Brief Event-Driven: TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On and more

In this briefing:

1. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On
2. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
3. Lynas (LYC AU): Wesfarmers’ Unattractive Bid
4. StubWorld: Naspers Embeds Another Layer Into Tencent
5. Wesfarmers Puts Out A Bid for Lynas

1. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps. 

Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions. 

You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:

• finish the historical overview of the Li family and PCCW
• present my trade idea and rationale
• give a detailed overview of the business units of PCCW and the associated performance of each
• recap ALL of my stub trades on Smartkarma and the performance of each  

2. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

3. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.

4. StubWorld: Naspers Embeds Another Layer Into Tencent

This week in StubWorld …

• There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.

Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

5. Wesfarmers Puts Out A Bid for Lynas

This morning, Wesfarmers Ltd (WES AU) announced an indicative, non-binding proposal to the Board of Directors of Lynas Corp Ltd (LYC AU) to acquire Lynas at A$2.25/share, payable in cash in the form of a Scheme of Arrangement.  

This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price.

It is, however, a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian Minister for Energy, Science, Technology, Environment and Climate imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. On December 5th, the shares fell to A$1.65 and they have not recovered.

David Blennerhassett gave an overview of the license renewal issues and timeline in Lynas: Between a Hard Place and Just Rock just a few weeks ago. It is definitely worth a read as background for those not up to speed on the situation. 

This is very early, non-binding, conditional in the extreme, and conditional non-binding offers are a graveyard of Australian arbitrageurs. The Offer is not all that attractive to boot. But I expect the stock will go up anyway, and that may make for some interesting trading opportunities.