In this briefing:
- 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
- Harbin Electric Expected To Be Privatised
1. 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.
2. 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%.
3. 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.
4. 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.
5. Harbin Electric Expected To Be Privatised
Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending.
HE is PRC incorporated, therefore a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption.
HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn or HK$7.27/share) was 65%.
HE issued 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) to its parent in January this year, at HK$4.56/share or a 60.9% discount to the June 2017 book value. A similar discount to the June 2018 book value backs out HK$4.15/share, or ~67% upside from the undisturbed price, in line with the premium to ASMC’s Offer.
A privatisation would require a scheme-like vote for the H-shares. HEC holds no H shares. There are 675mn H shares and no single shareholder controls a 10% (or more) blocking stake.
Dissension rights are available according to HE’s articles of association, although what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident.
There are likely to be the customary PRC regulatory approvals required, however as HEC is already the controlling shareholder and an SOE, these conditions are not in doubt.
Should an offer emerge, expect completion in ~6 months from the initial announcement.
