Brief Industrials: Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next? and more

In this briefing:

1. Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
2. Re-Launching Coverage of ZTO Express with Sell Rating and US$13.31 Target Price
3. Yungtay Tummy Rumblings Continue But Not Clear To What Avail
4. Smartkarma’s Week that Was in 🇯🇵/🇰🇷 : Korea’s NPS, Samsung, Toshiba, Hitachi Hi-Tech, Payments
5. A Pair Trade Between Doosan Heavy Industries & Doosan Corp: (미세먼지, Nuclear Power, & 0.42 Million)

1. Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?

The quietly disputed Tender Offer MBO for Kosaido Co Ltd (7868 JP) continues on its merry way. 

Originally scheduled to close March 1st, near the end of February 2019, Bain Capital Japan’s acquisition vehicle (BCJ-34) extended the ¥610/share Tender Offer MBO deadline by 11 days from March 1st to March 11th. Of course, that was something of a moot point – by that time, the shares hadn’t traded at less than a 15% premium to terms for a week after well-known local activist Yoshiaki Murakami’s vehicle Reno KK and affiliates had taken a stake of just below 10%. 

On the 8th of March, BCJ-34 raised its Tender Offer Price by 14.8% to ¥700/share and extended the Tender Offer by almost two weeks to the 25th of March. It also lowered the amount which needs to be bought to 50.1% from 66.67%. In that amended filing the buyer included words 「公開買付者は、本開買付条件の変更後の本公開買付価格を最終的なものとし、今後、本公開買付価格を一切変更しないことの決定をしております。」which roughly translates to “The Offeror, having changed the terms, has made This Tender Offer Price final, and from this point onward, has decided to absolutely not raise the Tender Offer Price.”

That’s that, but since then, the shares have not traded as low as the newly raised Tender Offer Price.

With one week to go, Aoyama Fudosan yesterdat announced it had lifted its stake to 747,800 shares or 3.00% of shares out, which brings the combined Reno KK/Aoyama Fudosan stake to 11.71%. 

Given the 1.1mm shares traded since the 11th (i.e. shares which if Murakami-san had bought he would not have to report until the 19th (today)) and that the share price was up sharply in decent volume this afternoon, it would not be difficult to imagine a higher stake being reported in the days ahead.

Murakami-san is not going away. This is starting to look a bit like another Murakami situation of recent. And that one turned out well.

2. Re-Launching Coverage of ZTO Express with Sell Rating and US$13.31 Target Price

ZTO Express (ZTO US)‘s earnings will fail to meet the high expectations of sell-side analysts and investors who seeit as a cheap proxy for Chinese e-commerce activity.

China’s express sector revenue grew 43.5% YoY in 2016, the year ZTO went public. Last year, revenue growth was just half that (21.8%), and we expect the sector’s growth to continue to moderate over the next few years.

The express sector is also evolving in ways that will put downward pressure on profitability and require greater investment from the express companies.

We expect the profitability of ZTO’s express business to decline in the medium-term as the company adjusts to slowing demand and emerging sector trends. Our earnings estimates, which are far below consensus figures, reflect these challenges.

ZTO suffers from declining earnings quality and two accounting issues that we feel make it a risky, unattractive investment. Our 12-month target price for ZTO is US$13.31, based on 16 times our blended 2019-20 EPS estimates. We rate the stock Sell.

3. Yungtay Tummy Rumblings Continue But Not Clear To What Avail

On March 6th, a day before the Hitachi Ltd (6501 JP) Taiwan elevator business Tender Offer for just over a third of Yungtay Engineering (1507 TT) was expected to close, the closing date was extended to 22 April, notably because the acquiring entity had not yet received Taiwan Ministry of Economy Investment Commission approval for the foreign investment, and the Fair Trading Commission had not yet given the green light, so there was no hope of getting it done by the next day in accordance with Taiwan’s Public Acquisition of Public Company Shares Administrative Law Article 18 Para 2. The proposed purchase price was unchanged at NT$60. 

While there have been noises in the market that both Otis and Schindler, which are reported to hold roughly 5-6% each (last year’s shareholder list included UT Park View which United Technologies (UTX US)‘s 10-K showed was a wholly-owned sub) were willing to offer more than Hitachi’s offered NT$60 (and MOPS filings indicate the board approval meeting in end-January referenced a NT$63 potential bid), there was no competitive bid made public and to the authorities by five business days prior to the first bid close (which would have been 26 Feb) as per the same law Article 7 Para 2.

Since then, there have also been other ructions. While terms remain unchanged, it is worthwhile looking into what has been going on. This is still interesting and because of its various inputs, slightly disconcerting to some, and the modalities continue to surprise me.

Past coverage of this situation can be found at:
28 Oct 2018 – Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)
17 Jan 2019 – Hitachi Tender for Yungtay Engineering Launches
26 Feb 2019 – Yungtay Noises Haven’t Produced a Result Yet

4. Smartkarma’s Week that Was in 🇯🇵/🇰🇷 : Korea’s NPS, Samsung, Toshiba, Hitachi Hi-Tech, Payments

Something of a slower week on Smartkarma this week (I contributed to that slowness by being away and under the weather when back) with about 120 insights published. A list of the insights to do with Japan and Korea this week are listed below.

There will be a couple more shortly. 

For more detail, read on below the fold…

For me, the MUST READS of this weak are the cashless payment-related pieces by Kirk Boodry and Michael Causton shown at the bottom. 

5. A Pair Trade Between Doosan Heavy Industries & Doosan Corp: (미세먼지, Nuclear Power, & 0.42 Million)

In this report, we provide an analysis of our pair trade idea between Doosan Heavy Industries (034020 KS) and Doosan Corp (000150 KS). Our strategy will be to be long Doosan Heavy Industries and be short Doosan Corp. Our base case strategy is to achieve gains of 7-9% on this pair trade over the next six months. 

In the past two years, Moon Jae-In administration’s energy policy has been to further reduce the reliance on nuclear power and increase reliance in renewable and coal power. The use of nuclear power in Korea is highly impacted by politics. There are a few stocks in Korea such as Doosan Heavy Industries (034020 KS) where politics is very important. The conservative parties in Korea tend to favor the use of nuclear power. However, the ruling liberal party does not favor the use of nuclear power. 

Among the domestic issues, the decline in the nuclear power generation and greater use of coal based power generation have been cited as key reasons why the fine dust problems has increased in Korea in the past two years. In fact, more than 0.42 million Korean citizens have signed petitions in the past few weeks that would oppose the continued decline in the use of nuclear power generation.