In this briefing:
- Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank
- The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts
- 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
1. Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank
It was announced today that Saudi Aramco plans to purchase up to 19.9% stake in Hyundai Oilbank for about 1.8 trillion won from Hyundai Heavy Industries Holdings (267250 KS) (HHIH), which would suggest nearly 9 trillion won in total value for Hyundai Oilbank. The following are the major highlights of the potential investment in Hyundai Oilbank by Saudi Aramco:
- Higher dividends for both Hyundai Oilbank and Hyundai Heavy Industries Holdings – At end of 2018, HHIH converted nearly 2 trillion won of capital surplus into retained earnings, which should allow the company to pay out higher dividends. HHIH has already declared that its long term plans include maintaining a 5% dividend yield and more than 70% dividend payout.
- Greater Investments in Robotics – HHIH is likely to use a big portion of the proceeds from the sale of its stake in Hyundai Oilbank to further invest in the robotics business.
- Our sum-of-the-parts valuation of Hyundai Heavy Industries Holdings suggests a value of 487,000 won, which is 28% higher than current share price.
2. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts
In this version of the GER weekly events wrap, we assess the recent lock-up expiry for Pinduoduo (PDD US) which may have led to a short squeeze. Secondly, we assess the debt tender for Softbank Group (9984 JP) which may be supporting the equity. Finally, we provide updates on bids for M1 Ltd (M1 SP) and Healthscope Ltd (HSO AU) as well as update a list of upcoming M&A and equity bottom-up catalysts.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
3. 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.
4. 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.
5. 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.
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