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.
On December 17th 2018, the TSE announced a somewhat strange and unexpected treatment of the TSE-calculated indices for two companies where shares were issued to shareholders of a foreign company where the Japanese company had acquired the foreign company through a Scheme of Arrangement under foreign jurisdiction.
The announcements for TOPIX and JPX Nikkei 400 were made then, and despite the events being entirely similar in construct, but different in month of Scheme Effective Date, they were put in the same month for Mitula and the first tranche of the Takeda inclusion, which was split between two months because of its large impact.
The large IPO last month of Softbank Corp (9434 JP) means there is another large inclusion going effective as of the open of trading on 31 January.
Wednesday is going to be a big day.
If everyone trades their required index amount on the day, it should be a trillion yen plus of flows.
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In this report, we provide an analysis of our pair trade idea between SK Telecom (017670 KS) and SK Hynix Inc (000660 KS). Our strategy will be to long SK Telecom (017670 KS) and short SK Hynix Inc (000660 KS). Our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 25th are used in our pair trade. [Long SK Telecom – $0.5 million; Short SK Hynix – $0.5 million for total of $1.0 million].
The following are the major catalysts that could boost SK Telecom shares higher than SK Hynix shares within the next six to twelve months:
Finally, a Higher DPS for SK Telecom is Likely, but Market Has Not Fully Factored In
SK Hynix’s Plan for a 40% Lower Capex in 2019 Implies an Excess Inventory Condition
5G Service Ready to Start in March; Higher ARPU Typically Results in Higher Share Price
SK Telecom’s Establishment of an Intermediate Holding Company Will Take Place in 2019
Grab is not just challenging the usual passengers-ride and taxi market; it has upped its game by selling monthly subscription plans, which can build recurring users. It is also looking to take bigger slices of business trips, traditionally the more lucrative pie for local taxi companies and niche car rental companies.
This report explains why Grab has gone into this promotional strategy, and is divided into five parts:
Over the past three years, an aggressive price war has pushed Indonesian data prices down 80% to unsustainable levels. With the exception of India, and Jio’s moves there, Indonesia now has the cheapest data in markets we track globally. However, there have been signs recently of tariff stability, with Telkomsel’s tariff rising 7%. Investors’ main concern, and the key risk to being bullish on the sector in Indonesia, is the risk a price war breaks out again. We think that is unlikely. The smaller telcos are not making sufficient returns to cover capex and finance costs and market share gains alone will not save them. Something needs to give: either prices rise and/or smaller players consolidate. Rumors swirling around Indosat (ISAT IJ) in recent days suggest consolidation may be under consideration again.
Our view is that the price cycle has turned in Indonesia and consolidation is likely. That underpins our positive view on Indonesian telcos. We look for Telkom Indonesia (TLKM IJ) to deliver strong growth from its two major engines: mobile through Telkomsel and fixed line (broadband). The stock has done reasonably well since mid-2018, but we see upside and rate the shares a Buy with a raised target price of IDR5,250. We continue to like the re-rating story at XL Axiata (EXCL IJ), and remain Buyers with a price target of IDR5,200. Indosat’s share price has soared in recent days and we have now cut the stock to a Sell with the target price retained at IDR2,040.
In spite of a stellar quarter (Q3 FY19), we remain cautious on Zee Entertainment Enterprises (Z IN) and the prospects of broadcasters in India. Hindi GEC is consolidating, and most of the growth is likely to happen in regional channels which remain competitive. Global data suggests ad spends as a % of revenue for many broadcasters and cable operators has been disrupted and couple of year’s down the line, India should be no exception. Contrary to consensus, driven by millennials and non-affordability of second television, cord cutting in India could accelerate sooner than excepted. With an hyper competitive OTT landscape, uncertainty post TRAI Tariff implementations, in an industry suspect to easy value migration, the long term outlook for Zee Entertainment Enterprises (Z IN) and the broadcast Industry warrants attention. The only near term positive for the stock is the potential stake sale to a strategic partner, which is likely to keep the stock price buoyant but only in the near term.
Next week promises to be a large catalyst driven week, with Apple Inc (AAPL US), NTT Docomo Inc (9437 JP) and Tesla Motors (TSLA US) expected to report results, among others. We have provided a list below of the key equity catalysts for next week as well as potential drivers for M&A deals and stubs. If you are interested in importing this directly into Outlook or have any further requests, please let us know.
Kind regards, Rickin Arun and Venkat
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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
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.
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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.
On December 17th 2018, the TSE announced a somewhat strange and unexpected treatment of the TSE-calculated indices for two companies where shares were issued to shareholders of a foreign company where the Japanese company had acquired the foreign company through a Scheme of Arrangement under foreign jurisdiction.
The announcements for TOPIX and JPX Nikkei 400 were made then, and despite the events being entirely similar in construct, but different in month of Scheme Effective Date, they were put in the same month for Mitula and the first tranche of the Takeda inclusion, which was split between two months because of its large impact.
The large IPO last month of Softbank Corp (9434 JP) means there is another large inclusion going effective as of the open of trading on 31 January.
Wednesday is going to be a big day.
If everyone trades their required index amount on the day, it should be a trillion yen plus of flows.
In this report, we provide an analysis of our pair trade idea between SK Telecom (017670 KS) and SK Hynix Inc (000660 KS). Our strategy will be to long SK Telecom (017670 KS) and short SK Hynix Inc (000660 KS). Our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 25th are used in our pair trade. [Long SK Telecom – $0.5 million; Short SK Hynix – $0.5 million for total of $1.0 million].
The following are the major catalysts that could boost SK Telecom shares higher than SK Hynix shares within the next six to twelve months:
Finally, a Higher DPS for SK Telecom is Likely, but Market Has Not Fully Factored In
SK Hynix’s Plan for a 40% Lower Capex in 2019 Implies an Excess Inventory Condition
5G Service Ready to Start in March; Higher ARPU Typically Results in Higher Share Price
SK Telecom’s Establishment of an Intermediate Holding Company Will Take Place in 2019
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Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt.
The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.
The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.
The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few.
After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively.
Corrigenda: There is an error in this insight. Please note the correction.
Correction: Please ignore the incomplete sentence at the end of the second paragraph in the blue box below (“On the valuation end,…”).
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
It has been a fairly busy week. Activity in the ECM space seems to be picking up with block trades taking the lead this week. We had Xiaomi Corp (1810 HK), Ayala Corporation (AC PM), Puregold Price Club (PGOLD PM), and Longfor Properties (960 HK) placements this week and most of them secondary sell-downs except for Puregold which was a top-up placement. Most placements performed well, trading above their IPO price, except for Longfor which only managed to claw back to its deal price on Friday.
Starting with Xiaomi, we think that there would likely be more selling considering that there is a massive overhang after the lock-up expired on 9th of January. Our calculation indicated that major shareholders may have about 6bn shares to be sold. Even if we exclude the founders’ shares, there will still be about 4bn shares left to be sold. The share price has managed to claw back above HK$10 level on Friday and we also heard that the books were several times covered with allocation being concentrated among a handful of investors. The tighter discount of this placement compared to the one earlier that crossed at 14% discount probably indicated demand is relatively better for this placement. On the valuation end, we
Ayala Corp’s placement was upsized and has also done well contrary to our view. We thought that the sell-down may perhaps indicate that there is an overhang from Mitsubishi’s remaining stake. But, we heard that books were well covered.
For IPOs this week, Weimob.com (2013 HK) traded well on the first day but took a spectacular dive on the second day of trading. It was down 30% intraday before bouncing back up and finally closing at IPO price on Friday. On the other hand, Chengdu Expressway Company Limited (1785 HK) hovered around its IPO price with little liquidity.
In terms of upcoming deals, PH Resorts Group (PHR PM) is looking to launch a US$350m share sale in about two months time. Maoyan Entertainment (EPLUS HK) has already launched its IPO on Friday while there will be more IPOs heading to the US. Jubilant Pharma is said to have turned to the US for its US$500m IPO after trying to list in Singapore last year. Home Credit Group and Sinopec’s retail unit might be seeking to this in Hong Kong this year. Luckin Coffee is also said to be seeking an IPO in Hong Kong.
Accuracy Rate:
Our overall accuracy rate is 71.9% for IPOs and 64.1% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Shenwan Hongyuang Group (Hong Kong, >US$1bn)
Tai Hing Holdings (Hong Kong, ~US$200m)
Changsha Broad Homes Industrial Group (Hong Kong, >US$100m)
Shanghai Gench Education (Hong Kong, >US$100m)
China Yunfang Holdings (Hong Kong, ~US$100m)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
We have revised our forecasts for Spark New Zealand (SPK NZ) following recent accounting changes. Ian Martin believes Spark is on track to achieve its revised long term operating EBITDA margin target of 31% by FY21, and possibly by FY20. Spark’s performance is driven largely by on-net mobile, fixed wireless access (FWA) and cloud/data services. Spark has also shown solid cost control gains and is ahead of its target for implementing its Agile program. It plans to launch 5G by July 2020 suggesting steady capex spending, and confidence in its earnings outlook. Spark is also planning to move more deeply into sports content including a partnership with NEC in sports production.
While we remain positive on the long term outlook for Spark, and have raised our target price from NZ$4.05 to NZ$4.40, the stock is not cheap. It trades at 18.2x FY19F EPS and 8.0x FY19 EBITDA. The company needs to show strong cost control to meet targets and for this reason we reduce our recommendation to Neutral.
Three year operating outlook for Spark NZ (NS$ m)
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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
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.
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Xiaomi Corp (1810 HK)’s shares are around 43% below the IPO price partly due to the recent well-documented selling of shares following the end of a lock-up period. Ultimately, every share has a “right” value and the investors buying into the recent share placement presumably have the view that the shares are attractive at current levels.
While there is no longer a strong case to sell the shares at current levels, we do not recommend diving head first to buy the shares due to limited upside, potentially worsening market outlook and ongoing share overhang from lockup expiry.
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On December 17th 2018, the TSE announced a somewhat strange and unexpected treatment of the TSE-calculated indices for two companies where shares were issued to shareholders of a foreign company where the Japanese company had acquired the foreign company through a Scheme of Arrangement under foreign jurisdiction.
The announcements for TOPIX and JPX Nikkei 400 were made then, and despite the events being entirely similar in construct, but different in month of Scheme Effective Date, they were put in the same month for Mitula and the first tranche of the Takeda inclusion, which was split between two months because of its large impact.
The large IPO last month of Softbank Corp (9434 JP) means there is another large inclusion going effective as of the open of trading on 31 January.
Wednesday is going to be a big day.
If everyone trades their required index amount on the day, it should be a trillion yen plus of flows.
In this report, we provide an analysis of our pair trade idea between SK Telecom (017670 KS) and SK Hynix Inc (000660 KS). Our strategy will be to long SK Telecom (017670 KS) and short SK Hynix Inc (000660 KS). Our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 25th are used in our pair trade. [Long SK Telecom – $0.5 million; Short SK Hynix – $0.5 million for total of $1.0 million].
The following are the major catalysts that could boost SK Telecom shares higher than SK Hynix shares within the next six to twelve months:
Finally, a Higher DPS for SK Telecom is Likely, but Market Has Not Fully Factored In
SK Hynix’s Plan for a 40% Lower Capex in 2019 Implies an Excess Inventory Condition
5G Service Ready to Start in March; Higher ARPU Typically Results in Higher Share Price
SK Telecom’s Establishment of an Intermediate Holding Company Will Take Place in 2019
Grab is not just challenging the usual passengers-ride and taxi market; it has upped its game by selling monthly subscription plans, which can build recurring users. It is also looking to take bigger slices of business trips, traditionally the more lucrative pie for local taxi companies and niche car rental companies.
This report explains why Grab has gone into this promotional strategy, and is divided into five parts:
Over the past three years, an aggressive price war has pushed Indonesian data prices down 80% to unsustainable levels. With the exception of India, and Jio’s moves there, Indonesia now has the cheapest data in markets we track globally. However, there have been signs recently of tariff stability, with Telkomsel’s tariff rising 7%. Investors’ main concern, and the key risk to being bullish on the sector in Indonesia, is the risk a price war breaks out again. We think that is unlikely. The smaller telcos are not making sufficient returns to cover capex and finance costs and market share gains alone will not save them. Something needs to give: either prices rise and/or smaller players consolidate. Rumors swirling around Indosat (ISAT IJ) in recent days suggest consolidation may be under consideration again.
Our view is that the price cycle has turned in Indonesia and consolidation is likely. That underpins our positive view on Indonesian telcos. We look for Telkom Indonesia (TLKM IJ) to deliver strong growth from its two major engines: mobile through Telkomsel and fixed line (broadband). The stock has done reasonably well since mid-2018, but we see upside and rate the shares a Buy with a raised target price of IDR5,250. We continue to like the re-rating story at XL Axiata (EXCL IJ), and remain Buyers with a price target of IDR5,200. Indosat’s share price has soared in recent days and we have now cut the stock to a Sell with the target price retained at IDR2,040.
In spite of a stellar quarter (Q3 FY19), we remain cautious on Zee Entertainment Enterprises (Z IN) and the prospects of broadcasters in India. Hindi GEC is consolidating, and most of the growth is likely to happen in regional channels which remain competitive. Global data suggests ad spends as a % of revenue for many broadcasters and cable operators has been disrupted and couple of year’s down the line, India should be no exception. Contrary to consensus, driven by millennials and non-affordability of second television, cord cutting in India could accelerate sooner than excepted. With an hyper competitive OTT landscape, uncertainty post TRAI Tariff implementations, in an industry suspect to easy value migration, the long term outlook for Zee Entertainment Enterprises (Z IN) and the broadcast Industry warrants attention. The only near term positive for the stock is the potential stake sale to a strategic partner, which is likely to keep the stock price buoyant but only in the near term.
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Hitachi Ltd (6501 JP)announced today after the close that it had received approvals from the relevant government organs for its proposed Tender Offer for Yungtay Engineering (1507 TT) and that the Tender Offer would be launched through Hitachi Elevator Taiwan Co. Ltd at TWD 60/share starting tomorrow. The statement filed by Yungtay on the TWSE website is linked here.
The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).
This one detail is different from the original announcement in October, which had set a minimum of 50.1% holding after the tender.
Since the announcement of a deal at a 22% premium, the stock has risen gently from about TWD 56 to just below the TWD 60 Tender Offer price in ever-decreasing volume.
data source: investing.com, TWSE
There has been little to no news on the stock regarding the deal in English, and only limited news in Chinese since the announcement of the deal.
The price evolution makes it look like a pretty straightforward deal. The lowered threshold for success obviously increases the likelihood of success. Weaker markets may also contribute.
But there is a reason why the threshold was lowered.
Post the close of market, Softbank Group (9984 JP) announced a $750mn USD tender offer through an unmodified Dutch auction to purchase a portion of its outstanding USD and EUR senior notes. This could be an interesting deal from a timing perspective and could portend action for the equity – more details below.
China vehicle sales volume declined in 2018, which was the first time since 1990.
Car dealers are negotiating commission rate with Autohome.
We believe Autohome has more bargaining power than dealers, but will compromise to some extent.
Our previous financial assumptions had already integrate the potential weakness in automobile industry.
The stock price has been fully reflected the impact of the negotiation.
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TSMC has struggled after breaking trend support last summer and from pressure stemming from the double top.
Underlying support is starting to take shape as the weekly cycle wrestles with a cycle trough amid a constructive descending wedge forming in the daily cycle. There are still a number of overhead hurdles to clear for a sustainable up cycle to resume. Current support is critical to hold as we hover just above this inflection point. A break below outlined support would take TSMC into a lower trading range.
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:
December express parcel pricing fell by over 9% Y/Y. Average pricing per express parcel fell by 9.1% Y/Y, the worst decline since Q216 (excluding January/February figures distorted by the Lunar New Year holiday).
Express parcel revenue growth remained well below 20% last month. Weak pricing dragged sector revenue growth down to 17% in December, the 4th consecutive month of sub-20% growth.
Intra-city pricing (ie, local delivery) was strong in 2018. Relative to weak inter-city pricing (down 3.1% Y/Y in 2018), pricing for intra-city express shipments was firm, rising by 0.1% last year. In fact, average pricing for intra-city express shipments has risen in four of the last five years.
Underlying domestic transport demand remained firm in December. Although demand for inter-city express shipments appears to be moderating (from high levels), underlying transportation activity in December remained firm. The three modes of freight transport we track (rail, highway, air) in aggregate rose 6.6% Y/Y in December, even as the growth of air freight slowed.
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression.
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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