US sanctions against Venezuela’s central bank and PDVSA, announced on Monday (January 28), have sent refiners on the US Gulf Coast scrambling for replacement supplies of heavy crude. Though they do not cover the business of non-US entities with PDVSA, the move has put Venezuelan crude importers in China and India on notice.
For US refiners, the three main alternative suppliers of heavy, sour crude — Canada, Mexico and Saudi Arabia — are either constrained in their ability to step up supply or are deliberately reducing shipments.
Venezuela’s upstream oil sector has been limping for a long time now. But the sanctions against PDVSA may deal it a death blow. The crude market is keeping a wary eye on the situation but appears unwilling to price in the worst-case scenario for the time being, as it remains fixated on the global economic prospects and concerns over oil demand growth.
We look at the fallout of the latest move by Washington on the primary entities doing oil business with Venezuela: refiners in the US, China and India (the main markets for Venezuelan crude) and Russian giants Rosneft and Lukoil.
We also discuss the likelihood and impact of Venezuelan crude production grinding down from the current 1 million b/d to zero.
SK Telecom (017670 KS) reported disappointing 4Q18 earnings results. SK Telecom’s revenue of 4,351.7 billion won was 0.2% lower than consensus and its operating profit of 225 billion won was 23% lower than the consensus in 4Q18. Despite the disappointing 4Q18 results (especially due to lower operating income and lack of flow through of SK Hynix dividends to SKT), we remain positive on SK Telecom.
We believe that SK Telecom’s 10,000 won DPS in 2018 is a disappointment. However, we believe the stage has been set for higher DPS policy, linking SK Hynix’s dividends to SK Telecom and as mentioned in the conference call numerous times, this is likely to be announced in the AGM in March. In terms of amount, we believe 13,000 won to 15,000 won appears to be reasonable in 2019.
The company’s comment about its sales and profits improving starting in 2H 2019 is consistent with its previous statement in the third quarter conference call. However, the company’s statement about its revenue target of more than 1 trillion won growth YoY in 2019 is new and positive. In 2018, SK Telecom generated consolidated sales of 16.9 trillion won, down 3.7% YoY. If the company is able to generate revenue of 17.9 trillion won in 2019, this would represent a growth of 5.9% YoY. The current consensus estimate of the company’s sales is 17.47 trillion won in 2019. Thus, the company has basically guided the 2019 sales target by 2.5% higher than the current consensus estimate.
TDK revised its FY03/19E guidance following the 3QFY03/19 earnings release, which underperformed both consensus and LSR expectations.
The company has been affected by the US-China trade war and the deceleration of the Chinese economy in the third quarter.
Revenue guidance for FY03/19E has been decreased to JPY1,370bn from JPY1,420bn (-3.5%) projected in October 2018. OP guidance for the year has been reduced to JPY110bn compared to the previous expectation of JPY120bn (-8.3%).
On our estimates, TDK is currently trading at a FY1 PE of 12x, lower than its historical median of 16.4x.
For the December quarter results, the market is focusing on the slowdown of the revenue growth, but we notice that the growth rate of operating profits recovered.
In two of our previous reports, we mentioned BABA’s efforts on cost control in the second half of 2018. Now we can see the results.
We believe the most important risk is the significant operating losses in the minor business “digital media”.
The P/E band suggests that the stock price has an upside of 40%.
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This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.
Our January Coverage of Hong Kong Connect southbound flow
Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
I will provide a trade approach on each name in a follow-up post.
SCSK currently holds 2,900,000 shares or 55.59% of voting rights.
The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.
The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments.
A Japanese newspaper recently reported that JDI is expected to post a consolidated loss for the current fiscal year. However, the company claims that the newspaper report was not based on any forecast made by JDI. The company has stated that it is currently calculating topline and bottomline for the third quarter and it expects the economic slowdown in China, prolonged user lifecycles for smartphones and the US China trade war to in fact have a greater than expected impact on the company’s financial performance. While its third quarter results are to be released in mid-February 2019, consensus expects the company to turnaround its losses to make an overall net profit for the year.
SCSK currently holds 4,768,000 shares or 69.52% of voting rights.
The Tender Offer is at ¥2,750/share which is a 39.3% premium to the last traded price of the day before the announcement (¥1,974), a 38% premium to the one-month average, and a 41% premium to the 3-month and 6-month averages.
It is being done at about 7.5x TTM EV/EBITDA.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
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Baidu’s new methodology directs the large majority of search results to its in-house functions, especially to its blog function BJH (百家号).
Baidu began to hide websites of search results after the change above was widely criticized. However, as a result, users can hardly find authoritative websites.
Because of these changes, it is hard for users to find useful content.
We believe Baidu is giving up its existing advantages for users and clients.
We also believe that users will choose to leave if the platform tries to choose content for them. If users leave Baidu, advertisers will follow them.
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EPO’s board has recommended Mastercard’s Offer to its shareholders. Visa’s Scheme meeting, initially scheduled for the 21 February, has been adjourned.
Mastercard’s £0.33/share offer compares to Visa’s £0.30/share tilt, and represents a 340% premium over EPO’s undisturbed price of £0.075/share.
The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag. Mastercard will move to cancel the shares on AIM if it achieves 75%.
EPO’s shares increased to £0.282 following Visa’s offer, but currently trades at ~£0.37, 12% above the latest offer, suggesting a higher bid is likely, or at least expected.
Cross-border payments are an estimated US$30tn business and both credit card giants are registering higher annual growth and billions of dollars in fees. EPO is a drop in the ocean for Mastercard (US$205bn market cap) and Visa (US$297bn).
Arguably this deal could run significantly higher – the question is how desperate these two players are towards buying now as opposed to building.
And it’s not just small transactions in the payment industry getting attention, after Fiserv Inc (FISV US)‘s announcement earlier this month it would merge with First Data Corp (FDC US)in a US$22bn transaction, and Paypal Holdings (PYPL US)‘s US$2.2bn acquisition of Sweden’s iZettle last year.
The S&P 500 has paused just below logical resistance at the downtrend, and we believe the equity market is in wait-and-see mode for incremental information on a variety of issues including trade talks, Fed action and earnings. Meanwhile, We are upgrading equal-weighted Technology to overweight.Our equal-weightedTech Sector has surged to the top of our RSR ranks due to broad-based strength in semiconductors last week. Solar stocks are another Group that is emerging as leadership.In today’s report we highlight attractive small-cap Technology stocks, as well as selection of key stocks (MSFT, AMZN, GOOGL, V, NFLX, and ADBE) and subsectors (semis, biotech, and homebuilders) which are all up against logical price resistance.
Tesla Motors (TSLA US) stock is in a tailspin, again. Closing at $297 today, the stock is down 11% ytd, well off its high last August at $379 and trailing even 2018’s comparatively tepid average of $316. Tesla bondholders have remained wary, with the benchmark 5.3% senior notes still hovering near 86 where they’ve traded since last September after plunging more than 10 points versus the beginning of 2018.
Investors are spooked as more Wall Street analysts have slashed their formerly ambitious estimates for Tesla’s fourth-quarter and 2019 revenue, profit, and cash flow primarily due to what they now identify as lower than expected demand and profitability for Model 3. The thing is, Tesla has been signaling escalating troubles for months as I have warned in “Great Magic Trick Tesla; Now Do It Again” which digested Tesla’s “miracle” third quarter and “Tesla: Down to the Wire” which reviewed the frantic close of the fourth quarter).
So while it’s interesting that market estimates are collapsing toward my previously below-consensus estimates–and even I lowered my already cautious 2019 numbers–I’m concerned about other potentially quake-worthy news affecting performance for 2019 and beyond which we are not getting from Tesla.
Yet three weeks later we still have no idea how much this mega-plant will cost, or whether Tesla has “funding secured” to pay for it–and these may not even be most troubling facts investors don’t have.
Whatare Musk, and Tesla, and Tesla’s banks, and Musk’s China-based financiers not telling us about Shanghai Giga 3?I suspect the answers may come with potentially nasty surprises.
In October 2018,Dreamtech Co Ltd (192650 KS) first provided its initial IPO prospectus but due to difficult market conditions, it withdrew its IPO last year. Dreamtech is trying to complete its IPO again this year for a listing in March. Established in 1988, Dreamtech makes modules and sensors for smartphones, auto vehicles, home appliances, and health care products.
The bankers have reduced the IPO price range to 11,000 won to 13,000 won (from 13,400 won to 16,700 won previously). The mid-point of the IPO price range has been reduced by 20% versus its first try at the IPO in 4Q18.
The bankers used 15 companies including SEMCO and SimmTech as comparable companies to Dreamtech. The average P/E of the comps is 14.6x (based on the annualized net profit in 1Q-3Q18). The bankers then took the annualized net profit of Dreamtech in 1Q-3Q18 and applied this P/E multiple which resulted in an implied market cap of 540.5 billion won or implied price of 17,286 won. After applying an additional 24.7% – 36.3% IPO discount, this resulted in the IPO price range of 11,000 won to 13,000 won.
United Microelectronics Corp (2303 TT) (UMC), the fourth largest foundry company globally, reported its 4Q18 earnings after market close yesterday. UMC reported disappointing results with sales of 35.5 NT$ billion, which was down 3% YoY and 3.7% lower than the consensus. It also reported EPS of NT$ (0.14). The Street had been expecting a positive EPS of $0.11. United Microelectronics Corp (2303 TT) shares are down 5% following its poor 4Q18 earnings.
In 4Q18, wafer shipments declined 5.2% QoQ and utilization rate was also lower at 88%, compared to 94% in 3Q18 and 90% in 4Q17. The company blamed the poor results mainly due to the weak demand for smartphones and crashing demand for cryptocurrency mining machines.
According to UMC, it expects the entire global foundry market growth to be flat this year. The company has already started to observe inventory correction within the entire semiconductor supply chain starting 4Q18. It expects the inventory correction is likely to last more than 1Q19.
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China Tower Corp, the owner and operator and telecommunication tower network in China, listed on August 8th last year. Over the past six months, the stock has returned 35% with the addition of a number of global investors to its share registry.
As it heads into lock-up expiry in Feb, in this insight we would like to examine China Tower’s performance since listing.
We note that China Tower has delivered a decent set of results for 3Q2018 and it will be a key beneficiary of China’s push into 5G built-up with little uncertainty.
The current valuation of the company was still lower than international tower providers.
With the improving operating metrics and stable income, we believe there are still upsides for China Tower Corp post-lock-up expiry.
Advanced Micro Devices reported earnings of $1.42 billion for fourth quarter 2018, up 6% YoY, narrowly missing consensus estimates by $20 million. For 2018 as a whole, AMD grew revenues by 23% to $6.48 billion. On the conference call, CEO Lisa Su claimed that the company exited the year having met its long-stated interim goal of 5% server market share. Furthermore, she reiterated her company’s intention to double that market share within four to six quarters.
On the earnings call, the company revealed that combined data center CPU and GPU sales for the quarter amounted to mid-teens percentage of overall revenue, roughly equally split between the two. This implies that data center GPU revenues were in the order of $105 million, amounting to ~20% of Nvidia‘s recently announced guidance miss for the quarter.
Paradoxically, AMD’s ambitions in the data center will remain largely unthwarted by the current semiconductor downturn, their market share gains will come at the expense of Intel and NVIDIA. Our original Opteron thesis remains intact and reinforced by the unexpectedly strong data center GPU market share gains against NVIDIA.
When we wrote in 3Q18 that there were scope for *upgrades* to Facebook’s earnings, the sell-side remained cautious. With the stock up 12% after-hours, we assess whether Facebook has further legs to the investment case. More details below.
A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).
Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.
In our view, the main logistics takeaways from BABA’s results are:
Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view.
CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19. This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.
Ceva’s Board has concluded that “the offer price of CHF 30 per CEVA share is reasonable from a financial perspective and that the Offer provides a fair exit opportunity for shareholders who wish to receive cash for their CEVA shares”.
However, CEVA Board does not recommend that shareholders tender shares in the belief that shareholders could realise a higher value with their continuing investment, due to:
the growth potential inherent in the CEVA business.
the effects of the acquisition of the freight management business of CMA CGM.
the strategic partnership between CEVA and CMA CGM.
According to Ceva, “the valuation of the revised business plan indicates a midpoint value of 40 francs per share, well above the share price of 30 francs offered“.
CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.
CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. It is the intention of CMA CGM to maintain CEVA’s listing.
After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended.
Shares are currently trading (marginally) through terms.
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United Co Rusal (486 HK)‘s discount to NAV narrows after sanctions are lifted, but remains well off its pre-sanctions level.
Preceding my comments on HHI and Rusal 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%.
On Tuesday, TPG Telecom Ltd (TPM AU) surprisingly cancelled plans to roll out its mobile network in Australia, blaming the government’s ban on using Huawei Technology (40978Z CH) for 5G equipment for its decision. The market seems to be undecided if TPG’s decision will lead to Australian Competition and Consumer Commission (ACCC) approving the TPG/VHA merger as TPG shares rose 3%, but Hutchison Telecomm (Aust) (HTA AU) (50% owner of VHA) shares declined 4%.
The bull view is that TPG’s decision removes ACCC’s primary concern and paves the way for approval. The bear view is that TPG’s eggs are all in the merger basket and the ACCC could call TPG’s bluff and block the merger. Overall, TPG’s decision to cancel its network rollout plans does not change our view that the risk-reward remain skewed towards the downside.
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The recent collapse of Xiaomi Corp (1810 HK)’s shares after the end of its six-month lock-up period has focused minds on upcoming lockup expirations. Pinduoduo (PDD US) is the next major Chinese tech company with an upcoming lock-up expiration – its six-month lock-up period expires on 22 January.
We have been bulls on Pinduoduo with the shares up 32% since its IPO. While we are not privy to the shareholding plans of Pinduoduo’s shareholders, we believe that Pinduoduo will likely not mirror Xiaomi’s share price collapse after the end of its six-month lock-up period.
After 6.5bn+ shares came off lockup last week (by Travis Lundy’s estimate), Xiaomi made a placement equal to about 1% of shares outstanding at a sharp discount to the close. This follows a block of 120mm shares last Thursday at HK$8.80 (at a 13+% discount); Apoletto reported a distribution (sale) of 594+mm shares on January 9th to reduce their total position across all funds from 9.25% to 4.99%; and there was a block placement launched earlier in the week for 231mm shares for sale between HK$9.28 and HK$9.60.
While as much as 1bn shares may have already transacted (assuming most of the 594mm shares distributed by Apoletto have been sold in the market), there were ~6.5 billion shares which could be sold and an additional 1bn+ of additional conversions designed to be sold.
In another 6 months, there will be another 4bn+ shares which come off LockUp. In total, that is up to 10-11bn shares coming off lockup between a week ago and 6 months from now. That is four times the total IPO size, and 70-80% of the total position coming off lock-up has an average in-price of HK$2.00 or less. Apoletto’s average in-price was HK$9.72.
Travis is also skeptical that the company’s capital deserves a premium to peers, and is not entirely convinced that the pre-IPO profit forecasts are going to be met in the medium-term. In the meantime, a lot of the current capital structure base is looking to get out.
Nota Bene: Bloomberg’s 3bn-shares-to-come-off-lockup number was confirmed by Travis (the day he published the piece linked below) with the people who tallied the info for the CACS function. They had neglected to count a certain group of shareholders. The actual number will be well north of 6 billion shares.
After the close of trading on the 15 January, NTT announced it had repurchased 3.395mm shares for ¥15.349bn in the first 7 trading days of the month, purchasing 10.9% of the volume traded. This announcement was bang in line with Travis’ insight the prior day, where he anticipated the buybacks would soon be done.
The push to buy shares on-market at NTT vs off-market at NTT Docomo has had some effect but not a huge effect. The NTT/Docomo price ratio is a bit more than 5% off its late October 2018 lows prior to the “Docomo Shock”, but the ratio is off highs. Off the lows, the Stub Trade has done really well.
NTT DoCoMo bought back ¥600bn of shares from NTT at the end of 2018. That means NTT DoCoMo could buy back perhaps ¥300-400bn of shares from the market over the next year or so before ‘feeling the need’ to buy back shares from NTT again. NTT will likely buy back at least ¥160bn of NTT shares from the government in FY19 starting April 1st, which means there will be room to buy back another ¥100bn from the government before not having any more room to do so.
There could be an NTT buyback from the market in FY2019, and one should expect that for the company to buy back shares from the government again, if NTT follows the pattern shown to date, there should be another ¥400-500bn of buybacks from the market over the next two years, and if EPS threatens a further fall on NTT DoCoMo earnings weakness, NTT might boost the buyback to make up for that.
The very large sale by NTT of NTT Docomo shares this past December will free up a significant amount of Distributable Capital Surplus.
On a three-year basis, Travis would rather own NTT than NTT Docomo. But he expects the drift on the ratio will not be overwhelming unless NTT does “something significant”.
Singaporean real-estate group Capitaland has entered into a SPA to buy Ascendas-Singbridge (ASB) from its controlling shareholder, Temasek. The proposed acquisition values ASB at an enterprise value of S$10.9bn and equity value of S$6.0bn. Capitaland will fund the acquisition through 50% cash and 50% in shares (862.3mn shares @$3.25/share – ~17% dilution). Capitaland-ASB will have a pro-forma AUM of S$116bn, making it the largest real estate investment manager in Asia and the ninth largest global real estate manager.
Hitachi Ltd (6501 JP)announced it had received approvals from the relevant government authorities, and its Tender Offer for Yungtay (at TWD 60/share) has now launched. 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 between the offer details as discussed in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) back in October, 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 deal looks pretty straightforward, but the stock has been trading reasonably tight to terms, with annualized spreads on a reasonable expectation of closing date in the 3.5-4.5% annualized range for a decent part of December, rising into early January before seeing a jump in price and drop in annualized on the second trading day of the year. This shows some expectation of a fight and a bump.
To avoid that fight and bump – the Baojia Group, which supported Hsu Tso-Ming’s board revolt last summer (discussed in the previous insight), has reportedly accumulated a 10% stake – Hitachi has lowered its minimum threshold to complete the deal to get to one-third plus a share. Given that it controls 11.7% itself as the largest shareholder, and has another 4.3% from the chairman in the bag, that means it needs about 17.3% of the remaining 84% to be successful.
Because the minimum is only about 21% of the float, this deal has quite decent odds of getting up unless someone makes a more serious run for it. As an arb, Travis sees a small chance of a bump because of some potential harassment value by Hsu Tso-Ming’s friends at Baojia Group. Hitachi has already taken that into account with the lowering of the minimum, but it is possible that enough noise can be created to obtain a bump.
Courts, a leading electrical, consumer electronics and furniture retailer predominantly in Singapore and Malaysia, has announced a voluntary conditional offer from Japanese big box electronics retailer Nojima Corp (7419 JP) at $0.205/share, a 34.9% premium to the last closing price. The key condition to the Offer is the valid acceptances of 50% of shares out. Singapore Retail Group, with 73.8%, has given an irrevocable to tender. Once tendered, this offer will become unconditional. The question is whether minorities should hold on.
Barings/Topaz-controlled Singapore Retail Group are exiting, having not altered their shareholding since CAL’s 2012 listing. If Nojima receives acceptances from 90% of shareholders, it will move to compulsory delisting of the shares. If the Offer closes with Nojima holding >75% of shares, it could still launch an exit/delisting offer pursuant to Rule 1307 and Rule 1308.
Long-suffering shareholders may wish to hold on for a potential turnaround should Nojima extract expected synergies. But this looks like a decent opportunity (of sorts) to also exit along with the controlling shareholder.
The board of Navitas, a global education provider, has unanimously backed a revised bid by 18.4% shareholder BGH Consortium of A$5.825/share, 6% higher than its previous rejected offer and a 34% premium to undisturbed price.
The revised proposal drops the “lock out” conditions attached to BGH Consortium’s previous offer, enabling BGH to support a superior proposal. BGH has also been granted an exclusivity period until the 18 Feb.
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.
Investors lashed out at Panalpina’s board last year (after years of griping by some of the top holders), eventually forcing the main shareholder to support the installation of a new chairman of the board.
The stock is clearly in play. And the sector is seeing ongoing consolidation. DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’sCeva Logistics AG (CEVA SW). Media reports suggested Switzerland’s Kuehne & Nagel are also rumoured to be considering an offer for Panalpina.
Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46%. If EGS wants to see OPMs up at global standards level – in the area of DSV and KNIN – then they may need to see someone else manage the assets. If EGS is steadfastly against Panalpina losing its independence, a deal will not get done. That said, if a deal does not get done because the board reflects the interest of EGS, that proves the board is not as independent as previously claimed. But one must imagine there is a right price for everything.
Earlier this month, Bristol Myers Squibb Co (BMY US)and Celgene announced a definitive agreement for BMY to acquire Celgene in a $74bn cash and stock deal. The headline price of $102.43 per Celgene share plus one CVR (contingent value right) is a 53.7% premium to CELG’s closing price of $66.64 on January 2, 2019, before assigning any value to the CVR. The CVR has a binary outcome: it will either be worth zero or will be worth a $9 cash payment upon the FDA approval of three drugs.
While there don’t appear to be any major problems in commercial products, it remains to be seen whether the antitrust authorities go further into the pipeline to determine whether potential competition from drugs still in clinical trials could present issues in the future.
Overall, the merger agreement appears fairly standard, but it does (also) require BMY shareholder approval which typically overlays a higher risk premium. For John DeMasi, the attraction for this arb is the current risk/reward.
ANTYA Investments Inc. chimes in on the deal and considers it unlikely that a suitor for CELG emerges at a higher price, whereas rumours of suitors for BMY abound, and would therefore make a long bet on BMY.
On the 10 January, PAH announced CKI had entered into a placing agreement to sell 43.8mn shares (2.05% of shares out) at HK$52.93/share (a 4.7% discount to last close), reducing CKI’s holding in PAH to 35.96%. This is CKI’s first stake sale in PAH since the 2015 restructuring of the Li Ka Shing group of companies, and it has been over three years since the CKI/PAH scheme merger was blocked by minority shareholders. It is also around two months since FIRB blocked CKI/PAH/CKA/CKHH in its scheme offer for APA Group (APA AU).
I don’t see a sale of PAH as being a realistic outcome – this is more likely an opportunity to take some money (the placement is just US$328mn) off the table. CKI remains intertwined with PAH via their utility JVs in Australia, Europe and UK, and in most investments, together they have absolute control.
I would also not discount a merger re-load. The pushback in 2015 was that the (revised) merger ratio of 1.066x (PAH/CKI) was too low and took advantage of CKI’s outperformance prior to the announcement. That ratio is now around 0.9x. A relaunched deal at ~1x would probably get up – the average since the deal-break is 1.02x and the 12-month average is 0.95x. And a merger ratio at these levels would ensure Ck Hutchison Holdings (1 HK)‘s holding into the merged entity would be <50%, so it would not be required to consolidate. This recent sell-down does not, however, elevate the near-term chances of a renewed merger.
The takeaway is that the stub is very choppy, it often (but not always) widens after the full-year results, and the highest implied stub/EBITDA occurred outside of FY16, its most profitable year. The downward trend since January last year reflects the anticipated ~17% decline in EBITDA for FY18 to ₩148bn, its lowest level in the past four years.
Sanghyun mentioned that there are signs of improving fundamentals for local cosmetics stocks (as reflected in CapIQ) and that Holdcos have traditionally been more susceptible to fundamental changes. This should augur a shift to the upside in the implied stub.
I see the discount to NAV at 27%, right on the 2STD line and compares to a 12-month average of 3%. This looks like an interesting set-up level.
The Offer for Selangor Properties (SPR MK)has been bumped again, to RM6.30 from RM6.00. The original Offer was pitched at RM5.70/share. This latest proposal is a 55% premium to the undisturbed price and 10% above the initial bid. This is starting to look reasonable, at 0.89x P/B. On balance, this will probably now get up. (link to my earlier insight: Selangor Props – Privatisation Offer Does Not Reflect Full Value)
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Offer close date, (failing which) 31-Jan-2019 – Termination Date
C
Source: Company announcements. E = Smartkarma estimates; C =confirmed
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Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.
On 30 August 2018, TPG Telecom Ltd (TPM AU) announced the recommended merger of equals with Vodafone Hutchison Australia (VHA). The consensus view was that the Australian Competition and Consumer Commission (ACCC) would approve the merger before the release of ACCC’s statement of issues. However, recent events suggest that regulatory approval from the ACCC is far from a sure thing.
We believe that TPG’s current share price provides limited upside should the ACCC approve the merger. On the other hand, there is material downside risk should the ACCC block the merger. Consequently, the risk-reward is skewed towards the downside.
This is the list of the realistically tradable prefs in Korea. Korea has a total 116 perfs. I filtered them by > ₩100bil market cap and > ₩0.2bil DTV. This filtering gives a total 23 pairs for share class trade. It is generally shown that dividend yield difference and liquidity affect pref discount. The higher div yield difference and the higher liquidity are, the less pref discount is.
Two names are currently catching my eye. Samsung E-M had a major recovery move last Friday mainly on bargain hunting. The duo made +2σ jump in one single day. Common/pref price ratio is now at 142% of σ. This much premium for Common is something we haven’t seen in nearly 6 months. The recent price rally should be more of a sentimental boost. Short-term correction should be expected.
CJ CheilJedang is also an interesting one here. The duo made -1.3σ jump last Friday. They are now at -185% of σ. Common/pref price ratio is currently close to 120D low on a 20D MA. The shares have been drifting sideways for almost a year now. There is no signal indicating any distinct trend that will break this sideways drift. This duo is also expected to see a quick mean reversion.
2018 full results due on the 18th February 2019: Since our initial report on 3rd September 2018, SIQ’s share price has declined some 21% versus the ASX All Ordinaries fall of circa 8%. With results due, we expect the market to refocus on Smartgroup and its good growth story. This is important as much of the focus for the group in the last two years has been on the acquisitions being made. To see management return focus to organic growth, post these acquisitions should help investor confidence in SIQ. Specifically concentrating on the cross-selling of its services whilst benefiting from Australia’s tight labour market and corporates chasing incremental cost savings can only be positives.
Review and upgrade to forecasts: With the benefit of further time to review SIQ’s business progress and the composition of our forecasts, we have increased fiscal 2018 and 2019 EPS forecasts 10% and 12% respectively. Much of our thought process is at the SG&A line, whilst the view that the overall trajectory of earnings remains on track.
2019 we expect to be a year of consolidation, with consistent growth: In the two years to the end of fiscal 2017, SIQ had made six acquisitions. These acquisitions were aimed at both industry consolidation, as well as complementary product build out. We expect 2019 to be a year where the benefits from these acquisitions are exhibited in both the bottom and top-line growth. We expect this even though 2019 may present macro challenges.
We reiterate our view that SIQ offers Growth at a Reasonable price: SIQ’s forward multiples are positive for a company which has posted a long term book value growth rate of circa 7%(net of dividend) and is forecast to post a similar rate 2019 and in 2020. Based on our 2019 EPS forecasts SIQ should be able to deliver circa A$0.62/share, which implies 18% YoY growth and a 13 times P/E.
Multiple news article mentioned SK Hynix’ weak Q4 2018 numbers due to the slowdown in the smartphone markets but the fact remains that:
smartphone is the dominant communication tools
smartphone penetration still has room to grow
current model of smartphone is likely to remain the same for the next foreseeable future
lower end smartphones will likely be the next growth driver
In this report we will discuss the following:
Q4 2018 result
Price action in 2018
Margin comparison with the peers
Exposure to the growing affordable smartphone segment
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Ebang (EBANG HK) is a Chinese designer of bitcoin mining machines which are sold under the Ebit brand. Ebang refiled its draft prospectus with HKEX on 20 December 2018, but the IPO plans of cryptocurrency related companies are in a state of flux. Last week, the CEO of the Hong Kong Exchanges and Clearing, said that companies seeking to go public in Hong Kong should show consistency in their business models, in response to questions about the IPO applications of Bitmain Technologies Ltd (1374554D CH), Canaan Inc. (CANAAN HK) and Ebang.
While 1H18 results were strong, Ebang cautions that it experienced significant decreases in revenue and gross profit for 3Q18 compared to 2Q18. In the absence of any 3Q18 financial metrics, we scrutinised the financial accounts to find clues on the extent of the slowdown. Our analysis of the financial accounts’ leading indicators points to a rapid slowdown.
We have been positive on the Chinese telcos, in part due to our thesis that peak 5G capex expectations were too high for China Mobile. That has largely played out as capex expectations have come down and the stock has performed well. The telcos see a steady state approach to 5G capex as the best way forward given the lack of a current business case. However, there are larger forces at work which imply higher capex – the need to support Huawei/ZTE (763 HK) given the moves against Chinese equipment manufacturers internationally, and the likelihood of economic stimulus packages.
It was announced today that Saudi Aramco plans to purchase up to 19.9% stake in Hyundai Oilbank for about 1.8 trillion won from Hyundai Heavy Industries Holdings (267250 KS) (HHIH), which would suggest nearly 9 trillion won in total value for Hyundai Oilbank. The following are the major highlights of the potential investment in Hyundai Oilbank by Saudi Aramco:
Higher dividends for both Hyundai Oilbank and Hyundai Heavy Industries Holdings – At end of 2018, HHIH converted nearly 2 trillion won of capital surplus into retained earnings, which should allow the company to pay out higher dividends. HHIH has already declared that its long term plans include maintaining a 5% dividend yield and more than 70% dividend payout.
Greater Investments in Robotics – HHIH is likely to use a big portion of the proceeds from the sale of its stake in Hyundai Oilbank to further invest in the robotics business.
Our sum-of-the-parts valuation of Hyundai Heavy Industries Holdings suggests a value of 487,000 won, which is 28% higher than current share price.
Samsung Electronics (005930 KS) and SK Hynix Inc (000660 KS) have cleared key resistance levels that open the way for intermediate gains with a ST peak due in late January that will offer better entry points on weakness in February.
The rally from late December is moving into extended territory. Buy volumes have improved as has upside momentum.
This breakout has also induced a tactical buy signal in the Kospi 200 index above the pivotal 278 resistance but breadth is still mixed to weak. We need to see better upside action in the broader market for a sustainable rise in Korea.
In this version of the GER weekly events wrap, we assess the recent lock-up expiry for Pinduoduo (PDD US) which may have led to a short squeeze. Secondly, we assess the debt tender for Softbank Group (9984 JP) which may be supporting the equity. Finally, we provide updates on bids for M1 Ltd (M1 SP) and Healthscope Ltd (HSO AU) as well as update a list of upcoming M&A and equity bottom-up catalysts.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
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DIGI (DIGI MK) reported a slightly disappointing set of 4Q18 figures, carrying on from 3Q. Service revenue contracted by 2% after growing 0.1% in 3Q. However, the overall margin was slightly better driven by an improved equipment margin, with EBITDA up 2.2% YoY. Underlying (ex-equipment) margins dipped by 80bp. DIGI’s KPIs look in line, with subscribers down by 140k (in line with historic trends) and ARPUs flat sequentially. Data usage continues to grow (now almost 10GB/ month/sub) from already high levels. The dividend was slightly down at 4.8 sen, suggesting dividends might have peaked. Guidance for 2019 is in line with our expectations: flat revenues and low single digit growth in EBITDA on a pre-IFRS basis. We have upgraded DIGI from Reduce to Neutral, the first time in 6 years we have not been Sellers! After five years of price declines and revenue erosion, Malaysian telcos look much closer to global norms now. With DIGI down 30% from its high in early 2015, and with earnings having stabilized we are now comfortable with a neutral rating.
Nvidia Corp (NVDA US) is moving back toward macro chart support levels. If these levels hold there is scope for a basing cycle to unfold that would lead to a positive turn for NVDA. During this process, Advanced Micro Devices (AMD US) will feel additional pressure to test macro support outlined in AMD Buy Support and Tactics . We reiterate macro support levels in this webcast.
NVDA’s MACD reveals a clear cycle – The break below floor support will now act as a ceiling and does telegraph a new and lower trading range.
Our SOX sell call last summer still has a few final touches to complete the major bear cycle with a key low due near May 2019. We are near, but not yet at the cycle trough.
Softbank Group (9984 JP) released the results of its 750mn USD tender for its Euro and USD commercial paper, which could also portend further support for the equity ahead of results next Wednesday. More details below.
With its nationwide fiber optic network infrastructure, NTT continues to dominate the fixed line broadband market in Japan with 68% market share. In this Insight we explore the fixed line broadband market in Japan today and how it is evolving, especially with the increasing dominance of “collaboration” offerings that bundle fiber with mobile services.
Mobile services are getting a lot of attention today, especially in the run up to 5G launches over the coming 12 months, but without fiber backhaul, 5G would be a nonstarter. In this Insight we investigate what 5G will bring and what is needed to support it as well as the telcos’ latest plans.
NTT is not just an incumbent telecom operator, it’s also a key player for future technologies and provides the physical infrastructure and architecture for many of the industries new services.With all the talk about 5G it is sometimes easy to forget that fixed line networks are still necessary. With NTT’s strong fiber-based network and its collaborations with NTT Docomo and many other partners in mobile and data, we believe NTT is well positioned to be a key and winning player in the evolving telecom and technology space.
Intel‘s fourth quarter 2018 results last week missed on earnings to the tune of $360 million. That, combined with a tepid outlook for 2019 YoY growth of just 1% spooked investors, sending the stock down over 5% on three times the normal trading volume the following day.
Lagging process technology leadership, ever increasing competition from ARM, AMD and NVIDIA, lower modem sales as iPhone unit shipments decline, falling NAND prices, data center spending significantly reduced as the hyperscalers digest and optimise their record-breaking build-out will all weigh heavily on the company in the coming quarters.
After a record breaking 2018 which saw the company’s annual revenue grow 13% to edge north of the $70 billion mark for the first time ever, Intel now faces a growing array of headwinds which will dog the company for the Year of the Pig.
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