquidity or the backdrop story warrant comment. This insight is no exception.

In the past two weeks, two companies who form part of the Huarong-CMB network (HCN), as discussed by David Webb, and one company enmeshed in the Enigma network, have received official offers or are have made announcements pursuant to the Hong Kong Code on Takeovers and Mergers.

• [HCN]  New Sports Group (299 HK) was halted from trading on the 18 January and announced a cash or scrip offer, with the cash alternative of $0.435/share priced at a premium of 3.57% to last close.
• [Enigma]  LEAP Holdings Group Ltd (1499 HK) is currently suspended pending an announcement.
• [HCN]  China Singyes Solar Tech (750 HK) announced it may be subject to a mandatory takeover pending the outcome of an MOU.

Below are brief comments on all three situations. In the case of New Sports, it is a very real deal, with financing in place for the cash option.

It is arguable whether the tanking in CSST shares yesterday after the resumption of trading, increases or lessens the chances of an official Offer unfolding.

5. Recruit Holdings Placement – A Tiny, Long Overdue Sell Down

Toppan Printing (7911 JP) is looking to sell 10.5m shares in Recruit Holdings (6098 JP) for about US$263m. Post-placement, Toppan Printing will still have about 6% stake (103m shares) in Recruit Holdings.

The deal scores well on our framework owing to its strong price and earnings momentum and stellar track record. However, it was offset by its relatively expensive valuation compared to peers. The selldown by Toppan Printing is tiny relative to the three-month ADV which the market would likely be able to absorb. The sell down is also long overdue considering that Toppan Printing skipped the 2016 secondary offering in which many shareholders have participated.

In this briefing:

1. StubWorld: CK Infra/Power Assets, Amorepacific, JCNC
2. Pasona : Interim Update – Still More Upside
3. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.
4. CRRC: Earnings Booming With Raised New Rail Line Delivery Target
5. Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries

1. StubWorld: CK Infra/Power Assets, Amorepacific, JCNC

This week in StubWorld …

• What’s up with Ck Infrastructure Holdings (1038 HK) reducing its stake in Power Assets Holdings (6 HK)?
• Trading around its lowest implied stub inside the past five years, improving sentiment toward cosmetic stocks should support an Amorepacific Group (002790 KS) setup.

Preceding my comments on CKI/PAH, Amorepacific and JCNC 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 as a % – of at least 20%.

2. Pasona : Interim Update – Still More Upside

INTERIM UPDATE – Pasona Group (2168 JP) released their second-quarter results on January 11th. This Insight updates our recent Insight Pasona Non-Grata and re-iterates our buy recommendation. Pasona shares have risen by 15% this year to the intra-say high last Friday. Our target price remains ¥1,500 – a further 18% upside from today’s level. 

3. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.

The shares have underperformed TOPIX by 25% over the last 12 months and in terms of book, see chart below, are trading at near 5 year lows. Earnings for 3/19 were revised down after 1Q (operating profit from Y75bn to Y66bn due to write-off in the rolling stock division). The current forecast in our view is achievable and next year, in the absence of further write-off and growth in other parts of the business, we would expect operating profits to recover to the Y80bn level. This is a big conglomerate with many moving parts, some good and some not so good, but there is a price for everything and given where the shares are now, and where we think earnings are going, we are happy to buy here with the company trading at 0.9x book and the shares yielding just under 3%.

4. CRRC: Earnings Booming With Raised New Rail Line Delivery Target

Based on CRC’s (China Railway Corporation) 2019 plan on rail investment, CRRC’s earnings from rail business might be better than estimated. With a 45% increase on new rail delivery mileage, and significantly increase on HSR train (Multiple Units) repair demand, we estimate CRCC’s EPS increase by another 20% yoy to RMB0.53 in 2019E, following a 17% yoy increase in 2018E.

Also, a better earnings outlook might trigger a mild valuation re-rating. The stock trades at 12.8x P/E 2019E (our estimates), attractive vs. its 15.5x historical P/E average since the merger in 2015.

5. Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries

Mitsubishi Corp (8058 JP) is looking to sell 9m shares of Ayala Corporation (AC PM) for approximately US$155m. Post-placement, Mitsubishi Corp will still hold 7.2% of Ayala Corp if the upsize option is not exercised.

The deal scores poorly on our framework owing to its the large deal size relative to its three-month ADV. The company is also slightly more leveraged than its peers. However, it was offset by cheaper valuation and a strong track record. 

But, our deal breaker here is the fact that the selldown one year after 2018’s selldown may signal that Mitsubishi Corp. may return to sell more on the market again in the near-term. While Mitsubishi, in the past, has reaffirmed that their partnership with AC will likely continue, it should not serve as a reassurance that it will continue to hold shares in AC.

In this briefing:

1. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun
2. Chengdu Expressway (成都高速) Post-IPO – Low Liquidity and Tiny Adjusted Free Float
3. Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific
4. Prored Partners (7034) – A Fast Growing Recent Listing in Japan.
5. HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)

1. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun

Lee Seo-Hyun (age 46), the billionaire second daughter of the Samsung Group Lee Gun-Hee, recently stepped down from her position as the CEO of Samsung C&T (028260 KS)‘s fashion business. After resigning from Samsung C&T, Lee Seo-Hyun will become a chairperson of the Samsung Foundation, focusing on corporate social responsibility activities.

Among the various fashion brands, the most problematic has been the 8 Seconds SPA brand, which has been continuing to lose money. Despite big ambitions to make 8 Seconds as one of the leading global SPA brands, this plan has fluttered, especially in the overseas markets such as China. This strongly suggests that there could be a big restructuring of the company’s fashion business in the coming months. 

Our NAV analysis of Samsung C&T suggests a range of 122k won to 139k won, which would represent an upside of 11% to 27%. In our NAV analysis, the investment stakes in affiliates were 19.2 trillion won, core business operating value was estimated at 9.9 trillion won (using 8x consensus OP in 2019), net cash of 2.2 trillion won, and Samsung Everland land value (post 50% taxes) of 1.8 trillion won. The range of value reflects the different discount for the quasi-holdco structure (20-30% discount).

2. Chengdu Expressway (成都高速) Post-IPO – Low Liquidity and Tiny Adjusted Free Float

Chengdu Expressway Company Limited (1785 HK) raised US$112m at the fixed price of HK$2.20 per share. We have previously looked at the IPO in Chengdu Expressway (成都高速) IPO Review – Well-Managed but Unexciting.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

3. Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific

• This is the complete list of Korea’s single-sub holdcos with current sigma %. Three local holdcos are currently standing out: Amorepacific Group (002790 KS): +231.84% of σ, Hanjin Kal Corp (180640 KS): -113.10% of σ and Youngone Holdings (009970 KS): +86.63% of σ.
• Amorepacific appears very tempting for stub trade. The Amore duo now has the widest price divergence on a 20D MA among Korea’s single-sub holdcos. But I would wait on this name. Locally, signals of improving fundamentals are being heard on the local cosmetics stocks. Holdco has traditionally been more susceptible to fundamentals changes. It is very possible that Amore duo leads to upwardly mean reversion in favor of Holdco in the short-term.

4. Prored Partners (7034) – A Fast Growing Recent Listing in Japan.

Prored Partners is a business consulting company founded in 2009 by the CEO, Mr Satani (who retains 60% of the equity). Prior to setting up Prored, he worked as a business consultant at a consultancy firm subsequently acquired by PwC Consulting. The shares were registered on the Mother’s exchange at the end of July 2018. Unfortunately, it is a micro-cap (market cap Y24bn) but should be of interest to those looking for a very fast growing small cap name. It trades on 17x our forecasts for this year to 10/19.  The company has been growing at a fast pace over the last few years. We expect this strong rate of growth to continue, see below.

5. HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)

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: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.

We see the Financials sector led the outflow by mainland investors last week with 201 million USD of net selling. We also highlight a few companies this week: China Tower (788 HK), Tencent Holdings (700 HK), New China Life Insurance (1336 HK), and Ping An Good Doctor (1833 HK).

In this briefing:

1. Nidec (6594 JP): Big Downward Revision
2. Korean Air – Six Important Catalysts
3. Beleaguered Panalpina Gets An Unsolicited Takeover Offer
4. Hitachi Tender for Yungtay Engineering Launches
5. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990

1. Nidec (6594 JP): Big Downward Revision

Nidec has cut FY Mar-19 sales guidance by 9.4%, operating profit guidance by 25.6% and net profit guidance by 23.8% to reflect what management calls unexpectedly weak demand, the need for large inventory adjustments, and anticipated restructuring charges. 

Management attributes this to U.S. – China trade friction, but weak demand for hard disc drives (HDDs) caused by excessive date center investment and falling NAND flash memory prices, and declining auto sales in both China and the U.S., appear to have compounded the problem. 

Nidec’s share price was up ¥60 (+0.49%) today to ¥12,395, but the announcement was made after the market closed. Management plans to discuss the situation at a press conference starting at 18:30 Tokyo time today.

2. Korean Air – Six Important Catalysts

Shares of Korean Air Lines (003490 KS) are down nearly 60% since its highs in 2010 and we believe this decline has been excessive. The stock has started to recover and we expected continued outperformance this year. We like both Korean Air (Common) (003490 KS) and Korean Air (Pref) (003495) at current levels. However, we think Korean Air (Pref) has a higher upside. We are including Korean Air (Pref) (003495) in our model stock portfolio. The following are the major catalysts that could boost Korean Air (Common) and Korean Air (Pref) shares by 20-30%+ in the next 6-12 months. 

• Increasing possibility of a breakthrough in corporate governance with potential help from KCGI & NPS
• Cheap valuation/Increasing interests from both value funds and hedge funds 
• Reduced political conflict between China & South Korea
• Turnaround of the aerospace business unit
• Huge investment plan by the Incheon International Airport to expand facilities by 2023
• Current ratio of Korean Air Pref/Common is below the 1 sigma level

3. Beleaguered Panalpina Gets An Unsolicited Takeover Offer

After investors lashed out at Panalpina Welttransport Holding (PWTN SW)‘s board late last year (after years of griping by some of the top holders), forcing the main shareholder to support the installation of a new chairman of the board, management may have thought they had some breathing room.

They did not.

Rival Kuehne + Nagel International A (KNIN VX) quickly (a couple of days later) showed interest in friendly negotations via the press, and Panalpina responded in the press that it wanted to stay independent. Danish rival DSV A/S (DSV DC) had shown interest before, then had gone after Ceva Logistics AG (CEVA SW) as discussed by David Blennerhassett in CEVA’s Days Of Independence Appear Numbered when the CMA CGM deal came out.

Now DSV has lobbed in a bid for the company.

The New News

On January 16^th Panalpina Welttransport announced that it had received an unsolicited, non-binding proposal from DSV A/S (DSV DC) to acquire the company at a price of CHF 170 per share, consisting of 1.58 DSV shares and CHF 55 in cash for each Panalpina share. 

The offer comes at a premium of 24% to Panalpina’s closing share price of CHF 137.5 as of 11 January 2019 and 31% to the 60-day VWAP of CHF 129.5 as of 11 January 2019.

Following the announcement, Panalpina’s shares surged above the terms of the offer implying that the market was anticipating a higher bid from DSV or one of its competitors. 

DSV claimed in its announcement that the “combination of DSV and Panalpina would create a leading global transport and logistics company with significant growth opportunities and potential for value creation” and that the structure of the offer will allow Panalpina’s shareholders to participate in the benefits of the combination.”

They also stated that “the combined business would generate expected revenues of more than DKK 110bn and EBITDA of more than DKK 7bn on a pro-forma 2018 basis (excluding any synergy benefits).”

DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’s Ceva Logistics AG (CEVA SW). Given the fragmented nature of the industry, DSV sees scale as a clear competitive advantage in the logistics market as operational leverage and purchasing power increase with rising freight volumes. As a result, M&A is currently an integral part of their strategy.

Media reports suggested that Switzerland’s Kuehne & Nagel was also rumored to be considering an offer for Panalpina.

Panalpina’s response is “According to its fiduciary duties, the Board of Directors of Panalpina is reviewing the proposal in conjunction with its professional advisers.”

Amid Panalpina’s struggles in ocean freight, IT system delays and below-average growth, activist investor Cevian Capital, which owns 12.3% of Panalpina has publicly urged Panalpina to be open for a takeover. 

Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46% and any deal will depend significantly on its approval. 

Given the fragmented nature of the industry, DSV sees scale as a clear competitive advantage in the logistics market as operational leverage and purchasing power increase with rising freight volumes. As a result, M&A is currently an integral part of their strategy.

This is an interesting situation. The question is whether it gets interestinger.

4. Hitachi Tender for Yungtay Engineering Launches

Hitachi Ltd (6501 JP)announced today after the close that it had received approvals from the relevant government organs for its proposed Tender Offer for Yungtay Engineering (1507 TT) and that the Tender Offer would be launched through Hitachi Elevator Taiwan Co. Ltd at TWD 60/share starting tomorrow. The statement filed by Yungtay on the TWSE website is linked here.

The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).

This one detail is different from the original announcement in October, which had set a minimum of 50.1% holding after the tender. 

The other details of the Tender Offer are the same as described in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) from when the deal was announced last October. 

Since the announcement of a deal at a 22% premium, the stock has risen gently from about TWD 56 to just below the TWD 60 Tender Offer price in ever-decreasing volume.

There has been little to no news on the stock regarding the deal in English, and only limited news in Chinese since the announcement of the deal. 

The price evolution makes it look like a pretty straightforward deal. The lowered threshold for success obviously increases the likelihood of success. Weaker markets may also contribute. 

But there is a reason why the threshold was lowered. 

5. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990

• China vehicle sales volume declined in 2018, which was the first time since 1990.
• Car dealers are negotiating commission rate with Autohome.
• We believe Autohome has more bargaining power than dealers, but will compromise to some extent.
• Our previous financial assumptions had already integrate the potential weakness in automobile industry.
• The stock price has been fully reflected the impact of the negotiation.