Brief Consumer: Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp and more

In this briefing:

1. Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp
2. Golden Agri: El Nino Back on the Front Burner; Bullish Catalyst for GAR
3. S: Outshines Thai Property Peers on High Recurring Profit
4. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade
5. Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer

1. Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp

On March 12th, 2019, we wrote a report on initiating a pair trade of going long Hyosung TNC Co Ltd (298020 KS) and going short Hyosung Corporation (004800 KS). (Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC).  This trade has worked out well and now we think this is a good time to close this trade.

The return on this pair trade was 8.2%. (This assumes no commission costs, pricing spreads, taxes, or borrowing cost) using closing share price as of March 12th to March 21st, 2019. This trade was made over a period of 9 days so the annualized returns would be 332%. 

We believe that Hyosung TNC is up so much in the past 9 days mainly because it appears that a few investors saw this stock as an undervalued stock that was being ignored by the market. In our report, Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC,  we mentioned that Hyosung TNC appears to be a turnaround story driven by the following four key factors: 

• Decline in raw material prices 
• Aggressive spandex investment in India 
• Stabilization of spandex prices in 2H19 
• Consolidation of the global spandex industry

2. Golden Agri: El Nino Back on the Front Burner; Bullish Catalyst for GAR

INVESTMENT VIEW:
The Australian Bureau of Meteorology raised its ENSO Outlook back to El Nino ALERT from WATCH, which is linked to regional droughts, lower yields and higher prices for agriculture across South East Asia.  As such, we believe the recent correction in Crude Palm Oil (CPO) prices is over and recommend buying back into shares of key producers with leverage to higher CPO prices, like Golden Agri Resources (GGR SP) (GAR). 

3. S: Outshines Thai Property Peers on High Recurring Profit

We initiate coverage of S with a BUY rating, based on a target price of Bt4.2 derived from a sum-of-the-parts (SOTP) methodology and implying 16.5xPE’19E, a 23% discount to the average of its peers in the Thai real estate sector.

The story:

• Asset value to drive long-term sustainable growth
• 19 projects under development worth a combined Bt36bn to drive sales over the next three years
• REITs will be a key catalyst to boost recurring income
• Higher revenue contribution from hotel business

Risks:

• Tightened credit approval
• Raw material costs & F/X fluctuation

Background: In 2014, Santi Bhirombhakdi** and his property arm, Singha Property Management, acquired a major stake in RASA, a listed property company on the SET, and changed its name to “Singha Estate Public Company Limited”,  or “S”. This new major shareholder quickly unveiled plans to transform S into a holding company. During 2015-17, the company made several acquisitions including (1) a 51.56% stake in NVD, a low-rise property developer that operates under the “Nirvana” brand with a current market value of Bt2.7bn; (2) Suntowers, an office complex worth Bt4.5bn; and (3) a mixed-use commercial complex owned by the major holder’s family business worth over Bt6bn. It also set up a joint venture with a partner to invest in and operate 26 hotels in the UK worth Bt8.6bn.

Revenue breakdown:

The residential property segment contributed 41% of S’s 2018 total revenue. This segment includes the development and sale of high-rise and-low rise projects such as single detached houses, townhomes, home offices, and condominiums.

The commercial property segment contributed 36% of total revenue. This business includes space for rent, common-service charges for utilities, security systems, and other service fees. The company owns two commercial property projects — The Lighthouse (a community mall) and Suntowers (an office complex).

S owns 37 hotels with a combined 4,271 rooms comprising (1) two hotels with 297 rooms in Thailand, namely Santiburi Beach Resort & Spa and Phi Phi Island Village Beach Resort; (2) 22 hotels in England and 7 in Scotland (total of 3,115 rooms) under a 50:50 JV with FICO Group; and (3) 6 Outrigger-branded hotels with 859 rooms. This segment accounts for 18% of sales.

The company also provides construction materials such as precast concrete and aluminum, as well as hotel management services. These two segments contribute 3% and 2% respectively.

4. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade

In my original insight on January 15, 2019 TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity, I proposed setting up a stub trade to profit from the mis-priced stub business of Amorepacific that was trading at its widest discount to NAV in at least three years. During the 65 calendar days that followed, Amorepacific Group (002790 KS) has gained 7.3% and the outperformed Amorepacific Corp (090430 KS) by 2.84%. The trade has reverted to average levels in a period of about two months and in this insight I will outline why I think the trade is over.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-trade analysis on the Amorepacific stub

5. Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer

I should have seen this coming. The asset is juicy enough, and they have a large enough stake, and the company is small enough, that this is an easy trade to do if you can get the funding. It makes eminent sense to be able to put the money down and go for it. 

I have covered this minor disaster of an MBO (Management BuyOut) of Kosaido Co Ltd (7868 JP) since it was launched, with the original question of what one could do (other than refuse). Famed/notorious Japanese activist Yoshiaki Murakami and his associated companies started buying in and then the stock quickly cleared the Bain Capital Japan vehicle’s bid price. The deal was extended, then the Bain bid was raised to ¥700/share last week with the minimum threshold set at 50.01% not 66.67% but still the shares had not traded that low, and did not following the news. But Bain played chicken with Murakami and the market in its amended filing, including the words 「公開買付者は、本開買付条件の変更後の本公開買付価格を最終的なものとし、今後、本公開買付価格を一切変更しないことの決定をしております。」which roughly translates to “The Offeror, having changed the terms, has made This Tender Offer Price final, and from this point onward, has decided to absolutely not raise the Tender Offer Price.”

So now Murakami-san has launched a Tender Offer of his own. Murakami-affiliated entities Minami Aoyama Fudosan KK and Reno KK have launched a Tender Offer at ¥750/share to buy a minimum of 9,100,900 shares and a maximum of all remaining shares. The entities currently own 3,355,900 shares (13.47%) between them – up from 11.71% reported up through yesterday [as noted in yesterday’s insight, it looked likely from the volume and trading patterns prior to yesterday’s Large Shareholder Report that they had continued buying]. 

Buying a minimum of 9,100,900 shares at ¥750/share should be easier for Murakami-san’s bidding entity than buying a minimum of 12,456,800 shares (Bain Capital’s minimum threshold) at ¥700/share, but the Murakami TOB Tender Agent is Mita Securities, which is a lesser-known agent and it is possible that the main agent for the Bain tender (SMBC Securities) could make life difficult for its account holders.

The likelihood that Murakami-san doesn’t have his bid funded or won’t follow through is, in my eyes, effectively zero. Tender Offer announcements are vetted by both the Kanto Local Finance Bureau and the Stock Exchange. You know this has been in the works for a couple of weeks simply because of that aspect. But one of the two documents released today includes an explanation of the process Murakami-san’s companies have gone through to arrive at this bid, and that tells you it may have gone on longer.

So what next? The easy answer is there is now a put at ¥750/share. Unless there is not. Weirder things have happened.

Read on…

And now there is more below.