Last Week in Event SPACE (27 August 2017)

This week, the market allocated a degree of credit to Naspers Ltd (NPN SJ) stub assets; Toshiba Corp (6502 JP) potentially ducked an (other) incoming anvil; China Unicom Hong Kong Ltd (762 HK) looks inexpensive vs. China United Network A (600050 CH) after their respective outbound-proxy-investment/mixed ownership announcements; and Suncorp Group Ltd (SUN AU) sought a judicial review of its blocked tilt for Tower Ltd (TWR NZ).

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

Events

Toshiba Corp (6502 JP) (Mkt Cap: $11.7bn; Liquidity: $192mn)

• Travis Lundy tweaked his bearish stance after Toshiba prioritized negotiations with Western Digital Corp (WDC US) on the sale of its Memory Chip ops.
  • However Toshiba faces further anvils - just because a deal might be done, it does not remove the "rancour so manifold and manifest on the Toshiba side over the past 6+ months”.
  • That adverse opinion on Toshiba’s internal controls by PwC is not to be disregarded. And investors seem unconcerned with the potential impact and magnitude of Toshiba's LNG costs. Toshiba still needs to show positive net assets by Mar-18 to stay listed. And positive net equity is required to be able to restructure anything.
  • But banks have unquestionably lit a fire under Toshiba’s management, and this does lower delisting risks somewhat to where Travis was a couple of weeks ago.

(link to insight: Toshiba Tilting To WDC - Third Anvil Drifting Away? But LNG...)

Celltrion Inc (068270 KS) (Mkt Cap: $12.5bn; Liquidity: $72mn)

• Celltrion will hold an EGM on the August 29 to decide whether it will move to KOSPI. All shareholders are permitted to vote, and the resolution requires 50+%.
  • Seo Jung-jin's (the major shareholder) support for a KOSPI is unclear – he may want to merge Celltrion with Celltrion Healthcare (091990 KS) so as to increase his controlling stake over Celltrion, and as such, would prefer to see Celltrion’s price suppressed. Sanghyun Park believes Celltrion Health may merge with other pharma companies, therefore Seo will likely vote yes at this EGM.
  • The KOSPI move is not that big a deal. But a move to KOSPI200 is, and Sanghyun believes the company is a shoo-in. He estimates ~₩238.2bn of new capital flowing into Celltrion, roughly 3x its daily trading volume.
  • As evidenced by Kakao Corp (035720 KS), Celltrion is also expected to see improved investment sentiment ahead of a KOSPI200 inclusion. Celltrion is up 3.6% this week, having handed back some ground after its 5.88% increase on the 22 August, subsequent to a regulatory filing announcing it would hold an EGM for the KOSPI move. Celltrion is up 28% since news first surfaced of a KOSPI inclusion back on 14 April.

(the link to insight: More Discussions on Impacts of Celltrion’s KOSPI200 Inclusion)

Hyundai Heavy Industries (009540 KS) (Mkt Cap: $7.7bn; Liquidity: $40mn)

• Sanghyun revisited the Hyundai Heavy Group structure and discussed Ching Mong-jun selling his remaining stake in Heavy, the proceeds of which he will rotate into Hyundai Robotics (267250 KS). But that will only increase his stake by about 0.35%, so not enough to move the needle.
  • Of greater interest is Hyundai Mipo Dockyard (010620 KS)'s remaining 7.98% stake in Heavy after the spin-off, which it needs to offload by Apr 2019. That’s worth about ₩700bil.
  • Mipo is expected to sell this stake to Robotics, but Robotic wants to purchase shares at a “reasonable” price. Heavy's shares have come under pressure this past month after the completion of the tender offer.
  • With Heavy under pressure, and Robotics undergoing its own adjustment, the arbitrage between the two is more "multi-dimensional" and therefore difficult to predict. A clearer picture will unfold once Robotics buys Mipo's Heavy stake.

(link to insight: Revisiting Hyundai Heavy Group’s Shareholding Structure & Robotics-Heavy Arbitrage)

M&A

Tower Ltd (TWR NZ) (Mkt Cap: $109mn; Liquidity: $0.4mn)

• Suncorp Group Ltd (SUN AU) has lodged an appeal with New Zealand's High Court on the Commerce Commission’s decision to block its proposed acquisition of Tower.
  • The Tower acquisition is not, in relative terms, a large deal for Suncorp. But it has stumped up NZ$47mn for a 19.9% stake in Tower and clearly remains committed.
  • Tower supports the appeal and intends to file its own cross-appeal in the coming weeks.
  • Morningstar maintains an NZ$0.85/ share fair value (Suncorp’s offer price was NZ$1.40) and notes the difficulties in assessing whether Tower will eventually be taken over. As yet, there is no word on Fairfax Financial Holdings Ltd. (FFH CN) returning to the table.

(link to the insight: Appeals of Competition Regulator’s Decision Offer Some Hope for Tower Shareholders; FVE Unchanged)

Very Briefly...

Croesus Retail Trust (CRT SP) (Mkt Cap: $660mn; Liquidity: $2.6mn)

• The scheme doc has been dispatched along with a fair & reasonable opinion from the IFA. Pranav Rao believes this a safe deal. Gross spread is 0.88%.

(link to the insight: Croesus Retail Trust: Scheme Document Despatched)

TCC International Holdings Ltd (1136 HK) (Mkt Cap: $2.3bn; Liquidity: $2mn)

• Scheme doc also dispatched for this deal, and in light of the large offer premium, the IFA also gave a fair & reasonable opinion. Though the cash terms are tight at 0.28%, the scrip spread is 5.75%.

(link to the insight: TCC International: Scheme Document Despatched)

Vocus Communications Ltd (VOC AU) (Mkt Cap: $1.2bn; Liquidity: $16.9mn)

• Vocus announced a termination of discussions with KKR and Affinity. It would appear a recovery is too far away and uncertain for the would-be (or would-have-been) suitors. The stock fell 25% after the announcement, back to pre-event levels. Earnings the prior week came in below guidance, which itself was downgraded guidance, and they took a hefty A$1.532bn goodwill hit. It closed the week at $2.463, around 5.6% above its five-year low touched in April this year.

Stub-land

Naspers Ltd (NPN SJ) (Mkt Cap: $101.6bn; Liquidity: $258mn)

• New Street Research (rightfully) addressed Nasper’s cheap stub earlier in the week, which I viewed as unjustifiable in last's week wrap-up.
  • New Street flagging the unlisted e-commerce assets which are continuing to gain traction, with losses easing in key segments like OLX.
  • Specific to the holdco discount, the Allegro sale "highlighted the tax efficient structures in place for its key listed assets resulting in negligible tax liabilities on sale".
  • Naspers capital allocation into new ventures (EdTech, food delivery) appears misunderstood, with M&A-spend, as a % of market cap, roughly similar to Tencent Holdings Ltd (700 HK), and actually below other larger internet names. And the market has not assigned credit to other successful ventures such as Avito, ru (MAIL LI) and Flipkart.
  • My discount to NAV has narrowed to 32.6%, from its low of 37.7% on the 10 August, and compares with a 12-month average of 29.9%. On Friday, Naspers pushed backed against investors on selling its stake in Tencent as a means to closing the discount.

(link to insight: Market Is Ignoring Naspers’ Investment Track Record. Discount to Underlying Value Is Unjustified)

China United Network A (600050 CH)/ China Unicom Hong Kong Ltd (762 HK)

• I briefly discussed CNC's stub - or lack thereof - amidst its mixed ownership announcement, and the recylcing of the capital proceeds into new shares in Unicom.
  • Shirley Lam from the SCMP (whose prior article on Hongkong & Shanghai Hotels (45 HK) was censored) pulled no punches on the machinations behind this mixed ownership and proxy investment, and makes for candid reading.
  • The government's ownership remains >50% as a number of the new placees are state-connected. This offshore-proxy investment into Unicom does maintain the reserves of the private players (Alibaba, inter alia) onshore. And acquiring shares in CNC, an SOE, at a ~10% discount to last close, is quite the sweetener.
  • I'd still advocate aligning with Unicom over CNC given its cheaper valuations.

Elsewhere....

Kia Motors Corp (000270 KS)

• The Seoul Central District Court will rule this coming Thursday, the 31st August, on whether "regular" bonuses constitute part of a worker's basic salary. If yes, workers leaving Kia will be entitled to higher wages and retirement benefits. The stake in Hyundai Mobis Co Ltd (012330 KS) is worth around 30% of Kia's market cap.