Brief Event-Driven: Poongsan Holdings Reverse Stub Trade: Current Status & Trade Approach and more

In this briefing:

1. Poongsan Holdings Reverse Stub Trade: Current Status & Trade Approach
2. Softbank Buyback More Than It Appears To Be
3. Eclipx (ECX AU): Worth a Punt that McMillan Merger Goes Through
4. Last Week in GER Research: Softbank, Pinduoduo, and Koolearn
5. LG Uplus – CJ Hello Acquisition: Current Status & Trade Approach

1. Poongsan Holdings Reverse Stub Trade: Current Status & Trade Approach

• Poongsan Holdco/Sub duo is now at +277% of σ on a 20D MA. This is the highest in 120 days. Price ratio wise, they are a little above 120D mean. Holdco discount is 52% to NAV.
• Sub share price has been closely correlated to the US-China trade war lately. Copper price is the single most important factor of Sub share price. US-China talks are currently affecting copper price enormously. Sub has again become a punching bag of short sellers amid fresh concerns over US-China trade.
• Sub is now hitting a 9x PER on already harshly adjusted FY19 earnings. This level is substantially lower than FY18 yearend PER of 12.0x. Valuation wise, Sub shares seem to be hitting bottom at this point. Sub shares moving at least sideways will lead to a mean reversion on Holdco/Sub price ratio.
• I expect it to happen at this point regardless of which direction the US-China talks are heading. Given Sub’s current valuation, Sub wouldn’t take more beating. I’d go long Sub and short Holdco now. Just, Holdco liquidity can be an issue to many of us here.

2. Softbank Buyback More Than It Appears To Be

Softbank Group (9984 JP) last week announced its Q3 results. The stock popped 15+% quickly that day and stayed up all day long, closing at +17.7%. The next day was up small. Over the two days volume was 74.1 million shares. 

I expect the shares were up for two reasons.

1. People figured out Son-san could sell as well as buy. And the sale of NVIDIA Corp (NVDA US) shares was done very well. 
2. Softbank announced a buyback of ¥600 billion – its largest buyback ever. 

The first was surprisingly well-executed. The ownership and transfers of assets from Softbank to the Softbank Vision Fund are sometimes tough to follow, and this should give non-Softbank SVF investors some pause, but Softbank’s ability to get leverage on assets is good, and the collar transaction was – in the eyes of this former derivatives strategist – very well done.

The US$15bn+ gain in market cap over the next two days was probably 10 times the net income impact of the savings on the NVIDIA trade, which means investors are paying 10x earnings for the same thing to incrementally happen every year vs what they thought was going to happen before Thursday. Financial trading businesses have generally traded over time in the high single digit PERs because of the variability of results, so the jump was a little more than it should have been for that, especially if you think some years the “right” jump because of better-than-market execution will have less impact than $2.9bn.

So the rest was either due to other business going well, or the share buyback. At ¥600 billion and at Friday’s closing price, it is about 7 days worth of volume using the 3-month volume average prior to the earnings release and 8.6 days of volume using a one-year average. That means they could buy 10% of ADV every day for 70-86 trading days and complete the buyback, or it means they could buy 3.4% of the volume every trading day. 

That doesn’t seem like a lot. But it is.

3. Eclipx (ECX AU): Worth a Punt that McMillan Merger Goes Through

On 29 January 2019, Eclipx (ECX AU) issued an unexpected trading update citing a soft 1H19 performance and that FY19 NPATA will be more second-half weighted than in the past. In response to Eclipx’s trading update, Mcmillan Shakespeare (MMS AU) said it needs to do further work resulting in the rescheduling of the first court hearing of 1 February 2019.

4. Last Week in GER Research: Softbank, Pinduoduo, and Koolearn

In this version of the GER weekly research wrap, we remind of our work on Softbank Group (9984 JP) before its 20% share rally which may have been prognosticated by its sweeping debt tender. Secondly, Arun updates on his excellent and contrarian call on Pinduoduo (PDD US) after its follow on placement announcement – of which he takes a more moderated view with the shares up 60% since IPO launch. Finally, we update on the IPO of Koolearn (1373356D HK) which provided an update to its prospectus.  A calendar of upcoming catalysts is also attached. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

5. LG Uplus – CJ Hello Acquisition: Current Status & Trade Approach

• LG Uplus is expected to have a BOD this Thursday (Feb 14) to finalize CJ Hello takeover. LG Uplus will pay approximately ₩1tril for a 53.92% controlling stake. This is twice last Friday’s closing price. Unlike the previous deal by SK Telecom, this deal is way much simpler. This is a straight stock acquisition deal. CJ Hello will be a listed subsidiary of LG Uplus. LG Group has no immediate merger plan.

• CJ Hello made a 15.12% gain last Friday. LG Uplus was up only 6.12%. CJ Hello was clearly overshot mainly by local retail. Local institutions did a sell-off in CJ Hello last Friday. Given the complexities of Korea’s local telecom regulations, merger is surely inevitable. However, given the current MC ratio of less than 7.5, it’d be too costly for LG Uplus to go for it at this point.

• LG Uplus needs a small-scale merger. LG Uplus will be exempted from stock purchase duty for its shareholders. For this, LG Uplus needs to keep MC ratio above 10. We should expect to see a consistent pressure on reducing the MC ratio. Relative price wise, this shouldn’t be positive on CJ Hello. I’d go short CJ Hello and long LG Uplus on last Friday’s CJ Hello overheating.