In this briefing:
- Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
- Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices
- Versum Materials – Entegris Beaten to the Punch by Merck KGaA
- The Mechanics of the Panalpina Vote
- Tesla – Truth and Consequences
1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
- The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
- Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
- Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
- After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.
2. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices
- SamE Common/1P price ratio gap is again above +100% of σ on a 20D MA in favor of Common. Deepening concerns about memory chip price hammered both SamE and Hynix yesterday. But SamE 1P couldn’t capitalize. 1P fell even further, almost reaching 120D high in Common/1P price ratio in favor of Common.
- We’ve recently heard rebounding demand for memory chips. This has pushed up both SamE and Hynix lately. Improving fundamentals coupled with the March AGM cycle factor have consistently supported SamE Common/1P price ratio above +0.5σ on a 20D MA since late Jan. This optimism is now facing a serious challenge probably for the first time since late last year.
- Opinions are still heavily divided on memory chip business outlook. The concerns reignited by the falling price news would be here with us in the coming few weeks at least. This’d outweigh even the March AGM factor. 1P starts placing itself ahead of Common. I’d go long 1P and short Common now. I’d hold onto the position until -150~200% of σ. This is a 5~6% yield.
3. Versum Materials – Entegris Beaten to the Punch by Merck KGaA
Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum Materials (VSM US) the morning of February 27, 2019, with the announcement of a $48 per share cash acquisition proposal that was presented to Versum’s board of directors that same day. Versum, which was spun out of Air Products & Chemicals, Inc (APD US) in 2016, is a global provider of solutions (Materials and Delivery Systems and Services) to the semiconductor and display industries.
On January 28, 2019, a day after the WSJ broke the story that Versum and Entegris were in talks, the companies announced a $9 billion (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the other 52.5%. The deal was well received with both companies’ shares climbing steadily since the announcement.
However, these best laid plans took a Teutonic turn when the other Merck (Merck KGaA, the German pharmaceuticals and chemicals group unaffiliated with Merck & Co Inc. (MRK US) of the USA) threw its hat in the ring.
According to Merck, its Executive Board unanimously approved its proposal and is fully committed to pursuing the transaction. Merck said it is prepared to proceed immediately to due diligence and negotiations and to quickly agree to a merger agreement. It further stated the completion of the offer will be subject to customary closing conditions, including the receipt of necessary regulatory clearances.
The $48 per share proposed price is a 51.7% premium over VSM’s January 25, 2019 share price just prior to the announcement of the Versum/Entegris merger and a 15.9% premium over VSM’s closing price on February 26, 2019.
The ball is now in the VSM board of directors’ court and below we’ll look at how the board might react and where the chips may fall.
4. The Mechanics of the Panalpina Vote
This insight is a kind of public service announcement for investors looking at the Panalpina Welttransport Holding (PWTN SW) situation as it might affect the likely upcoming Extraordinary General Meeting that the Ernst Göhner Foundation requested of Panalpina, and to which Panalpina has acquiesced. The agenda item of the EGM requested is to implement a “One Share One Vote” system.
Activist Cevian has come out against the proposal by the Ernst Göhner Foundation. This sounds counterintuitive except for one odd legal angle.
The Foundation’s ostensible goal is to ensure that the vote is “fair” so that Cevian and Artisan Partners can vote their full stake after having been capped at 5% for many years because of Article 5 in the Panalpina Articles of Association. The more cunning aspect of this is that, as per the Panalpina announcement…
In a letter addressed to Panalpina’s Board of Directors, minority shareholder Cevian had recently questioned the practice to fully admit EGF with all its voting rights at the Company’s shareholders’ meetings. Cevian took the position that the voting restriction of 5% must be applied to all shareholders and, hence the voting power of EGF must be reduced to 5%. An ad hoc board of independent directors (BoiD) consisting of five directors (without representatives of EGF and Cevian) and chaired by Thomas E. Kern, is currently evaluating the situation based on expert opinions submitted by each of EGF and Cevian and based on independent expert advice obtained by the BoiD.
The Foundation knows that their position may be legally weak, and their position could be capped at 5% rather than grandfathered. Indeed, the “independent expert advice” obtained by Cevian includes the opinions of “four leading Swiss stockbrokers” who had come to the conclusion that the Foundation had been unlawfully excluded from the 5% cap, according to this Reuters article on the 26th. The company states that the Ernst Göhner Foundation is and has been exempted from this rule because of “grandfathering” because it owned the shares before the implementation of the rule, but there is nothing in the Articles of Association which grants the EGF that exemption. The full Cevian press releases in English and German are available through their spokesperson and are attached below (at the bottom of the insight).
Another Reuters article discussed the situation, with quotes from Cevian, and added this tidbit at the end.
An ad hoc board of independent directors consisting of five directors, without representatives of EGF and Cevian…will review the proposal and decide how the voting on it will take place at the extraordinary general meeting,” spokeswoman Edna Ayme-Yahil said.
Investors should note…..
The last paragraph of Article 5 of the Panalpina Articles of Association says “No entries shall be made in the register of shareholders following the dispatch of the convocation to the Shareholders’ Meeting until the day after the Shareholders’ Meeting.” This is a little different than is the case for many large Swiss companies where they give the convocation and investors may subsequently register their shares.
For Novartis AG (NOVN SW), which held its AGM today (28 Feb 2019), the deadline for registering shares was 3 days prior to the AGM as shown on p6 in the Organizational Notes on the AGM Notice.
Temenos Group Ag (TEMN SW) last year set their registration deadline 13 days ahead of the AGM, which is further away, but the Convocation Notice had been sent 47 days before the AGM.
In Panalpina’s case, if you are not registered by the time the company sends out the convocation, there is no requirement for the company to admit your shares to the register even if there is plenty of time to do so (though the Board can make exceptions to the entry restriction).
For investors interested in or concerned about the situation, there are measures which may be advisable to implement ASAP to ensure you can vote.
5. Tesla – Truth and Consequences
Tesla Motors (TSLA US) CEO Elon Musk teased in a tweet late Wednesday night about “news” coming on Thursday, most likely something he hopes will be positive enough to divert attention from a seemingly unending stream of bad news. If so, it may not last.
Tesla’s problems aren’t going away, they’re escalating:
- Elon Musk is in trouble again with the SEC;
- Tesla’s brand-new general counsel is leaving after just two months on the job;
Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).
- The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
- Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
- Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
- Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).
The common theme here is that all these problems were preventable, avoidable, and unnecessary.
That’s not going away any time soon–as long as Musk remains in complete control.
How long will that be?
Good question–Read on as Bond Angle analysis continues.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.