In this briefing:
- Harbin Electric: The Price Is Not Right
- 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now
- Are US Stocks Still Expensive?
- TRACKING TRAFFIC/Containers & Air Cargo: Container Rates Up
- Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
1. Harbin Electric: The Price Is Not Right
As speculated in Harbin Electric Expected To Be Privatised, Harbin Electric Co Ltd H (1133 HK) has now announced a privatisation Offer from parent and 60.41%-shareholder Harbin Electric Corporation (“HEC”) by way of a merger by absorption.
The Offer price of $4.56/share, an 82.4% premium to last close, has been declared final. The price corresponds to the subscription of 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) @$4.56/share by HEC in January this year.
Of greater significance, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors can justify recommending an Offer to shareholders at any price which gave cash less cavalier than cash.
Dissension rights are available, however, what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident.
As all PRC approvals have been obtained, this transaction may complete earlier than prior mergers by absorption, which have taken 6-8 months from the initial announcement.
2. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now
Our review of ten Asian gaming companies forward prospects for 2019 yielded our top five picks. Two of those comprise this insight. Three more will follow in Part Two. There is, in our opinion, some disconnect between continuing macro headwinds in both the VIP and mass sectors and a more bullish tone based on a recent upside trend in Macau, strong results in the Philippines and Cambodia. Given the battering of the market in general, the already 8 month old bearish tone to the sector and the current pricing of the two stocks noted here, we see significant upside opportunity as we near the beginning of 2019.
3. Are US Stocks Still Expensive?
There are striking parallels between 1929 and 2018.
The 1929 crash put a halt to a nine-year bull run on the market.
Up until October 1929, same as this year, market consensus was that asset prices could only go up from their current level.
As we mentioned in When the Tide Goes Out, Dominoes Fall, a decade of building up excesses meant a painful burst, back 79 years ago: between October of 1929 and September of 1932, eighty-nine percent of the value of stocks was erased and the market didn’t recover to its former peak until 25 years later.
Are we in a similar situation right now?
4. TRACKING TRAFFIC/Containers & Air Cargo: Container Rates Up
Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces.
Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.
In this issue readers will find:
- An analysis of November container shipping rates, which our index suggests increased by over 20% Y/Y. We concede that our index skews toward volatile spot rates rather than contract rates, but we suspect higher average container rates in Q418, combined with moderating fuel prices, will result in surprisingly strong earnings for the quarter.
- A look at November air cargo activity and air cargo pricing, which diverged. The volume of air cargo handled by the five airlines we track declined slightly (-0.1% Y/Y) but some of those carriers reported sharply higher yields (circa +10% Y/Y), due to limited capacity expansion in the region.
- Some good news: fuel prices have continued to moderate. Bunker climbed by just 5.1% Y/Y as of mid-December, and jet fuel prices have fallen about 11% Y/Y. Given firm container rates and air cargo pricing, the drop in fuel prices bodes well for Q418 margins, though it’s unclear whether such gains are sustainable.
Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers and air cargo operations in the near-term. We believe many investors remain too pessimistic regarding near-term earnings for container carriers and airlines.
5. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
Highlights of significant recent happenings include:
- Feeding the Dragon – Sumitomo Corp (8053 JP) buying into massive Chile copper project; Mitsui & Co Ltd (8031 JP) and Tokyo Gas (9531 JP) announced plans to be long-term buyers of Mexican LNG.
- Local News on Global Companies – Huawei Technology (40978Z CH)‘s to do “whatever is required” to meet Canada’s 5G security standards; Ant Financial (1051260D CH)’s Sesame Credit be used to apply for Canadian visas; Facebook Inc A (FB US) offered data to Netflix Inc (NFLX US) and Royal Bank Of Canada (RY CN); BlackBerry Ltd (BB CN)‘s high-security reputation increasingly valuable; Fedex Corp (FDX US) and United Parcel Service Cl B (UPS US) deny negative impact from Amazon.com Inc (AMZN US)‘s Amazon Air operations; and Anheuser Busch Inbev Sa (Adr) (BUD US) and Tilray Inc (TLRY US) are doing “joint” product development.
- Trade Deals & No Deals – Bosideng Intl Hldgs (3998 HK) got an unexpected boost, while Canada Goose Holdings (GOOS CN) took an unexpected hit as a consequence of the U.S.A. Government’s problems with Huawei Technology (40978Z CH) .
- Outliers – Another “silver lining” to global warming? The Warming Arctic Opens the Northwest Passage as a Potential Maritime Superhighway
