In today’s briefing:
- China Traditional Chinese Medicine (570 HK): Disaster as Offer Lapses, Potential Deal Break Price
- TCM (570 HK): Likely Rush for The Exits As Deal Busts
- Fuji Soft (9749) Reiterates Support for KKR Tender#1, Recos Shareholders Wait, Ignores Nozawa Letter
- Horizon Robotics (9660 HK) IPO: The Bear Case
- Fuji Soft (9749 JP): The Board’s Unchanged Recommendation Caps the Upside
- China Healthcare Weekly (Oct.20)-A Big Lesson from China TCM’s Deal Break, “Must Option” of Biotech
- Fujikura (5803 JP): Positioning & Potential Passive Buying
- Korea Value-Up Index: Estimated Passive Flows as ETF Launches Coming
- SSE50 Index Rebalance Preview: Potential Inclusions Continue to Outperform; Trim into Strength
- [JAPAN ACTIVISM] Murakami Group Now 23.5% on Exedy (7278) – LOTS of Room Left To Run
China Traditional Chinese Medicine (570 HK): Disaster as Offer Lapses, Potential Deal Break Price
- Shockingly, the Sinopharm-led consortium’s offer for China Traditional Chinese Medicine (570 HK) has lapsed as the precondition long stop date has not been extended.
- This deal break caught many, including me, off guard. There are lessons to be learnt and questions to be asked.
- Shareholders will have a bruising Monday. Our analysis suggests a deal break price of around HK$3.44, a 10% downside to the last close.
TCM (570 HK): Likely Rush for The Exits As Deal Busts
- China Traditional Chinese Medicine (570 HK) (TCM) has been a frustrating deal, for a deal that shouldn’t be frustrating.
- As feared from its 16th October monthly update, the inability to secure investor group consents appears to have torpedoed the transaction. Will we eventually find out why this got stonewalled?
- This deal lapse changes the Hong Kong M&A landscape; if you can’t rely on SOE transactions to get up, what next? The immediate question now is downside support on Monday.
Fuji Soft (9749) Reiterates Support for KKR Tender#1, Recos Shareholders Wait, Ignores Nozawa Letter
- On Tuesday, Fuji Soft Inc (9749 JP) said they had received the legally-binding Bain proposal on 11 October, but noted they could not confirm founder Nozawa-san’s agreement or intentions.
- Founder Nozawa Hiroshi responded with a pair of impassioned letters Thursday criticising process, asking Fuji Soft to withdraw support for KKR, and switch to or allow the Bain Offer.
- Fuji Soft on Friday reiterated support for the KKR First Tender, but interestingly, saw a majority resolve to suggest common shareholders NOT tender because of the optionality.
Horizon Robotics (9660 HK) IPO: The Bear Case
- Horizon Robotics (9660 HK), a provider of autonomous driving products and services, is seeking to raise up to US$696 million through a HKEx IPO.
- In Horizon Robotics (9660 HK) IPO: The Bull Case, we highlighted the key elements of the bull case. In this note, we outline the bear case.
- The bear case rests on high related parties’ revenue, customer concentration risk, pricing pressure, uncertain path to profitability, high cash conversion cycle and FCF burn.
Fuji Soft (9749 JP): The Board’s Unchanged Recommendation Caps the Upside
- The Fuji Soft Inc (9749 JP) Board has maintained its recommendation of KKR’s first-stage tender offer. However, the recommendation was not unanimous, with four dissenting directors.
- Bain’s likely next move is to waive the precondition and launch its offer. To bring KKR to the negotiating table, Bain will want to acquire as many shares as possible.
- KKR’s first stage closes on 21 October. Success requires KKR to either work with Bain or match terms. As shares trade through Bain’s terms, there is little or no upside.
China Healthcare Weekly (Oct.20)-A Big Lesson from China TCM’s Deal Break, “Must Option” of Biotech
- The “industry clearing” of innovative drug companies is far longer and more brutal than imagined. But Chinese innovative drug ecosystem will ultimately usher in a better innovation pattern in the future.
- For every innovative pharmaceutical company with ambitious goals, globalization is a “must option”. With more and more Chinese biotech achieving success, the internationalization prospects will become better and better.
- China TCM’s privatization failure made us realize large SOEs we always believe in would violate their commitments to market/investors.Now, we need to get back to the fundamentals to minimize losses.
Fujikura (5803 JP): Positioning & Potential Passive Buying
- Fujikura Ltd (5803 JP) could be added to a global index at the end of November and there will be a lot of buying in the stock.
- Following the rally in the stock, Fujikura Ltd (5803 JP) trades expensive to the average and median of its peers on most valuation metrics.
- The increase in cumulative excess volume in Fujikura Ltd (5803 JP) over the last 3 months far outpaces the increase in its peers.
Korea Value-Up Index: Estimated Passive Flows as ETF Launches Coming
- The KRX announced the 100 constituents of the much-awaited Korea Value-Up Index on 24 September. There were hits and misses but broad consensus was that the index is a miss.
- Following market feedback, the KRX could conduct a special rebalance of the index in December. But this could be after the launch of ETFs tracking the index.
- With a big overlap and similar characteristics as the KOSPI 200 Index, there could be limited assets benchmarked to the Korea Value-Up Index in the short-term.
SSE50 Index Rebalance Preview: Potential Inclusions Continue to Outperform; Trim into Strength
- With over 95% of the review period complete, 4 non-constituents are in inclusion zone and 6 constituents are in deletion zone.
- We estimate one-way turnover of 6.5% at the December rebalance leading to a one-way trade of CNY 11.95bn (US$1.7bn). Index arb balances could increase the impact on the stocks.
- The potential adds have continued to outperform the potential deletes. There has been a big jump in the last few weeks as markets have rallied. Trim positions into strength.
[JAPAN ACTIVISM] Murakami Group Now 23.5% on Exedy (7278) – LOTS of Room Left To Run
- This past week, activist Murakami-san’s City Index Eleventh announced that the companies which jointly report now own 20.3%, which translates to 23.5% of voting rights. Average in-price? ¥2,928/share.
- The 2030 Plan from April saw 8% ROE by 2030, 6% by 2026. They’ve since bought back 11% of shares out. Better, but 1/4 of market cap is net cash+securities.
- If one assumes they spend the net cash+securities to buy back stock 10% higher than here, pro-forma PBR is <0.6x. ROE would be 7+%. There’s room to run here, still.
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