Brief Hong Kong: Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019 and more

In this briefing:

1. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019
2. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb
3. StubWorld: Wharf Under Pressure As Cooling Measures Bite
4. Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent

1. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.

Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016

2. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb

An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm.  After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China. 

In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub. 

In this insight I will cover:

I. The Trade

II. The Stub Assets

III. My Track Record with Stub Trades

3. StubWorld: Wharf Under Pressure As Cooling Measures Bite

This week in StubWorld …

• Wheelock & (20 HK) is coming up “expensive”, but it’s Wharf Holdings (4 HK) which is under-performing after PRC property sales targets are lowered amid Beijing’s cooling measures.

Preceding my comments on Wheelock and other stubs 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%.

4. Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent

Dongzheng Automotive Finance (2718 HK) is raising up to US$428m in its upcoming IPO. We have covered the background of the company in Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth. 

In this insight, we will look into the company’s valuation, compare it to listed auto peers, and run the deal through our framework.