In today’s briefing:
- [Japan Governance] FSA Urges Japan Non-Life Insurers to Eliminate Cross-Holdings – Sales Coming
- HSCI Index Rebalance: 25 Adds, 29 Deletes & Changes to Southbound Stock Connect
- HSTECH Index Rebalance: Tongcheng (780 HK) In; GDS (9698 HK) Out; Round Trip Trade US$1bn
- Hang Seng Internet & IT Index Rebalance: Three Changes & One Big Surprise
- Senko Group (9069 JP) Offering – Banks and Insurers Unwinding Cross-Holdings in Offering
- Boral (BLD AU): Seven Group (SVW AU)’s Best & Final Offer
- Outsourcing (2427 JP) – Earnings Out, With a Bigger Impairment, But Not Clearly A MAC
- Heiwado (8276 JP) – Banks and Insurers Unwinding Cross-Holdings In Offering
- Outsourcing (2427 JP): The Weak 4Q Unlikely to Deter Bain
- Seven Group Reloads On Boral (BLD AU)
[Japan Governance] FSA Urges Japan Non-Life Insurers to Eliminate Cross-Holdings – Sales Coming
- There has been a recent non-life insurer price-fixing scandal. The JFTC and FSA investigated. Last December, the FSA issued Business Improvement Orders to the four majors.
- There was a Bigmotor scandal last summer and Sompo Japan got a Business Improvement Order last month. All four insurers have to respond to a BIO for the price-fixing scandal.
- 9 Feb post-close, Jiji/Nikkei had articles saying the FSA had urged four major non-lifes subject to the first BIO to accelerate sales of ¥6.5trln+ of 5,900 Cross-Holdings. That’s big.
HSCI Index Rebalance: 25 Adds, 29 Deletes & Changes to Southbound Stock Connect
- There are 25 adds and 29 deletes for the Hang Seng Composite Index (HSCI) at the March rebalance to take the number of index constituents down to 514.
- We expect 21 of the 25 HSCI inclusions to be added to Stock Connect while we expect 27 of the 29 HSCI deletions to be removed from Southbound Stock Connect.
- Since the start of the year, shares held though Southbound Connect have increased on 22 of the 29 HSCI deletions and there could be some unwinding in the weeks ahead.
HSTECH Index Rebalance: Tongcheng (780 HK) In; GDS (9698 HK) Out; Round Trip Trade US$1bn
- As expected, Tongcheng Travel Holdings (780 HK) will replace GDS Holdings (9698 HK) in the Hang Seng TECH Index (HSTECH INDEX) at the close on 1 March.
- Estimated one-way turnover is 3.9% leading to a round-trip trade of HK$7.74bn (US$988m). There is nearly 14x ADV to buy in Tongcheng Travel Holdings (780 HK).
- Positioning in Tongcheng Travel (780 HK) does not appear to be very high, while positioning in GDS Holdings (9698 HK) is very high with a couple of deletions coming up.
Hang Seng Internet & IT Index Rebalance: Three Changes & One Big Surprise
- There will be 3 changes for the Hang Seng Internet & Information Technology Index (HSIII) at the March rebalance. There are some surprises.
- Estimated one-way turnover at the rebalance is 5.6% resulting in a round-trip trade of HK$3.26bn (US$416m). 6 stocks will have over 1x ADV to trade.
- There is huge short interest on East Buy Holding (1797 HK) and there could be some short covering ahead of the inclusion of the stock in the index.
Senko Group (9069 JP) Offering – Banks and Insurers Unwinding Cross-Holdings in Offering
- SENKO Group Holdings Co., Ltd. (9069 JP) today announced large financial institutional cross-holders would sell shares in a Secondary Offering. There’s a buyback on the back end.
- Cross-Holding unwinding is the subject of the moment. It will continue to be so. It will involve selldowns, and buybacks. Study the model of what companies must do what.
- In this case, Senko has a LOT of cross-holders and minimal excess cash. So investors buy more shares. But there is a buyback and index demand to come.
Boral (BLD AU): Seven Group (SVW AU)’s Best & Final Offer
- Seven Group Holdings (SVW AU) holds 71.59% in Boral Ltd (BLD AU) and is looking to acquire the remaining shares at A$6.05/share via a mix of SVW stock and cash.
- The offer consideration ratchets higher to A$6.15/share if SVW’s aggregate shareholding reaches 80% and to A$6.25/share if SVW’s aggregate shareholding reaches 90.6%.
- Seven Group Holdings (SVW AU) is an addition to a global index at the end of the month and a drop in the stock post inclusion will affect Boral Ltd.
Outsourcing (2427 JP) – Earnings Out, With a Bigger Impairment, But Not Clearly A MAC
- Outsourcing Inc (2427 JP) delayed its earnings from 14 February to 19 February on tardiness in calculating impairment losses. That caused a short sharp shock in share price.
- An article came out suggesting it was a small number, and domestic biz EAS-related. Results today do not suggest EAS-related, and half is overseas. But no suggestion of precondition breach.
- For that, I think this probably goes through, and the EC FSR review period should end on 20 Feb so a deal announcement by Friday is eminently possible.
Heiwado (8276 JP) – Banks and Insurers Unwinding Cross-Holdings In Offering
- Heiwado Co Ltd (8276 JP) today announced a Secondary Offering sell-down by cross-holders, combined with a buyback post-offering to mitigate some of the effects of overhang.
- Banks and insurers are selling, and that will leave the stock with a lot of cross-holders left, but investors should look at the model given he zeitgeist.
- Companies with lots of cross-holders have to be “fair” to them. Those without copious cash have to spread it around so this transaction model looks likely to be continued.
Outsourcing (2427 JP): The Weak 4Q Unlikely to Deter Bain
- Outsourcing Inc (2427 JP) has disclosed a weak 4Q materially below guidance due to cost overruns and JPY6,875 million in impairments. The results did not provide an update on Bain’s tender.
- The weak 4Q has raised concerns that Bain would reconsider terms. Our take is that the results will not warrant a change in the DCF valuation or breach a pre-condition.
- Bain is likely to consider the results a reflection of near-term industry weakness rather than company-specific issues. The annualised spread for a March-end completion is 9.8%.
Seven Group Reloads On Boral (BLD AU)
- After Boral (BLD AU) rejected Seven Group (SVW AU)‘s $6.50/share Offer in 9 June 2021, Seven bumped to $7.30 cash if they got to 29.5%, and $7.40 if 34.5%.
- Seven reached 29.5% by July 1, 34.5% less than a week later, then 52.65% on the 15 July, and at the close of the Offer (29 July 2021), held 69.6%.
- Seven, now holding 71.6%, has made a cash/scrip Offer for shares not owned, with certain tendering thresholds triggering more cash. Terms are best & final.
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