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

CRE (291 HK): Playing Devil's Advocate - An expensive way to get a cheap beer!

Event-Driven

China Resources Beer Holdings / Event-Driven

On 21 April 2015 pre-open, China Resources Enterprise - the Hong Kong-listed vehicle for parent (and SOE) China Resources Holdings (51.78% owned), <a href="http://www.cre.com.hk/home/investorrel/announcements/2015/201504/P020150421275171477696.pdf" target="_blank">announced</a> that...<ul><li>CRH had made a Binding Proposal to CRE to acquire all of the non-beer businesses (retail, food, non-alcoholic beverage) from CRE for a payment of HKD 28 billion (HKD 11.56/share), leaving CRE to be a listed pure play beer company with the largest market share by volume in China. </li><li>As a part of the package, subject to the "fiduciary duties" of the CRE directors, CRE would pay out a special dividend of 11.50 HKD per share - effectively the whole proceeds of the sale - to shareholders and then,</li><li>to show its support for the pure play beer company ("hereafter "NEWBREWCO") of which CRH would still own 51.78%, CRH would purchase another 10.00% of shares at a per share price of HKD 12.70 in a partial tender offer. </li></ul>Yesterday May 4th after the close, CRH and CRE announced they had signed a Sale &amp; Purchase Agreement (SPA) for the Disposal Assets, had appointed an Independent Board Committee (IBC), and had appointed Rothschild as Independent Financial Advisor (IFA) to the Independent Board Committee and Independent Shareholders. The company offered a bit more clarity in the way of timing (schedule below), but no more information about the unaudited financials (even for the full-year 2014 for which results have been announced) of the Disposal Assets. The same numbers were put out as in the April 21st release.The real financials will be in the accountant's report (i.e. the fine print) on the financial statements of the Group audited by the Company's auditor and included in the circular to be despatched to Shareholders on or around June 8th.THE ANALYSIS THUS FAR<ul><li><a href="http://www.smartkarma.com/insight_providers/12" target="_blank">Jon Foster</a> was first to bat with an excellent <a href="http://www.smartkarma.com/insights/beer-is-cheap-but-is-it-cheap-enough" target="_blank">analysis</a> of the structure of the transaction and an analysis of the NEWBREWCO (which he calls "CRE-BrewCo"); his conclusion : the deal presents a beer company with a valuation discount to the other HK-listed pure play Tsingtao (which is growing more slowly than NEWBREWCO), allowing a post-deal re-rate with put options available in the tender. </li><li>I followed on by offering the <a href="http://www.smartkarma.com/insights/jon-s-beer-is-cheap-the-arb-calculations" target="_blank">arbitrage calculations</a> (break even purchase prices and valuations assuming tender offer results) to the standard view of the arb deal.</li><li>I also offered a<a href="http://www.smartkarma.com/insights/54003752-7536-4830-a241-063930dcbfab" target="_blank">devil's advocate criticism</a> of the deal itself. My view is, in 20 words or less, CRE shareholders are being asked to sell the assets FAR too cheaply, and the process invites governance concerns; Analysis is in the previous piece and below.</li></ul>WHAT'S NEW?<ul><li>TIMETABLE: I provide a timetable. There are a few small changes, and the Partial Offer Long Stop Date has been extended from 30 Sep 2015 to 31 Dec 2015.</li></ul><ul><li>DIRECTORS &amp; THE BOARD<ul><li>The new document tells us the Directors (other than the IBC) consider the terms of the Binding Proposal "fair and reasonable" and "in the interests of the Company and Shareholders as a whole." </li><li>It also says "The Board considers that the Disposal presents a good opportunity for the Group to deliver to Shareholders immediate and ongoing value, in the form of..." special div, transfer of execution risks of improving non-beer businesses, transformation of 291 HK to a beer pure play allowing "greater market clarity". </li><li>These two points should invite significant shareholder scrutiny.</li></ul></li><li>PRICE MOVEMENTS<ul><li>Since CRE shares' last traded before the Pending Substantial Disposal statement in early April, the SOE-filled broad Shanghai Composite has risen 17% (to May4, yesterday's announcement), with non-financials rising even more, and non-financial PBRs are broadly at 3.5x. In HK, hypermarket operator Sun Art (6080 HK) shares have risen 10% and now trades at 3.13x Dec2014 book (just under FOUR TIMES the BVPS multiple CRH is proposing despite long-term similarities in OPMs). That is what the non-beer portion (what CRE minorities are selling) has done. </li><li>Since then the HK-listed version of Tsingtao (168 HK) is down 5%. That is the NEWBREWCO comp. The A-share listing of Tsingtao is up 1%.</li></ul></li><li>COMPS: I give a bit more information on comparables to the Disposal Assets and market-wide comparable valuations. On an EV/EBITDA basis, the price offered looks fair because HK-listed China retail does not garner the favor that China-listed retail does, but on a PSR, PBR, or OPM-normalized basis, the price is completely inadequate.</li><li>NOT NEW: I beat a dead horse on selling the Disposal Assets at the wrong price.</li></ul>

On 21 April 2015 pre-open, China Resources Enterprise - the Hong Kong-listed vehicle for parent (and SOE) China Resources Holdings (51.78% owned), announced that...CRH had made a Binding Proposal to CRE to acquire all of the non-beer businesses (retail, food, non-alcoholic beverage) from CRE for a payment of HKD 28 billion (HKD 11.56/share), leaving CRE to be a listed pure play beer company with the largest market share by volume in China. As a part of the package, subject to the "fiduciary duties" of the CRE directors, CRE would pay out a special dividend of 11.50 HKD per share - effectively the whole proceeds of the sale - to shareholders and then,to show its support for the pure play beer company ("hereafter "NEWBREWCO") of which CRH would still own 51.78%, CRH would purchase another 10.00% of shares at a per share price of HKD 12.70 in a partial tender offer. Yesterday May 4th after the close, CRH and CRE announced they had signed a Sale &amp; Purchase Agreement (SPA) for the Disposal Assets, had appointed an Independent Board Committee (IBC), and had appointed Rothschild as Independent Financial Advisor (IFA) to the Independent Board Committee and Independent Shareholders. The company offered a bit more clarity in the way of timing (schedule below), but no more information about the unaudited financials (even for the full-year 2014 for which results have been announced) of the Disposal Assets. The same numbers were put out as in the April 21st release.The real financials will be in the accountant's report (i.e. the fine print) on the financial statements of the Group audited by the Company's auditor and included in the circular to be despatched to Shareholders on or around June 8th.THE ANALYSIS THUS FARJon Foster was first to bat with an excellent analysis of the structure of the transaction and an analysis of the NEWBREWCO (which he calls "CRE-BrewCo"); his conclusion : the deal presents a beer company with a valuation discount to the other HK-listed pure play Tsingtao (which is growing more slowly than NEWBREWCO), allowing a post-deal re-rate with put options available in the tender. I followed on by offering the arbitrage calculations (break even purchase prices and valuations assuming tender offer results) to the standard view of the arb deal.I also offered adevil's advocate criticism of the deal itself. My view is, in 20 words or less, CRE shareholders are being asked to sell the assets FAR too cheaply, and the process invites governance concerns; Analysis is in the previous piece and below.WHAT'S NEW?TIMETABLE: I provide a timetable. There are a few small changes, and the Partial Offer Long Stop Date has been extended from 30 Sep 2015 to 31 Dec 2015.DIRECTORS &amp; THE BOARDThe new document tells us the Directors (other than the IBC) consider the terms of the Binding Proposal "fair and reasonable" and "in the interests of the Company and Shareholders as a whole." It also says "The Board considers that the Disposal presents a good opportunity for the Group to deliver to Shareholders immediate and ongoing value, in the form of..." special div, transfer of execution risks of improving non-beer businesses, transformation of 291 HK to a beer pure play allowing "greater market clarity". These two points should invite significant shareholder scrutiny.PRICE MOVEMENTSSince CRE shares' last traded before the Pending Substantial Disposal statement in early April, the SOE-filled broad Shanghai Composite has risen 17% (to May4, yesterday's announcement), with non-financials rising even more, and non-financial PBRs are broadly at 3.5x. In HK, hypermarket operator Sun Art (6080 HK) shares have risen 10% and now trades at 3.13x Dec2014 book (just under FOUR TIMES the BVPS multiple CRH is proposing despite long-term similarities in OPMs). That is what the non-beer portion (what CRE minorities are selling) has done. Since then the HK-listed version of Tsingtao (168 HK) is down 5%. That is the NEWBREWCO comp. The A-share listing of Tsingtao is up 1%.COMPS: I give a bit more information on comparables to the Disposal Assets and market-wide comparable valuations. On an EV/EBITDA basis, the price offered looks fair because HK-listed China retail does not garner the favor that China-listed retail does, but on a PSR, PBR, or OPM-normalized basis, the price is completely inadequate.NOT NEW: I beat a dead horse on selling the Disposal Assets at the wrong price.

CRE (291 HK): An Update on 'Cheap' Beer... Directors Ask You To Sell Cheaply