Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Lost in Translation - A 500bn Yen Deal for Sharp?

Equity Bottom-Up

An article out Friday said Hon Hai was interested to buy all of Sharp for JPY 300bn yen. Today the stock jumped 8 yen, or 7.3%, after having touched a lifetime low of 108 yen on Friday. That puts Sharp at a market cap of 200bn yen. For a book value accruing to common shareholders of less than zero. There is a reason it did not jump further. Below I discuss the state of play.Sharp is in its last throes - the Final Act of this Japanese Tragicomedy (or Toranoko-medy*) of Errors. This is the endgame (no reference to <a href="https://www.smartkarma.com/entities/941" target="_blank">Valeant</a>/<a href="https://www.smartkarma.com/search?q=Philidor" target="_blank">Philidor</a> intended). It is 4th and 200 to go**. Sharp reportedly wants to make sure its fate is decided by March-end. Presumably that is because the company is not expecting a dramatic rescue due to its own fundamentals in the interim. Last week as Tokyo trading went into a mid-week holiday, we got clarification from the <a href="http://asia.nikkei.com/Business/Companies/Public-private-fund-taking-LCD-spinoff-plan-to-Sharp-s-creditors" target="_blank">Nikkei</a> that things were starting to get a little more concrete for <a href="https://www.smartkarma.com/entities/391" target="_blank" data-smartkarma-citation="entities:391">Sharp Corp</a>.The INCJ - The Innovation Network Corporation of Japan - had put the idea of buying Sharp's LCD assets in a spinoff from Sharp in front of an investment committee on Tuesday, and was going to put the plan in front of Sharp's creditors. The <a href="http://www.incj.co.jp/english/" target="_blank">INCJ</a> is theoretically a public-private partnership acting as an industrial company rehabilitation private equity business. It is actually more a public-public vehicle (the initial capital was 95.83% provided by the government and the DBJ (a government-owned policy bank) plus 25 of Japan's then-top blue chip (old boy network?) companies each putting in 0.167% of initial capital. The INCJ then acts as a placeholder to provide Japanese companies the ability to spin off existing businesses and provide them with capital to restructure to protect jobs and Japanese ownership of technology.INCJ is still the controlling shareholder for <a href="https://www.smartkarma.com/entities/8280" target="_blank" data-smartkarma-citation="entities:8280">Japan Display Inc</a> (JDI) in which it holds a 36% stake and which is Japan's leader in smartphone screens formed from the display spinoffs of Sony, Toshiba, and Hitachi. The tieup between JDI - which is now listed - and Sharp would be designed to keep Sharp's intellectual property in display devices in Japanese hands - something METI has been keen on for the last several years as it became apparent that Something Had To Be Done.Hon Hai - Last Friday, it <a href="http://www.japantimes.co.jp/news/2015/12/25/business/corporate-business/hon-hai-proposes-purchase-sharp-provided-top-brass-step/#.VoEOjIS8x0c" target="_blank">became clear</a> that <a href="https://www.smartkarma.com/entities/745" target="_blank" data-smartkarma-citation="entities:745">Hon Hai Precision Industry</a> which has been mooted as a future buyer of Sharp for at least a few years had already put forth a plan to Sharp's board which would entail Hon Hai taking over all of Sharp and likely assuming most or all of its debt on the condition that Sharp's management team resign and that new executive leadership come from Hon Hai. The proposed takeover amount is "around 300bn yen." <ul><li>A deal of some sort has been in the works since early 2012 but foundered multiple times as it became clear Sharp management was not willing to give up control. In 2012, Sharp and Hon Hai finally settled on Hon Hai boss Terry Guo buying some Sharp assets, and Sharp selling a 37.6% stake in its Sakai factory to Hon Hai in return for cash. Just 10 days ago, Sharp was <a href="http://asia.nikkei.com/Business/Deals/Sharp-looks-to-pull-out-of-Foxconn-panel-venture" target="_blank">apparently looking to sell</a> Hon Hai its remaining 37.6% stake.</li><li>Terry Guo had visited Sharp in late October and an article earlier this month in the Nikkei suggested that Mr. Guo could note actually get a meeting with Sharp CEO Takahashi who was afraid of being grilled by Guo after an OP loss of 25bn yen in H1. Terry Guo's question was "Who should I meet?" That tells you the reason why Terry Guo wants management out. </li></ul>So that's the presentation of some of the players. The Other Major Players are The Banks, The Preferred Share Holders (who also happen to be The Banks), Other DebtHolders, the Ministry of Economics Trade and Industry (METI), The Employees, Management of Sharp, Suppliers to Sharp, Customers of Sharp, and The People of Japan. There are also Other Potential Players. A week before the most recent Hon Hai news, KKR had <a href="http://asia.nikkei.com/Business/Deals/US-fund-KKR-among-Sharp-s-potential-sponsors" target="_blank">emerged</a> as a possible interested party. Late last spring, the Sakai factory division of Sharp was reportedly trying to shop itself to Samsung. There are surely other sharks circling below the agitated surface waters.Oh... and there are other interested parties who may have an interest. The Shareholders...  Maybe.Next comes the hard part. What does it all mean? Nothing good for shareholders. More below the fold... *The Japanese version - Toranokomedy - refers to 虎の子 (tora no ko), the tiger cub that the mother jealously guards forsaking all else to defend it. For Sharp - it is the LCD business and the toranoko reference comes from a Nikkei <a href="http://www.nikkei.com/article/DGXLZO87015030Q5A520C1EA1000/?dg=1" target="_blank">article</a> in May wherein it was noted that at the Analyst Meeting Sharp CEO Takahashi had said the LCD business was indispensable to the Medium Term Plan's success, although the company is so cash-strapped it has almost no money to pump into the LCD unit, and the banks had basically told the company it had to get rid of it.**4th and 200. We are about to enter Q4, during which Sharp and all bankers/officials involved want to see some kind of resolution. Sharp's main banks doled out 200bn yen in pref shares in May on the expectations that a paydown in debt and recovery in business fortunes would support the company. Instead the company lost 84bn yen in H1 on dramatically-worsened fortunes, and those pref shares now have sub-par tangible book value. Common shareholders, of course, are owners of substantially negative tangible book value.

An article out Friday said Hon Hai was interested to buy all of Sharp for JPY 300bn yen. Today the stock jumped 8 yen, or 7.3%, after having touched a lifetime low of 108 yen on Friday. That puts Sharp at a market cap of 200bn yen. For a book value accruing to common shareholders of less than zero. There is a reason it did not jump further. Below I discuss the state of play.Sharp is in its last throes - the Final Act of this Japanese Tragicomedy (or Toranoko-medy*) of Errors. This is the endgame (no reference to Valeant/Philidor intended). It is 4th and 200 to go**. Sharp reportedly wants to make sure its fate is decided by March-end. Presumably that is because the company is not expecting a dramatic rescue due to its own fundamentals in the interim. Last week as Tokyo trading went into a mid-week holiday, we got clarification from the Nikkei that things were starting to get a little more concrete for Sharp Corp.The INCJ - The Innovation Network Corporation of Japan - had put the idea of buying Sharp's LCD assets in a spinoff from Sharp in front of an investment committee on Tuesday, and was going to put the plan in front of Sharp's creditors. The INCJ is theoretically a public-private partnership acting as an industrial company rehabilitation private equity business. It is actually more a public-public vehicle (the initial capital was 95.83% provided by the government and the DBJ (a government-owned policy bank) plus 25 of Japan's then-top blue chip (old boy network?) companies each putting in 0.167% of initial capital. The INCJ then acts as a placeholder to provide Japanese companies the ability to spin off existing businesses and provide them with capital to restructure to protect jobs and Japanese ownership of technology.INCJ is still the controlling shareholder for Japan Display Inc (JDI) in which it holds a 36% stake and which is Japan's leader in smartphone screens formed from the display spinoffs of Sony, Toshiba, and Hitachi. The tieup between JDI - which is now listed - and Sharp would be designed to keep Sharp's intellectual property in display devices in Japanese hands - something METI has been keen on for the last several years as it became apparent that Something Had To Be Done.Hon Hai - Last Friday, it became clear that Hon Hai Precision Industry which has been mooted as a future buyer of Sharp for at least a few years had already put forth a plan to Sharp's board which would entail Hon Hai taking over all of Sharp and likely assuming most or all of its debt on the condition that Sharp's management team resign and that new executive leadership come from Hon Hai. The proposed takeover amount is "around 300bn yen." A deal of some sort has been in the works since early 2012 but foundered multiple times as it became clear Sharp management was not willing to give up control. In 2012, Sharp and Hon Hai finally settled on Hon Hai boss Terry Guo buying some Sharp assets, and Sharp selling a 37.6% stake in its Sakai factory to Hon Hai in return for cash. Just 10 days ago, Sharp was apparently looking to sell Hon Hai its remaining 37.6% stake.Terry Guo had visited Sharp in late October and an article earlier this month in the Nikkei suggested that Mr. Guo could note actually get a meeting with Sharp CEO Takahashi who was afraid of being grilled by Guo after an OP loss of 25bn yen in H1. Terry Guo's question was "Who should I meet?" That tells you the reason why Terry Guo wants management out. So that's the presentation of some of the players. The Other Major Players are The Banks, The Preferred Share Holders (who also happen to be The Banks), Other DebtHolders, the Ministry of Economics Trade and Industry (METI), The Employees, Management of Sharp, Suppliers to Sharp, Customers of Sharp, and The People of Japan. There are also Other Potential Players. A week before the most recent Hon Hai news, KKR had emerged as a possible interested party. Late last spring, the Sakai factory division of Sharp was reportedly trying to shop itself to Samsung. There are surely other sharks circling below the agitated surface waters.Oh... and there are other interested parties who may have an interest. The Shareholders...  Maybe.Next comes the hard part. What does it all mean? Nothing good for shareholders. More below the fold... *The Japanese version - Toranokomedy - refers to 虎の子 (tora no ko), the tiger cub that the mother jealously guards forsaking all else to defend it. For Sharp - it is the LCD business and the toranoko reference comes from a Nikkei article in May wherein it was noted that at the Analyst Meeting Sharp CEO Takahashi had said the LCD business was indispensable to the Medium Term Plan's success, although the company is so cash-strapped it has almost no money to pump into the LCD unit, and the banks had basically told the company it had to get rid of it.**4th and 200. We are about to enter Q4, during which Sharp and all bankers/officials involved want to see some kind of resolution. Sharp's main banks doled out 200bn yen in pref shares in May on the expectations that a paydown in debt and recovery in business fortunes would support the company. Instead the company lost 84bn yen in H1 on dramatically-worsened fortunes, and those pref shares now have sub-par tangible book value. Common shareholders, of course, are owners of substantially negative tangible book value.

A Tragicomedy of Errors - Dealing with Sharp Sharpish