Last Week in Event SPACE: Celltrion, Toshiba, Healthscope, Orient Overseas, Samsung C&T

Last Week in Event SPACE ...

• Short interest inCelltrion Inc (068270 KS) may indicate a weightier story behind the FDA's inspection of its manufacturing processes.
• Toshiba Corp (6502 JP) extends the deadline on the sale of its memory ops to Bain, however, this may be a stalling veneer towards a possible IPO.
• Healthscope Ltd (HSO AU) is in the private equity crosshairs, however, the upside appears limited.
• Orient Overseas International Ltd (316 HK)closed below $70 for the first time since July last year on concerns CFIUS might refuse COSCO taking over OOIL's Long Beach terminal berths.
• As Samsung explores avenues to eliminate its circular ownership structure, will Samsung C&T Corp (028260 KS) become the Hyundai Mobis Co Ltd (012330 KS) of the Samsung Group?
• With bothYue Yuen Industrial Hldg (551 HK) and Pou Sheng Intl Holdings Ltd (3813 HK) downgraded shortly after Pou Sheng's failed scheme offer, it begs the question - what did dissenting shareholders know?

Celltrion Inc (068270 KS)(Mkt Cap: $33.9bn; Liquidity: $596mn)

There is significant short selling on Celltrion - >16% of its current market cap - and Sanghyun Park estimates this is only half the shares borrowed.

• What's going on? Celltrion is trading marginally above the street target price of ₩284,276. Celltrion's current ₩36tn valuation compares to last year sales of less than ₩1tn and this year is not expected to generate any significant improvement. Current inventory is also ~₩1.6tn.
• Of greater concern is the FDA elevating a prior order on certain manufacturing process last year, to a warning letter earlier this year. Celltrion has said this is no biggie and in an April 6 press release, it said it is making progress to addressing the FDA concerns and "is confident that the issues raised ... will be resolved in a timely manner".
• Celltrion's biosim business is not rocket science. It's all about how much cheaper they can produce in relation to the originals. And Celltrion does have impressively low production costs. Some investors are clearly betting there is more to this.

(link to Sanghyun's' insight: Celltrion's FDA CRL Issue Summary)

Toshiba Corp (6502 JP)(Mkt Cap: $17.7bn; Liquidity: $78mn)

The March deadline for Chinese antitrust approval for the sale of Toshiba Memory to Bain has come and gone, and Toshiba has set the next deadline inconceivably short at 15 April.

• Mio Kato, CFA is of the opinion Toshiba is an unenthusiastic seller of its crown jewel memory business and its repeated commitments to the sale to Bain is just setting the stage for it to walk away from the deal while maintaining the image of acting in good faith.
• Toshiba's share price underperformance is probably being driven by concerns about the Bain deal falling through. Mio is not as bullish as some as to the value of Memory, but still believes it could be listed for more than the US$19bn that the Bain deal values it at. Plus Toshiba would gain the benefit of perhaps keeping the entity consolidated.

(link to Lightstream's insight: Toshiba: Doth the Company Protest Too Much?)

Very, very briefly ...

• Samsung SDI Co Ltd (006400 KS) plans to raise approximately US$520mn by selling its 2% stake in Samsung C&T Corp (028260 KS). The selldown was mandated by Korea's antitrust agency in Dec 2017, with a deadline of six months to comply.
  • According to Sumeet Singh, the deal scores well on Smartkarma's framework largely owing to C&T's strong earnings momentum. Although, the discount of 2.8-4.9% is partly negated by the 4% jump in C&T's share price today and the deal at 10-days of ADV is not too large but not very small either in terms of liquidity.

Denso Corp (6902 JP) (Mkt Cap: $43.2bn; Liquidity: $105mn)

Would Denso fund Renesas Electronics Corp (6723 JP)'s acquisition of Maxim Integrated Products (MXIM US)? That is the question posed by LightStream Research as Desno seeks to accelerate its ADAS (advanced driver-assistance systems) development.

• Denso recently acquired a 5% stake in Renesas for US$800mn. There have been ongoing rumours Renesas may make a tilt for Maxim, and this now would appear more credible with the increased management flexibility and ties with the Toyota group. According to Mio, the Maxim acquisition would give Renesas a clear advantage over other ADAS competitors such as Infineon Technologies AG (IFX GR).
• The ADAS sensor count in an autonomous vehicle is expected to increase with each level of autonomy. Level 4/5 will require about 28 or more ADAS sensors per car from a low of 7 sensors required for a level 2 autonomous car (e.g. Tesla Autopilot). Denso is likely to steadily focus on gaining the necessary expertise in semiconductors which are key to developing sensors. This influenced Denso’s investment in Renesas and as such is likely to increase Denso’s interest in Maxim too. But it won't come cheap - perhaps US$20bn. If Denso cannot fund it entirely - and its balance sheet indicates it probably can - it may get help from Toyota.

(link to Lightstream's insight: Is a Possible Maxim Merger a Viable Investment For Denso)

Healthscope Ltd (HSO AU) (Mkt Cap: $2.7bn; Liquidity: $11.6mn)

Healthscope is rumoured to be in the private equity crosshairs, with BGH Capital and TPG Capital touted as potential suitors.

• Healthscope's previous takeover was a competitive process, but the multiple paid was well below where the company was re-listed and currently trades. Pranav Rao believes an offer were to emerge for Healthscope, it is unlikely that a price above A$2.40 would be paid.

(link to Pranav's insight: Healthscope: Acquire. Re-List. Repeat?)

Orient Overseas International Ltd (316 HK) (Mkt Cap: $5.5bn; Liquidity: $7.2mn)

OOIL closed below $70 on Friday on concerns the newly empowered Council on Foreign Investment in the US (CFIUS) could seek to make an example by refusing to allow COSCO to take over additional terminal berths controlled by OOCL/OOIL in Long Beach.

• Charles De Trenck believes it is possible that COSCO (and SIPG) could be asked to pledge to sell down part or all of the new Long Beach facilities as conditions precedent for a final approval by all US authorities for COSCO's takeover of OOIL. Final approval is supposed to have a 30 June 2018 deadline.
• Shares are currently trading ~12% discount to COSCO offer price, compared to a peak discount ~ 3-5%. Fair long-term value for OOIL share price without a subsidised COSCO deal was closer to HK$50 in 2016-17.

(link to Charle's insight: OOIL Drifts Below HK$70 on Inklings of Concerns Over Trump Approvals for Long Beach - COSCO Deal)

Atlas Iron Ltd (AGO AU) (Mkt Cap: $202mn; Liquidity: $2.7mn)

Mineral Resources Ltd (MIN AU) announced a scrip-merger with iron ore miner Atlas via a scheme of arrangement, at one MIN share for every 571 Atlas shares. The scheme values Atlas at A$280mn and ~2.4x EV/EBITDA. The bid represents a near-60% premium to Atlas' prior close and is unanimously recommended by the Atlas’ directors. The scheme vote for Atlas shareholders will be in July.

• While Atlas’ iron ore margins are troublingly thin, it does have a ~1.1bn metric ton resource base that could support higher iron ore production rates in the right circumstance.
• Morningstar considers the deal to be logical for Mineral Resources. Its fair value for Min Resources remains unchanged at $12.30 or a 2022 EV/EBITDA of 6.4x, a P/E of 13.7x and dividend yield of 3.6%. Shares closed Friday at $16.93.

(link to Morningstar's insight: No-Moat Mineral Resources in Scheme to Buy Atlas Iron; No Change to Our AUD 12.30 FVE)

Very, very briefly ...

• The Australian reported that oOh!Media Ltd (OML AU) might make a play for HT&E Ltd (HT1 AU), in a move that looks like a consequence of the ACCC blocking their merger with APN Outdoor Group Ltd (APO AU) last year.
• The Australian suggests that Apollo might be interested in the regional paper business of Fairfax Media Ltd (FXJ AU).

• i-mobile Co Ltd (6535 JP) (Mkt Cap: $209mn; Liquidity: $1.3mn) announced it will execute its tachiaigai bunbai offering at ¥1080/share which is a 2.96% discount to the close of ¥1114/share. That means 1 million shares at a maximum of 500 shares apiece, which means there will be an increase in shareholder count of 2000 or more, which means it will clear the hurdle to enter TSE1. Expect an announcement in the not-too-distant future.
• Wavelock Holdings Co Ltd (7940 JP) (Mkt Cap: $172mn; Liquidity: $2.6mn) officially listed on the TSE First Section on Wednesday, so it moves to TOPIX on the close of May 30th.

Samsung C&T Corp (028260 KS)

Stripping out its holdings in Samsung Electronics Co Ltd (005930 KS), Samsung Biologics Co., Ltd (207940 KS), Samsung Life Insurance Co., Ltd (032830 KS), and Samsung SDS Co Ltd (018260 KS), and even applying a 30% haircut to these stakes, you're getting Samsung C&T's remaining businesses (construction, trading, apparel, resorts, and others) for free.

• This is not altogether a new development. Of interest is the various restructuring scenarios of the Samsung Group.
• "Follow the money" is a logical route, and Lee Kun-Hee (father) and Lee Jae-Yong (son) are largely positioned in Samsung C&T and Samsung Electronics. Samsung C&T is therefore expected to play a prominent role in the Group's restructuring, and could, according to Douglas Kim be a potential Holdco or Investmentco company similar to Hyundai Mobis Co Ltd (012330 KS) of the Hyundai Motor Group.
• Douglas' NAV analysis backs out a fair value of 184,000 or 33% upside from Friday's close.

(link to Douglas' insight: All Roads Lead to Samsung C&T)

Sohu.com Inc (SOHU US) / Sogou Inc (SOGO US) / Changyou.com Ltd (CYOU US)

SOHU, which is roughly back to pre-excitement-over-SOHO's-listing levels, will pocket a tidy US$340mn from Changyou's special dividend. But stub revenue, gross profit, net income, and net cash have all been in a multi-year decline. In FY17, the stubs ops have a negative equity value. Without the benefit of a turnaround at the stub level, investors should simply purchase Changyou and SOHO directly.

Pou Chen (9904 TT) / Yue Yuen Industrial Hldg (551 HK) / Pou Sheng Intl Holdings Ltd (3813 HK)

Pou Chen was coming up on my monitor after its scheme offer for Pou Sheng's failed on Monday. Pou Sheng is 62.41% held by Yue Yuen and Yuen Yuen is 49.9% held by Pou Chen. In effect, Pou Chen was attempting to privatise its grandson/granddaughter. Please refer to Pranav Rao's insight Pou Sheng International: Privatization by Grandparent

• The 214.9mn shares that voted against Pou Sheng's scheme or 22.9% of disinterested shareholders, exceeded the 10% blocking condition. That's a lot of shares. Subsequent to the failed vote, both Goldman and CS downgrade Yue Yuen and reduced target prices. Pou Sheng was also on the receiving end of various downgrades and reduced target prices. Pou Sheng and Yuen Yuen closed the week down 34% and 22% respectively. I'd be interested to understand the logic behind those voting "no" on the scheme.

United Co Rusal Plc (486 HK) / MMC Norilsk Nickel PJSC (ADR) (MNOD LI)

Bloomberg is no longer providing current prices (though HP <GO> is now working) for Rusal as the "Security is subject to US and/or EU and/or UN sanctions". You can find pricing on the HKEx website here, which closed Friday at HK$2.04, around its 2016 low and roughly a record low EV when taking into account the drop in debt. As an aside, Norilsk is not sanctioned and the stake held is almost sufficient to de-lever Rusal completely. I have a discount to NAV of ~72% vs. a 12-month average of ~33%.