In this briefing:
- LG Holdings Stub Trade: Current Status & Trade Approach
- NTT Buybacks Will Roll On
- StubWorld: Young Poong Blows Out, Again
- Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni
- LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap
1. LG Holdings Stub Trade: Current Status & Trade Approach
- LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
- I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
- I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.
2. NTT Buybacks Will Roll On
There is an extensive history of writing on the NTT (Nippon Telegraph & Telephone) (9432 JP) family (and indeed Japan telecom sector) buybacks – their modalities and methods, impacts, legal and accounting requirements, competition, push-me-pull-you effect, etc.
One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Today, the Nikkei carried an article noting that the Japanese government’sFY2019 budget currently being formed proposes a sale of JPY 160bn of shares to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares.
This news is not unexpected to Smartkarma readers of the ongoing series. And there are implications and read-throughs.
3. StubWorld: Young Poong Blows Out, Again
This week in StubWorld …
- Subsequent to a 5% decline this past two days, Young Poong Corporation (000670 KS)‘s 30.8% holding in Korea Zinc Co Ltd (010130 KS) accounts for an eye-watering ~200% of its market cap.
Preceding my comments on Young Poong 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 as a % – of at least 20%.
4. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni
On Friday, following news about entering merger/acquisition talks with Leoni AG (LEO GR), shares of Motherson Sumi Systems (MSS IN) closed up 3.1% up to INR166. Leoni’s stock, on the other hand, increased by 2.7% at Friday’s close, although the stock has been experiencing a declining trend over the past year. We mentioned in Two More Acquisitions on the Way for Motherson Sumi, that Leoni could be a potential acquisition target for Motherson in its wire harnessing segment, although on the higher end of the size spectrum. The company representatives have not commented on this acquisition news and the deal is not finalised yet. Thus, this could simply remain at the discussion stage with no real transaction taking place.
Leoni has been experiencing a decline in its earnings during the recent quarters of FY2018, expecting negative free cashflows for FY2018E. However, recent news is that Leoni has recently been undertaking a comprehensive restructuring programme after cutting its earnings target for FY2018E and has appointed a new chief executive in September to lead these efforts. Further, it should be noted that Leoni is a well-established company in the auto components business and thus, could overcome its current struggles and be in a good position to exploit the long-term growth prospects of this market. Thus, acquiring Leoni is likely to strengthen Motherson’s position globally by providing the latter with increased coverage geographically and product wise.
5. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap
- LG Group’s tech affiliates will likely increase dividends this year. Local street expects a ₩500 yearend dividend for LGE Common, up 25% YoY. Pref will get ₩550. Dividend yield difference will be 1.28%p, highest since 2015. Price gap should be narrowing as we move towards the end of the year.
- On 20D moving average, we don’t seem to have an opening for stat arb. But on 2Y mean, we have room for mean reversion. This is a 6~7% potential yield. Improved street sentiments on LGE fundamentals next year will also push this mean reversion. I’d go long Pref and short Common at this point to hunt for this.
