In today’s briefing:
- TCM (570 HK): Likely Rush for The Exits As Deal Busts
- China Traditional Chinese Medicine (570 HK): Disaster as Offer Lapses, Potential Deal Break Price
- Korea Value-Up Index: Estimated Passive Flows as ETF Launches Coming
- Fuji Soft (9749 JP) – The Fine Print Is Worth Reading
- Shinko Electric (6967 JP) Takeover – THIS Is a Dip to Buy
- SSE50 Index Rebalance Preview: Potential Inclusions Continue to Outperform; Trim into Strength
- Tokyo Metro (9023 JP) IPO: Trading Debut
- Hang Seng Internet & IT Index (HSIII) Rebalance Preview: Capping Flows in December
- Entry Opportunities from Delisting Risk Due to Korea Zinc’s Post-Buyback Volume Drying Up
- Doosan’s Tweaked Restructuring Play: My Take on Hitting Robotics’ 13% Spread
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.
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.
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.
Fuji Soft (9749 JP) – The Fine Print Is Worth Reading
- On 11-Oct, Bain submitted a binding proposal for Fuji Soft Inc (9749 JP). On 15-Oct, FSI acknowledged, but questioned the Nozawa family commitment. Founder Nozawa wrote letters the 17th.
- O 18-Oct, FSI reiterated support for the KKR First Tender in a late night drop. It included fine print, but no media coverage. Today, FSI filed a Target Opinion Amendment.
- That filing included yet more fine print not in the public filing Friday. And KKR extended. The new fine print is nuanced. But worth reading.
Shinko Electric (6967 JP) Takeover – THIS Is a Dip to Buy
- Over the last few days, Shinko Electric Industries (6967 JP) shares have dipped lower than the previous standard trading range.
- I expect this weakness is related to investors in other deals deciding to sell this deal too. I believe it is not related to Shinko specifically.
- For that, while gap risk remains somewhat high, I still see break risk as low and see this as a great opportunity to buy the dip.
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.
Tokyo Metro (9023 JP) IPO: Trading Debut
- Tokyo Metro (9023 JP) priced its IPO at JPY1,200 per share to raise gross proceeds of US$2.3 billion. The shares will start trading on 23 October.
- We previously discussed the IPO in Tokyo Metro (9023 JP) IPO: The Bull Case, Tokyo Metro (9023 JP) IPO: The Bear Case and Tokyo Metro (9023 JP) IPO: Valuation Insights.
- The peers have modestly derated since the prospectus was released on 20 September. The IPO price remains attractive, particularly relating to the implied dividend yield.
Hang Seng Internet & IT Index (HSIII) Rebalance Preview: Capping Flows in December
- The December rebalance for the HSIII Index only involves capping to limit stocks to 12% of the index weight. There will not be any constituent changes.
- Estimated one-way turnover at the rebalance is 4.4% resulting in a round-trip trade of HK$2.9bn (US$378m).
- The largest outflows are expected to be from Meituan (3690 HK) and JD.com (9618 HK) with inflows spread across the other index constituents.
Entry Opportunities from Delisting Risk Due to Korea Zinc’s Post-Buyback Volume Drying Up
- Korea Zinc’s delisting daily trading volume cutoff is 20K, about 0.12% of the total. We might see volumes plummet, making it tough to maintain even that 20K level.
- Keep an eye on trading opportunities; we have some time with delisting risks, but low trading volume could lead to being booted from the KOSPI 200 and Global Index.
- This sell-off could spike short-term volatility and create great entry points for trading, especially after the court approved the buyback tender, denying MBK’s injunction.
Doosan’s Tweaked Restructuring Play: My Take on Hitting Robotics’ 13% Spread
- The big question is how to cash in on the dissenters’ rights spread for Robotics. The main concern is cancellation risk, but the FSS doesn’t seem too negative on approval.
- To sustain nuclear momentum, Enerbility needs heavy borrowing for facility investments, requiring a lower debt ratio. Offloading debt-heavy Bobcat is a move shareholders might support.
- With NPS unlikely to ignore the government’s nuclear push, Robotics’ spread could narrow quickly. Despite cancellation risk and no hedge, the remaining juice makes an outright position worth considering.
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