Last Week in Event SPACE (20 August 2017)

This week, Toshiba Corp (6502 JP) sidestepped an ACME anvil but there are more to follow; Monsanto Co (MON US) / Bayer Ag Reg (BAYN GR)'s horizontal anti-trust issues were analysed, both Korea Aerospace Industries (047810 KS) & Samsung Electronics Co Ltd (005930 KS) are in Moon's crosshairs; Fairfax Media Ltd (FXJ AU)'s separation of Domain advances; and a Kinki transaction is reacquainted.

(Market capitalisation and liquidity discussed below are in US$. Liquidity is assessed on a 3-month average)

M&A Land

China Life Insurance Co Ltd (2823 TT) (Mkt Cap: $3.8bn; Liquidity: $12.1mn)

• Pranav Rao discussed the FSC’s approval for this partial transaction, which means the offer will close one day before CLIC's dividend goes ex ... assuming the offer is not extended.
  • Travis Lundy complimented Pranav’s price with proration possibilities across “breakeven” prices in stock prices, PER, PBR and IRR.
  • The partial of TWD 35 is pitched at an all-time high stock price, while CLIC is trading at a 5 year high compared to peers. The minimum tender of 25% is not high and the deal should get done. It’s a trade that tilts interesting/cheap at the moment.

(link to Pranav's insight: https://www.smartkarma.com/insights/china-life-insurance-co-partial-offer-to-close-just-in-time; and Travis' https://www.smartkarma.com/insights/china-life-2823-tt-partial-offer-arb-grids-comps)

Monsanto Co (MON US)/ Bayer Ag Reg (BAYN GR)

• Roderick Manalo discussed vertical and conglomerate anti-trust issues as it relates to the Monsanto/Bayer deal, in a companion piece to his previous insight Monsanto / Bayer: Horizontal Antitrust Issues. The distinguishable features in terms of scrutiny on a companies operations, focus on whether competition is weakened and/or customers will be disadvantaged by increasing prices.
• Specific issues identified include:
  • customer foreclosure (one significant customer in the downstream market for seeds will disappear and the merged entity might not be interested in buying its competitors’ products)
  • bundling (Bayer’s crop protection + Monsanto’s strength in seeds could enable the merged entity to develop seeds that favour its own crop protection products);
  • and innovation / R&D Issues. "As it did with Dow / DuPont, the EC may cite concerns that the merger reduces innovation and R&D in crop protection given both companies are integral innovators in the crop protection industry".
• This an excellent insight to familiarise readers with the approval process while addressing non-horizontal remedies.

(link to insight: https://www.smartkarma.com/insights/monsanto-bayer-vertical-and-conglomerate-antitrust-issues)

Energy Development Corp (EDC PM) (Mkt Cap: $2.5bn; Liquidity: $2.1mn)

• Travis added arb grids to my earlier piece on this partial offer.
  • Travis is less bullish on proration than me – that is, he believes tendering will be higher, therefore proration will be lower than my projected 90%.
  • He is a buyer at PHP6.86.

(link to insight: https://www.smartkarma.com/insights/edc-pm-voluntary-partial-tender-offer-the-arb-grids)

Very Brief Musings

United Engineers Ltd (UEM SP) (Mkt Cap: $1.2bn; Liquidity: $4.9mn)

• UE’s circular was dispatched with the IFA assigning a fair & reasonable opinion.
  • Currently trading comfortably though terms following on-market purchases by Oxley Holdings Ltd (OHL SP). This is one deal set to fail.

(Link to insight https://www.smartkarma.com/insights/united-engineers-ifa-says-offer-fair-and-reasonable)

New World Dept Store China (825 HK) (Mkt Cap: $429mn; Liquidity: $1.6mn)

• The latest announcement has an air of desperation about it. And for good reason. This deal closes on the 28 August and New World Development (17 HK) is still short ~25mn shares. CCASS tendering since the last announcement is essentially zero. At least the share price is back below the offer price. I have no clue why it traded up to $2.13 recently.

Global Logistic Properties Ltd (GLP SP) (Mkt Cap: $11bn; Liquidity: $41.8mn)

• Elliott is selling shares at S$3.24/share. Elliott is well in the money – they bought a chunk around $2.65. They still hold~236mn shares.

Event

Fairfax Media Ltd (FXJ AU) (Mkt Cap: $1.8bn; Liquidity: $15.4mn)

• Morningstartouched on Fairfax’s full year results - "no major surprises" is the abridged summary. But more importantly the ongoing halo effect concerning the Domain spin-off.
  • Fairfax will retain 60% of Domain in keeping with that previously guided in February. Domain will take on A$150mn of debt as part of the separation, which is roughly 1.3x Domain's historical EBITDA.
  • Morningstar's $0.75/share price target incorporates a 10.4x FY18 EBITDA for Domain and 3.5x for the rump. The market is currently assigning a punchy 15x for Domain.
  • Yet that market value ostensibly bakes in the shifting media policy rules which may allow Fairfax to acquire media assets, or suitors to acquire Domain.
  • On that media reform, One Nation has agreed to a deal with the Coalition while cross-bench senator Nick Xenophon’s sticking point centers on tax breaks for small players. Assuming Nick is still on the scene. The next sitting is the beginning of September.

(Link to insight: https://www.smartkarma.com/insights/domain-all-grown-up-and-ready-to-separate-from-fairfax)

Minato Bank Ltd/The (8543 JP) (Mkt Cap: $752mn; Liquidity: $0.4mn)

• Travis revisited the Osaka/Kinki-Hyogo mega-regional bank.
  • With Kansai Urban Banking Corp (8545 JP) trading at ~0.8x P/B and Minato Bank at 0.6x, Travis advocates the Minato / Kansai Urban (8543/8545) share price ratio should end up higher.
  • If incorporating KUB’s prefs and a static KUB share price, the P/B edges up to ~0.9x, therefore even more upside for Minato.
  • Absent prefs, "on a 5-year average profitability basis, the Minato/KUB ratio might be worth 1.3x (net income) to 1.5x (Business Profit). Stripped on tax differentials an appropriate ratio well over 2.0x."
  • The caveat to this trade is that the less expensive bank tend to consistently get short-changed - but not by a lot.
  • The other caveat is that KUB and KOB (Resona Holdings Inc (8308 JP) 's subsidiary Kinki Osaka Bank) will merge. Minato will not. As Travis quaintly puts it, “the honeymoon suite here is being reserved for KUB and Kinki Osaka. Minato appears like it will sleep in the guest bungalow on the property.”
  • There are various permutations at play. On a net basis, Travis favours being long Minato vs KUB here.

(Link to insight: https://www.smartkarma.com/insights/a-kinki-osaka-menage-a-trois-revisited)

Korea Aerospace Industries (047810 KS) (Mkt Cap: $3.6bn; Liquidity: $60mn)

• According to Sanghyun Park , KAI is in President Moon’s crosshairs as the politician addresses corporate corruption. Yet KIAs external auditor Samil PwC gave an unmodified opinion on KAI's FY13-16 financial statements.
  • In lieu of its defense reliance, KAI has historically been vulnerable to “politically connected structural wrongdoings including embezzlement.” Tackling KAI sounds noble enough, but given North Korean rumblings, timing is questionable.
  • A war with North Korea may never take place so arguably, when is not the right to clean house? The fact Park Geun-hye's main support base was cozy with the military underscores Moon's inclination to do so.
  • What are the allegations? Overstating proceeds from the sale of aircraft to Iraq. That had a price tag US$2.67bn. Basically, KAI said they had received the proceeds but in fact they had not.
  • Despite Samil’s opinion, this accounting inquiry is not over. Korea's FSS will also audit KAI's books and provide its own audit opinion, although it's doubtful they'll uncover anything Samil didn't.
  • Perhaps, as Sanghyun continues, this end game is KAI's privatization, severing ties with military-backed politicians. This could take the shape of EXIM (the major shareholder owning 26.41% stakes) privatizing KAI.

(Link to insight: https://www.smartkarma.com/insights/kai-crisis-summary-implication-of-samil-pwc-s-unmodified-opinion)

Toshiba Corp (6502 JP) (Mkt Cap: $11.5bn; Liquidity: $197mn)

• Travis goes deep on Toshiba, associating the company with the hapless Wile E Coyote's predilection to being wiped out with an anvil.

  • Toshiba dodged the first anvil after PwC's somewhat surprising Qualified Opinion enabled Toshiba to live another day.
  • The second anvil revolves around the SRO investigation into Toshiba’s internal control. “The opinion on financials was qualified, but the Adverse Opinion on internal controls reads badly”. Yet that SRO panel will comprise senior "independent" experts from law/accountancy firms or university tenure - usually of the same age as Toshiba's management and board”. Mmm.
  • The third anvil is the Memory Sale. Toshiba, by all accounts, has handled this sale badly. For that deal to close by March-end, an agreement needs to be inked in the next 6 weeks or so.
  • Travis believes there is too much going on here for there not to be ongoing delisting risk. It is somewhat implausible the TSE concludes the quantum of accounting and subsequent loss-recognition issues by the existing management team and board along with PwC's ongoing claims against Toshiba, have all been resolved.
  • But jettisoning a venerated blue chip is no small matter. As repeatedly mentioned in various conversations "But it's Japan... they'll find an excuse to save Toshiba."

(link to insight: https://www.smartkarma.com/insights/wile-e-toshiba-avoids-the-first-anvil)

Samsung Electronics Co Ltd (005930 KS) (Mkt Cap: $266bn; Liquidity: $495mn)

• The revisions keep coming. The aptly named “Samsung Retreat Act” amends the treasury shares acquisition conditions, enabling Korean companies to buy their own shares via a pre-arranged block deal, if there is a “valid & inevitable reasons”.

  • This would enable Samsung Electronics Co Ltd (005930 KS) to buy its own shares from Samsung Life Insurance Co., Ltd (032830 KS) and Samsung Fire & Marine Ins (000810 KS).
  • This revision, according to Sang, is one in a sequence of revisions aimed at squeezing Samsung. Recent key law revisions include the Insurance Business Act (affiliated holdings to be based on market value vs. acquisition cost); Fair Trade Act (the holdco ratio will include all stake is affiliates, irrespective of its major shareholders or not). None of these revisions have come into effect. All require parliament approval (two-thirds vote).
  • While it seems Moon has his agenda - apparently the Moon administration doesn't want SamE to be part of Samsung Group's future holdco system, as SamE is just too big and too influential - there is a groundswell of support for chaebol reform, specifically targeting Samsung. Bear in mind Moon is not against a Samsung holdco conversion – just leaving SamE out of any holdco conversion equation.
  • Sanghyun believes the latest revision to allow SamE to buy Life’s SamE is reasonable and not a bad thing for either company. Which may help explain why Korean instos have been mopping up shares in both companies in recent days.

(link to insight: https://www.smartkarma.com/insights/will-samsung-electronics-have-dual-governance-structure-implications-of-latest-law-revision)

Shibaura Electronics Co Ltd (6957 JP) (Mkt Cap: $274mn; Liquidity: $0.9mn)

• Travis discussed Shibaura's tachiaigai bunbai, which for the linguistically challenged (me), translates to "out-of auction proportional sale". This will take place between 24-29 August.
  • The event will bolt on around 100 new shareholders or ~1,927 in total, still short of the 2,200 required for TSE1 transfer requirements.
  • Insiders selling could facilitate that number, but with ~97% free float, there’s not a lot insiders available to sell.
  • Shibaura is not overly expensive. IF this event is geared towards TOPIX, “it would go in at the close of the second to last business day of the month AFTER it was transferred to the TSE1. The likely earliest possible date would be end-October.”

(Link to insight: https://www.smartkarma.com/insights/shibaura-electronics-tachiaigai-bunbai-to-lead-to-topix-inclusion

Kakao Corp (035720 KS) (Mkt Cap: $6.7bn; Liquidity: $65mn)

• Sanghyun discussed Kakao's regulatory filing announcement to spin off its internal gaming business unit and merge with its affiliate 'Kakao Games', formerly known as 'NZIN Corp. Unofficially, Kakao officials are saying that Kakao Games should get at least a ₩500bn valuation or it won’t go ahead.
  • Sanghyun doesn’t see any meaningful impact on Kakao’s shares price from the IPO, however longer-term, it should help improve Kakao’s overall operation efficiency.
  • While this is the first step towards an IPO next year, it also paves the way for a holdco conversion. Together with Kakao’s plan to merge with K Cube Holdings, long-term sentiment support should be evident.

(link to insight: https://www.smartkarma.com/insights/kakao-reorganization-for-game-business-kakao-games-ipo-holdco-conversion)

Stub-Land

Swire Pacific Ltd Cl A (19 HK) / Swire Properties Ltd (1972 HK)

• Swire Pac/Swire Prop announced their interim results. At the stub level, the beverage segment benefited from “the remeasurement to fair value of interests in JV” with a profit of $1.7bn vs. $336mn last year. Stripping out such gains and foreign exchange losses, profit in China was slightly higher (accounting for 73% of this segment's profit), with most of the profit gains coming from the US and Taiwan ops, which contributed to ~23% and 1% respectively to this division's bottom line.
  • Marine generated a loss of $692mn vs. a loss of $247mn in 1H16, but an improvement over the 2H16 loss of ~$2.8bn. “Vessel utilisation and day rates have deteriorated” as stated by management.
  • Elsewhere, net debt at the parent level increased to ~$38bn from $31.6bn as at FY16.
  • My discount to NAV is around 18%, just above the 15-month low of 21% while the 12-month average is 7.6%. The key attraction at the stub level is the beverage segment, but it is not a sufficiently engaging enough prospect or catalyst to commit to going long the stub, in my opinion.
  • And you’ll need to hedge out Cathay, which generated a $2.05bn loss in the 1H17. Perhaps we’re getting to that stage where Swire relinquishes control of the airline to Air China.

Naspers Ltd (NPN SJ)

• Tencent Holdings Ltd (700 HK)announced a 70% jump (yoy) in profit to RMB18.2bn, easily beating market expectations.
  • Tencent accounts for ~88% of Nasper’s NAV. Nasper's discount to NAV of 35%, is slightly above its 12-month low of 38% and compares witha 1-year average of ~30%. It looks inexpensive, but that is not new. The market is assigning significant (and growing) -ve value to Nasper’s growing and profitable unlisted ops.
  • Going Long Naspers, Short Tencent is a recipe to “getting your head ripped off” as some investors succinctly put it. Naspers to me simply looks cheap here, trading at a 22% discount to street estimates.