Last Week in Event SPACE – Chipbond, Idemitsu, Kakao, Aconex, Rowsley

Last week, Chipbond Technology Corp (6147 TT) joins the great semi China cash out; the founding Idemitsu Kosan Co Ltd (5019 JP) family bumps its stake, but a negative minority control position is still a way off; Kakao Corp (035720 KS) is a short, but it's just a question of when; Aconex Ltd (ACX AU) is a clean arb, and Oracle Corp (ORCL US) will likely counter if a competitor comes over the top; and Rowsley Ltd (ROWS SP) embarks on a reverse medical makeover.

Events

Chipbond Technology Corp (6147 TT) (Mkt Cap: $1.3bn; Liquidity: $18.5mn)

Late last week, Chipbond Technology Corp (6147 TT) announced it would sell its majority stake in Chipmore Technology shares to Boe Technology Group Co. Ltd (200725 CH)/北京芯動能投資基金, Hefei Municipal fund, and Beijing ESWIN for US$166mn. This follows several semiconductor OSAT houses like Siliconware Precision Inds (2325 TT) and Chipmos Technologies Inc (8150 TT) also cashing out in China.

• Selling China affiliate's shares to partners in China should facilitate orders from investing partners, such as BOE. Alternatively, BOE et al may curtail their own in-house OSAT capacity expansion or transfer their orders from other OSAT vendors to their own invested OSAT companies in China.
• Andrew Lu expects more selling as China aims to achieve a 40% self-sufficiency rate in the semiconductor industry by 2020. In addition, the Taiwan government has prohibited China government-backed companies buying Taiwan semiconductor companies directly but is unperturbed when buying centers on Taiwan semis' affiliates in China. Expect more Taiwan semi companies to jump on the China cash out bandwagon.

(link to Andrew's insight: Taiwan Semis - Cash Out in China in Exchange for More Orders and Upgrades)

Idemitsu Kosan Co Ltd (5019 JP)(Mkt Cap: $8.2bn; Liquidity: $44mn)

The background of the Idemitsu family saga runs deep and I recommend a refresher course via Travis Lundy's various insights on the company. Plus, revisiting mangalores never gets old.

• Idimetsu’s management launched a 48mn share global offering back in July, which perhaps not uncoincidentally, reduced the family stake from 33.92% - a stake that blocks corporate action - to 26.1%.
• Earlier this week, the family company Nissho Kosan announced it had started buying Idemitsu shares in the market in early November and as of the close of the 18th Dec had accumulated 3,968,300 shares (1.91%), bringing the total family/foundation stake to 28.00%.

• Will the family keep buying? There is evidence they will. To get to 33.34% the family would need to buy another 11.1mm shares (beyond their holding on December 18th). That would be about 11-12% of the current Real World Float™ of ~101mm shares and would take another 32 trading days at their current pace of 340k shares.

• At this juncture, Travis would start thinking about being long Showa Shell vs Idemitsu again. It may not be quite the right level, but - on a dilution-adjusted basis - the Showa Shell / Idemitsu Ratio is not overly far from its lows in the spring of this year. Things look healthy for the refiners. In the short-term though, Travis thinks it is worthwhile being long Idemitsu.
• Travis’ biggest caveat is that managed money positioning in crude oil and gasoil futures on NYMEX and ICE is at a decade-plus high, and the 1mo-24mo forward spreads for both WTI and Brent are in contango at levels not seen since Q3 2014.

(link to Travis' insight: Idemitsu Family Upping Stake (Still Doesn’t Like a Showa Shell Deal)

Kakao Corp (035720 KS) (Mkt Cap: $8.1bn; Liquidity: $117mn)

Kakao will be the 5^th GDR issued by a Korean-bourse listed company to list in Singapore in recent years. Sanghyun Park is asking – when to short the company?

• The previous 4 GDRs - Youngone Corp (111770 KS), Kolao Holdings (900140 KS) and Doosan Infracore Co Ltd (042670 KS) in 2013 and Hanwha Chemical Corp (009830 KS) in 2014 - all sparked a DR→underlying share conversion after their respective DR listing, such that there are virtually no remaining GDRs for either company. That is, all of the GDRs have been converted into underlying shares listed on the Korean bourse. To arrive at this point, a very high volume of short selling was involved.
• Sanghyun's findings are that a majority of arbitrage hunters shorted all of these 4 GDR issuing companies before the listing. This suggests the arbitragers actively engaged in the DR issuance price determination process in an effort to increase their arbitrage returns, rather than taking a safer/smoother path by shorting the underlying shares.
• Company fundamentals play a critical role in determining the spread between the price on the board resolution day (the GDR issuance announcement day) and the DR issuing price. Doosan Infracore and Hanwha Chemical, both of which had visibly weaker levels of business fundamentals than the other two, had higher yields. Kakao’s valuations appear even more fragile than those of Doosan and Hanwha. This could imply a very large number of aggressive arbitrage hunters before its GDR listing on the SGX.

• Shorts on Kakao were ~9% earlier this week, which is not unusual. Kakao is down ~20% from the recent 52W high of ₩168,000, but that still backs out a 55-70x PER range. So, Sanghyun's bet is Kakao will eventually deliver a 10-15% actual yield for arbitrage hunters, similar to Doosan and Hanwha.

(link to Sanghyun's insight: Kakao GDR Issuance - Study on Short Selling Based Arb Trade Potential Yield)

Coway Co Ltd (021240 KS)(Mkt Cap: $6.9bn; Liquidity: $14.3mn)

It was reported in various Korean media this week that Yoon Seok-Keum, the Chairman of the Woongjin Group, is considering the acquisition of Coway Co Ltd (021240 KS), a company which he was forced to sell to MBK Partners a few years back due to financial difficulties.

• Douglas Kim does not believe this is good news for Coway. Yoon is taking on significant leverage to proceed with this acquisition and this may lead to a major change in the company's dividend policies. Coway has spent ₩352bn in dividends this year, or ~5% yield. A change in its payout policies would face opposition from investors.

(link to Douglas' insight: Korea M&A Spotlight: Chairman of Woongjin Group Yoon Seok-Keum Is Considering on Acquiring Coway)

M&A

Aconex Ltd (ACX AU)(Mkt Cap: $1.2bn; Liquidity: $7.7mn)

The previous Friday, Oracle Corp (ORCL US) agreed to buy Aconex for A$1.56bn, or A$7.80 per share, a 47% premium to the last close. Aconex is a cloud-based subscription service to a platform helping construction companies manage complex projects. It's a drop in the bucket for Oracle, but it fits in with its stated goal of acquiring more internet-based services.

• Long-term growth rates at 20% often deserve high multiples and the deal is struck at EV/Sales multiple of 8.1x FY18 estimates. The only companies among Aconex's comps with similar or higher Price/Sales multiples are Temenos Group AG (TEMN SW) and Oracle itself.
• Conditions (FIRB) appear relatively straightforward. It’s a scheme vote (75%) and 13.53% is in the bag from co-founders Robert Philpott and Leigh Matthew Jasper, as well as shareholders Andrea Jasper and Simon Yencken.

• The trade here, for an arb, would be to be a buyer of Aconex on any dip. Oracle has the money, and the will, and sees no impediment to paying a > 8x sales. Currently trading at A$7.71/share.

(link to Travis' insight: Aconex (ACX AU) Takeover by Oracle)

Rowsley Ltd (ROWS SP) (Mkt Cap: $454mn; Liquidity: $8.3mn)

Back in July, Rowsley announced it would be buying Sasteria, the company that holds Thomson Medical, currently owned by Peter Lim, Rowsley's largest shareholder. On 18th December, Rowsley entered into an S&P agreement.

• Rowsley's shares popped 20% to S$0.13/share after the S&P announcement - a brief flurry in July saw shares touch $0.198 - and Zhen Zhou believes it looks pricey.
• A quick calculation shows that Rowsley is trading at an implied EV/EBITDA of 38.5x. That’s an 83% premium to listed peers in South East Asia.
• The details of the S&P play out like a reverse takeover. To fund the purchase, Rowsley will issue 21.3bn new shares at S$0.075/share. After issuance, Mr Lim will hold 90.07% in Rowsley, up from 45.36%. The sale requires a simple majority vote. Lim will abstain.

(link to Zhen Zhou's insight: Signs of Irrational Exuberance as Rowsley Transforms into Thomson Medical)

Very very briefly in M&A land …

Henry Group Holdings Ltd (859 HK) (Mkt cap: US$306mn; liquidity: US$1.4mn)

With Henry suspended pursuant to the Takeovers code, some points of note:

• It completed a $965mn disposal of property on the 13 Dec. The sale was essentially done at book value.
• The remaining assets mainly comprise a mish-mash of various IP in Hong Kong – some of which have not been leased in over a year (see page 3 of its 17/18 interim report). It owns one residential property.
• Currently trading at 1.18x P/B.
• According to CCASS, almost the entire stake held by Ian Ng (Chairman) has been brought into CCASS. He holds 76.91% and 74.76% has been placed with Lego Securities in the past month. You don’t need shares in CCASS to accept a general offer or an off-market transfer. Only if selling in the market or pledging to a bank/broker. Something is up – expect an offer to be made shortly.

AWE Ltd (AWE AU)(Mkt cap: US$415mn; liquidity: US$2.5mn)

AWE’s board has unanimously recommended Mineral Resources Ltd (MIN AU) implied offer of A$0.83/share, comprising A$0.415/share in cash + between 0.0198-0.0277 MinRes shares per AWE share. This scrip range is to reflect the trading in MinRes shares 10 days prior to the Scheme vote.

• Shareholders can opt for all cash or all scrip, but actual allocation will be scaled back to ensure a 50% cash and 50% scrip allocation.
• An Explanatory Booklet is expected to be dispatched in mid-Feb 2018 with AWE shareholders expected to vote on the Scheme in mid-April.
• At A$0.86/share, AWE is trading slightly above the low-end of MinRes' scrip range.

Cavium Inc (CAVM US) (Mkt Cap: $5.9bn; Liquidity: $119mn)

CTFN sources indicate Marvell Technology’s acquisition of Cavium is not expected to run into antitrust hurdles, but the US$6bn cash/scrip offer may encounter a lengthy review from US and Chinese trade regulators.

• The deal is viewed as being highly complementary, with significant synergistic cost savings. But a delay is likely to come from the two trade agencies fighting against each other in the approval process.

(link to CTFN's insight: Cavium/Marvell Could See Extended Review from US and Chinese Trade Regulators)