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

Diageo / Sichuan Swellfun Partial Tender - A Last Minute Deal in China

Quiddity Advisors

Event-Driven

UK alcoholic drinks conglomerate <a href="https://www.smartkarma.com/entities/977" target="_blank" data-smartkarma-citation="entities:977:1">Diageo Plc (DGE LN)</a> bought a stake in <a href="https://www.smartkarma.com/entities/6645" target="_blank" data-smartkarma-citation="entities:6645:1">Sichuan Swellfun Co Ltd A (600779 CH)</a> in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.'s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.Last year's Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.<h2>The New News</h2>On 26 February 2019, Diageo <a href="https://www.diageo.com/PR1346/aws/media/7412/260219-possible-partial-tender-offer-for-shares-in-sjf.pdf" target="_blank">announced</a> it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.The proposal was <a href="http://static.sse.com.cn/disclosure/listedinfo/announcement/c/2019-02-27/600779_20190227_1.pdf" target="_blank">announced</a> on the Shanghai Stock Exchange as well in Chinese.This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday's close. Assuming yesterday's close is The Right Price, today's limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. What To Do? That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don't bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.This is a trader's trade rather than an arbitrageur's trade and should be dealt with accordingly.Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.'s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.Last year's Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.The New NewsOn 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.The proposal was announced on the Shanghai Stock Exchange as well in Chinese.This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday's close. Assuming yesterday's close is The Right Price, today's limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. What To Do? That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don't bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.This is a trader's trade rather than an arbitrageur's trade and should be dealt with accordingly.Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

Diageo Proposes Another Partial Tender for Sichuan Swellfun