AsiaInfo Tech priced its IPO at HKD 10.50/share and will start trading today. Prior to the trading debut, in this short note, we summarize the latest information with updates on our valuation.
Our Previous Insight on AsiaInfo Tech:
Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes.
This month’s issue covers the following topics:
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing appears to be falling faster than costs can be cut. Overall domestic transportation demand, however, remains solid and shows no signs of slowing.
A last-minute lump of coal in the stocking from accounting software and services provider MYOB Group Ltd (MYO AU)?
Kohlberg Kravis Roberts has reduced its indicative offer to $3.40 from $3.77 after sifting through MYOB’s books, with MYOB announcing:
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)
KKR’s revised non-binding proposal is scheduled to expire at 5pm Friday, providing a day and change for MYOB to sound out shareholders as to the next move. Either the lower tilt is grudgingly accepted, or MYOB rejects and KKR walks away (for now), or goes hostile.
Either way, with MYOB’s VWAP above the revised proposal on all but 6 days since the initial announcement on the 8 October and $3.47/share on average, there won’t be a lot of Ho Ho Ho’ing.
Shares are down 11% as I type, implying 13% upside and 11% downside (using the ASX performance-adjusted price) or ~18% downside when pegged to peers. That’s not an attractive risk/reward heading into year-end.
There is an extensive history of writing on the NTT (Nippon Telegraph & Telephone) (9432 JP) family (and indeed Japan telecom sector) buybacks – their modalities and methods, impacts, legal and accounting requirements, competition, push-me-pull-you effect, etc.
One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Today, the Nikkei carried an article noting that the Japanese government’sFY2019 budget currently being formed proposes a sale of JPY 160bn of shares to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares.
This news is not unexpected to Smartkarma readers of the ongoing series. And there are implications and read-throughs.
Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.
After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.
If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.
So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).
Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot.
The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”
I cheerfully say quantum mechanics completely baffles me.
I less cheerfully say this whole episode with Takeda and index providers has baffled me too.
But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.
If it all works out well, it might just be Spooky Action At a Distance.
Hitachi Ltd (6501 JP) announced the acquisition of an 80.1% stake in ABB Ltd (ABBN VX)’s power grids business for $6.4 billion. ABB will retain the remaining stake in the divested unit, which is valued at an EV of $11 billion. ABB’s power grids is a global #1 player and makes transformers, long distance electricity-transmission systems and energy storage units.
Setting aside the huge cultural and integration challenges, we believe that Hitachi’s acquisition of ABB’s power grids is a bold but a risky move.
Satellite companies attempting to convince the Federal Communications Commission to allow them to sell C-band spectrum they license from the U.S. have begun talks to secure customers, sources told CTFN.
Softbank Group (9984 JP) is set to raise JPY2.65 trillion ($23.5 billion) through the Softbank Corp (9434 JP) IPO, Japan’s biggest-ever IPO. However, SoftBank Corp’s IPO which is set for 19 December is oversubscribed by less than double, according to press reports. This level of oversubscription is well below blockbuster Japanese stock debuts such as Mercari Inc (4385 JP) and Recruit Holdings (6098 JP).
Based on client discussion on SoftBank Corp’s intrinsic value, we have put together a DCF-based valuation along with scenario analysis. Our conclusion remains the same that SoftBank Corp is overvalued at the proposed IPO price of JPY1,500 per share.
Although we were bearish on the IPO initially and turned increasingly so following the relatively poor reception among retailers that was discussed in Softbank IPO: Signs Point to Risk of Early IPO Price Break, we were still a touch surprised at the extent of the drop today, with the stock finishing down 14.53% to close at the lows with 271.5m shares changing hands. With a rising dividend yield and looming buying from passive funds on the on hand and a potentially large overhang from retailers who may have been looking to flip for a profit on the other, we discuss what would turn us more bullish below.
Softbank Group (9984 JP)’s market cap has consistently traded below its NAV. A popular expectation was that the Softbank Corp (9434 JP) IPO should be a catalyst to narrow the conglomerate discount (holdco discount). On its trading debut today, SoftBank Corp’s shares fell 14.5% from its IPO price of JPY1,500 to JPY1,282 per share – the worst first-day decline ever for a major IPO in Japan since the Japan Display (6740 JP) IPO in 2014.
In our previous research, we stated that the SoftBank Corp IPO is unlikely to meaningfully narrow SoftBank’s holdco discount. Our updated SoftBank SoTP analysis which reflects SoftBank Corp’s trading debut suggests that SoftBank’s holdco discount has not meaningfully narrowed.
AsiaInfo Tech priced its IPO at HKD 10.50/share and will start trading today. Prior to the trading debut, in this short note, we summarize the latest information with updates on our valuation.
Our Previous Insight on AsiaInfo Tech:
Bloomberg reported Softbank Corp (9434 JP)‘s international bookbuild was 2 – 3x covered while retail offering was at almost 2x. There were other reports of bookrunners struggling to sell shares to retail investors.
In this insight, we will look at how peers and market have performed since bookbuild and provide a sensitivity table with implied valuations for different price points and thoughts on the price range for near-term trading.
We have already covered most aspects of Softbank Corp (9434 JP) ‘s IPO in our previous insights:
On 24 December, MYOB Group Ltd (MYO AU) announced that it entered into a scheme implementation agreement under which KKR will acquire MYOB at $3.40 per share, which is 10% lower than 2 November offer price of A$3.77. MYOB claims its decision to recommend KKR’s lower offer was based on current market uncertainty, long-term nature of its strategic growth plans and the go-shop provisions of the deal.
We believe that KKR’s revised offer is opportunistic, but MYOB’s shareholders are caught between a rock and a hard place. Shareholders can take a short-term view and grudgingly accept the revised offer. Alternatively, shareholders can take a long-term view by rejecting the offer and hope MYOB’s strategic growth plans and a market recovery can reverse the inevitable share price collapse.
As per reports, Infosys Ltd (INFO IN) may consider a proposal for a share buyback of $1.60 billion very soon. The buyback announcement is likely to be made on January 11 when the company board meets to consider the 3Q FY19 results. Before this, in November 2017, Infosys Ltd (INFO IN) had announced a buyback and spent Rs130 bn to buy a total of 113mn equity shares. This fresh buyback could be an important development and could be an important support for the stock, it is also sensible for other reasons.
There are no major acquisitions in recent times by Infosys Ltd (INFO IN) and if this is likely to be the trend for near future, share buyback is not a bad idea. The company is still struggling with some of the legacy issues and the priority as of now is to streamline the organic growth. We think Infosys Ltd (INFO IN) is also cautious with inorganic growth opportunities as the company had serious issues with acquisitions in the past. What could be another key driver behind this is that in valuation terms, Infosys Ltd (INFO IN) is not very expensive.
During the second half of December 2018, Japan saw two telecom companies list on the Tokyo Stock Exchange: Softbank Corp (9434 JP) and ARTERIA Networks (4423 JP). After years of industry consolidation, which saw several stocks delist, this felt like a Christmas miracle (at least for those watching the sector’s stocks).
It would be hard to find two companies in the same industry that are so different – both in their business models as well as in how their IPOs were positioned to investors. One stock is 100 times larger than the other, but this is not a story of David and Goliath. It is two unique stories in parallel.
While each company took a very different approach to selling its stock, both have suffered from the subsequent broader market weakness, irrespective of company specifics. We can’t say it has been the worst of times, but it certainly has been a tough time with SoftBank Corp down 13% and Arteria down 20% from their IPO prices.
In this Insight we explore how each company approached its IPO and how each has fared since.
It could have gone either way.
After securing a 19.9% stake from Bain in early October and initially pitching A$3.70/share, in a textbook bear hug, KKR (marginally) bumped its indicative offer to A$3.77/share to a get a look under the hood, then following seven weeks of due diligence, backtracked with a lower price of A$3.40/share, citing adverse market conditions.
MYOB Board’s response last week to the reduced offer was to inform KKR that it is not in a position to recommend the revised proposal, however, “it remains in discussions with KKR regarding its proposal”, leaving the door open for ongoing negotiations. KKR for its part, said there were no landmines following the DD process. The price action last Friday suggested the outcome was a coin toss.
Today, KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal and subject to an independent expert concluding the Offer is in the best interest of shareholders. The Offer price assumes no full-year dividend is paid.
The agreement provides a “go shop” provision until the 22 February 2019 – when MYOB is expected to release its FY18 results – to solicit competing proposals.
The Offer appears reasonable when compared to peers and with regards to the 14% decline in the ASX technology index; but conversely, could be construed as being opportunistic.
A Scheme Booklet is expected to be dispatched mid-March with an estimated implementation date of 3 May. Currently trading at a 3.8%/11% gross/annualised spread. 1 January makes a new year and there will be investors who would want to take an agreed deal at 11%.
* Consensus Estimates
It has been a huge Q4 for Japan capital markets and banking, and the result is some fat fees for global investment bankers on the Takeda/Shire deal, and a Softbank Corp IPO which I’d be totally OK not owning. A result of this activity is the fun in index land.
And there is a lot of fun to be had.
Some of that fun has been described in Softbank Corp IPO – Dividends, Index Buying, and Offer Structure. More was described in the various insights in the Takeda/Shire series, most recently in Takeda/Shire VI: Now For The Real Fun.
But it is worth revisiting because it involves, over the five weeks starting just before the Christmas holidays, across the two deals, probably…
Timing and impact is discussed herein.
Last Week in Event SPACE …
(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)
M&A – ASIA-PAC |
ANTA Sports Products (2020 HK) (Mkt Cap: $12.8bn; Liquidity: $28mn)
Amer Sports Oyj (AMEAS FH) announced (ANTA’s is here) an Offer at €40/share (a 39% premium to the undisturbed price of 10 September 2018), and announced that the Board of Directors of Amer Sports has decided to unanimously recommend that Amer Sports’ shareholders accept the Tender Offer. Several major shareholders holding 7.91% have irrevocably undertaken to tender, and Maa-ja vesitekniikan tuki r.y., who hold ~4.29%, have expressed that they view the Tender Offer positively. ANTA indirectly holds 1,679,936 shares (1.4%) as well.
links to:
Travis’ insight: ANTA (2020 HK) Angling on Amer Apparent
Arun’s insight: ANTA/Amer: Good Deal for Amer and FountainVest, a Poor Deal for ANTA
Japan Display (6740 JP) (Mkt Cap: $520mn; Liquidity: $15mn)
NHK reported JDI was in talks to sell about a 33% stake to a Chinese consortium for $440m (probably ¥50bn) which would value the company at about 3.5x (at the time) its current market cap. INCJ is also, apparently, considering support. These moves would go a long way toward restoring the company’s beaten-up balance sheet and the cost cuts should allow the company to survive – although Apple’s struggles still cast a shadow on a return to a strong level of profitability. JDI’s share price shot up 34.6% on the news on Friday.
(link to Mio’s insight: Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet)
Pioneer Corp (6773 JP)(Mkt Cap: $210mn; Liquidity: $4.2mn)
After Pioneer revealed in September it had sold its Tohoku Pioneer subsidiary to Denso Corp (6902 JP) for ¥10.9bn, it announced an MOU with Barings and went into debt to them. That seemed like “the end of the line” for the company. Pioneer needed a sponsor, but it was going to stay listed. Last week, Pioneer announced a “Partnership” with Baring Private Equity Asia which is a revitalization plan of ¥102bn. The deal offers minority shareholders an exit. The announcement does not mention investors are effectively being asked to approve their own squeezeout at 25% below the last price.
(links to Travis’ insights: Barring Beleaguered Booster Boldness, Baring Buys Pioneer (In a Takeunder))
On December 3rd, the boards of both Hindustan Unilever (HUVR IN) (“HUL”) and GlaxoSmithKkine (“GSKCH”) approved a merger (subject to regulatory and shareholder approval) – at an exchange ratio of 4.39 HUL shares for every 1 GSKCH share – in a £3.1 bn deal. Combining with GSKCH should see HUL leapfrog both Britannia Industries (BRIT IN) and Nestle India (NEST IN) in food and refreshment revenue, and put it roughly on level pegging with ITC Ltd (ITC IN).
(link to my insight: Hindustan And GSK In The Pursuit of Happiness)
Red Hat Inc (RHT US) (Mkt Cap: $31bn; Liquidity: $485mn)
Red Hat has set a meeting date of January 16, 2019 for shareholders to vote on the merger agreement with Intl Business Machines (IBM US), and related matters. Red Hat also set a record date of December 11th, 2018 for shareholders entitled to vote on the deal.
(link to John’s insight: Red Hat Sets January 16, 2019 Special Meeting Date to Vote on IBM Deal)
Macquarie Radio Network (MRN AU) (Mkt Cap: $235mn; Liquidity: $0.1mn)
Reportedly, preliminary discussions are underway between Nine Entertainment Co Holdings (NEC AU) and MRN’s second-largest shareholder, John Singleton. This development is not entirely unsurprising; it appears formal discussions were deferred until the Nine/Fairfax Media (FXJ AU) merger was formally completed (which occurred on 7 December). Nine acquired Fairfax’s 54.5% stake in MRN in the merger, discussed in my insight Nine & Fairfax – Integrated Advertising.
(link to my insight: Macq Media In The Crosshairs As Fairfax Merger Completes)
Celltrion Inc (068270 KS) / Celltrion Healthcare (091990 KS)
While Inc and Healthcare are not cross-linked by any shareholding, Healthcare is ostensibly Celltrion’s internal sales arm. Their fundamentals and prices should be (& are) highly correlated.
(link to Sanghyun’s insight: Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare)
(link to Travis’ insight: API Tilts at Sigma Healthcare: Expect More)
(link to Travis’ insight: Huatai Securities GDR Gets The Green Light, Taps Brakes)
STUBS/HOLDCOS |
Naspers Ltd (NPN SJ)/Tencent Holdings (700 HK)
Naspers’ recent underperformance against Tencent has resulted in the discount to NAV widening to near-on 12 months lows. While Naspers remains a function of what happens to Tencent, it offers potentially interesting long-term prospects.
links to:
my insight: StubWorld: Naspers And The Valuation Gap.
Alastair’s insight: Naspers: Profitability Improvements Continue
Toyota Industries (6201 JP) / Toyota Motor (7203 JP)
Curtis Lehnert recommends a Toyota Industries’ set-up at current levels which are in excess of -2 Standard Deviations below the long-term average, while Toyota Industries is trading at a 35% discount to his NAV – Toyota Industries’ stake in Toyota Motor accounts for 60%).
(link to Curtis’s insight: TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave)
Newton’s Three Laws of Motion And How They Pertain to Index Inclusions
Travis Lundy noted that Newton’s Third Law, commonly understood that for every action there is always an equal and opposed reaction, applies in some measure to index inclusions.
(link to Travis’ insight: Softbank Corp, Takeda, and Newton’s Three Laws of Motion)
Briefly …
SHARE CLASSIFICATIONS |
Travis published his H/A Spread Monitor Project offering a brief look at recent changes in H-Share and A-Share spreads, Southbound flow and impact, and where the spreads are trading within their own historical ranges. My share class monitor provides a snapshot of the premium/discounts for 215 share classifications around the region. Ke Yan, CFA, FRM issued his Discover HK Connect series, to help understand the flow of southbound trades via the Hong Kong Connect.
The largest net buys this week were generally in healthcare and IT, and consumers. Large net buys were seen in Yichang Hec Changjiang Pharm (1558 HK), Tingyi (Cayman Islands) Holding Corp (322 HK), Semiconductor Manufacturing (981 HK) , BYD Co Ltd (H) (1211 HK), and Sands China Ltd (1928 HK). The largest net sells this past week were Tencent Holdings (700 HK), and several banks, real estate developers, and then Sunny Optical Tech (2382 HK).
For liquid Korean prefs, Samsung Electronics Pref Shares (005935 KS), which trades $36m a day, is at a 36% discount, which compares with its annual range of -42%/+36%.
links to:
Travis’ insight: H/A Spread & Southbound Monitor – Going Into Year End
my insight: Share Classifications: Mid-December 2018 Snapshot
Ke Yan’s insight: Discover HK Connect: Mainlanders Are Buying Shandong Gold, Tingyi, YiChang HEC (2018-12-10)
Hyundai Motor Co (005380 KS) (Mkt Cap: $20.7bn; Liquidity: $64mn)
The 1P (005385 KS) / 2P (005387 KS) dividend yield difference of 0.53% is close to a year high. Of interest is the recently announced hydrogen cell investment, which may be considered a signal that the HMG-government relation has vastly improved. This potentially suggests that any HMG restructuring may get accelerated, which would be positive for 1P. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time for 1P to Catch Up)
OTHER M&A UPDATES |
CCASS |
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.
Name | % change | Into | Out of | Comment |
17.13% | Astrum | Grand Moore | ||
11.12% | BOCI | CMB | ||
16.45% | Chung Lee | GF Sec | ||
12.50% | CIS | CCASS | ||
75.00% | UBS | CCASS | ||
43.41% | CIS | BNP | ||
24.77% | Telecom Digital | Std Chart | ||
17.83% | Great ROC | Oriental Patron |
It could have gone either way.
After securing a 19.9% stake from Bain in early October and initially pitching A$3.70/share, in a textbook bear hug, KKR (marginally) bumped its indicative offer to A$3.77/share to a get a look under the hood, then following seven weeks of due diligence, backtracked with a lower price of A$3.40/share, citing adverse market conditions.
MYOB Board’s response last week to the reduced offer was to inform KKR that it is not in a position to recommend the revised proposal, however, “it remains in discussions with KKR regarding its proposal”, leaving the door open for ongoing negotiations. KKR for its part, said there were no landmines following the DD process. The price action last Friday suggested the outcome was a coin toss.
Today, KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal and subject to an independent expert concluding the Offer is in the best interest of shareholders. The Offer price assumes no full-year dividend is paid.
The agreement provides a “go shop” provision until the 22 February 2019 – when MYOB is expected to release its FY18 results – to solicit competing proposals.
The Offer appears reasonable when compared to peers and with regards to the 14% decline in the ASX technology index; but conversely, could be construed as being opportunistic.
A Scheme Booklet is expected to be dispatched mid-March with an estimated implementation date of 3 May. Currently trading at a 3.8%/11% gross/annualised spread. 1 January makes a new year and there will be investors who would want to take an agreed deal at 11%.
* Consensus Estimates
Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes.
This month’s issue covers the following topics:
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing appears to be falling faster than costs can be cut. Overall domestic transportation demand, however, remains solid and shows no signs of slowing.
A last-minute lump of coal in the stocking from accounting software and services provider MYOB Group Ltd (MYO AU)?
Kohlberg Kravis Roberts has reduced its indicative offer to $3.40 from $3.77 after sifting through MYOB’s books, with MYOB announcing:
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)
KKR’s revised non-binding proposal is scheduled to expire at 5pm Friday, providing a day and change for MYOB to sound out shareholders as to the next move. Either the lower tilt is grudgingly accepted, or MYOB rejects and KKR walks away (for now), or goes hostile.
Either way, with MYOB’s VWAP above the revised proposal on all but 6 days since the initial announcement on the 8 October and $3.47/share on average, there won’t be a lot of Ho Ho Ho’ing.
Shares are down 11% as I type, implying 13% upside and 11% downside (using the ASX performance-adjusted price) or ~18% downside when pegged to peers. That’s not an attractive risk/reward heading into year-end.
There is an extensive history of writing on the NTT (Nippon Telegraph & Telephone) (9432 JP) family (and indeed Japan telecom sector) buybacks – their modalities and methods, impacts, legal and accounting requirements, competition, push-me-pull-you effect, etc.
One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Today, the Nikkei carried an article noting that the Japanese government’sFY2019 budget currently being formed proposes a sale of JPY 160bn of shares to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares.
This news is not unexpected to Smartkarma readers of the ongoing series. And there are implications and read-throughs.
Although we were bearish on the IPO initially and turned increasingly so following the relatively poor reception among retailers that was discussed in Softbank IPO: Signs Point to Risk of Early IPO Price Break, we were still a touch surprised at the extent of the drop today, with the stock finishing down 14.53% to close at the lows with 271.5m shares changing hands. With a rising dividend yield and looming buying from passive funds on the on hand and a potentially large overhang from retailers who may have been looking to flip for a profit on the other, we discuss what would turn us more bullish below.
Softbank Group (9984 JP)’s market cap has consistently traded below its NAV. A popular expectation was that the Softbank Corp (9434 JP) IPO should be a catalyst to narrow the conglomerate discount (holdco discount). On its trading debut today, SoftBank Corp’s shares fell 14.5% from its IPO price of JPY1,500 to JPY1,282 per share – the worst first-day decline ever for a major IPO in Japan since the Japan Display (6740 JP) IPO in 2014.
In our previous research, we stated that the SoftBank Corp IPO is unlikely to meaningfully narrow SoftBank’s holdco discount. Our updated SoftBank SoTP analysis which reflects SoftBank Corp’s trading debut suggests that SoftBank’s holdco discount has not meaningfully narrowed.
It has been a huge Q4 for Japan capital markets and banking, and the result is some fat fees for global investment bankers on the Takeda/Shire deal, and a Softbank Corp IPO which I’d be totally OK not owning. A result of this activity is the fun in index land.
And there is a lot of fun to be had.
Some of that fun has been described in Softbank Corp IPO – Dividends, Index Buying, and Offer Structure. More was described in the various insights in the Takeda/Shire series, most recently in Takeda/Shire VI: Now For The Real Fun.
But it is worth revisiting because it involves, over the five weeks starting just before the Christmas holidays, across the two deals, probably…
Timing and impact is discussed herein.
Last Week in Event SPACE …
(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)
M&A – ASIA-PAC |
ANTA Sports Products (2020 HK) (Mkt Cap: $12.8bn; Liquidity: $28mn)
Amer Sports Oyj (AMEAS FH) announced (ANTA’s is here) an Offer at €40/share (a 39% premium to the undisturbed price of 10 September 2018), and announced that the Board of Directors of Amer Sports has decided to unanimously recommend that Amer Sports’ shareholders accept the Tender Offer. Several major shareholders holding 7.91% have irrevocably undertaken to tender, and Maa-ja vesitekniikan tuki r.y., who hold ~4.29%, have expressed that they view the Tender Offer positively. ANTA indirectly holds 1,679,936 shares (1.4%) as well.
links to:
Travis’ insight: ANTA (2020 HK) Angling on Amer Apparent
Arun’s insight: ANTA/Amer: Good Deal for Amer and FountainVest, a Poor Deal for ANTA
Japan Display (6740 JP) (Mkt Cap: $520mn; Liquidity: $15mn)
NHK reported JDI was in talks to sell about a 33% stake to a Chinese consortium for $440m (probably ¥50bn) which would value the company at about 3.5x (at the time) its current market cap. INCJ is also, apparently, considering support. These moves would go a long way toward restoring the company’s beaten-up balance sheet and the cost cuts should allow the company to survive – although Apple’s struggles still cast a shadow on a return to a strong level of profitability. JDI’s share price shot up 34.6% on the news on Friday.
(link to Mio’s insight: Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet)
Pioneer Corp (6773 JP)(Mkt Cap: $210mn; Liquidity: $4.2mn)
After Pioneer revealed in September it had sold its Tohoku Pioneer subsidiary to Denso Corp (6902 JP) for ¥10.9bn, it announced an MOU with Barings and went into debt to them. That seemed like “the end of the line” for the company. Pioneer needed a sponsor, but it was going to stay listed. Last week, Pioneer announced a “Partnership” with Baring Private Equity Asia which is a revitalization plan of ¥102bn. The deal offers minority shareholders an exit. The announcement does not mention investors are effectively being asked to approve their own squeezeout at 25% below the last price.
(links to Travis’ insights: Barring Beleaguered Booster Boldness, Baring Buys Pioneer (In a Takeunder))
On December 3rd, the boards of both Hindustan Unilever (HUVR IN) (“HUL”) and GlaxoSmithKkine (“GSKCH”) approved a merger (subject to regulatory and shareholder approval) – at an exchange ratio of 4.39 HUL shares for every 1 GSKCH share – in a £3.1 bn deal. Combining with GSKCH should see HUL leapfrog both Britannia Industries (BRIT IN) and Nestle India (NEST IN) in food and refreshment revenue, and put it roughly on level pegging with ITC Ltd (ITC IN).
(link to my insight: Hindustan And GSK In The Pursuit of Happiness)
Red Hat Inc (RHT US) (Mkt Cap: $31bn; Liquidity: $485mn)
Red Hat has set a meeting date of January 16, 2019 for shareholders to vote on the merger agreement with Intl Business Machines (IBM US), and related matters. Red Hat also set a record date of December 11th, 2018 for shareholders entitled to vote on the deal.
(link to John’s insight: Red Hat Sets January 16, 2019 Special Meeting Date to Vote on IBM Deal)
Macquarie Radio Network (MRN AU) (Mkt Cap: $235mn; Liquidity: $0.1mn)
Reportedly, preliminary discussions are underway between Nine Entertainment Co Holdings (NEC AU) and MRN’s second-largest shareholder, John Singleton. This development is not entirely unsurprising; it appears formal discussions were deferred until the Nine/Fairfax Media (FXJ AU) merger was formally completed (which occurred on 7 December). Nine acquired Fairfax’s 54.5% stake in MRN in the merger, discussed in my insight Nine & Fairfax – Integrated Advertising.
(link to my insight: Macq Media In The Crosshairs As Fairfax Merger Completes)
Celltrion Inc (068270 KS) / Celltrion Healthcare (091990 KS)
While Inc and Healthcare are not cross-linked by any shareholding, Healthcare is ostensibly Celltrion’s internal sales arm. Their fundamentals and prices should be (& are) highly correlated.
(link to Sanghyun’s insight: Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare)
(link to Travis’ insight: API Tilts at Sigma Healthcare: Expect More)
(link to Travis’ insight: Huatai Securities GDR Gets The Green Light, Taps Brakes)
STUBS/HOLDCOS |
Naspers Ltd (NPN SJ)/Tencent Holdings (700 HK)
Naspers’ recent underperformance against Tencent has resulted in the discount to NAV widening to near-on 12 months lows. While Naspers remains a function of what happens to Tencent, it offers potentially interesting long-term prospects.
links to:
my insight: StubWorld: Naspers And The Valuation Gap.
Alastair’s insight: Naspers: Profitability Improvements Continue
Toyota Industries (6201 JP) / Toyota Motor (7203 JP)
Curtis Lehnert recommends a Toyota Industries’ set-up at current levels which are in excess of -2 Standard Deviations below the long-term average, while Toyota Industries is trading at a 35% discount to his NAV – Toyota Industries’ stake in Toyota Motor accounts for 60%).
(link to Curtis’s insight: TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave)
Newton’s Three Laws of Motion And How They Pertain to Index Inclusions
Travis Lundy noted that Newton’s Third Law, commonly understood that for every action there is always an equal and opposed reaction, applies in some measure to index inclusions.
(link to Travis’ insight: Softbank Corp, Takeda, and Newton’s Three Laws of Motion)
Briefly …
SHARE CLASSIFICATIONS |
Travis published his H/A Spread Monitor Project offering a brief look at recent changes in H-Share and A-Share spreads, Southbound flow and impact, and where the spreads are trading within their own historical ranges. My share class monitor provides a snapshot of the premium/discounts for 215 share classifications around the region. Ke Yan, CFA, FRM issued his Discover HK Connect series, to help understand the flow of southbound trades via the Hong Kong Connect.
The largest net buys this week were generally in healthcare and IT, and consumers. Large net buys were seen in Yichang Hec Changjiang Pharm (1558 HK), Tingyi (Cayman Islands) Holding Corp (322 HK), Semiconductor Manufacturing (981 HK) , BYD Co Ltd (H) (1211 HK), and Sands China Ltd (1928 HK). The largest net sells this past week were Tencent Holdings (700 HK), and several banks, real estate developers, and then Sunny Optical Tech (2382 HK).
For liquid Korean prefs, Samsung Electronics Pref Shares (005935 KS), which trades $36m a day, is at a 36% discount, which compares with its annual range of -42%/+36%.
links to:
Travis’ insight: H/A Spread & Southbound Monitor – Going Into Year End
my insight: Share Classifications: Mid-December 2018 Snapshot
Ke Yan’s insight: Discover HK Connect: Mainlanders Are Buying Shandong Gold, Tingyi, YiChang HEC (2018-12-10)
Hyundai Motor Co (005380 KS) (Mkt Cap: $20.7bn; Liquidity: $64mn)
The 1P (005385 KS) / 2P (005387 KS) dividend yield difference of 0.53% is close to a year high. Of interest is the recently announced hydrogen cell investment, which may be considered a signal that the HMG-government relation has vastly improved. This potentially suggests that any HMG restructuring may get accelerated, which would be positive for 1P. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time for 1P to Catch Up)
OTHER M&A UPDATES |
CCASS |
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.
Name | % change | Into | Out of | Comment |
17.13% | Astrum | Grand Moore | ||
11.12% | BOCI | CMB | ||
16.45% | Chung Lee | GF Sec | ||
12.50% | CIS | CCASS | ||
75.00% | UBS | CCASS | ||
43.41% | CIS | BNP | ||
24.77% | Telecom Digital | Std Chart | ||
17.83% | Great ROC | Oriental Patron |
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.
IPO listings this week have mostly been within our expectation. Mobvista (1860 HK), Natural Food International H (1837 HK), and Fosun Tourism (1992 HK) have all struggled to hold on to their IPO price on the first day of trading. Unfortunately, WuXi AppTec Co (2359 HK) has also struggled on this first day despite our expectation that the company should be trading at a relatively smaller 19% A-H premium which would imply about 11% upside based on Ke Yan, CFA, FRM‘s sensitivity analysis and Wuxi Apptec’s A share Friday close price.
In the US, Tencent Music Entertainment (TME US) performed well within our expectation. The company’s share price opened about 9% above IPO price. As Sumeet Singh has mentioned in his insight, Tencent Music IPO – Firework – Trading Strategies, this is unlikely going to be a bumper IPO and short-term investors could take profit at high single-digit to low double-digit returns on debut. Indeed, after a decent debut, TME has collapsed below its IPO price, probably due to investors taking profit as the broad market traded poorly on Friday.
Next week, all eyes will be on Softbank Corp (9434 JP)‘s debut and Mio Kato, CFA summarised in his note some of the reasons why Softbank Corp could perform poorly in the near term. Bookbuild results have been mixed. Bloomberg report suggested that Softbank’s international bookbuild was 2-3x oversubscribed while retail offering was at almost 2x. However, Nikkei Asian Review’s article reported that it has been a struggle to sell the IPO shares to retail investors. In any case, we will put out a note next week on our thoughts on bookbuild, updated valuation of peers, and how we think the IPO will likely trade after the recent series of events.
Other debuts next week include Luzhou Commercial Bank Co Ltd (1983 HK), Wanka Online (1669726D HK), and Asiainfo Technologies (1675 HK).
Our overall accuracy rate is 72% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
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.
AsiaInfo Tech priced its IPO at HKD 10.50/share and will start trading today. Prior to the trading debut, in this short note, we summarize the latest information with updates on our valuation.
Our Previous Insight on AsiaInfo Tech:
Bloomberg reported Softbank Corp (9434 JP)‘s international bookbuild was 2 – 3x covered while retail offering was at almost 2x. There were other reports of bookrunners struggling to sell shares to retail investors.
In this insight, we will look at how peers and market have performed since bookbuild and provide a sensitivity table with implied valuations for different price points and thoughts on the price range for near-term trading.
We have already covered most aspects of Softbank Corp (9434 JP) ‘s IPO in our previous insights:
Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.
After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.
If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.
So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).
Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot.
The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”
I cheerfully say quantum mechanics completely baffles me.
I less cheerfully say this whole episode with Takeda and index providers has baffled me too.
But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.
If it all works out well, it might just be Spooky Action At a Distance.
Hitachi Ltd (6501 JP) announced the acquisition of an 80.1% stake in ABB Ltd (ABBN VX)’s power grids business for $6.4 billion. ABB will retain the remaining stake in the divested unit, which is valued at an EV of $11 billion. ABB’s power grids is a global #1 player and makes transformers, long distance electricity-transmission systems and energy storage units.
Setting aside the huge cultural and integration challenges, we believe that Hitachi’s acquisition of ABB’s power grids is a bold but a risky move.
Satellite companies attempting to convince the Federal Communications Commission to allow them to sell C-band spectrum they license from the U.S. have begun talks to secure customers, sources told CTFN.
