In today’s briefing:
- Merger Arb Mondays (25 Nov) – Seven & I, Fuji Soft, ID&EH, Arcadium, Henlius, Canvest, GAPack
- HSTECH Index Rebalance: Midea (300 HK) Replaces Weibo (9898 HK); US$1.5bn Round-Trip Trade
- Henlius (2696 HK): NDRC Approval Should Calm Nerves
- Hang Seng Index (HSI) Rebalance: Still Baby Steps to Get to 100 Members
- HK Connect SOUTHBOUND Flows (To 22 Nov 2024); Volumes Much Lower But Broad-Based Buying Continues
- Henlius (2696 HK): The Spread Should Narrow After NDRC Approval
- A/H Premium Tracker (To 22 Nov 2024): AH Premia Rise Sharply; Hs Shellacked Vs As In Most Sectors
- China Healthcare Weekly (Nov.24) – 10th VBP, Biotech Valuation Logic, China Resources Reorganization
Merger Arb Mondays (25 Nov) – Seven & I, Fuji Soft, ID&EH, Arcadium, Henlius, Canvest, GAPack
- We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
- Highest spreads: Shanghai Henlius Biotech (2696 HK), Canvest Environmental Protection Group (1381 HK), Get Nice Financial Group Ltd (1469 HK), Shinko Electric Industries (6967 JP), Arcadium Lithium (LTM AU).
- Lowest spreads: Renewable Japan (9522 JP), Macromill, Inc (3978 JP), Nec Networks & System Integr (1973 JP), Fuji Soft Inc (9749 JP), Xingda International (1899 HK), Elematec Corp (2715 JP).
HSTECH Index Rebalance: Midea (300 HK) Replaces Weibo (9898 HK); US$1.5bn Round-Trip Trade
- In a surprise, Midea Group (300 HK) will replace Weibo (9898 HK) in the Hang Seng TECH Index (HSTECH INDEX) after the close of trading on 6 December.
- Estimated one-way turnover at the rebalance is 4.5% resulting in a round-trip trade of HK$11.72bn (US$1.51bn). Passives need to buy 9x ADV in Midea Group (300 HK).
- The Midea Group Co Ltd A (000333 CH) / Midea Group (300 HK) premium could drop due to the index inclusion providing an entry point into an AH expansion trade.
Henlius (2696 HK): NDRC Approval Should Calm Nerves
- Due to several factors, the gross spread of Shanghai Fosun Pharmaceutical (Group) (2196 HK)’s HK$24.60 offer for Shanghai Henlius Biotech (2696 HK) has widened to 21.5%.
- The wide gross spread reflects the China TCM deal break hangover, slow progress in satisfying the precondition, Fosun Pharma’s potential funding challenges, and the shareholder vote.
- NDRC approval should calm nerves about precondition satisfaction. Even with lingering deal-break concerns, a 21.5% gross spread is excessive.
Hang Seng Index (HSI) Rebalance: Still Baby Steps to Get to 100 Members
- Kuaishou Technology (1024 HK) and New Oriental Education (9901 HK) will be added to the Hang Seng Index in December while New World Development (17 HK) will be deleted.
- Estimated one-way turnover is 2.7% and the estimated round-trip trade is HK$10.89bn (US$1.4bn) with over 1 day of ADV to trade in the adds and the delete.
- The index committee has net added 1 stock to the Hang Seng Index this year to go from 82 to 83 constituents. Reaching the 100-member target will drag into 2026.
HK Connect SOUTHBOUND Flows (To 22 Nov 2024); Volumes Much Lower But Broad-Based Buying Continues
- SOUTHBOUND gross trading activity dropped sharply but net SOUTHBOUND buying remains very strong and very broad-based.
- The trend continues to be net buying of tech though Friday saw a lot of profits taken in Tech names by SOUTHBOUND holders.
- I expect HK-listed tech to continue getting bought. Alibaba, Tencent, Xiaomi, etc are safe havens against Trump tariffs as they don’t compete in the US. Still.
Henlius (2696 HK): The Spread Should Narrow After NDRC Approval
- On the 24th June, Fosun Pharmaceutical (2196 HK) made a HK$24.60/share Offer, in cash, for H-shares not held in Shanghai Henlius Biotech (2696 HK). A scrip alternative was subsequently afforded.
- This is a pre-conditional Offer, subject to NDRC, Mofcom and SAFE – followed by a Scheme-like vote for independent H-shareholders. Henlius has announced that NDRC approval has now been secured.
- Trading at a massive gross spread of ~21.5% compared to ~10% just prior to China Traditional Chinese Medicine (570 HK)‘s capitulation. This is excessive.
A/H Premium Tracker (To 22 Nov 2024): AH Premia Rise Sharply; Hs Shellacked Vs As In Most Sectors
- Huge volumes continue to be traded on the mainland share markets. SOUTHBOUND volumes dropped sharply but net buying continued strongly.
- Stocks in HK and mainland markets fell heavily with HK’s main indices down 6-7% and China’s blue chip indices down 3.3-3.6% (CSI 500 – 4.8%).
- Within H/A Pairs, after outperforming the HK/mainland spread for weeks, spreads got shellacked. Worst week in a long time (-3.7%), perhaps on the back of “disappointing” lack of stimulus measures.
China Healthcare Weekly (Nov.24) – 10th VBP, Biotech Valuation Logic, China Resources Reorganization
- The 10th national VBP officially begins. Enterprises involved in this VBP include Shanghai Fosun Pharmaceutical (2196 HK)Shanghai Pharmaceuticals (2607 HK), Sichuan Kelun Pharmaceutical (002422 CH), CSPC (1093 HK), etc..
- We analyzed Chinese Biotech companies’ P/S range based on different product revenue growth. Due to low profitability, there is “a valuation discount” if they are included in global valuation system.
- KPC has agreed to acquire 51% interest in CR Shenghuo from CR Sanjiu. Due to good performance, we are full of expectations for the future acquisition/integration within China Resources.
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