Brief Industrials: Lasertec (6920 JP): Pricing in Long-Term Growth and more

In this briefing:

1. Lasertec (6920 JP): Pricing in Long-Term Growth
2. Snippets #21: Bremain, TMB Rights Issue
3. Korean Stubs Spotlight: A Pair Trade Between Ecopro Co and Ecopro BM
4. Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
5. CEVA Logistics: Okay, Now You Can Tender

1. Lasertec (6920 JP): Pricing in Long-Term Growth

Lasertec hit a new high in the semiconductor stock rally that followed Micron Technology’s March 20 earnings call. On Friday, March 22 (March 21 was a holiday in Japan), Lasertec was up 8.4% to ¥4,900. At this price, the shares are selling at 42x our EPS estimate for FY Jun-19, 36x our estimate for FY Jun-20 and 31x our estimate for FY Jun-21. On a 5-year view, earnings growth could bring the projected P/E multiple down to 21x, in our estimation.

Following strong 1H results, management left FY Jun-19 sales and profit guidance unchanged, but raised semiconductor-related orders guidance by 13% while cutting  orders guidance for FPD-related and other products by nearly 40%. Total new orders guidance was raised from ¥37 billion to ¥39 billion, compared with sales guidance of ¥28 billion, implying an increase in the order backlog from ¥39.9 billion to ¥50.9 billion.

With this in mind, we have raised our sales and profit estimates for FY Jun-20 and added new, higher estimates for FY Jun-21 and beyond. Rising demand for EUV mask blank and mask defect inspection equipment should drive an increase in total sales from ¥29 billion this fiscal year to ¥38 billion in FY Jun-21, and approximately ¥50 billion in FY Jun-23. Over the same period, operating profit should rise from ¥7.0 billion to ¥9.5 billion, and then to approximately ¥14 billion.

Risks for investors include the potential delay or reduction of orders and shipments (as just happened with FPD inspection equipment), high volatility in quarterly orders, sales and profits, and extended valuations.

2. Snippets #21: Bremain, TMB Rights Issue

These are the five developments/news flows/trends and their potential impact on Thai equities you should be aware of in recent weeks: 

• Reversing Brexit. A special report highlighting the possible reversal of Brexit should have limited impact on Thai equities, though a few names like SSI, Thai Union, and Minor do float up on the screen.
• TMB announces a 5 for 1 rights issue at Bt2.07/sh, which could raise US$570m of new capital for their acquisition of Thanchart and imply a 65-35 split of ownership between the two banks.
• Politically motivated wage hike. Some of the political campaigns by smaller parties are even more populist than the major parties, implying wage increases between 10-30% from current levels. This could really destabilize Thailand’s long-term prospects as an investment base. 
• Italian-Thai Chairman thrown into prison. Premchai Karnasutra, who killed one of Thailand’s last 9 black leopards, is sentenced to 16 months in jail. Share prices actually rose!
• Bangkok’s third airport! The Navy is putting up the UTaPao airport construction up for bid. Front runners include the CP-led consortium, which includes ITD, but contenders include the BTS-STEC consortium and another smaller one.

3. Korean Stubs Spotlight: A Pair Trade Between Ecopro Co and Ecopro BM

In this report, we provide an analysis of our pair trade idea between Ecopro Co Ltd (086520 KS) and Ecopro BM Co Ltd (247540 KS). Our strategy will be to go long Ecopro Co and to go short on Ecopro BM. Our base case strategy is to achieve gains of 7-9% on this pair trade. 

Our SoTP valuation suggests a value per share of 52,004 won for Ecopro Co Ltd (086520 KS), representing 65% higher than current share price. Ecopro Co. currently has a market cap of 691 billion won. Ecopro Co’s 56% stake in Ecopro BM is worth 819 billion won, representing 119% of its market cap. Ecopro BM’s share price has jumped nearly 50% since its IPO on March 5th. We believe Ecopro Co has a much higher upside right now versus Ecopro BM over the next one to six months. 

Established in 1998, Ecopro Co started its business focusing on air pollution control related products. It also has major investments in companies such as Ecopro BM Co Ltd (247540 KS) and Ecopro Innovation (unlisted). Ecopro Co’s major customers include Samsung Electronics, SK Hynix, and Hyundai Heavy Industries. 

4. Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer

I should have seen this coming. The asset is juicy enough, and they have a large enough stake, and the company is small enough, that this is an easy trade to do if you can get the funding. It makes eminent sense to be able to put the money down and go for it. 

I have covered this minor disaster of an MBO (Management BuyOut) of Kosaido Co Ltd (7868 JP) since it was launched, with the original question of what one could do (other than refuse). Famed/notorious Japanese activist Yoshiaki Murakami and his associated companies started buying in and then the stock quickly cleared the Bain Capital Japan vehicle’s bid price. The deal was extended, then the Bain bid was raised to ¥700/share last week with the minimum threshold set at 50.01% not 66.67% but still the shares had not traded that low, and did not following the news. But Bain played chicken with Murakami and the market in its amended filing, including the 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.”

So now Murakami-san has launched a Tender Offer of his own. Murakami-affiliated entities Minami Aoyama Fudosan KK and Reno KK have launched a Tender Offer at ¥750/share to buy a minimum of 9,100,900 shares and a maximum of all remaining shares. The entities currently own 3,355,900 shares (13.47%) between them – up from 11.71% reported up through yesterday [as noted in yesterday’s insight, it looked likely from the volume and trading patterns prior to yesterday’s Large Shareholder Report that they had continued buying]. 

Buying a minimum of 9,100,900 shares at ¥750/share should be easier for Murakami-san’s bidding entity than buying a minimum of 12,456,800 shares (Bain Capital’s minimum threshold) at ¥700/share, but the Murakami TOB Tender Agent is Mita Securities, which is a lesser-known agent and it is possible that the main agent for the Bain tender (SMBC Securities) could make life difficult for its account holders.

The likelihood that Murakami-san doesn’t have his bid funded or won’t follow through is, in my eyes, effectively zero. Tender Offer announcements are vetted by both the Kanto Local Finance Bureau and the Stock Exchange. You know this has been in the works for a couple of weeks simply because of that aspect. But one of the two documents released today includes an explanation of the process Murakami-san’s companies have gone through to arrive at this bid, and that tells you it may have gone on longer.

So what next? The easy answer is there is now a put at ¥750/share. Unless there is not. Weirder things have happened.

Read on…

And now there is more below.

5. CEVA Logistics: Okay, Now You Can Tender

CMA CGM SA (144898Z FP) has 89.47% of Ceva Logistics AG (CEVA SW) and will now move to squeeze out and delist. The additional tender period will run from 20 March to 2 April.

After issuing the prospectus back in late January, CEVA’s board of directors recommended shareholders to not tender shares in the belief that shareholders could realise a higher value with their continuing investment.

Investors thought otherwise and have cashed out at CHF 30/share, a 62.8% premium to the undisturbed price. The massive share price under performance of CEVA subsequent to its listing on the 4 May 2018 – down 33% five months out from the IPO – would have crystallized that decision to tender.

CEVA’s board now recommend shareholders tender into the upcoming additional offer period. If delisting occurs, it is expected concurrently occur with a squeeze-out, which would be expected to take place in the third quarter of 2019 once all stock exchange and other legal conditions are fulfilled.