In today’s briefing:
- HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping
- SKT ADR Play on the 31st for MSCI Exclusion
- Nitro’s Opportunistic A$1.58 Offer from Potentia
- Prosus: 30% Discount Seems About Right
- Link Net: Axiata’s MTO Kicks Off Today
- Observability Pair Trade: Long Elastic / Short Splunk
- Delta Electronics: Taiwan Vs. Thailand Pairs Monitor, Call with Management
- Two Niche Semiconductor Industry Stocks Highly Exposed to EV Acceleration
- Open Text/Micro Focus: Next Chapter in an Acquisition Growth Story
- Headwinds Persist, Including Rising DXY, 10-Yr Treasury Yield, & Commodities; Buying Staples, Solar
HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping
- The September rebalance of the HSI, HSCEI and HSTECH indices will use today’s closing prices to cap the index constituents at 8%. This will lead to large flows.
- The largest inflows will be on Baidu (9888 HK), SenseTime Group (20 HK), China Shenhua Energy (1088 HK), Tencent (700 HK), Kuaishou Technology (1024 HK) and Anta Sports (2020 HK).
- The largest outflows will be on Meituan (3690 HK), AIA Group (1299 HK), Sunny Optical (2382 HK), SMIC (981 HK), China Pacific Insurance (2601 HK) and China Construction Bank (939).
SKT ADR Play on the 31st for MSCI Exclusion
- We need a hedge to short SKT on the 31st. For this, we need to consider trading SKT ADR, which is pretty liquid as DTV reaches nearly $8mil.
- The play structure is simple. It exploits the pattern that passive flow is concentrated on underlying shares rather than ADRs. We witnessed this pattern in the last two cases.
- Passive outflow may be aggravated since SKT leaves not only STANDARD but also sub-indices such as ESG. So, the degree of a temporary DR premium can get thicker.
Nitro’s Opportunistic A$1.58 Offer from Potentia
- Nitro Software Ltd (NTO AU) entered a trading halt in response to an AFR report that Potentia has lobbed an indicative non-binding proposal at A$1.58 per share.
- Potentia’s offer follows its success in securing a 17% stake at A$1.58 per share on Monday night. The stake is large enough to deter rival schemes.
- The offer is opportunistic and unattractive. However, the ability of Potentia to relatively quickly secure a significant stake suggests that the Board will be under pressure to engage.
Prosus: 30% Discount Seems About Right
- The initial impact, of the share repurchase program, was for Prosus’ simple discount to listed NAV to reduce from roughly 50% to around 25% within 4 weeks of implementation.
- The weekly size of the share repurchase program has been reduced by ~40%, on a 4-week rolling average basis, since the discount has been below 30%.
- We remain constructive on Tencent and, with Prosus at 25% or less simple discount to NAV, would own Tencent directly (long-only), or be long Tencent, short Prosus/Naspers.
Link Net: Axiata’s MTO Kicks Off Today
- After Axiata (AXIATA MK) completed the acquisition of 66.03% in Link Net (LINK IJ) on the 22 June, Axiata was obligated to undertake a mandatory offer for the remaining 33.97%.
- The MTO commences today and concludes on the 28 September. Payment will be the 6 October.
- There are no conditions attached to the MTO. Play the spread, where available.
Observability Pair Trade: Long Elastic / Short Splunk
- Like PANW and SNOW, Elastic continues to power through macro headwinds seen by many other software companies.
- Elastic has a Crowdstrike like dynamic, where it is capturing new workloads from incumbents, in the cloud. In this case, Symantec’s share donator role is being played by Splunk.
- In this tough volatile environment, we like an observability pair trade of Long ESTC / Short SPLK.
Delta Electronics: Taiwan Vs. Thailand Pairs Monitor, Call with Management
- We had a call with Delta Electronics (2308 TT) management to understand the company’s latest developments, particularly in relation to its growing automotive and EV businesses.
- Delta Thailand shares have rallied 55.4% in T$ terms, while Delta Taiwan has only rallied 9.3%.
- Delta’s EV business is growing 50% per year and has major customers including Tesla, GM, and Volkswagen, however, our sense is the Taiwan entity has an advantage.
Two Niche Semiconductor Industry Stocks Highly Exposed to EV Acceleration
- SDI Corporation (2351 TT) and Jih Lin Technology (5285 TT) are well positioned to generate significant long-term business from automotive end-market chip demand.
- The companies are the #1 and #2 leaders globally by market share respectively for power lead frames.
- Could receive earnings upgrades if CEV to EV market expectations are pulled forward.
Open Text/Micro Focus: Next Chapter in an Acquisition Growth Story
- Open Text agreed a 532p/share cash offer for legacy software, highly leveraged FTSE250 constituent, Micro Focus (98% premium, 2.3x EV/Fwd Revenues, 6.4x EV/Fwd EBITDA), taking advantage of target’s downwards re-rating.
- My TP based (5.6x EV/Fwd EBITDA based) is 350p, which reflects macro challenges. Although the offer from Open Text seems every generous, ROIC could reach low single teens.
- Gross spread is 2.35% and the estimated annual return would be 4.38% assuming settlement by mid-February. Irrevocables amount to 16.62%, the lengthy part will be antitrust and FDI approvals. Long.
Headwinds Persist, Including Rising DXY, 10-Yr Treasury Yield, & Commodities; Buying Staples, Solar
- In last week’s Compass (Aug. 23) we discussed the increasing odds for a deeper pullback in the broad market indexes.
- This was due to 5-week uptrend breaks on the SPX, NDX, and Russell 2000, the Fed tightening, and with Treasury yields, the U.S. dollar (DXY), and commodities (DJP) inflecting higher.
- The market remains in pullback mode; the SPX, NDX, and Russell 2000 are all approaching 50-day MA support, the first big area of interest on this pullback.
💡 Before it’s here, it’s on Smartkarma
Sign Up for Free
The Smartkarma Preview Pass is your entry to the Independent Investment Research Network
- ✓ Unlimited Research Summaries
- ✓ Personalised Alerts
- ✓ Custom Watchlists
- ✓ Company Data and News
- ✓ Events & Webinars
