Brief Consumer: StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels and more

In this briefing:

1. StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels
2. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
3. Korean Stubs Spotlight: Close the Pair Trade Between BGF Co. & BGF Retail
4. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise
5. Hyundai Autoever IPO Preview

1. StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels

This week in StubWorld …

• Can One Bhd (CAN MK)‘s gets shareholder approval to launch a Mandatory General Offer for 33%-held Kian Joo Can Factory (KJC MK). (note, both legs are illiquid)
• Curtis Lehnert sees Mahindra & Mahindra (MM IN)‘s discount to NAV at its widest since 2015.

Preceding my comments on Can One/Kian Joo, Mahindra and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

2. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

Anheuser Busch Inbev Sa/Nv (ABI BB) is looking to list its Asian operations in order to lighten its debt burden. The listing will probably be in Hong Kong and the company could raise around US$5bn at a valuation of around US$70bn.

In my earlier insight, Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China, I looked at how the Asian operations of ABI have shaped up over the past few years.  

In this insight, I’ll do a quick comparison of the past financial performance of China Resources Beer Holdin (291 HK) and Tsingtao Brewery Co Ltd H (168 HK).

3. Korean Stubs Spotlight: Close the Pair Trade Between BGF Co. & BGF Retail

On January 8th, 2019, we wrote a report on initiating a pair trade of going long BGF Co Ltd (027410 KS) and going short Bgf Retail (282330 KS). (Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail) 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 7.5%. (This assumes no commission costs, pricing spreads, taxes, or borrowing cost) using closing share price as of January 8th to February 19th, 2019. This trade was made over a period of 42 days so the annualized returns would be nearly 65%. 

It appears that many traders and investors agreed that BGF was excessively undervalued versus BGF Retail early in 2019. Among the factors cited above, the excessive NAV discount to its intrinsic value as well as the market’s overt concerns about the size of the tender offer between BGF and BGF Retail in 2018 appear to be the key factors that drove the share prices of these two firms diverging excessively in 2H 2018 but then converging back to their norms so far in 2019. 

4. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

The company that brought the off-road vehicle to post-war India in the 1940s has grown into a leading personal vehicle manufacturer covering land, air and sea. Merely making cars, planes and boats wasn’t ambitious enough for this company though, the conglomerate wouldn’t be complete without a financial services and tech consulting business under the corporate umbrella. 

Indian holding companies typically trade a wider discount to NAV than their East Asian counterparts, however the 42% discount to NAV that Mahindra & Mahindra (MM IN) currently trades at, is a trough level historically for the company. In the body of this insight I will present my case for a stub trade on the company, detailing the business structure, performance and the unlisted stub businesses.

In this insight I will cover:

I. The Trade

II. Group Overview and Stub Business Review

III. My Track Record with Stub Trades

5. Hyundai Autoever IPO Preview

• Hyundai Autoever is ready to complete its IPO in March 2019. Established in 2000, Hyundai Autoever is the IT service arm of the Hyundai Motor Group. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 
• The IPO price range is between 40,000 won and 44,000 won. The IPO base deal size is from $125 million to $138 million. According to the bankers’ valuation, the expected market cap is expected to range from 840 billion won to 924 billion won. 
• The bankers used four companies including Samsung SDS, POSCO ICT, Lotte Data Comm, and Shinsegae I&C to value Hyundai Autoever. Using the annualized net profit of the comps in 2018, the bankers derived an average P/E multiple of 24x for the peers. Then the bankers took the annualized net profit of Hyundai Autoever in 2018 (52.2 billion won) and applied the peers average P/E multiple of 24x to derive the implied market cap of 1.25 trillion won. After applying additional IPO discount of 26.4% – 33.1%, the bankers derived the IPO price range of 40,000 to 44,000 won.