In today’s briefing:
- 7&I (3382) – Bain Gets York Holdings with a Surprising Price, And We Approach Deal Deadlines
- Hang Seng Internet & IT Index Rebalance: Five Changes with First De-SPAC Listing In
- Hang Seng Index (HSI) Rebalance: Does Anyone Know What the Index Committee Is Thinking?
- Warren Buffett and the Japanese Trading Houses I
- HSCI Index Rebalance: 29 Adds, 41 Deletes & Changes to Southbound Stock Connect
- HSCEI Index Rebalance: Beigene, ZTO Replace Sino Biopharma, Li Ning; Surprise for Some
- HSTECH Index Rebalance: Horizon Robotics, Tencent Music Replace East Buy, ZA Online; US$2.3bn Trade
- Mayne Pharma (MYX AU): Cosette Pharma’s Binding Offer at A$7.40
- Merger Arb Mondays (24 Feb) – Seven & I, Proto, Tam Jai, Pentamaster, Vesync, Canvest, Domain
- Seven & I Restructures but Discontent Rises Among Franchisees and Customers
7&I (3382) – Bain Gets York Holdings with a Surprising Price, And We Approach Deal Deadlines
- Over the weekend, the Nikkei and Jiji reported the 7&i Board met Saturday and decided Bain would have preferred negotiating rights to buy York Holdings. They bid “over ¥700bn.”
- That’s a trifle lower than the ¥1.2trn Reuters reported (on Christmas Day) Bain bid but details aren’t known. Proper structuring would get the vast majority to 7&i in post-tax cash.
- For 7&i to decide by the AGM (which could be contentious), they need time to debate. Bids are likely needed in 3wks. In the meantime, “Trump Risk” lurks.
Hang Seng Internet & IT Index Rebalance: Five Changes with First De-SPAC Listing In
- There will be 5 changes for the Hang Seng Internet & Information Technology Index (HSIII Index) at the March rebalance. There is one surprise for us with Synagistics being added.
- Estimated one-way turnover at the rebalance is 6.5% resulting in a round-trip trade of HK$3.74bn (US$482m). 4 stocks will have over 1x ADV to trade.
- Horizon Robotics (9660 HK) is an add to the HSIII, Hang Seng TECH Index and HSCI. Inclusion in Southbound Stock Connect will take place in May.
Hang Seng Index (HSI) Rebalance: Does Anyone Know What the Index Committee Is Thinking?
- We continue to be led down the garden path – no constituent changes for the Hang Seng Index (HSI INDEX) in March means we remain at 83 members.
- Despite having an opportunity to add stocks to the index without increasing turnover, the index committee have done nothing. Which begs the question – what exactly are they waiting for?
- Float and capping changes result in an estimated one-way turnover of 3.8% and the resulting round-trip trade is HK$16.7bn (US$2.15bn).
Warren Buffett and the Japanese Trading Houses I
- The Berkshire Hathaway Annual Shareholder Letter for 2024 was released this weekend. Much was made in Japanese twitter-space of the comments he made on the Japanese trading houses.
- He said Berkshire Hathaway’s admiration of these companies “has consistently grown” and Berkshire likes their capital deployment, managements, and their attitude in respect to investors. They also pay themselves reasonably.
- He mentioned Berkshire will increase their stakes somewhat in the trading houses “over time.” That comment deserves some exploration, as does the comment about yen funding.
HSCI Index Rebalance: 29 Adds, 41 Deletes & Changes to Southbound Stock Connect
- There are 29 adds and 41 deletes for the Hang Seng Composite Index (HSCI) at the March rebalance to take the number of index constituents down to 505.
- We expect 27 of the 29 HSCI inclusions to be added to Stock Connect from the open on 10 March while Horizon Robotics (9660 HK) should be added in May.
- We expect 28 of the 41 HSCI deletions will be removed from Stock Connect and there has been increased Southbound holding in a lot of the stock this calendar year.
HSCEI Index Rebalance: Beigene, ZTO Replace Sino Biopharma, Li Ning; Surprise for Some
- BeiGene (6160 HK) and ZTO Express Cayman (2057 HK) will replace Sino Biopharmaceutical (1177 HK) and Li Ning (2331 HK) in the HSCEI INDEX at the close on 7 March.
- Estimated one-way turnover at the rebalance is 5% resulting in a round-trip trade of HK$6.4bn (US$825m). The final capping will use the close of trading on 4 March.
- ZTO Express Cayman (2057 HK) is also an inclusion to a global index with implementation scheduled for the close on 21 March.
HSTECH Index Rebalance: Horizon Robotics, Tencent Music Replace East Buy, ZA Online; US$2.3bn Trade
- As expected, Horizon Robotics (9660 HK) replaces East Buy Holding (1797 HK) in the Hang Seng TECH Index (HSTECH INDEX) in March.
- In a surprise, Tencent Music Entertainment Group (1698 HK) will be added and ZhongAn Online P&C Insurance C (6060 HK) will be deleted.
- Horizon Robotics (9660 HK) is also an inclusion to the HSIII Index and HSCI Index and will be added to Southbound Stock Connect in May.
Mayne Pharma (MYX AU): Cosette Pharma’s Binding Offer at A$7.40
- Mayne Pharma (MYX AU) entered a scheme implementation deed with Cosette Pharma at A$7.40 per share, a 36.8% premium to the undisturbed price.
- The offer is conditional on shareholder and FIRB approval. The vote is low-risk as the two largest shareholders are supportive.
- The offer is reasonable but not a knockout bid. At the last close and for an end-of-May payment, the gross/annualised spread was 2.8%/11.0%.
Merger Arb Mondays (24 Feb) – Seven & I, Proto, Tam Jai, Pentamaster, Vesync, Canvest, Domain
- We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
- Highest spreads: Seven & I Holdings (3382 JP), Smart Share Global (EM US), Tam Jai International (2217 HK), Vesync (2148 HK), ESR Group (1821 HK), Goldlion Holdings (533 HK).
- Lowest spreads: Makino Milling Machine Co (6135 JP), Shibaura Electronics (6957 JP), Millennium & Copthorne Hotels Nz (MCK NZ), Domain Holdings Australia (DHG AU), Avjennings Ltd (AVJ AU).
Seven & I Restructures but Discontent Rises Among Franchisees and Customers
- York HD is due to take over operation of all group business except Seven Eleven at the end of February and press reports suggest Bain’s bid has been accepted.
- All of which is fine but this leaves Seven Eleven Japan which is struggling against rivals. Even franchise owners are becoming more critical.
- A recent survey by Nikkei also suggested that consumers are increasingly favouring Lawson and Familymart and 30% visited Seven Eleven stores less frequently in 2024. This is a big problem.
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