In today’s briefing:
- Kokusai Electric (6525 JP): Placement Price Could Be Determined Today; Index Impact Could Be Delayed
- How Has the Index Rebalance Strategy Performed During Market Turmoil?
- Itochu (8001 JP) Launches Lowball TOB for Descente (8114) – Buying China on the Cheap
- Select Sector Indices – HUGE Impact of Proposed Constituent Weighting Changes
- Trend Micro (4704) Up For Sale? Would Be a HUGE Buyout But How Huge? And Who?
- Trend Micro (4704 JP): Evaluating the Privatisation Rumours
- Flow Developments to Watch as the Release of the Value-Up Index Approaches
- Macquarie Korea Infrastructure Fund: Rights Offering of About 500 Billion Won
- Private Equity Examining Ramsay Health (RMC AU). Again.
- Hang Seng Index (HSI) Rebalance Preview: Inclusion Candidates for September
Kokusai Electric (6525 JP): Placement Price Could Be Determined Today; Index Impact Could Be Delayed
- Kokusai Electric (6525 JP) could price their secondary offering after market close today. The stock is down 10.5% since the rumors of the placement began 7 trading sessions ago.
- The Philadelphia Stock Exchange Semiconductor Index (SOX INDEX) has been dropping over the last few days and is 8.6% lower over the last 8 trading days.
- Kokusai Electric (6525 JP) has been trading higher on expectations of index inclusion in August, but that could move to November now.
How Has the Index Rebalance Strategy Performed During Market Turmoil?
- The market turmoil over the last few trading sessions has not been kind to a simple index rebalance strategy of buying the forecast adds and selling the forecast deletes.
- The overall returns and stock specific returns indicate that trades are more crowded in some indices as compared to others and traders should consider that when position sizing.
- Anecdotally, periods of negative returns are followed by periods of strong returns for the strategy as weak hands are shaken out of their positions.
Itochu (8001 JP) Launches Lowball TOB for Descente (8114) – Buying China on the Cheap
- Today, Itochu Corp (8001 JP) announced it would launch a Tender Offer when approvals were received, to buy out minorities in Descente Ltd (8114 JP) at ¥4,350/share.
- Itochu was buying at that price or higher, in the market, in October 2023. Earnings and book are up since then. Outlook for the Descente China Holdings affiliate? Great.
- The valuation transparency is disappointing. Activists would have 3mos or so to push for more. But with friendly holders, they get very close to the minimum anyway.
Select Sector Indices – HUGE Impact of Proposed Constituent Weighting Changes
- S&P DJI have started a market consultation to change the index weighting methodology for the Select Sector Indices to reduce concentration and avoid reverse turnover.
- There is US$281bn tracking the Select Sector Indices from the SPDR ETFs. The market consultation will have a larger impact on indices where there is a high degree of concentration.
- The largest inflows are expected in Apple, Conocophillips, Amazon.com and Netflix while the largest outflows will be from Microsoft, NVIDIA, Chevron, Procter & Gamble, Exxon Mobil, Costco Wholesale and Meta Platforms.
Trend Micro (4704) Up For Sale? Would Be a HUGE Buyout But How Huge? And Who?
- A Reuters article overnight says Trend Micro might be up for sale. This caused the ADRs to jump 10% overnight. The remaining co-founders are 65 and 70 this year.
- The stock has effectively gone sideways the last few years as Value Act has been activisting. Now one has to exercise one’s imagination to think about a possible sale price.
- On a DCF basis, a PE fund couldn’t reasonably do this. Multiples are too high. That means a strategic buyer would be more likely. But Who? Why? And How much?
Trend Micro (4704 JP): Evaluating the Privatisation Rumours
- Trend Micro Inc (4704 JP) shares rose 14.8% on Friday after Reuters reported that it is exploring a sale after attracting buyout interest.
- The interest is unsurprising due to the weak share price. Since ValueAct disclosed a stake on 8 August 2022, the shares are down 0.7% vs the Nikkei 225’s 23.6% increase.
- The lack of a controlling shareholder and increased cybersecurity M&A activity support the buyout interest. A privatisation price is likely to be around JPY9,000. Valuation is undemanding at last close.
Flow Developments to Watch as the Release of the Value-Up Index Approaches
- The plan is to select 20 large-cap companies from around 30 with value-up disclosures by late August, then gradually expand the index’s constituents.
- Investors seeking both dividends and value-up benefits must buy stocks individually, as ETFs lack tax advantages, potentially triggering fund shifts from dividend ETFs to value-up stocks.
- We can target stocks in dividend ETFs not making value-up disclosures, as they may face overhang risk during fund migration to the value-up index.
Macquarie Korea Infrastructure Fund: Rights Offering of About 500 Billion Won
- Macquarie Korea Infra Fund (088980 KS) announced that it is proceeding with a rights offering capital increase of 500 billion won, which represents about 9.4% of its current market cap.
- MKIF plans to use higher liquidity increase in the following main areas: Seoul East Underground Expressway – 215 billion won Acquisition of Hanam Data Center – 423 billion won
- In the next 6-12 months, we believe MKIF has a solid chance of outperforming KOSPI (on combined capital gains/dividends basis).
Private Equity Examining Ramsay Health (RMC AU). Again.
- Back in April 2022, Australia’s largest private hospital operator Ramsay Health Care (RHC AU) announced an unsolicited, non-binding Offer from KKR at A$88.00/share. Arguably, KKR dodged a bullet.
- RHC’s share price took another leg down last week after RHC announced weaker-than-expected FY24 earnings; plus a write-down of its European/UK ops. RHC is now ~50% adrift of KKR’s NBIO.
- Not altogether surprisingly, various media sources are reporting private equity outfits are (again) running a diagnostic check on RHC.
Hang Seng Index (HSI) Rebalance Preview: Inclusion Candidates for September
- Post market close on Friday, Hang Seng Indexes will announce the changes for the Hang Seng Index (HSI INDEX) that will be implemented at the close on 6 September.
- With no constituent changes in March and 1 add/1 delete in June, there could be more changes in September with Health Care stocks among the potential inclusions.
- Changes to the Hang Seng Industry Classification System (HSICS) will be implemented from the September rebalance and that will alter industry coverage.
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