Brief Consumer: Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer and more

In this briefing:

1. Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
2. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
3. Sell Prada (1913 HK): Accounting Inflates Margins and Facilitates Excessive Dividends
4. Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait
5. NIO: A Survivor Among All the Chinese Start-Ups

1. 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.

2. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

Ruhnn Holding Ltd (RUHN US) is looking to raise about US$200m in its upcoming IPO.

The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.

The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model. 

Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019.  The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.

3. Sell Prada (1913 HK): Accounting Inflates Margins and Facilitates Excessive Dividends

In our first report on Prada S.P.A. (1913 HK): An expensive luxury, we explained how creative accounting was disguising their business reality.  Since then, the stock has fallen 44% and the dividend has been cut. However, we think the key issues have yet to be addressed. They report growth, good operating cashflow and a solid financial position, but in-store sales are stagnant, margins falling, inventory rising and credit quality declining. It seems that profits are being inflated in order to pay dividends, largely to the controlling family.

4. Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait

I started writing this over the weekend after the results of the Itochu Corp (8001 JP) Tender Offer for 9.56% of Descente Ltd (8114 JP) were announced late Friday. 

Itochu planned on buying 7.21 million shares out of the 75.37mm shares which bear voting rights (as of the commencement of the Tender), and 15,115,148mm shares were tendered, which led to a pro-ration rate of 47.7% which was 0.3% below my the middle of my “wide range” expected pro-ration rate of 42-54% and 0.7% beyond the 44-47% tighter range discussed in Descente Descended and Itochu Angle Is More Hostile of 28 February.

Two more central ideas were discussed in that piece:

1. The hostility shown by Descente management during the Tender Offer had led Itochu to abandon discussions about post-tender management until after the Tender Offer was completed. Both sides indicated a willingness to pick up where things had left off – at Descente’s request – but Descente needed to stew a bit.
2. The revelation by ANTA Sports in an interview with the CEO in the Nikkei in late February that ANTA supported Itochu meant that the likelihood of Itochu NOT having enough votes to put through its own slate of directors was almost zero. At a combined 47.0% of post-Tender voting rights, if 94% or less of shares were to vote, it would mean Itochu could get the majority of over 50% and determine the entire slate of directors themselves. If there was another shareholder holding a couple of percent which supported Itochu, it would be a done deal even if everyone voted. And that 2-3% existed.

So… the threat that Itochu would hold an EGM to seat new directors to oblige a stronger course for management was a very strong probability. Management who was rabidly opposed to Itochu owning the stake could not very well bow down in front of Itochu post-tender just to save its own hide – not after the employee union and the OB group came out against. President Ishimoto had effectively put himself in an untenable position unless a miracle occurred because Itochu could not legally walk away from its offer, and Ishimoto-san was bad-mouthing Itochu even as they were negotiating during the Tender Offer Period. 

It was not, therefore, any surprise that President Ishimoto would step down. The surprise for me was that the news he would go came out as talks commenced over the weekend (but did not “bridge the gap” as the Nikkei reported), before we got to the first business day post-results. 

Talks apparently continue with no resolution, and the media reports offer no hint as to what the issues might be. 

5. NIO: A Survivor Among All the Chinese Start-Ups

Since its announcement on 4Q2018 results and termination of Jiading plant construction, NIO’s share price has been halved. We believe the market has over-reacted on NIO’s cashflow risk. With the expected 30-50% reduction on NEV (New Energy Vehicle) subsidies, all the Start-ups would have worse-than-ever cashflow pressure in 2019. But NIO might survive.

In China’s NEV market, NIO’s market position remains unique among all the Chinese Start-ups. Tesla is still NIO’s main competitor. NIO’s ES6 has capability to compete with Tesla’s Model Y, based on our comparison. Tesla and NIO both have to rely on external funding. The other Chinese Start-ups have to compete with traditional OEMs who have much less cash flow pressures.

NIO’s 4Q2018 financial data were in good trend. We estimate its net loss in 2019 to be further narrowed to Rmb6.1bn. With estimated Rmb13.2bn cash balance at end-Feb 2019, NIO have enough money to cover its estimated cash outflow in the next two year. And it would be able to get another round of external funding in 2020/2021, as long as its business operation ramps up as expected.