In this briefing:
- Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
- TPG Telecom/VHA Merger: Risk-Reward Is Skewed Towards the Downside
- List of 23 Tradable Prefs in Korea: Samsung E-M & CJ CheilJedang Currently Catch the Eye
- Pioneer Shareholders Approve Deal
- 31 January TOPIX & JPX Nikkei 400 Major Index Changes
1. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
- Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
- At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
- Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.
2. TPG Telecom/VHA Merger: Risk-Reward Is Skewed Towards the Downside
On 30 August 2018, TPG Telecom Ltd (TPM AU) announced the recommended merger of equals with Vodafone Hutchison Australia (VHA). The consensus view was that the Australian Competition and Consumer Commission (ACCC) would approve the merger before the release of ACCC’s statement of issues. However, recent events suggest that regulatory approval from the ACCC is far from a sure thing.
We believe that TPG’s current share price provides limited upside should the ACCC approve the merger. On the other hand, there is material downside risk should the ACCC block the merger. Consequently, the risk-reward is skewed towards the downside.
3. List of 23 Tradable Prefs in Korea: Samsung E-M & CJ CheilJedang Currently Catch the Eye
- This is the list of the realistically tradable prefs in Korea. Korea has a total 116 perfs. I filtered them by > ₩100bil market cap and > ₩0.2bil DTV. This filtering gives a total 23 pairs for share class trade. It is generally shown that dividend yield difference and liquidity affect pref discount. The higher div yield difference and the higher liquidity are, the less pref discount is.
- Two names are currently catching my eye. Samsung E-M had a major recovery move last Friday mainly on bargain hunting. The duo made +2σ jump in one single day. Common/pref price ratio is now at 142% of σ. This much premium for Common is something we haven’t seen in nearly 6 months. The recent price rally should be more of a sentimental boost. Short-term correction should be expected.
- CJ CheilJedang is also an interesting one here. The duo made -1.3σ jump last Friday. They are now at -185% of σ. Common/pref price ratio is currently close to 120D low on a 20D MA. The shares have been drifting sideways for almost a year now. There is no signal indicating any distinct trend that will break this sideways drift. This duo is also expected to see a quick mean reversion.
4. Pioneer Shareholders Approve Deal
On Friday 25 January 2019, shareholders of Pioneer Corp (6773 JP) voted to implement a self-imposed (self-inflicted?) equity “cramdown” of sorts.
In September, Pioneer and BPAE signed a memorandum of understanding whereby Baring Private Equity Asia would lend money to Pioneer and subsequently inject equity capital and keep the company listed. In December, BPAE and Pioneer management decided that the equity injection would push out then-existing shareholders at a steep discount to the lowest share price the stock had theretofore seen in the company’s 50-year-plus history of being listed.
Now that’s done.
The situation now looks quite a bit like a regular “risk arb” or “wind up” situation, though investors do not have exact understanding of the payment date.
What comes next is outlined below.
5. 31 January TOPIX & JPX Nikkei 400 Major Index Changes
On December 17th 2018, the TSE announced a somewhat strange and unexpected treatment of the TSE-calculated indices for two companies where shares were issued to shareholders of a foreign company where the Japanese company had acquired the foreign company through a Scheme of Arrangement under foreign jurisdiction.
The two companies were LIFULL (2120 JP) and Takeda Pharmaceutical (4502 JP).
The announcements for TOPIX and JPX Nikkei 400 were made then, and despite the events being entirely similar in construct, but different in month of Scheme Effective Date, they were put in the same month for Mitula and the first tranche of the Takeda inclusion, which was split between two months because of its large impact.
The large IPO last month of Softbank Corp (9434 JP) means there is another large inclusion going effective as of the open of trading on 31 January.
Wednesday is going to be a big day.
If everyone trades their required index amount on the day, it should be a trillion yen plus of flows.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
