Event-Driven

Brief Event-Driven: Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp and more

In this briefing:

  1. Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp
  2. Korean Stubs Spotlight: A Pair Trade Between Ecopro Co and Ecopro BM
  3. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade
  4. Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
  5. CEVA Logistics: Okay, Now You Can Tender

1. Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp

On March 12th, 2019, we wrote a report on initiating a pair trade of going long Hyosung TNC Co Ltd (298020 KS) and going short Hyosung Corporation (004800 KS)(Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC).  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 8.2%. (This assumes no commission costs, pricing spreads, taxes, or borrowing cost) using closing share price as of March 12th to March 21st, 2019. This trade was made over a period of 9 days so the annualized returns would be 332%. 

We believe that Hyosung TNC is up so much in the past 9 days mainly because it appears that a few investors saw this stock as an undervalued stock that was being ignored by the market. In our report, Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC,  we mentioned that Hyosung TNC appears to be a turnaround story driven by the following four key factors: 

  • Decline in raw material prices 
  • Aggressive spandex investment in India 
  • Stabilization of spandex prices in 2H19 
  • Consolidation of the global spandex industry

2. Korean Stubs Spotlight: A Pair Trade Between Ecopro Co and Ecopro BM

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In this report, we provide an analysis of our pair trade idea between Ecopro Co Ltd (086520 KS) and Ecopro BM Co Ltd (247540 KS). Our strategy will be to go long Ecopro Co and to go short on Ecopro BM. Our base case strategy is to achieve gains of 7-9% on this pair trade. 

Our SoTP valuation suggests a value per share of 52,004 won for Ecopro Co Ltd (086520 KS), representing 65% higher than current share price. Ecopro Co. currently has a market cap of 691 billion won. Ecopro Co’s 56% stake in Ecopro BM is worth 819 billion won, representing 119% of its market cap. Ecopro BM’s share price has jumped nearly 50% since its IPO on March 5th. We believe Ecopro Co has a much higher upside right now versus Ecopro BM over the next one to six months. 

Established in 1998, Ecopro Co started its business focusing on air pollution control related products. It also has major investments in companies such as Ecopro BM Co Ltd (247540 KS) and Ecopro Innovation (unlisted). Ecopro Co’s major customers include Samsung Electronics, SK Hynix, and Hyundai Heavy Industries. 

3. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade

In my original insight on January 15, 2019 TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity, I proposed setting up a stub trade to profit from the mis-priced stub business of Amorepacific that was trading at its widest discount to NAV in at least three years. During the 65 calendar days that followed, Amorepacific Group (002790 KS) has gained 7.3% and the outperformed Amorepacific Corp (090430 KS) by 2.84%. The trade has reverted to average levels in a period of about two months and in this insight I will outline why I think the trade is over.

In this insight I will discuss:

  • Performance of ALL my recommended stub trades
  • a post-trade analysis on the Amorepacific stub

4. 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…


For Recent Insights on the Kosaido Situation Published on Smartkarma…

DateInsight
21-Jan-2019Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-Feb-2019Kosaido: Activism Drives Price 30+% Through Terms
19-Feb-2019Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-Feb-2019Kosaido (7868 JP) TOB Extended
19-Mar-2019Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?

And now there is more below.

5. CEVA Logistics: Okay, Now You Can Tender

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CMA CGM SA (144898Z FP) has 89.47% of Ceva Logistics AG (CEVA SW) and will now move to squeeze out and delist. The additional tender period will run from 20 March to 2 April.

After issuing the prospectus back in late January, CEVA’s board of directors recommended shareholders to not tender shares in the belief that shareholders could realise a higher value with their continuing investment.

Investors thought otherwise and have cashed out at CHF 30/share, a 62.8% premium to the undisturbed price. The massive share price under performance of CEVA subsequent to its listing on the 4 May 2018 – down 33% five months out from the IPO – would have crystallized that decision to tender.

CEVA’s board now recommend shareholders tender into the upcoming additional offer period. If delisting occurs, it is expected concurrently occur with a squeeze-out, which would be expected to take place in the third quarter of 2019 once all stock exchange and other legal conditions are fulfilled.

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