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

Hitachi Transport System (9086) - Not a Clear Outcome But Interesting Possibilities

Hitachi Transport Is the Eventy Energizer Bunny

Hitachi Transport (9086) Takeover Deal Imminent

Hitachi Transport & SG Holdings:  Consciously Uncoupling

Hitachi Transport System (9086 JP): Up 36% Since Treasury Shares Cancelled

Seino Holdings (9076) - Delivering Cash Back in BIG BUYBACK, May Be an MBO Candidate

Quiddity Advisors

Event-Driven

<div>
<p><em>This insight covers a bit of history, a bit of teaching about how TOPIX works, a bit about the foreseeable events, and a bit of the fundamentals of the company. If you think you know all that, please don't hesitate to jump immediately to the bottom section where there is a Thin Red Line across the screen and a section titled Short &amp; Sweet Version. That is also the conclusions. </em></p>
<hr>
<h3>The Background</h3>
<p>At the end of March 2016, <a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a>,  <a href="https://www.smartkarma.com/entities/hitachi-transport-system-ltd" target="_blank" data-smartkarma-citation="entities:2395:1" rel="noopener">Hitachi Transport System (9086 JP)</a>, and as-yet unlisted <a href="https://www.smartkarma.com/entities/sg-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:26070:1" rel="noopener">SG Holdings (9143 JP)</a>  <a href="https://www.hitachi.com/New/cnews/month/2016/03/f_160330a.pdf" target="_blank" rel="noopener">announced</a> Hitachi Transport was going to spend ¥66.3bn to buy a 20% stake in the unlisted delivery subsidiary (Sagawa Express) of then still-unlisted <a href="https://www.smartkarma.com/entities/sg-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:26070:1" rel="noopener">SG Holdings (9143 JP)</a>, forming a capital and business tie-up looking to merge "within three years" (i.e. merger by 1 April 2019). <a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a> was going to sell a 29% stake (out of the 59% they owned) in Hitachi Transport for ¥87.5 billion to SG. They were both going to expand strongly outside of Asia.  HTS was known at the time for its 3PL and "Smart Logistics" capabilities to make customer supply chains more efficient, etc, whereas Sagawa was known as a top last-mile delivery business. The combined entity was set to overtake <a href="https://www.smartkarma.com/entities/yamato-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:2:1" rel="noopener">Yamato Holdings (9064 JP)</a> in terms of revenue and get closer to industry top dog <a href="https://www.smartkarma.com/entities/nippon-express-co-ltd" target="_blank" data-smartkarma-citation="entities:18582:1" rel="noopener">Nippon Express (9062 JP)</a>. It was supposed to help SG improve margins by doing more in B2B. </p>
</div><div>
<p>SG IPOed in late 2017. Three years came and went. Nothing happened. There were a few collaborative projects but it was slow-going, and there were signs of friction. In May 2019 a Medium Term Management Plan (with no mention of SG or Sagawa) was announced, and the Nikkei carried an interview with HTS President Nakatani who said, when asked about the integration..</p>
<blockquote><p>"I am aware that we are moving toward integration. I would like to harmonize future directions." [Nikkei: He showed a positive attitude...] "We have decided to discuss and consider the possibility of business integration, but we have not made any decisions, including any start to discussions."</p></blockquote>
<p>On September 25 last year, the Diamond Online let fly a scoop saying the capital and business tie-up between the two was going to be scrapped. HTS shares fell 10+%. </p>
<div>
<p>Hitachi Transport's first release to the exchange said the article wasn't based on information they announced and that it was not going to be a dissolution of the capital tie-up, just a re-arranging of the deckchairs and a board meeting was going on and there would be an announcement within the day. HTS shares - at that point down 7% on the day - bounced sharply (they closed down 4%).</p>
<p>The announcement after the close talked about a "partial modification" of the business and capital tie-up, but it involved HTS selling its 20% stake in Sagawa Express, and buying back 27.675mm of the 32.35mm shares of HTS SG held. It was almost a full unwind. SG managed to sell fewer than 27.675mm shares in the ToSTNeT-3 transaction as others also jumped in to sell. </p>
<p>My conclusion was to NOT sell that despite the opportunity to be able to do so in size. My conclusion was bullish HTS and basically bearish SG. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/591/original/Screenshot+2021-08-28+at+4.14.40+PM.png?1630138493" class="editor-image img-responsive" data-smartkarma-image-id="226591"></figure></section><p>That didn't work so well in the first ten weeks, with the share price ratio falling 20% from 1.252 to 1.00 by 1 December 2020. </p>
<p>When the TSE announced its new listing criteria for TSE Prime, there was going to be trouble. There had to be 35% of shares "tradable" and by that time, the register looked as follows:</p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/604/original/Screenshot+2021-08-28+at+5.41.44+PM.png?1630143753" class="editor-image img-responsive" data-smartkarma-image-id="226604"></figure><p></p></section><p>It did not clear the 35%v threshold (it would have been fine but for the large number of public sellers in the 28 September ToSTNeT-3 transaction.) </p>
<p>By early February 2020, the HTS/SG ratio had reached the ratio of that fateful day announcing the split and by mid-June, the ratio was 26% higher in 9 months. So I am now happier with that call from the past.</p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/603/original/Screenshot+2021-08-28+at+5.35.44+PM.png?1630143372" class="editor-image img-responsive" data-smartkarma-image-id="226603"></figure><p></p></section><p>On 20 April 2021, SG Holdings announced they had sold 4.6mm shares (at JPY 3,119.5). And on 20 May (the yellow dot on the blue line in the chart above), HTS <a href="https://www.hitachi-transportsystem.com/en/news/pdf/20210520_Cancellation%20of%20Treasury%20Shares.pdf" target="_blank" rel="noopener">announced</a> it would cancel 6,975,786 shares (6.2% of shs out) in order to put tradable shares back above 35%. In fact, the sale by SG had done that, and the market did not react. But it was a start, and it kept Hitachi Transport in the TSE Prime section and therefore the TOPIX Index when it launches in April 2022 because tradable shares were back above 35%. </p>
<section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/605/original/Screenshot+2021-08-28+at+5.42.00+PM.png?1630143772" class="editor-image img-responsive" data-smartkarma-image-id="226605"></figure><p></p></section></section><p>But there were still a lot of Treasury Shares, which as per the 6 May <a href="https://www.hitachi-transportsystem.com/en/ir/library/presentations/pdf/Presentation%20Material%20of%20financial%20results%20for%20FY2020.pdf" target="_blank" rel="noopener">Results Presentation</a>, included the use of stock (and cash) for alliance and M&amp;A. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/594/original/Screenshot+2021-08-28+at+4.29.03+PM.png?1630139904" class="editor-image img-responsive" data-smartkarma-image-id="226594"></figure></section><p>With the shares rallying, on 19 August, the company <a href="https://www.hitachi-transportsystem.com/en/news/pdf/20210819_Cancellation%20of%20Treasury%20Shares.pdf" target="_blank" rel="noopener">announced</a> that on 3 September, they would cancel 20,699,214 shares out (19.8% of total shares out), leaving treasury shares of 228,308. That would put Hitachi to just under 40% (where there is no question of consolidation if Hitachi Transport doesn't want), it puts SG Holdings to 9.8% (i.e. still below 10%), and puts the public at greater than 50%. </p>
<section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/606/original/Screenshot+2021-08-28+at+5.42.15+PM.png?1630143788" class="editor-image img-responsive" data-smartkarma-image-id="226606"></figure><p></p></section><p>The shares reacted well to that too. </p></section><div class="content-highlight">
<p><strong>But all this creates a curious problem. </strong></p>
<p>The float is now 50%, vs 41% pre-selldown, and 33.6% post-dealbreak, and the stock will stay in Prime.</p>
<p>But there is selling to come. </p>
</div>
<p>More below the fold. </p>
<p></p>
</div>
</div>


This insight covers a bit of history, a bit of teaching about how TOPIX works, a bit about the foreseeable events, and a bit of the fundamentals of the company. If you think you know all that, please don't hesitate to jump immediately to the bottom section where there is a Thin Red Line across the screen and a section titled Short &amp; Sweet Version. That is also the conclusions. 

The Background
At the end of March 2016, Hitachi Ltd (6501 JP),  Hitachi Transport System (9086 JP), and as-yet unlisted SG Holdings (9143 JP)  announced Hitachi Transport was going to spend ¥66.3bn to buy a 20% stake in the unlisted delivery subsidiary (Sagawa Express) of then still-unlisted SG Holdings (9143 JP), forming a capital and business tie-up looking to merge "within three years" (i.e. merger by 1 April 2019). Hitachi Ltd (6501 JP) was going to sell a 29% stake (out of the 59% they owned) in Hitachi Transport for ¥87.5 billion to SG. They were both going to expand strongly outside of Asia.  HTS was known at the time for its 3PL and "Smart Logistics" capabilities to make customer supply chains more efficient, etc, whereas Sagawa was known as a top last-mile delivery business. The combined entity was set to overtake Yamato Holdings (9064 JP) in terms of revenue and get closer to industry top dog Nippon Express (9062 JP). It was supposed to help SG improve margins by doing more in B2B. 

SG IPOed in late 2017. Three years came and went. Nothing happened. There were a few collaborative projects but it was slow-going, and there were signs of friction. In May 2019 a Medium Term Management Plan (with no mention of SG or Sagawa) was announced, and the Nikkei carried an interview with HTS President Nakatani who said, when asked about the integration..
"I am aware that we are moving toward integration. I would like to harmonize future directions." [Nikkei: He showed a positive attitude...] "We have decided to discuss and consider the possibility of business integration, but we have not made any decisions, including any start to discussions."
On September 25 last year, the Diamond Online let fly a scoop saying the capital and business tie-up between the two was going to be scrapped. HTS shares fell 10+%. 

Hitachi Transport's first release to the exchange said the article wasn't based on information they announced and that it was not going to be a dissolution of the capital tie-up, just a re-arranging of the deckchairs and a board meeting was going on and there would be an announcement within the day. HTS shares - at that point down 7% on the day - bounced sharply (they closed down 4%).
The announcement after the close talked about a "partial modification" of the business and capital tie-up, but it involved HTS selling its 20% stake in Sagawa Express, and buying back 27.675mm of the 32.35mm shares of HTS SG held. It was almost a full unwind. SG managed to sell fewer than 27.675mm shares in the ToSTNeT-3 transaction as others also jumped in to sell. 
My conclusion was to NOT sell that despite the opportunity to be able to do so in size. My conclusion was bullish HTS and basically bearish SG. 
That didn't work so well in the first ten weeks, with the share price ratio falling 20% from 1.252 to 1.00 by 1 December 2020. 
When the TSE announced its new listing criteria for TSE Prime, there was going to be trouble. There had to be 35% of shares "tradable" and by that time, the register looked as follows:
It did not clear the 35%v threshold (it would have been fine but for the large number of public sellers in the 28 September ToSTNeT-3 transaction.) 
By early February 2020, the HTS/SG ratio had reached the ratio of that fateful day announcing the split and by mid-June, the ratio was 26% higher in 9 months. So I am now happier with that call from the past.
On 20 April 2021, SG Holdings announced they had sold 4.6mm shares (at JPY 3,119.5). And on 20 May (the yellow dot on the blue line in the chart above), HTS announced it would cancel 6,975,786 shares (6.2% of shs out) in order to put tradable shares back above 35%. In fact, the sale by SG had done that, and the market did not react. But it was a start, and it kept Hitachi Transport in the TSE Prime section and therefore the TOPIX Index when it launches in April 2022 because tradable shares were back above 35%. 
But there were still a lot of Treasury Shares, which as per the 6 May Results Presentation, included the use of stock (and cash) for alliance and M&amp;A. 
With the shares rallying, on 19 August, the company announced that on 3 September, they would cancel 20,699,214 shares out (19.8% of total shares out), leaving treasury shares of 228,308. That would put Hitachi to just under 40% (where there is no question of consolidation if Hitachi Transport doesn't want), it puts SG Holdings to 9.8% (i.e. still below 10%), and puts the public at greater than 50%. 
The shares reacted well to that too. 
But all this creates a curious problem. 
The float is now 50%, vs 41% pre-selldown, and 33.6% post-dealbreak, and the stock will stay in Prime.
But there is selling to come. 

More below the fold. 




Hitachi Transport Uncoupled - TSE Prime, Price Popping, And Supply To Come