Brief Industrials: Hopewell’s Egregiously Bad Offer, But What Can You Do? and more

In this briefing:

1. Hopewell’s Egregiously Bad Offer, But What Can You Do?
2. Doosan E&C Rights Offer: Conditions & Timetable
3. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable
4. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support
5. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

1. Hopewell’s Egregiously Bad Offer, But What Can You Do?

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  The IFA (China Tonghai Capital) considers the $38.80/share Offer to be fair & reasonable. The Scheme is conditional on ≥75% for, ≤10% against from disinterested shareholders. As Hopewell is HK-incorporated, there is no “head count ” test.  The full timetable is as follows:

After hearing conflicting opinions on what constitutes a blocking stake, a chat with the banker confirmed the blocking stake, as per the Companies Ordinance, is tied to 63.07% of shares out (i.e. Scheme shareholders – see page 95); whereas the Takeovers Code is tied to 59.42% of shares out. Effectively there are two assessments on the blocking stake and the more stringent (the 59.42% out in this case) prevails. 

With the Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years (the Glorious Property (845 HK) offer, which incidentally was voted down), the IFA creatively argues that extenuating factors such as the premium to historical price needs to also be taken into account. Hardly original, but that is where investors must decide whether this is as good as it’s going to get – given the Wu family’s control, there will not be a competing offer – or to hold out for a superior price longer term. This is a final offer and it will not be increased.

What the IFA fails to discuss is that the widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.

Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. And that is the disingenuous conclusion from the IFA that the premium to last close and with reference to historical pricing, is in effect the overriding reason to conclude the Offer is reasonable. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.

A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ).

Trading at a wide gross/annualised return of 7%/37.5%, reflecting the risk to completion, and the significant downside should the scheme be voted down. Tough one – the premium to last close and with reference to the 10-year price performance, should be sufficient to get it over the line, and the basis for this “bullish” insight. But only for the brave.

2. Doosan E&C Rights Offer: Conditions & Timetable

• Doosan E&C’s rights offer is pretty much in line with the street’s initial expectation. They raise an estimated ₩420bil at an offer price of ₩1,255. The recently amended KRX rule allows an issuer to freely set an offer price. They set it at ₩1,255 based on the Feb 13~20 prices with a 15% discount.
• Final price will be fixed on Apr 30. Whichever higher of ₩1,255 or Apr 26~30 VWAP at a 40% discount will be a final offering price. So, offering price must be at least ₩1,255. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C stake. With a 20% oversubscription, nearly ₩300bil will likely come from DHICO. This is like DHICO is helping E&C at an even heftier price. This is why the market is being much softer on E&C relative to DHICO.

3. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable

• This is a total ₩608.4bil rights offer. This is larger than initially expected. A projected ₩543bil will be raised through common share issuance. The other ₩65bil will be raised in the form of RCPS. This is a combined 72.56% capital increase with a 42.05% share dilution.
• 80% will be allocated to the stockholders. Per share allocation for the stockholders is 0.58. Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights will be listed and trade on Apr 19~25 only for Common. May 2 is for final pricing. New Common shares will be listed on May 29.
• Offering size is much larger than initially expected. In the short-term, DHICO shares will likely take a harsh beating. At this point, we’d better stay away from it for now.

4. Komatsu, HCM and CAT Tactical Recovery Targets and Macro Pivot Support

We thought a technical view on these counters would help clarify where tactical rally targets come into play as well as more important macro support levels where a basing process is expected to begin.

Key resistance points can be used as short zones with key pivots stops and limit levels that reign in risk.

All three stocks display varying degrees of a macro descending corrective wedge formations that have yet to fully mature. 

CAT stands out as the more buoyant of the group and faces its own set of upside pivot resistance points with solid macro support to work with on weakness.

We wanted to fold in a technical view with Mio Kato, CFA and his insight Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime . This group may be ahead of the earnings curve and why we may see more gas in a corrective bounce cycle (CB easy policy and the hunt for value may be part of the rally) before more pressure points are hit to re test macro support targets.

5. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

Central banks around the world have signaled their willingness to return back to the Easy Money Playbook in their quest to re-stimulate economic growth and inflation. This significant shift in market expectations has been the key factor driving the recent rally in Gold (GOLD COMDTY) prices, and it appears to have legs.  As such, we are closing our Spdr Gold Shares (GLD US) short.