Last Week in Event SPACE: Alibaba, Mobis/Glovis, Japan Display, Takeda, Santos, Sharp

Last Week in Event SPACE ...

• The new rules under the pilot program for China Depositary Receipts shrink the pool of hopefuls, but should still promote the Big Five;
• Elliott Advisors calls for a more detailed roadmap on the Hyundai Mobis Co Ltd (012330 KS) / Hyundai Glovis Co Ltd (086280 KS) spin-off merger;
• Japan Display Inc (6740 JP) tanks after announcing two offerings, yet further downside is probably muted due to lack of borrow;
• The curious case of Hon Hai Precision Industry (2317 TT) selling US$3bn of shares in Sharp Corp (6753 JP) to its management staff and employees;
• Santos Ltd (STO AU) looks good buying here after Harbour Energy's rejigged non-binding offer grants it access to the knowledge box;
• A possible merger of equals as Takeda Pharmaceutical Co Ltd (4502 JP) is widely tipped to make an offer for Shire PLC (SHP LN).

Alibaba Group Holding Ltd (BABA US) (Mkt Cap: $442bn; Liquidity: $3.8bn)

The recently announced pilot program for domestic companies currently listed overseas issuing China Depositary Receipts was discussed by Travis Lundy and is an interesting read throughout. There were a bunch of overseas listed Chinese companies which were hoping to avail themselves of this DR program however the new pilot rules make the likely pool smaller.

• The expectation is that overseas listings of the Big Five (Alibaba Group Holding Ltd (BABA US), Baidu Inc (ADR) (BIDU US), JD.com Inc (ADR) (JD US), NetEase Inc & Tencent Holdings Ltd (700 HK)) could rise just on expectations that money from a CDR listing could somehow be used to repurchase shares overseas. Or could see local market valuations much higher than overseas valuations. Potentially, it is in the tech companies' interests to see their overseas-listed shares rally significantly so as to provide a benchmark for "fair value."
• On the flipside, Ctrip.com International (ADR) (CTRP US), Weibo Corp (ADR) (WB US), Sunny Optical Tech (2382 HK), BYD Co Ltd (H) (1211 HK), AAC Technologies Holdings Inc (2018 HK), Sogou Inc (SOGO US), and TAL Education Group (TAL US) do not clear the market cap hurdle and could fall in price.

(link to Travis' insight: Pilot Program on China Depositary Receipts Launched - Expect the Big 5 to Prep Quickly)

Hyundai Glovis Co Ltd (086280 KS) (Mkt Cap: $6.2bn; Liquidity: $61mn)

Sanghyun Park clarifies an ambiguous IR doc on the Glovis/ Hyundai Mobis Co Ltd (012330 KS) spin-off merger, and also offers up some trade ideas, including shorting Glovis and going long Mobis, provided the Post Spin-off Mobis is worth more than ₩17.2tn.

• However, the Big New News was the disclosure by Elliott Advisors on Tuesday it held US$1bn in the key affiliates of Hyundai Motor Group, without specifically disclosing which affiliate. Korea's local sources are speculating that half of this is in shares of Mobis.
• "Elliott calls on management to share a more detailed road map as to how it will improve corporate governance, optimise balance sheets, and enhance capital returns at each of the companies." Elliott is expected to unveil more detailed and specific demands shortly, and the expectation is that it will ask Mobis to convert Post Spin-off Mobis into a legit Holdco (not a de facto Holdco) as it may exact a greater valuation premium.

link to Sanghyun's insights:
Mobis & Glovis Spinoff Merger - Trade Ideas
Elliott Factor - Focus Is on Post Spin-Off Mobis Valuation

Japan Display Inc (6740 JP) (Mkt Cap: $890bn; Liquidity: $18.5mn)

JDI announced two Offerings - one to a Business Entity (Nichia Corporation) for ¥5bn, locked up for two years, and one for ¥30bn to a slew of Foreign Funds who have no lockup. The issue price for both offerings will be determined by the VWAP of the days from April 5-9th, inclusive.

• Travis expected shares to decline this week and they did not disappoint (down ~17%); but he doesn't expect it to go down overly-much in the Apr 5th-9th period. The cost of stock borrow to "hedge" one's purchase is not that important. The big issue is that there isn't much incremental borrow out there. SC Capital's line of query into loan desks indicates roughly 90m shares short JDI, or around 12 days of the 30-day average daily trading volume.
• Mio Kato, CFA has been all over this situation and his pieces here are recommended reading on JDI's fundamentals. Travis would want to own the stock at the close of the 9th with the expectation to hold for 6 months plus.
• Separately, SC Capital met with JDI's management and highlighted the much stronger-than-consensus earnings outlook for FY3/19 based on strong Full-Active display sales.

links to:
Travis' insight: JDI Offering Trading Considerations
SC Capital's insight: Japan Display--Strong Orders from Apple & Chinese Customers for Full-Active Displays

Harim Holdings Co Ltd (024660 KS) (Mkt Cap: $326mn; Liquidity: $1.3mn)

On Wednesday Jeil Holdings (003380 KS) said it will merge with 68.1%-held Harim, Korea's largest chicken producer. Jeil is a holding company and its 50.9% stake in dry bulk shipper Pan Ocean Co Ltd (028670 KS) accounts for 61% of its NAV compared to 11% for the Harim position. Further details of Jeil's holdings can be found in Douglas Kim's insights here.

• The merger, which has been speculated by the market for some time, eliminates one Holdco layer, and should have a positive impact on the share prices of both Jeil and Harim. Jeil closed up 6% for the week against 2% for Harim.
• I have a discount to NAV of 49% for Jeil, down from a low of 55% two weeks ago, against a 12-month average of 48%. I've incorporated a static number for Jeil prior to its June 1997 IPO. There may be further narrowing in the discount however the stake in Harim is by no means Jeil's largest position.

(link to Douglas' insight: Korea M&A Spotlight: Jeil Holdings Merges With Harim Holdings)

Sharp Corp (6753 JP)(Mkt Cap: $14.7bn; Liquidity: $62.8mn)

Travis discussed the curious sale of Sharp shares by Hon Hai Precision Industry (2317 TT) on the last business day of 2017. The sale of 11.36mn Sharp Class C Shares took place at ¥310,192/share, worth ¥352.49bn to Hon Hai, netting them a profit of NT$66bn or ~US$2.2bn.

• Because the likelihood that the shares are placed in a highly concentrated fashion among the top executives means news on Sharp is likely to be bullish. And Travis tends to agree with SC Capital's recent piece that as a short it is not that interesting here.
• But watch the overhang. It could be US$3bn in August when the C Class shares can be sold. There is not a lot of reason for rank-and-file Taiwanese employees to own Sharp shares with yen exposure.

(link to Travis' insight: The Curious Case of $3bn of Sharp Shares Sold to Hon Hai Execs & Employees)

Takeda Pharmaceutical Co Ltd (4502 JP) (Mkt Cap: $37bn; Liquidity: $134mn)

Japanese pharma firm Takeda said it is officially considering making an offer for diversified rare-disease-focused Shire PLC (SHP LN) in what would probably be a merger of equals.

• Morningstar views Takeda's shares as fairly valued, but Shire’s shares as significantly undervalued. Shire’s established hemophilia portfolio could give Takeda (or another suitor) the opportunity to acquire a diversified rare-disease business and rapidly growing immunology business at a good price.
• Takeda had previously discussed a case for acquiring Shire on March 28. As per the takeovers code, Takeda has until April 25 to decide whether to make an official offer.

(link to Morningstar's insight: Takeda Considers Swallowing Shire, a Somewhat Surprising Move That Could Make Strategic Sense)

Santos Ltd (STO AU) (Mkt Cap: $9.4bn; Liquidity: $35mn)

Santos Ltd (STO AU) has granted Harbour access to due diligence pursuant to Harbour's non-binding, indicative and conditional offer of US$4.98/share (A$6.50/share). Harbour made two proposals in March, first at $6.25 a share and then $6.37 - and not forgetting the rejected A$4.55 tilt last August - before Santos agreed to engage at $6.50. This indicates a low chance of a further increase.

• Counter/competitive offers? Plenty. Woodside Petroleum Ltd (WPL AU) and PNG LNG player Oil Search Ltd (OSH AU), which withdrew their merger proposal in 2015; Exxon Mobil Corp (XOM US), which acquired PNG player InterOil Corporation (USA) (IOC US) last year, a company in which both Total Sa (FP FP) and Oil Search expressed interest; and ENN and Hony can also counter any takeover offer that is higher than their own entry price.

• While A$6.50/share appears a full offer - above Morningstar's prior fair value of $5.75 - pre-events in Australia have been a graveyard, and the wide spread (~9.5% gross) likely hinges on FIRB intervention. Santos is Australia’s largest domestic gas supplier, although as Morningstar points out, regulatory risk is less likely than previously, given the increased number of energy players now in the Australian market. I'd look to set-up ~around these levels.

links to:
Morningstar's insight: Harbour Formalises AUD 6.50 Bid for Santos; We Increase FVE to AUD 6.15; Take No Action Just Yet
My insight: Santos – Harbour Energy Returns to the Well

Marketech International Corp. (6196 TT) (Mkt Cap: $347mn; Liquidity: $4.4mn)

On 30 March 2018, Taiwanese industrial motherboard designer Ennoconn Corp (6414 TT) (a Foxconn Group sub) announced an unsolicited deal to buy 51.12% of small-to-mid-cap semiconductor and optical components trader and clean-room designer Marketech in an all-cash offer at NT$59.00 to run from April 9th to May 8th 2018.

• This is an Unsolicited Offer. It appears that somewhere between a bit over a quarter and a bit over one-third of the company is held by insiders. The deal can get done without the directors, but if the Board of Directors decide this Offer is too low, there could easily be expectations of a further bump.
• The minimum theoretical pro-ration level would be 51.12%. The stock closed Friday up at 57.60, ~2% shy of the tender price. That either implies a 90% proration or people are betting this goes higher. Travis bets the market plays for a bump.

(link to Travis' insight: Foxconn Sub Ennoconn Makes Partial Offer for Marketech (6196 TT)

Viacom Inc Class B (VIAB US) (Mkt Cap: $12.6bn; Liquidity: $141.5mn)

Viacom Inc Class A (VIA US) has reportedly rebuffed a formal offer from CBS Corporation (CBS US) and is expected to propose its own counter-offer.

• Given the share price disparity between VIA and VIAB Johannes Salim, CFA believes the play is through VIAB. If the deal does not happen, he also opines that betting on VIA's turnaround through the cheaper VIAB is a good bet as well.

(link to Johannes' insight: CBS-Viacom M&A: The Second Time a Charm?)

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

HLG closed earlier this week at a 12-month low with the discount to NAV (~36%) similarly at a one-year low. For a very clean, single stock Holdco structure, this is a wide discount. A simple HLG/ HLP ratio is also around a 7-year low.

• With the majority of HLG’s stub assets (both revenue and asset value) sharing the same site and/or related development with HLP, there is little to differentiate between the two companies. The gradual selling of HLG's HK properties (at the stub level) - such as the sale of Amoycan last November - increases the stub exposure to China and only serves to narrow the difference between the two companies.
• Liquidity arguably plays a factor in the trading of the two stocks, although HLP is now twice as liquid as HLG compared to 4x in recent years. And HLG has zero street coverage against largely positive coverage (11 Buys, 6 Holds & 3 Sells - target price of $21.93) for HLP; which probably augurs a more supportive shareholding base in HLP.
• Yet HLG is a passive Holdco which supports an argument for mean revision. More so as the stub assets have gradually been increasing over time. This looks like a set-up at these levels.

(link to my insight: StubWorld - Hang Lung, CK Hutch)

My ongoing series flags large moves in CCASS holdings over the past week or so (>10%), moves which are often outside normal market transactions. These may be indicative of share pledges.

Often these moves can easily be explained - the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those bolded, I could not find an obvious reason for the CCASS move. China Oceanwide Holdings Ltd (715 HK) (Mkt Cap: $977mn; Liquidity: $0.2mn) and Dadi Education Holdings Ltd (8417 HK) (Mkt Cap: $105mn; Liquidity: $0.1mn) look interesting.