Industrials

In this briefing:

1. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again
2. Horiba (6856 JP): Bad News Largely Discounted
3. EM Relative Strength Is Bottoming: Overweight
4. FamilyMart: A Shrewd Head-Fake?
5. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

1. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again

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:

2. Horiba (6856 JP): Bad News Largely Discounted

Horiba combines high gearing to semiconductor capital spending with a large and growing automotive test business characterized by upward trending but uneven profitability. At ¥4,545 (Friday, December 21, closing price), its share price has dropped by 53% from an all-time high of ¥9,590 reached last May. Falling demand for semiconductor production equipment and a downward revision to FY Dec-18 sales and profit guidance announced in November appear to be largely in the price. 

The downward revision, which cut projected full-year operating profit growth from 15.5% to 2.5%, followed a 22.2% year-on-year decline in operating profit in 3Q and implies a similar rate of decline in 4Q. The weakness is concentrated in Semiconductor Equipment and Automotive Test, the former due to a cyclical downturn in overall demand, the latter due to M&A-related and other one-time expenses. New Automotive Test orders continued to outpace sales, leading to a 9.5% increase in the order backlog during 3Q.

Automotive Test sales and profits should rise next year, while semiconductor equipment sales and profits seem likely to bottom out. In a report issued on December 17, SEMI (the semiconductor equipment and materials industry organization) forecasts a further decline in wafer fab equipment sales in 1H of 2019, followed by recovery in 2H. Other industry sources we talked to before the report was issued had similar views. 

This scenario could fall apart due to general economic weakness, American attempts to stifle China’s semiconductor industry, or both. On December 21, Reuters reported that Foxconn “…is in the final stages of talks with the local government of the Chinese city of Zhuhai to build a chip plant there with a total investment of about $9 billion… most of which would be shouldered by the Zhuhai government through subsidies and tax breaks…” This looks like a perfect target for the Americans, but whether or not they will notice or care remains to be seen.

Horiba is now selling at 9.6x our EPS estimate for this fiscal year, 13.4x our estimate for next year and 12.1x our estimate for FY Dec-20. These and other projected valuations are near the bottom of their 5-year historical ranges. If the Semiconductor Equipment division does not recover in 2H of 2019, historical data suggest that its operating profit could drop by 70% rather than the 47% we are now forecasting, resulting in a P/E ratio of 17x. Nevertheless, it is time to start considering when and at what price to buy Horiba.

3. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

4. FamilyMart: A Shrewd Head-Fake?

We think the failed tender but continued asset sale between Familymart Uny (8028 JP) and Don Quijote (7532 JP)  is astutely beneficial for Familymart Uny Holdings (8028 JP) and parent Itochu Corp (8001 JP) . More details below 

5. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook. 

Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in. 

Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.

THEY GOT NOTHING.

I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners. 

In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.

“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. 

Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected. 

The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.

There was a clearly-available trading strategy based on that. 

The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).

In this briefing:

1. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend
2. Company Visits: The Best of November/December 2018
3. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles
4. LG Holdings Stub Trade: Current Status & Trade Approach
5. Harbin Electric Expected To Be Privatised

1. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend

• CJ Corp (001040 KS) announced a 0.15 stock dividend. CJ will issue a new class B pref. Both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10 year duration. It gives an extra 2% of the face value to what Common gets. A total 4,226,513 new class B prefs will be issued.
• CJ previously had two class B prefs. Based on the historic discount % of these two, 2P’s discount to Common on the listing day is estimated at 33%. There will be nearly 10% price dilution in both Common and 1P. There will be a 10+%p difference in gain per share. 1P’s dilution-adjusted net gain per share stands at 13.61%, whereas Common is only 0.66%.
• Price ratio wise, 1P is in an undervalued territory. On a longer horizon, it is currently close to the 2Y mean. This stock dividend should push 1P further upward above the 2Y mean. CJ also said that it would give cash dividend. Current div yield difference is a historic high at 1.53%p. This should be another reason to push up 1P. I’d go long 1P and short Common at this point.

2. Company Visits: The Best of November/December 2018

During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…

• SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
• Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
• Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
• TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.

3. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles

• On December 18th, the Korean government announced numerous measures to reduce fine dust levels, including a significant increase in the number of hydrogen powered vehicles, including expanding hydrogen vehicles to 65,000 units by 2022 (cumulative). 
• The Korean government wants to encourage the growth of hydrogen powered economy and position the country as one of the global leaders in this segment. The Korean government plans to spend about 3.5 trillion won to support the Korean auto industry. The Korean government’s new plan is to expand the hydrogen vehicles to 65,000 units by 2022, which is a big increase from the previous plan of expanding the hydrogen vehicles to 15,000 units by 2022.
• The Hyundai Motor Group also recently announced a grand plan to expand its fuel cell vehicles with the announcement of its ‘FCEV Vision 2030.’ The Hyundai Motor Group plans to increase its annual production capacity for fuel cell systems to 0.7 million units by 2030, with plans to invest about $7 billion in the next 10 years to develop hydrogen fuel cell systems. 

4. LG Holdings Stub Trade: Current Status & Trade Approach

• LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
• I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
• I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.

5. Harbin Electric Expected To Be Privatised

Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending.

HE is PRC incorporated, therefore a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption. 

HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn or HK$7.27/share) was 65%.

HE issued 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) to its parent in January this year, at HK$4.56/share or a 60.9% discount to the June 2017 book value.  A similar discount to the June 2018 book value backs out HK$4.15/share, or ~67% upside from the undisturbed price, in line with the premium to ASMC’s Offer. 

A privatisation would require a scheme-like vote for the H-shares. HEC holds no H shares. There are 675mn H shares and no single shareholder controls a 10% (or more) blocking stake.

Dissension rights are available according to HE’s articles of association, although what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident. 

There are likely to be the customary PRC regulatory approvals required, however as HEC is already the controlling shareholder and an SOE, these conditions are not in doubt.

Should an offer emerge, expect completion in ~6 months from the initial announcement.

In this briefing:

1. Small Potatoes Nikkei 225 Changes on Christmas Day
2. SMC (6273 JP): Profits Start to Decline
3. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric
4. Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much

1. Small Potatoes Nikkei 225 Changes on Christmas Day

Specialty steel maker Nisshin Steel (5413 JP) is slated to merge with parent company Nippon Steel & Sumitomo Metal (5401 JP) as of January 1, 2019. For that, Nisshin Steel will be delisted on December 26th (i.e. the last day of trading is the 25th) and that means the Nikkei Inc was obliged to choose a replacement to take Nisshin Steel’s place in the Nikkei 225 and other indices.

On December 11th, the Nikkei Inc announced Itoham Yonekyu Holdings Inc (2296 JP) would take Nisshin’s place in the Nikkei 500 Index, announced that Japan Post Holdings (6178 JP) would join the Nikkei 300 Index, and announced that Dic Corp (4631 JP) would replace Nisshin Steel in the Nikkei Stock Average, better known as the Nikkei 225.

The only one which matters is the Nikkei 225 (the other two have tiny tracking), and this is not a huge index trade as both Nisshin Steel and DIC are deemed 500 yen par value stocks.

This is an event one could “miss.”

And it will happen on Christmas Day, after a long weekend for Japan traders. 

2. SMC (6273 JP): Profits Start to Decline

SMC’s year-on-year profit comparisons have turned negative. In the three months to September (Q2 of FY Mar-19), gross profit was down 3.7% year-on-year, operating profit was down 8.8% and net profit was down 9.6%. Operating profit was down 15.1% from Q1. Sales were up only 0.4% year-on-year in Q2, compared with 29.0% growth a year earlier, and down 7.5% from Q1. Management responded by cutting full-year guidance, implicitly changing anticipated 2H operating profit growth from +3.0% to -9.3% year-on-year.

This has all been discounted. The share price dropped 43% from its 52-week and all-time high of ¥55,830 on January 18 to a 52-week low of ¥31,580 on October 28, then rebounded to ¥40,000 in early December. Last Friday, December 14, it closed at ¥34,840. 

What happens next? The share price trend suggests that because year-on-year profit comparisons have finally turned negative, it’s time to start anticipating recovery. But the  fundamentals indicate that profit comparisons are likely to remain very difficult and most probably negative for at least three more quarters. Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China. The length and depth of the downturn and the timing and strength of recovery are both unclear. Any positive news on the trade front should support the share price, but while trade friction aggravates the cyclical downturns in the semiconductor and auto industries, it is not their cause.

At ¥34,840, the shares are selling at 17.0x our EPS estimate for FY Mar-19 and 17.7x our estimate for FY Mar-20. These multiples compare with a 5-year historical range of 13.8x – 28.5x. Our projected EV/EBITDA multiples for the same two years are 8.7x and 8.1x, which compare with a 5-year historical range of 7.0x – 15.1x. This should help put a floor under the share price. Interestingly, Japan Analytics’ chart analysis indicates that SMC has never been seriously overbought (see chart below).

3. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric

Weichai Power, China’s largest independent Diesel engine producer, has been looking for a new core business to survive in long term downward trend of its current core business (Diesel engine for commercial vehicle and construction machines) since 2012 when it acquired 25% stake of KION Group AG (KGX GR). By now Weichai owns KION (materials handling equipment), Dematics (integrated automated supply chain technology, directly own ed by KION),  Power Solutions International (PSIX US) (cleantech engine). It also has stakes in Ballard Power Systems (BLDP CN) (PEM fuel cell products), Ceres Power Holdings (CWR LN) (fuel cell technology and engineering). Lately, Weichai entered into an agreement with Westport Fuel System (WPRT.US) to develop and commercialise HPDI 2.0.

It seems Weichai decides to put its chip on fuel cell and low-emission engines. However, our analysis shows all the above investment would not be enough to secure Weichai’s market outlook in the next 5-10 years. 

This note focus on an evaluation of Weichai’s technology choices on a 5-10 year time horizon. We will discuss the company’s 12-months view in another note.   

4. Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much

Bharat Heavy Electricals (BHEL IN) had announced a sizeable share buyback a couple of weeks ago. This buyback amounting to total Rs16.3 bn has opened yesterday, but we think that it is unlikely to help much. In the coming years, the Indian power distribution companies (DISCOMs) are likely to buy more power from renewable sources and the proposed changes in regulation will expedite the shift. In addition, resolution of power assets in distress continues to remain slow and new orders for Bharat Heavy Electricals (BHEL IN) which is already struggling with slow moving orders, remain sluggish. Another interesting development is shift in interest from company’s key customers. For example, NTPC Ltd (NTPC IN) is exploring acquisition opportunities much more than greenfield expansion. All of this is certainly bad news for the Bharat Heavy Electricals (BHEL IN) stock. While the PAT nos. are small in absolute terms and even a slight positive change will make valuations look attractive for the stock, this will not have a meaningful impact unless things improve structurally for the company.

In this briefing:

1. Company Visits: The Best of November/December 2018
2. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles
3. LG Holdings Stub Trade: Current Status & Trade Approach
4. Harbin Electric Expected To Be Privatised
5. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

1. Company Visits: The Best of November/December 2018

During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…

• SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
• Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
• Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
• TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.

2. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles

• On December 18th, the Korean government announced numerous measures to reduce fine dust levels, including a significant increase in the number of hydrogen powered vehicles, including expanding hydrogen vehicles to 65,000 units by 2022 (cumulative). 
• The Korean government wants to encourage the growth of hydrogen powered economy and position the country as one of the global leaders in this segment. The Korean government plans to spend about 3.5 trillion won to support the Korean auto industry. The Korean government’s new plan is to expand the hydrogen vehicles to 65,000 units by 2022, which is a big increase from the previous plan of expanding the hydrogen vehicles to 15,000 units by 2022.
• The Hyundai Motor Group also recently announced a grand plan to expand its fuel cell vehicles with the announcement of its ‘FCEV Vision 2030.’ The Hyundai Motor Group plans to increase its annual production capacity for fuel cell systems to 0.7 million units by 2030, with plans to invest about $7 billion in the next 10 years to develop hydrogen fuel cell systems. 

3. LG Holdings Stub Trade: Current Status & Trade Approach

• LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
• I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
• I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.

4. Harbin Electric Expected To Be Privatised

Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending.

HE is PRC incorporated, therefore a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption. 

HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn or HK$7.27/share) was 65%.

HE issued 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) to its parent in January this year, at HK$4.56/share or a 60.9% discount to the June 2017 book value.  A similar discount to the June 2018 book value backs out HK$4.15/share, or ~67% upside from the undisturbed price, in line with the premium to ASMC’s Offer. 

A privatisation would require a scheme-like vote for the H-shares. HEC holds no H shares. There are 675mn H shares and no single shareholder controls a 10% (or more) blocking stake.

Dissension rights are available according to HE’s articles of association, although what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident. 

There are likely to be the customary PRC regulatory approvals required, however as HEC is already the controlling shareholder and an SOE, these conditions are not in doubt.

Should an offer emerge, expect completion in ~6 months from the initial announcement.

5. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

In this briefing:

1. Horiba (6856 JP): Bad News Largely Discounted
2. EM Relative Strength Is Bottoming: Overweight
3. FamilyMart: A Shrewd Head-Fake?
4. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
5. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend

1. Horiba (6856 JP): Bad News Largely Discounted

Horiba combines high gearing to semiconductor capital spending with a large and growing automotive test business characterized by upward trending but uneven profitability. At ¥4,545 (Friday, December 21, closing price), its share price has dropped by 53% from an all-time high of ¥9,590 reached last May. Falling demand for semiconductor production equipment and a downward revision to FY Dec-18 sales and profit guidance announced in November appear to be largely in the price. 

The downward revision, which cut projected full-year operating profit growth from 15.5% to 2.5%, followed a 22.2% year-on-year decline in operating profit in 3Q and implies a similar rate of decline in 4Q. The weakness is concentrated in Semiconductor Equipment and Automotive Test, the former due to a cyclical downturn in overall demand, the latter due to M&A-related and other one-time expenses. New Automotive Test orders continued to outpace sales, leading to a 9.5% increase in the order backlog during 3Q.

Automotive Test sales and profits should rise next year, while semiconductor equipment sales and profits seem likely to bottom out. In a report issued on December 17, SEMI (the semiconductor equipment and materials industry organization) forecasts a further decline in wafer fab equipment sales in 1H of 2019, followed by recovery in 2H. Other industry sources we talked to before the report was issued had similar views. 

This scenario could fall apart due to general economic weakness, American attempts to stifle China’s semiconductor industry, or both. On December 21, Reuters reported that Foxconn “…is in the final stages of talks with the local government of the Chinese city of Zhuhai to build a chip plant there with a total investment of about $9 billion… most of which would be shouldered by the Zhuhai government through subsidies and tax breaks…” This looks like a perfect target for the Americans, but whether or not they will notice or care remains to be seen.

Horiba is now selling at 9.6x our EPS estimate for this fiscal year, 13.4x our estimate for next year and 12.1x our estimate for FY Dec-20. These and other projected valuations are near the bottom of their 5-year historical ranges. If the Semiconductor Equipment division does not recover in 2H of 2019, historical data suggest that its operating profit could drop by 70% rather than the 47% we are now forecasting, resulting in a P/E ratio of 17x. Nevertheless, it is time to start considering when and at what price to buy Horiba.

2. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

3. FamilyMart: A Shrewd Head-Fake?

We think the failed tender but continued asset sale between Familymart Uny (8028 JP) and Don Quijote (7532 JP)  is astutely beneficial for Familymart Uny Holdings (8028 JP) and parent Itochu Corp (8001 JP) . More details below 

4. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook. 

Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in. 

Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.

THEY GOT NOTHING.

I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners. 

In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.

“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. 

Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected. 

The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.

There was a clearly-available trading strategy based on that. 

The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).

5. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend

• CJ Corp (001040 KS) announced a 0.15 stock dividend. CJ will issue a new class B pref. Both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10 year duration. It gives an extra 2% of the face value to what Common gets. A total 4,226,513 new class B prefs will be issued.
• CJ previously had two class B prefs. Based on the historic discount % of these two, 2P’s discount to Common on the listing day is estimated at 33%. There will be nearly 10% price dilution in both Common and 1P. There will be a 10+%p difference in gain per share. 1P’s dilution-adjusted net gain per share stands at 13.61%, whereas Common is only 0.66%.
• Price ratio wise, 1P is in an undervalued territory. On a longer horizon, it is currently close to the 2Y mean. This stock dividend should push 1P further upward above the 2Y mean. CJ also said that it would give cash dividend. Current div yield difference is a historic high at 1.53%p. This should be another reason to push up 1P. I’d go long 1P and short Common at this point.

In this briefing:

1. Wonik Merger Swap: Div-Adjusted Yield Is Now at 4.17% – Cancellation Risk Is Slim

1. Wonik Merger Swap: Div-Adjusted Yield Is Now at 4.17% – Cancellation Risk Is Slim

• Wonik IPS (240810 KS) / Wonik Tera Semicon (123100 KS) merger got shareholder approval yesterday. Spread now stands at 4.28%. Spread peaked at 5.12% on Dec 12. Dividend-adjusted spread is 4.17%.
• Tera Semicon is a bit of a concern. Its stock purchase price is 1.38% higher than current price. Worst case would be half of the minority shareholders claiming rights. Even if so, this would be less than ₩60bil. The company is liquid enough to absorb it.
• Local institutional arb traders have been seen doing this trade, at least partly. I’d make this trade when spread widens to 5~6%. I expect it to get to this level very soon. 

In this briefing:

1. EM Relative Strength Is Bottoming: Overweight
2. FamilyMart: A Shrewd Head-Fake?
3. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
4. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend
5. Company Visits: The Best of November/December 2018

1. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

2. FamilyMart: A Shrewd Head-Fake?

We think the failed tender but continued asset sale between Familymart Uny (8028 JP) and Don Quijote (7532 JP)  is astutely beneficial for Familymart Uny Holdings (8028 JP) and parent Itochu Corp (8001 JP) . More details below 

3. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook. 

Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in. 

Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.

THEY GOT NOTHING.

I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners. 

In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.

“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. 

Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected. 

The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.

There was a clearly-available trading strategy based on that. 

The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).

4. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend

• CJ Corp (001040 KS) announced a 0.15 stock dividend. CJ will issue a new class B pref. Both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10 year duration. It gives an extra 2% of the face value to what Common gets. A total 4,226,513 new class B prefs will be issued.
• CJ previously had two class B prefs. Based on the historic discount % of these two, 2P’s discount to Common on the listing day is estimated at 33%. There will be nearly 10% price dilution in both Common and 1P. There will be a 10+%p difference in gain per share. 1P’s dilution-adjusted net gain per share stands at 13.61%, whereas Common is only 0.66%.
• Price ratio wise, 1P is in an undervalued territory. On a longer horizon, it is currently close to the 2Y mean. This stock dividend should push 1P further upward above the 2Y mean. CJ also said that it would give cash dividend. Current div yield difference is a historic high at 1.53%p. This should be another reason to push up 1P. I’d go long 1P and short Common at this point.

5. Company Visits: The Best of November/December 2018

During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…

• SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
• Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
• Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
• TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.

In this briefing:

1. SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability
2. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
3. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns

1. SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability

• Sales on an upward trend, good core profit return, and earnings on an upward trend relative to its sector
• Well-positioned to win some upcoming bids for public and private projects such as the MRT Purple Line, expressway, and high-speed train to boost earnings moving forward, net profit up by 134% in 3Q18 YoY
• Strong backlog of public and private projects amounting to around Bt3bn to help sustain revenue growth, 104% in 3Q18 YoY
• Trades below Thai Industrials at 19CE* 4.1x PB, offers much higher ROE, and a solid balance sheet
• Risks: Delay in construction, volatility in raw materials prices

* Consensus Estimates

2. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

3. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns

At the time of the IPO we were quite negative on China Tower (788 HK) prospects. However, in recent calls and meetings our view has changed and become more constructive. Chris Hoare now believes that China Tower is managing to generate co-location growth outside the Master Services Agreement (MSA) and at a much lower level of capital intensity (perhaps up to 50%) than indicated in the IPO. Management has also proven to be more open to shareholders than expected and with lower capex, higher FCF generation we upgrade to a BUY with a HK$1.60 target price.  The stock has started to move as the market has begun to understand the more positive outlook. It will be interesting to see if China Tower is allowed to retain these benefits long term.

Summary China Tower forecasts: 

In this briefing:

1. LG Holdings Stub Trade: Current Status & Trade Approach
2. Harbin Electric Expected To Be Privatised
3. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
4. Hitachi (6501 JP): A Bold but Risky Acquisition of ABB’s Power Grids
5. SoftBank Corp IPO Valuation: Bull/Bear Case DCF Scenarios

1. LG Holdings Stub Trade: Current Status & Trade Approach

• LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
• I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
• I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.

2. Harbin Electric Expected To Be Privatised

Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending.

HE is PRC incorporated, therefore a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption. 

HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn or HK$7.27/share) was 65%.

HE issued 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) to its parent in January this year, at HK$4.56/share or a 60.9% discount to the June 2017 book value.  A similar discount to the June 2018 book value backs out HK$4.15/share, or ~67% upside from the undisturbed price, in line with the premium to ASMC’s Offer. 

A privatisation would require a scheme-like vote for the H-shares. HEC holds no H shares. There are 675mn H shares and no single shareholder controls a 10% (or more) blocking stake.

Dissension rights are available according to HE’s articles of association, although what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident. 

There are likely to be the customary PRC regulatory approvals required, however as HEC is already the controlling shareholder and an SOE, these conditions are not in doubt.

Should an offer emerge, expect completion in ~6 months from the initial announcement.

3. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

4. Hitachi (6501 JP): A Bold but Risky Acquisition of ABB’s Power Grids

Hitachi Ltd (6501 JP) announced the acquisition of an 80.1% stake in ABB Ltd (ABBN VX)’s power grids business for $6.4 billion. ABB will retain the remaining stake in the divested unit, which is valued at an EV of $11 billion. ABB’s power grids is a global #1 player and makes transformers, long distance electricity-transmission systems and energy storage units.

5. SoftBank Corp IPO Valuation: Bull/Bear Case DCF Scenarios

Softbank Group (9984 JP) is set to raise JPY2.65 trillion ($23.5 billion) through the Softbank Corp (9434 JP) IPO, Japan’s biggest-ever IPO. However, SoftBank Corp’s IPO which is set for 19 December is oversubscribed by less than double, according to press reports. This level of oversubscription is well below blockbuster Japanese stock debuts such as Mercari Inc (4385 JP) and Recruit Holdings (6098 JP).

In this briefing:

1. FamilyMart: A Shrewd Head-Fake?
2. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
3. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend
4. Company Visits: The Best of November/December 2018
5. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles

1. FamilyMart: A Shrewd Head-Fake?

We think the failed tender but continued asset sale between Familymart Uny (8028 JP) and Don Quijote (7532 JP)  is astutely beneficial for Familymart Uny Holdings (8028 JP) and parent Itochu Corp (8001 JP) . More details below 

2. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook. 

Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in. 

Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.

THEY GOT NOTHING.

I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners. 

In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.

“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. 

Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected. 

The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.

There was a clearly-available trading strategy based on that. 

The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).

3. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend

• CJ Corp (001040 KS) announced a 0.15 stock dividend. CJ will issue a new class B pref. Both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10 year duration. It gives an extra 2% of the face value to what Common gets. A total 4,226,513 new class B prefs will be issued.
• CJ previously had two class B prefs. Based on the historic discount % of these two, 2P’s discount to Common on the listing day is estimated at 33%. There will be nearly 10% price dilution in both Common and 1P. There will be a 10+%p difference in gain per share. 1P’s dilution-adjusted net gain per share stands at 13.61%, whereas Common is only 0.66%.
• Price ratio wise, 1P is in an undervalued territory. On a longer horizon, it is currently close to the 2Y mean. This stock dividend should push 1P further upward above the 2Y mean. CJ also said that it would give cash dividend. Current div yield difference is a historic high at 1.53%p. This should be another reason to push up 1P. I’d go long 1P and short Common at this point.

4. Company Visits: The Best of November/December 2018

During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…

• SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
• Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
• Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
• TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.

5. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles

• On December 18th, the Korean government announced numerous measures to reduce fine dust levels, including a significant increase in the number of hydrogen powered vehicles, including expanding hydrogen vehicles to 65,000 units by 2022 (cumulative). 
• The Korean government wants to encourage the growth of hydrogen powered economy and position the country as one of the global leaders in this segment. The Korean government plans to spend about 3.5 trillion won to support the Korean auto industry. The Korean government’s new plan is to expand the hydrogen vehicles to 65,000 units by 2022, which is a big increase from the previous plan of expanding the hydrogen vehicles to 15,000 units by 2022.
• The Hyundai Motor Group also recently announced a grand plan to expand its fuel cell vehicles with the announcement of its ‘FCEV Vision 2030.’ The Hyundai Motor Group plans to increase its annual production capacity for fuel cell systems to 0.7 million units by 2030, with plans to invest about $7 billion in the next 10 years to develop hydrogen fuel cell systems.