Singapore

Brief Singapore: Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive and more

In this briefing:

  1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
  2. Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines
  3. Japan – Chinese Flu
  4. ESR Cayman Pre-IPO – A Giant in the Making

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

Shipping

  • Capital flows are strongly Granger causal
  • Gross capital flows lead World shipping activity by 4 months
  • Capital flows have been slowly rising since June 2018: in February they jumped
  • Reinforces out pro-Asia and pro-China investment message

2. Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines

Spin2

Last Week in Event SPACE …

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

M&A – ASIA-PAC

MYOB Group Ltd (MYO AU) (Mkt Cap: $1.4bn; Liquidity: $10mn)

While not new news, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has now reached a stake of 11%. The last chunks purchased appear to have been done at (or around) A$3.40/share, which is equal to terms. The Manikay letter to the Board asks the Board to consider the market movements since December and posits a fair value in excess of A$4.00/share.

  • Manikay says that it is interested in becoming a long-term shareholder. But the letter seems to level its criticism of the deal price most pointedly at the fact that the deal was offered and agreed to just a few days off a two-year low in the S&P/ASX200 Index and since then the index has rebounded to within 1.5% of an 11-year high.
  • A “market context” bump is not a bad case in and of itself because of where peers have moved and where the market has moved, and we won’t know whether that point is taken up by the IER in the Scheme Document. 
  • This strikes Travis Lundy as not a bad reward/risk to buy up to 1-2% through terms. The back end “undisturbed price” has risen and the recent earnings release shows online penetration continues to grow. 

(link to Travis’ insight: MYOB Setting Up As A Riskier Trade)

EVENTS

Lynas Corp Ltd (LYC AU) (Mkt Cap: $758mn; Liquidity: $6mn)

Irrespective of whether the Malaysian rare earth processing licence provided to Lynas was without adequate due process (as has been speculated) or whether the facility is indeed an environmental concern; the fact remains the Malaysian government has reneged on the previously agreed-upon three-step licence process – imposing unachievable pre-conditions by the licence renewal date this September – and that is wrong.

  • Ongoing negotiation with the Malaysian government is the only course of action by which Lynas will achieve the renewal of its operating licence (unencumbered or with “acceptable” caveats). The agreed management pathway for NUF provides scope for a positive outcome from extensive consultation. 
  • But even if a viable resolution is reached, it would only serve to temporarily manage Lynas out of its current predicament – given the vocal domestic opposition, the long-term prognosis is likely the shuttering and removal of the LAMP.
  • Shares are down 45% from the pre-general election (for Malaysia) peak and ~24% down from when the Review Committee was first mooted in September 2018, and roughly a similar % compared to the 3 December closing price, the day before the pre-conditions were introduced. That still appears too optimistic. Resolving the Malaysian government roadblock will quite likely be a stop-gap measure, at best.

(link to my insight: Lynas: Between a Hard Place and Just Rock)


POSCO Chemtech (003670 KS) (Mkt Cap: $758mn; Liquidity: $6mn)

Posco Chemtech is to merge with POSCO ESM through a stock swap at a ratio of 1 to 0.2172865. The merger will be effective as of April 1. The merged company is planning to move from KOSDAQ to KOSPI. These proposals will be put to the vote at the upcoming AGM scheduled for March 18. 

  • KOSPI 200’s re-balancing reference date is after the close of the last trading day in April and the change takes effect on the next trading day after the 2nd Thursday of June. If the KRX approves it before the end of April, Chemtech’s KOSPI inclusion will happen this June. If not, it will have to wait until next year. 
  • New passive money flowing into Chemtech is estimated at ₩68bn. This represents 1.69% of market cap and 4.82% of float market cap. This is less than twice total daily trade value.

(link to Sanghyun Park‘s insight: POSCO Chemtech: Merger, Renaming, KOSPI Move & Joining KOSPI 200)

M&A – US

Versum Materials (VSM US) (Mkt Cap: $5.3bn; Liquidity: $75mn)

In a follow-up note John DeMasi provides an update of events, looking into VSM’s corporate governance documents, reviewing relevant landmark Delaware takeover case law, and elaborating on a possible path to control of Versum for  Merck KGaA (MRK GR)

  • Merck has now filed form DFAN14A filed with the SEC. The talking points/Q&A confirm that the VSM/Entegris Inc (ENTG US) deal caught Merck by surprise as they had not been contacted by Versum as part of any market check.
  • Other important takeaways include number 7, where Merck stress (yet again) they are fully committed to pursuing their proposal; number 11, where they don’t rule out raising their price; and number 21, where they answer whether they have purchased any VSM shares with “The number of shares of Versum common stock held by Merck … does not exceed a level that would require disclosure.”
  • Merck continues to speak and act like a bidder who is not going away, and its upcoming roadshow in New York with shareholders underscores its commitment to the deal, adding to the pressure on the Versum Board. 

(link to John’s insight: Versum Materials – Merck KGaA Not Going Away (Part II))


Briefly …

Bristol Myers Squibb Co (BMY US) has responded to Starboard Value’s (& other critics) opposition of its perceived overpaying for Celgene Corp (CELG US) with a comprehensive and substantive presentation, increasing the likelihood this deal gets up. (link to ANTYA Investments Inc.‘s insight: Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable)

STUBS & HOLDCOS

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

JM has bought 662k shares in JS since the beginning of March, averaging 47.5% of daily volume, narrowing the simple ratio (JM/JS). JM has consistently bought back shares in JS over the years. Since December 2011, buybacks have taken place at an average price/book (for JS) of 0.75x (it is currently at 0.70x according to CapIQ) and at an average JM/JS ratio of 1.75x. The current ratio is 1.70x, bang in line with its 7+ year average. The 20-year average is 1.82x.

  • Presumably the Keswick family’s long-term plan is collapsing the circularity. But given the significant costs involved – either JM privatizing JS or vice versa – for now, the family will likely opt for the circularity creep, by continuing to chip away at minority ownership as JS takes its dividends in-specie, JM acquires JS, gradually increasing the inter holdings of the two entities.
  • JS is also trading “cheap”, at a 42% discount to NAV, adjusted for cross-holdings. JS is now around 25% points “cheaper” than JM (which has a discount to NAV of 17%), compared to a one-year average of ~24%.  A year ago, the % difference was 6%.
  • JM has bought 1.8mn shares YTD compared to 2.5mn for the same period last year, while 4.9mn shares were acquired in 2018, compared to 7.6mn, 8.2mn, and 2.1mn in 2015-2017 respectively. The very long-term ratio is marginally in favour of JM, yet the more recent yearly average suggests it is line. JS looks cheap on a discount to NAV basis and it makes sense for JM to continue to acquire shares, favouring JS near-term. I also tilt in favour of this outcome.

(link to my insight: StubWorld: Matheson’s Strategic Buying of Strategic)


Briefly …

OTHER M&A UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

Comment

17.77%
Sun Securities
Outside CCASS
32.00%
DBS
Outside CCASS
23.08%
Guotai
Outside CCASS
55.66%
HSBC
DBS
11.90%
Well Link
Outside CCASS
Source: HKEx

UPCOMING M&A EVENTS

Country

Target

Deal Type

Event

E/C

AusGrainCorpSchemeMarchBinding Offer to be AnnouncedE
AusGreencrossScheme6-MarSettlement DateC
AusPropertylinkOff Mkt8-AprLast Payment DateC
AusSigmaSchemeMarchBinding Offer to be AnnouncedE
AusEclipx GroupSchemeMarchFirst Court HearingE
AusMYOB GroupScheme11-MarFirst Court Hearing DateE
AusHealthscopeSchemeApril/MayDespatch of Explanatory BookletE
HKHarbin ElectricScheme29-MarDespatch of Composite DocumentC
HKHopewellScheme13-MarLast time for lodging shares to qualify to voteC
IndiaGlaxoSmithKlineScheme9-AprTarget Shareholder Decision DateE
JapanShowa ShellScheme1-AprClose of offerE
NZTrade Me GroupScheme19-MarDespatch of Scheme BookletC
SingaporeCourts AsiaScheme15-MarOffer Close DateC
SingaporeM1 LimitedOff Mkt18-MarClosing date of offerC
SingaporePCI LimitedSchemeMarchRelease of Scheme BookletE
ThailandDeltaOff Mkt1-AprClosing date of offerC
FinlandAmer SportsOff Mkt12-MarRelease of Final Results of Tender OfferC
NorwayOslo Børs VPSOff Mkt29-MarAcceptance Period EndsC
SwitzerlandPanalpinaOff Mkt5-AprEGMC
USRed Hat, Inc.SchemeMarch/AprilDeal lodged for approval with EU RegulatorsC
Source: Company announcements. E = our estimates; C =confirmed

3. Japan – Chinese Flu

Sk2

By Konstantinos Venetis, Senior Economist

  • Japan skirts recession but near-term prospects remain weak
  • Deflationary headwinds to persist in H1, threatening business spending
  • Recovery likely in late 2019 as world trade finds a firmer footing

4. ESR Cayman Pre-IPO – A Giant in the Making

Revenue%20breakdown

ESR Cayman (ESR HK) aims to raise up to US$1.5bn in its planned Hong Kong listing, as per media reports. The company is backed by Warburg Pincus and counts APG, the Netherlands’ largest pension provider, as one of its main investors.

ESR operates an end-to-end model starting from development of the asset to divesting it to one of its private funds and/or REITs. It operates in China, Japan, South Korea, Australia, Singapore and India. AUM has grown rapidly over the past few years as the company has undertaken a number of acquisitions in the recent past. 

In this insight, I’ll touch upon the company’s business model and provide an overview of its operations. 

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