Daily Industrials: ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements and more

In this briefing:

1. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements
2. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard
3. HDC Holdings Stub Trade: Current Status & Trade Approach
4. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War
5. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments

1. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements

Over 2017-18, the Australian Securities & Investments Commission (ASIC) undertook a review of allocation in equity raising transactions. The review involved large and mid-sized licensees (brokers), Issuers, International investors and other international regulators. The results of the review were published by ASIC in Dec 2018. This insight highlights some of the key findings.

It’s good to see that some of the standard practices of banks allocating more to existing clients and participants of earlier deals have at least been acknowledged. Even though some institutional investors have outright labelled the allocation process as a “black box”, ASIC doesn’t seem to want to do much about it.

The area where ASIC is more concerned is the messaging to investors which highlights the different definitions of “well-covered” across banks. Although, the banks seem to have mislead the regulator on interpretation of “real-demand” with ECM bankers saying that all orders are taken at face-value. That raises a whole new level of questions on the messaging around demand for the deal.

2. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard

This week in StubWorld …

• With concerns over its tender offer for BGF Retail (282330 KS) now behind it, now may be the time for a BGF Co Ltd (027410 KS) setup.
• Kingboard Chemical (148 HK) gets a boost after buying properties from its major shareholder, however, the implied yield is uninspiring.

Preceding my comments on BGF and KBC 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. HDC Holdings Stub Trade: Current Status & Trade Approach

• HDC Holdings (012630 KS) and HDC-OP (294870 KS) price gap is now at a nearly record high. Holdco discount is now 60% to NAV. On a 20D MA, Holdco and Sub are currently below -1 σ.
• I initiated a stub trade on the duo on Dec 11. It paid off on a short term horizon until the duo reached within -0.5~0 σ on a 20D MA. Yield peaked at 4.6% on Dec 14. If you approached with a longer term horizon, things wouldn’t have been as enjoyable.
• The only possibly explainable factor for the recent price divergence is HDC I-Controls’ need to dump a 1.78% Holdco stake. 1.78% overhang risk is not enough to sustain this much divergence and current 60% Holdco discount.
• The duo has again entered < -1 σ territory at yesterday’s closing prices. I’d first make another short-term stub trade. I’d hold onto the position until they reach within -0.5~0 σ on a 20D MA with a loss cut at -5%. But a little longer term approach to hunt for a higher yield wouldn’t be a bad idea at this point.

4. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a bid. On 7 January 2019, Konnectivity launched a voluntary conditional offer (VGO) at S$2.06 cash per share. Konnectivity is jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP).

5. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments

In this report, we discuss some of the major changes in regulation and recent important news related to the Korea National Pension Fund Service (NPS), including changes to the voting rights of outsourced Korean equity investments by NPS as well as how it may deal with the Hanjin Kal Corp (180640 KS) corporate governance issues. 

It was reported yesterday that the NPS will allow 57 trillion won ($51 billion) of Korean equity investments which are currently managed indirectly by numerous outsourced asset management companies to have their own respective voting rights. The Financial Services Commission (FSC) announced yesterday that an amendment to the enforcement ordinance of the Capital Market Act was passed allowing NPS’s indirectly managed Korean equity investments’ voting rights to be exercised by the outsourced asset managers rather than by NPS itself passed the Cabinet meeting. 

What are the major implication? As a result of this move, this will act as a key positive catalyst spurring on greater corporate activism since NPS’s outsourced fund managers will have greater freedom to make more aggressive decisions to improve shareholder value of Korean companies. In addition, it also reduces the overall responsibility of carrying out the Stewardship Code changes to not just on NPS but on the rest of the major asset management companies in Korea.