In this briefing:
- Tesla – Truth and Consequences
- Descente Descended and Itochu Angle Is More Hostile
- China Housing: City Picks For The Near-Term Cyclical Upside
- China Risun (中国旭阳) IPO Quick Note: Past the Peak of Coking Cycle
- China Housing: Early Indicators For Sales Volumes In 2019
1. Tesla – Truth and Consequences
Tesla Motors (TSLA US) CEO Elon Musk teased in a tweet late Wednesday night about “news” coming on Thursday, most likely something he hopes will be positive enough to divert attention from a seemingly unending stream of bad news. If so, it may not last.
Tesla’s problems aren’t going away, they’re escalating:
- Elon Musk is in trouble again with the SEC;
- Tesla’s brand-new general counsel is leaving after just two months on the job;
Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).
- The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
- Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
- Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
- Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).
The common theme here is that all these problems were preventable, avoidable, and unnecessary.
That’s not going away any time soon–as long as Musk remains in complete control.
How long will that be?
Good question–Read on as Bond Angle analysis continues.
2. Descente Descended and Itochu Angle Is More Hostile
Descente Ltd (8114 JP) has been in the press quite a bit in recent days with management commentary about how the company and directors disagree with the Tender Offer launched by Itochu Corp (8001 JP) to raise their stake from 30% to 40% and how it could lead to conflict of interest and worsening management, lower morale for employees, and a loss of independence.
Management, former management, and former employees have all joined the party. Wednesday saw a significant sell-down of shares to a post-Tender Offer low, but it was not clear why.
Descente had, on the 26th, noted in a puff piece in the Nikkei that it would move up the release of its next Mid-Term (Three Year) Plan (normally due in May this year), and it would focus on growing direct sales in China through more stores, growing sales in the US through adding products to the list (currently the major product in North America is skiwear), selling LeCoq Sportif in Indonesia and Munsingwear in Vietnam. WHEN is unknown, but the explicit goal is to encourage shareholders to keep their shares rather than tender them to Itochu.
Today saw a new filing from Itochu in which it amended its original announcement, claimed Descente’s activity in the media was additional and additive to the Target Company Position Statement filed on 7 February, and for that reason, their activity had not been appropriately disclosed to shareholders. Furthermore, Itochu noted that while the jibber-jabber had been going on the last two-plus weeks, Descente had asked Itochu to negotiate post-Tender management structure plans, and Itochu had agreed. Itochu and Descente talked for 9 days from 11-20 Feb but Descente was bad-mouthing Itochu in the press at the same time. That induced Itochu to stop talks. And late today, the Nikkei has released a 27 February interview with the CEO of ANTA, Itochu’s longtime textile partner in China and a 6.86% holder of Descente shares, where he says that he supports Itochu’s tender offer, will not sell their shares in Descente, and would support Itochu efforts to restructure management.
These three new developments change things in interesting ways, in my opinion pushing Descente’s own plans closer to Itochu’s, and introducing the possibility of significantly more hostility to come, with a much higher likelihood Itochu can win the proxy wars to come.
In-depth analysis below the fold.
Previous insights on the situation and its runup are listed below.
Recent Insights on the Descente/Wacoal and Itochu/Descente Situations on Smartkarma | ||
Date | Author | Insight |
12-Sep-2018 | Michael Causton | Wacoal and Descente Agree Partial Merger to Head Off Itochu |
16-Oct-2018 | Michael Causton | Itochu Ups Stake in Descente – Refuses to Give up Dreams of Takeover |
21-Jan-2019 | Michael Causton | Itochu Confirms Intent to Deepen Hold over Descente |
31-Jan-2019 | Travis Lundy | No Détente for Descente: Itochu Launches Partial Tender |
10-Feb-2019 | Michael Causton | Itochu and Descente: Gloves Off |
10-Feb-2019 | Travis Lundy | Descente’s Doleful Defense (Dicaeologia) |
3. China Housing: City Picks For The Near-Term Cyclical Upside
Based on our CityScreener(TM) methodology using house price, sales volumes, land sales and new starts metrics, we highlight the major cities in China where we believe the housing markets (new home sales) either enjoy a strong sustained momentum or have a potential cyclical upside relative to other cities.
4. China Risun (中国旭阳) IPO Quick Note: Past the Peak of Coking Cycle
China Risun, a leading coking coal refining player in China, is seeking up to USD 243 million via a listing in Hong Kong. In this insight, we will discuss the following topics:
- Company’s business and the value chain of coking coal
- Industry backdrop of the coking coal processing industry in China
- Shareholders and investors
- Thoughts on valuation
5. China Housing: Early Indicators For Sales Volumes In 2019
China housing markets start 2019 off a record high base in 2018 in terms of new home sales volumes. With the official NBS January-February data at the national level only expected to be published mid-March, we take a brief look at the early indicators for January-February in the weekly data to February 24 and January data for some major cities and average contract sales for select developers.
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