Last Week in Event SPACE (29 July 2017)

A vexing week for arbs as HNA’s funding for CWT Ltd (CWT SP) comes under pressure and the Tower Ltd (TWR NZ) / Suncorp Group Ltd (SUN AU) deal is torpedoed by the local regulator. We ascertained NXP Semiconductors NV (NXPI US)'s break price, regulatory approvals for Orient Overseas International Ltd (316 HK), a failed IPO is injected into Goodbaby International Hldg Ltd (1086 HK) while the FTC investigates Amorepacific Corp (090430 KS).

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

In M&A World

CWT Ltd (CWT SP) (Mkt Cap: $900mn; Liquidity: $2.2mn)

• Pranav Raorevisited CWT, which has been tainted by association as key funding channels for the HNA Group allegedly come to a standstill.
  • The ultimate shareholders of HNA necessitates a separate discussion, but suffice to say the recent announcement that two charities control the company begets more questions than answers.
  • Pranav argues a 50% probability of the deal completing amidst these ongoing media rumblings, in addition to the unusual situation in which HNA Holding Group dispatched a circular without providing a notice of the EGM.
  • Currently trading at a gross spread of 13.1% to the offer price of $2.36.
  • As one investor aptly put it: "you would have to be asleep at the wheel on this one if you think it isn't as hairy as a lolly that has been dropped in a barber shop."

Tower Ltd (TWR NZ) (Mkt Cap: $117mn; Liquidity: $0.4mn)

• The blocking of this deal by New Zealand’s Commerce Commission caught out investors and analysts/insight providers (me) alike. Shares are down 27% on the news.
  • As Morningstardiscussed, Suncorp and Tower's estimated combined market share of 30% was less than Insurance Australia Group (IAG AU)'s 45% share. And Tower is struggling in a competitive general insurance market with just 5% market share.
  • The Commission has yet to release a detailed finding on its decision. The abridged conclusion was that it was not satisfied that "the merger would not have the effect of substantially lessening competition in the personal insurance market.”
  • Fairfax Financial Holdings Ltd. (FFH CN), which has limited exposure in New Zealand, and dropped out of the competitive bidding war at the time of Suncorp’s official offer, can return to the negotiation table. It’s non-binding offer, which received unanimous Tower BoD approval back in February, was $1.17/share.
  • For now, without the assistance of Suncorp, Tower's perforce to tap the equity market has increased markedly.

Orient Overseas International Ltd (316 HK) (Mkt Cap: $5.8n; Liquidity: $24mn)

• Pranav also reevaluated the regulatory approvals faced by OOIL
  • EU approvals appear undemanding. Potentially OOIL/COSCO may be required to shed a few routes, although nothing substantive as to jeopardise the deal.
  • China approvals should similarly be straightforward. Beijing “support” is probably too strong a word, however, Tung Chee-hwa, Hong Kong’s first chief Chief Executive (1997-2005), has been steadfastly loyal. The Tung’s family political connections run deep and regulatory approval is expected to be uncomplicated.
  • The US approval is less assured. The DoJ has been aggressive in the past year when it comes to shipping alliances, and CFIUS will look at how the involvement of a Chinese SOE impacts US national security.
  • Pranav is a buyer closer to $70.50.

NXP Semiconductors NV (NXPI US) (Mkt Cap: $37.2n; Liquidity: $352mn)

• Roderick Manaloexplored the breakup price of NXP, which has railed ~36% since a takeover from Qualcomm was first floated back in September 2016. A bullish line would point to the price performance of a basket of NXP peers and relevant indices, indicating minimal downside. A bearish view notes NXP previously traded at a discount to comps, which is arguably supported by NXP’s "mediocre quarterly financials .... and its declining consensus estimates".
  • Factoring in peers, indices and other data points Roderick concludes a break price of $103, with a $98-108 range.

Event

Amorepacific Corp (090430 KS) (Mkt Cap: $15.2bn; Liquidity: $51mn)

• Douglas Kimreferenced the Korean Fair Trade Commission's (FTC) investigation of AmorePacific and the potential abuse of power at Aritaum stores, which only sell AmorePacific branded cosmetics. Sales for these stores was ₩444bn in 2016 vs. revenue for AmorePacific of ₩5.6tn.
  • At the core of the investigation is the alleged forced operational risks lumped with the franchise owners, not AmorePacific.
  • Douglas is bearish on AmorePacific due to i) THAAD political risk between China & South Kores; ii) greater competition/loss of market share; and iii) significant minimum wage increases. This investigation adds further weight to his argument.

Goodbaby International Hldg Ltd (1086 HK) (Mkt Cap: $540mn; Liquidity: $1.2mn)

• I briefly addressed Goodbaby’s intention to acquire a variant of the failed Goodbaby China's IPO last year. Pricing looks rich, unless extrapolating full years numbers from the stellar first 4 months of this year.
  • The Goodbaby China IPO involved the issuance of new shares, diluting the major shareholder, Zhenghuan Song's stake. For that IPO, we considered the China ops to be unattractive as they comprised none of Goodbaby's main business (strollers), only their clothes operations, in which they had no brand or market standing. Song is also Goodbaby's largest shareholder.
  • This asset injection of a dumbed-down-IPO-equivalent results in Song monetising his entire direct position in the Chinese operation, to be funded by Goodbaby's total cash on hand + new shares. The family is keen to exit, therefore why should the company enter?

Stubs

Hang Lung Group Ltd (10 HK) / Hang Lung Properties Ltd (101 HK)

• Both HLG & HLP announced interim results on the 27^th. Net debt at the parent level declined to $3.2bn from $3.8bn as at Dec 2016. The stub investment property increased 5% during the period to $8.7bn.
  • These two updates, all else being equal, widens the current NAV discount to 21.9% from 20.3%.
  • This compares with a 12-month average of 20%, not suitably extreme for a set-up trade. Also, on a simple 5-year ratio (HLG/HLP) – a useful self-check given 90% of the NAV derives from HLP while HLG is a passive holdco - the pair is trading around the average.

China Conch Venture Holdings Ltd (586 HK) / Anhui Conch Cement Co Ltd A (600585 CH)

• Anhui announced a positive profit alert with a 90-110% increase yoy for the June interim numbers. Without further information/clarity on the stub assets, not surprisingly the stub continues to underperform Anhui.
  • A simple CCV/Anhui ratio is at an all-time low since CCV’s Dec 13 listing. There’s a fair bit of pain in the long CCV, short Anhui trade, potentially exacerbated by investors unwinding.
  • As is, the market is assigning zero value to the stub ops, its net cash holding and 31% stake in Wuhu Conch Profiles And Science Co., Ltd (000619 CH).
  • It was cheap before and remains cheap. I continue to recommend a Long CCV, short Anhui via its H-shares.

For those following stub trades, I produce a weekly monitor of potential set-up and unwind trade ideas, sourced from 650+ holdco relationships across the region.