In today’s briefing:
- Update: Shinko Electric (6967) Shorter-Dated and Break Risk Small but GAP RISK Now Much Higher
- Sumitomo Forestry (1911 JP): Selloff Provides Entry for Potential Index Inclusion
- Merger Arb Mondays (05 Aug) – Henlius, Asia Cement, Canvest, GA Pack, CPMC, A8, Fancl
- Kokusai Electric (6525): Global Index Inclusion Highly Dependent on Free Float
- Itochu (8001 JP) Launches Lowball TOB for Descente (8114) – Buying China on the Cheap
- Yuanta/P-Shares Taiwan Div+ ETF Rebalance Preview: Nuvoton Deletion & Positioning
- Itochu Buying Out Sub CI Takiron (4215) Below Book – Too Cheap And Weak Process/Transparency
- Descente (8114 JP): Itochu’s (8001 JP) Light Pre-Conditional Offer
- Technology Select Sector Index (XLK US): Reversing the Huge Flows from June
- China TCM (570.HK) Privatization Update – Things Are Still Manageable
Update: Shinko Electric (6967) Shorter-Dated and Break Risk Small but GAP RISK Now Much Higher
- When this deal was announced, it was light. But the timing, JSR influence, large-ish float, ensured FUD would make this trade wide. It traded wider.
- Nearly 7mos ago, Shinko had much-underperformed peer Ibiden, meaning downside gap risk from undisturbed was negative as spreads were wide. I reco’d a buy. Then 5mos ago, recommended taking profits.
- Ibiden has now underperformed Shinko by 25+% in 2-plus weeks. GAP RISK is higher but this is a short-timer. HUGE yield to “expected” start date, so everyone assumes a delay.
Sumitomo Forestry (1911 JP): Selloff Provides Entry for Potential Index Inclusion
- Sumitomo Forestry (1911 JP) is a potential inclusion to a global index at the August rebalance. If added, passive trackers will need to buy over 6x ADV.
- Sumitomo Forestry (1911 JP) has traded lower on risk-off sentiment and further downside provides an entry point that could pay off if the stock is added to the index.
- Sumitomo Forestry (1911 JP) has outperformed its peers but trades at similar valuations to some stocks. A long/short trade could protect the downside.
Merger Arb Mondays (05 Aug) – Henlius, Asia Cement, Canvest, GA Pack, CPMC, A8, Fancl
- 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: Yichang HEC Changjiang Pharma (1558 HK), China Traditional Chinese Medicine (570 HK), Asia Cement China (743 HK), Canvest Environmental Protection Group (1381 HK), Shanghai Henlius Biotech (2696 HK).
- Lowest spreads: Fancl Corp (4921 JP), Second Chance Properties (SCE SP), Tatsuta Electric Wire & Cable (5809 JP), Mimasu Semiconductor Industry (8155 JP), Alps Logistics (9055 JP).
Kokusai Electric (6525): Global Index Inclusion Highly Dependent on Free Float
- IPO lock-up expiry of Kokusai Electric (6525 JP) results in a forecasted increase in free float to 35% and fcap of $2.9bn for the August 2024 review.
- Secondary offering of Kokusai Electric (6525 JP) results in a forecasted increase in free float to 60-65% and latest fcap of $3.4bn- $3.7bn for the November 2024 review.
- Inclusion will be determined based on fcap against the fcap threshold. Fcap uncertainty for November is largely driven by stock price fluctuations and the Greenshoe Option.
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.
Yuanta/P-Shares Taiwan Div+ ETF Rebalance Preview: Nuvoton Deletion & Positioning
- Nuvoton Technology (4919 TT) should be deleted from the Yuanta/P-Shares Taiwan Dividend Plus ETF in September and that will trigger selling of over 4 days of ADV.
- Nuvoton Technology (4919 TT) has underperformed most of its peers since the start of the calendar year and shorts have started to increase in the stock.
- Positioning appears light and the recent deletion from an index has increased the real float of the stock. Recent semiconductor weakness could further pressure the stock.
Itochu Buying Out Sub CI Takiron (4215) Below Book – Too Cheap And Weak Process/Transparency
- Itochu Corp (8001 JP) today announced another TOB to buy out minorities of a sub other than Descente Ltd (8114 JP). C.I. TAKIRON Corporation (4215 JP) at ¥870. A takeunder.
- The stock was up a lot today I assume on news I didn’t see. Slightly lower than the close. Low EV/EBITDA multiple. Lacking transparency.
- The Board is OK selling at below book, but if one takes out net cash, securities, net receivables, and inventory/materials of one quarter of sales, the rest is 0.54x book.
Descente (8114 JP): Itochu’s (8001 JP) Light Pre-Conditional Offer
- Descente Ltd (8114 JP) has recommended a pre-conditional tender offer from Itochu Corp (8001 JP) at JPY4,350, 16.6% premium to the undisturbed price.
- The pre-condition is approval under the competition laws of Japan and China. The offer is anticipated to commence in early November. In January 2019, Itochu completed a hostile partial offer.
- While the offer is attractive vs peer multiples, it is light vs historical trading ranges. Securing the required acceptance rate could prove challenging as the price is light.
Technology Select Sector Index (XLK US): Reversing the Huge Flows from June
- The Technology Select Sector SPDR (XLK US) ETF tracks the Technology Select Sector Index and has an AUM of over US$65bn.
- The recent drop in NVIDIA Corp (NVDA US) has taken its market cap and free float market cap lower than Microsoft Corp (MSFT US) and Apple (AAPL US).
- If that continues to be the case on 13 September, there will be huge outflows for NVIDIA (NVDA) and huge inflows for Apple (AAPL) at the close on 20 September.
China TCM (570.HK) Privatization Update – Things Are Still Manageable
- What disappoints investors is that privatization progress is slower-than-expected. Since approval is in “advanced stage”, August update is eye-catching. Investors may need more patience with this type of SOE deal.
- The key to the success of this privatization lies in whether CNPGC is willing to abide by its commitments. If yes, CNPGC will take all measures to solve the problems.
- According to our valuation calculation, even without this privatization, HK$3.5/share is fair for China TCM. Reasonable share price is above HK$5/share. Don’t forget, the privatization is still on the agenda.
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