Last Week in Event SPACE: BHP, WH Group, Beijing Capital Land, China Life, Macau Gaming Concessions

• Although returning capital through both dividends and off-market buy-backs are options available to BHP, the DLC structure has limited the release of value from these franking credits. BHP's commitment to paying both groups of shareholders the same dividend was hampered by the spin-off of South32 in 2015, as there were no longer sufficient assets in the UK company to generate the necessary income required to pay British shareholders' share, which comprise ~40% of the DLC structure.
• The DLC Dividend Share enabled the Aussie company to make an after-tax payment to the British company to fund the UK dividend. But franking credits were attached to the payment which meant the credits were effectively lost. Yet, paying dividends from after-tax profits to Ltd AND Plc shareholders going forward will similarly waste credits.
• Ultimately the unification costs have come down sufficiently (by ~two-thirds) in recent years to make this unification tenable. Ultimately a unified structure helps facilitate deals such a the Woodside Petroleum (WPL AU) proposal.
• As BHP Ltd is acquiring all shares in BHP Plc on a one for one basis, expect the spread between the two lines to collapse (which it has). This transaction is not a sure thing - 75% of shareholders of both lines have to back the DLC unwinding. BHP would not, under the current nationality rules, be eligible for FTSE100 Index, forcing index trackers to sell. And if Aussie shareholders start talking about the inefficiency of delivering franking credits to Australian holders because some will be lost to non-Australian holders of an Australian company, some of the Aussie small-holders of Limited might get upset. On balance, there is sufficient argument here to unify.
• The index impact? Both Travis Lundy and Brian Freitas delve into index ramifications in BHP DLC Unification - On Dirt-Diggers and Deckchairs and BHP Group Unification: Massive Passive Index Impact. I urge you to read to both. Travis' 4,000-word piece, which takes a deep dive on the history behind the DLC, also advocates a SHORT BHP vs Rio Tinto Ltd (RIO AU) - among other trade suggestions. Rio and BHP are not quite the same company, but they are not dramatically different.
• Travis and I conducted a joint webinar. The webinar recording is available here. The password is FlashBHP@19Aug

Sydney Airport (SYD AU) (Mkt Cap: $15.2bn; Liquidity: $41mn)

(link to my insight: Sydney Airports (SYD AU) Reject's Consortium's Revised Offer)

• According to a senior official at the Ministry of Public Security, at least RMB1tn (US$145bn) leaves the country yearly to illegal gambling and casino platforms. Yet shutting down Macau casinos, and turning the SAR into a ghost town will not stop these outflows. Keeping them operating and taking a "commission" appears the appropriate status quo. For now, given time constraints to conduct a consultation, an extension of 1-2 years for the concessions appears the logical course of action, an outcome backed by the CEO's of Melco International Development (200 HK) and SJM Holdings (880 HK).
• But whether foreign investment is still welcome in such enterprises is becoming increasingly murky. Siding with local owners (SJM, Galaxy & Melco) is arguably a more prudent investment choice. Given all of the above, Wynn Macau Ltd (1128 HK) and MGM China Holdings (2282 HK) have massively underperformed their US parent. In contrast, Sands China Ltd (1928 HK) has (modestly) outperformed its parent recently. Las Vegas Sands (LVS US) is seeking to sell its US ops, and this is disrupting future earnings. On balance, I'd look to set up a Long LVS, short Sands China.

• Melco looks rich here versus its MLCO. If you had set-up Melco - Long Melco and Short MLCO - I'd unwind that trade. I'd be inclined to reverse the stub here - Short Melco and Long MLCO.

The Prosus Exchange Offer to buy 45.33% of Naspers closed the previous Friday with pro-ration coming in at 64% for those who participated on an uncapped basis. Based on the settled borrowed shares on STRATE, which to Travis' understanding came out at 45mm shares, and based on the idea that some ADRs would have been borrowed, converted, and synthetically short-tendered, he expects that the roughly 60-70% of active and passive LOs participated at 47.6% (some lent their shares so arbs could participate, some left shares un-tendered so they could sell them in the index rebalance tomorrow 17 Aug at the close). This past Monday, Travis recommended shortiing Naspers and buying Prosus. This is a short-term trade. He expects the index demand on Tuesday was larger than the naked arb demand. And expects the EM funds who sold their Naspers to buy Prosus did not go as large as they might have while the All-World funds may have participated to a much higher degree. That trade turned out ok.

• I expect the September rebalance is not well understood. There is a LOT of Naspers to buy and there will be quite a bit of Prosus to sell. I expect people haven't looked that far forward. I would not want to be short Naspers past end-August. I would want to be long Naspers vs index and long Naspers vs Prosus by 30 August. The big risk is the Joint Capping Consultation and any resulting announcement. The best way to trade that given the flows of the next several weeks is to be long Naspers and short Prosus. BOTH would suffer but Naspers has local index buying and Prosus appears to have local index selling to do in September.
• Longer-term, there is a risk of combined Naspers/Prosus capping as put forth under the FTSE/JSE consultation. If executed, I expect that comes in Dec 2021 or later. I don't expect that in Sep (though it would be a good idea). Longer-term, there is now NOTHING TO DO for Naspers shares as far as I can tell. Prosus will see a buyback of $5bn post-offer. Naspers will see nothing.
• Travis believes that if Tencent stands still, the price pressure on both Naspers AND Prosus from here is UP as investors settle into the new post-Offer Circular shareholder structure, deep value buyers buy Tencent REALLY cheap in the form of Naspers and just hold on. And the Naspers vs Prosus spread is still VERY VERY wide.