Last Week in Event SPACE: E Mart, Cityneon, Septeni, Spring, Coway/Woongjin, Guoco

Last Week in Event SPACE ...

• The race is on to create Korea's Amazon Fresh after Affinity Equity Partners and BRV's ₩1tn injection into the Shinsegae Group, owner of the E Mart Inc (139480 KS) brand.
• Cityneon Holdings (CITN SP)'s Offer is by no means a knock-out price, but a possible follow-up delisting Offer looms.

• The odds of Spring Real Estate Investment Trust (1426 HK)'s Offer completing narrow, but tendering is at a trickle.
• If Septeni Holdings (4293 JP)'s partial Tender Offer trades wide there will be adequate opportunity to profit on the back end as a deal with Dentsu should mean synergies on the revenue side.
• Coway Co Ltd (021240 KS) tanks after Woongjin Thinkbig (095720 KS) acquires a 22.17% stake; but it's Woongjin Co Ltd (016880 KS) that looks a short here.
• Guoco Group Ltd (53 HK)'s privatisation fails. Again.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)

E Mart Inc (139480 KS) (Mkt Cap: $5bn; Liquidity: $20mn)

Shinsegae Group first announced its intentions to spin off and merge their e-commerce businesses back in January 2018. Now private equity funds Affinity Equity Partners and BRV will each inject ₩500bn (₩1tn combined) into the new SSG.com entity.

• One of the perceived weaknesses of Gmarket and Coupang is in fresh foods. There are a few popular websites such as MarketKurley, however fresh food availability is not as widespread as many consumers in Korea would like. One of the strategies of SSG.com is to be the number one player in the online fresh foods segment - the "Amazon Fresh" of Korea - and provide more extensive and differentiated fresh foods compared to existing players.
• The online sales of Emart and Shinsegae nearly doubled from 2014 to reach ₩2.06tn in 2017, and is expected to be around ₩2.6tn in 2018 (up 26% YoY). By 2023, Shinsegae Group plans to boost its annual online sales of SSG.com to nearly ₩10tn.
• In order to reach its goal of ₩10tn in sales in 2023, it would need to generate a CAGR of about 30% from 2018 to 2023. SSG.com plans to use the funds from the capital injection to expand its distribution centers from two locations currently to six in the Metropolitan Seoul area as well as improve its SSG.com online website and the entire distribution value chain. According to the Shinsegae Group, the combined e-commerce businesses of Emart and Shinsegae under the SSG.com brand will start in 1Q19.

(link to Douglas Kim's insight: Shinsegae Group's SSG.com Receives 1 Trillion Won Investment: Trying to Create Korea's Amazon Fresh)

Cityneon Holdings (CITN SP) (Mkt Cap: $229mn; Liquidity: $1.5mn)

Cityneon announced West Knighton Limited, a 68.95% shareholder after completing a recent share acquisition, will make a mandatory unconditional cash Offer for all shares, other than those already owned. The mandatory Offer price is S$1.30 (a 3.2% premium to last close) and is unconditional in all respects. The Offer price will not be increased and it is West Knighton's intention to delist the company.

• This is by no means a knock-out price and is ~10% below the consensus target price of S$1.40+. The mandatory Offer is triggered via the major shareholder exiting (having entered only a year ago), and is largely an opportunistic Offer to secure a larger stake in the company.
• I would not tender into the Offer and recommend buying at or just below the $1.30 Offer Price. Cityneon is likely to surprise to the upside in earnings after securing its 4th intellectual property right in May.
• If West Knighton receives acceptances from 90% of disinterested shareholders (those shares it does not own), it will move to compulsory delist the company. However, if the Offer closes with West Knighton holding >75% but <90% of shares, it may be able to launch an exit/delisting offer pursuant to Rule 1307 and Rule 1308, on the condition ≥75% voting for and ≤10% against the proposal - and all shareholders can vote. The delisting offer price is typically the same price as per a preceding voluntary/mandatory offer. It will also need a favourable IFA opinion. If the delisting offer is approved, those who do not tender would be left holding unlisted scrip.

(link to my insight: Cityneon - Buy For The Back-End)

Septeni Holdings (4293 JP) (Mkt Cap: $266mn; Liquidity: $2mn)

Dentsu Inc (4324 JP) announced a Partial Tender Offer at ¥260/share for shares in internet advertising agency Septeni along with a potential subscription to buy treasury shares held by Septeni, and shares in a Third Party Allotment. Dentsu will buy 26,895,000 shares of Septeni (20.99%) in a Tender Offer. If Dentsu does not get to 20.99% in the partial tender, Dentsu will buy shares in a third-party allotment at ¥260/share so the post-transaction result is that they own 20.99%. Dentsu has agreed not to go over that number.

• This looks like a very generous offer. It is a very generous offer against the non-cash book value (20x book), but this company is almost entirely a company where the assets walk out the door every evening. And the Tender Offer Price is about where the shares dropped to 6 months ago after H1 results.
• If you believe the company is going to get back on track and is worth 16-20x EPS next year, then this could trade surprisingly tight. If Nanamura-san and company and none of the other large corporate/insider shareholders tender, but everyone else does, pro-ration comes out at 31.6%. Excluding GPIF holdings gets you to 33.1%. If you buy at ¥222 and offer all your shares at ¥260/share in the Tender Offer, and get filled to 31.6%, your "breakeven" cost on your remaining position will be ¥201.8/share which will be 19.9x company forecast Sep19 EPS of ¥10.29/share.
• But Septeni will be an illiquid smallcap after the trade. Longer-term, Travis Lundy expects this is a way for Dentsu to get in front position to take out the company when Nanamura-san wants to sell. He will be 64 years old in January.

(link to Travis' insight: Dentsu Buy of Septeni - Interesting SmallCap TOB)

Spring Real Estate Investment Trust (1426 HK) (Mkt Cap: $748mn; Liquidity: $1mn)

On the First Closing Date, PAG Real Estate bumped its Offer for Spring to $5.30/unit from $4.85. This is a 76.7% premium to the undisturbed price. The Offer price will not be increased and the Offer has been extended until the 14 Nov.

• Units tendered totalled 23.883% as per the announcement, which implies PAG has 38.701% of units outstanding. It requires another 11.3% of units out to tender for the Offer to turn unconditional. The revised Offer price will be available to any unitholder who has previously accepted the Offer - provided the Offer becomes unconditional.
• The EGM for shareholders to vote on the Huizhou property transaction has now been rescheduled to the 29 November, being the business day after the latest date PAG can declare its Offer unconditional.
• Shares closed Friday at $4.64 implying a ~70% chance of completion. CCASS movements indicate only 0.06% of issued shares have tendered since Monday's bump. My inquiries suggest shareholders who have not tendered (excluding the Manager and affiliates) are mainly retail holders.

(link to my insight: Spring REIT - PAG Real Estate Bumps. Get Involved)

Coway Co Ltd (021240 KS) (Mkt Cap: $4.2bn; Liquidity: $16mn)

Woongjin Thinkbig (095720 KS) will acquire a 22.17% stake (16.3587mn shares) in Coway for ₩1,684.9bn. This represents an acquisition price of 103,000 won per share or just a 22.8% premium to last close. Coway fell 19% on the news, while Woongjin Co Ltd (016880 KS) increased 22% and Thinkbig was up 5%. Douglas thinks there are good reasons for this.

• Typically, a major M&A deal involving the transfer of controlling ownership in Korea includes a management premium that ranges anywhere from 20-100%. This management premium is right at the low end.
• In recent years Coway has been losing market share of its key products to leading competitors such as LG Electronics and SK Magic. Woongjin's Chairman Yoon Seok Geum is likely to re-emphasise increased brand awareness of the Woongjin Coway brand name, which is likely to lead to higher spending on marketing, advertising, and promotions. Therefore, lower profitability at the expense of trying to regain market share.
• There have also been concerns about the Woongjin Group's corporate governance policies and this is likely to scare some long-term value investors. Plus, there are likely to be increased concerns about the higher debt load on the Woonjin Group as a result of this acquisition of Coway.
• As an aside, Woongjin Co is coming up rich vs. 24.33%-held Thinkbig on my stubs' monitor. Sanghyun Park thinks so too and suggests an unwind trade here, or Shorting Woongjin Corp and going Long Thinkbig.

links to:
Douglas' insight: Korea M&A Spotlight: Woongjin Group & STIC Consortium Agrees to Acquire Coway
Sanghyun's insight: Woongjin's Surprise Deal with MBK Partners on Coway: Deal Summary & Short-Term Approach

Selangor Properties (SPR MK) (Mkt Cap: $442mn; Liquidity: $0.1mn)

Kayin Holdings, the 68.23% shareholder of Selangor Properties, the largest landowners in Damansara Heights, has proposed a selective capital reduction and a corresponding capital repayment of RM5.70/share (a 40.39% premium to last close and a two-year high) in SPR for all remaining shareholders.

• The premium is decent. Yet the cash payment looks light. There does appear to be significant value to be unlocked within property development, especially the 15 acres in close proximity to two major projects in Damansara Heights – Guocoland Ltd (GUOL SP)’s Damansara City and Pavilion Damansara Heights. This has also been flagged by Pangolin Investment Management, a 1.24% shareholder in SPR.
• Though illiquid, this is not a knock-out price for a solid company and minority shareholders should make a noise for a higher offer. Even RM6.84, the all-time high price, is at a discount to the current book value, before any adjustment. Trading with completion in mind at a gross/annualised spread of 6%/18%.

(link to my insight: Selangor Props - Privatisation Offer Does Not Reflect Full Value)

Mengke Holdings Ltd (1629 HK) (Mkt Cap: $107mn; Liquidity: $0.1mn)

The major shareholders, collectively holding 75%, have sold their shares to Champion Alliance (Offeror)/Million Success at $1.42/share, triggering an unconditional mandatory offer also at $1.42/share, a 9.23% premium to last close.

• The Offer is unconditional in all respects. Any dividends declared or paid after the announcement will reduce the Offer price. The Offeror intends to maintain Mengke's listing.
• Optically, the offer price appears opportunistic, having recently recovered from an 18-month low. Yet, $1.42 backs out eye-watering metrics of 51x EV/EBITDA and 135x PER (& 30x peak earnings in FY15). The major shareholder and chairman is stubbing out. I would be inclined to follow.

(link to my insight: Running Out of Puff? Tender Into Mengke's Offer)

Guoco Group Ltd (53 HK) (Mkt Cap: $5bn; Liquidity: $1.5mn)

In somewhat of a surprise, Guoco's latest privatisation attempt failed. This outcome was always a risk; however, given the adverse market moves recently, Elliott's support and the IFA signing off, I thought together this would have likely tilted undecided voters in favour of the Scheme.

• 35.2% of the shares held by independent Scheme shareholders who attended and voted shot the resolution down. By my calculations, First Eagle (7% of issued shares or 23mn shares) voted against the Scheme and accounted for ~94% of the Against votes.
• Guoco fell 24% to close at $100.40/share on Friday or a discount to NAV 43.5%, which compares to the one-year average of 46% at the time of the Offer announcement. Another privatisation attempt cannot be made for 12 months.

(link to my insight: Guoco's Privatisation Fails. Again)

Jardine Cycle & Carriage (JCNC SP) (Mkt Cap: $9bn; Liquidity: $6mn)

Astra International (ASII IJ) reported a net profit for 9M18 of IDR17.07Bbn +21% YoY, which implies a strong beat for 3Q18, according to Angus Mackintosh. This was driven by a much better performance from United Tractors (UNTR IJ), which represents its heavy equipment and mining business, as well as a decent performance from its auto division, where it saw an increase in motorcycle sales and a slight decline in auto sales. This offset a decline in the contribution from its agri-business through Astra Agro Lestari (AALI IJ).

• According to Curtis Lehnert, the real catalyst is November 7 when JCNC reports. These Astra numbers imply improving Indonesian motorcycle sales which should be positive for the stub, while Vietnamese auto sales are expected to impress in 3Q18.
• JCNC's 26.6% discount to NAV remains at an extreme level and is only slightly above its recent multi-year low of 28.5%.

TerraSky Co Ltd (3915 JP) (Mkt Cap: $148mn; Liquidity: $0.1mn)

Terrasky made a disclosure (J-only) in mid-April that it had begun its preparations to qualify for TSE 1 listing, and simultaneously announced a tachiaigai bunbai offering for 280,000 shares at a price of ¥3,340, with a maximum limit of 100 shares/investor. This was implemented in May and the company managed to sell (J-only) 258,300 shares (it is unusual for tachiaigai bunbai to not sell the full amount). The company announced a tachiaigai bunbai earlier this week to sell 121,400 shares to investors - 100 shares each. It was not executed that well, selling only 95,800 shares of 121,400 shares on offer.

• Based on the number of shares sold in the May and October tachiaigai bunbai offerings, there should be a large enough shareholder count now to get past the TSE1 listing hurdle. But it is not certain. The company chose 121,400 shares this time for a reason and fell more than 25,000 shares (250 shareholders) short. If the company enters TSE 1 in November an inclusion event can be expected at the end of December 2018 (the close of the 27th).
• This is an expensive but high-growth smallcap. It is expensive because the company appears to be hellbent on growing revenue at the expense of making money near-term. On a Price/Sales ratio, the company is cheaper than many of its MOTHERS or TOPIX Smallcap peers, but on a PER basis, it is off-the charts expensive.
• There is probably one way to trade this well (own the whole tachiaigai bunbai) but it is only for people willing to short-term own something highly illiquid. Otherwise not worth bothering with and will be illiquid on the follow.

(link to Travis' insight: TerraSky (3915 JP) - Tachiaigai Bunbai Likely Leads to TOPIX Inclusion)

• MYOB Group Ltd (MYO AU). KKR has bumped (by 2%) its indicative proposal to $3.77/share and has been granted access to the data room. (link to Arun George's insight MYOB (MYO AU): A Step Forward Towards Completion)

• Capilano Honey (CZZ AU). Wattle Hill RHC Fund and ROC Capital P/L have bumped its offer to $21/share from $20.06/share. There is no change in the scrip consideration. The scheme meeting is scheduled for the 15 November, with an expected implementation date of 5 December (if approved). Capilano's BOD continues to recommend shareholders vote in favour of the scheme.

• Melco Resorts and Entertainment (Philippines) (MRP PM). The tender offer at PHP7.25/share (unchanged) has now commenced and will close on the 29 November. The offer was amended twice. Originally it was pitched as a delisting offer by MCO (Philippines) Investments Ltd. Now the goal of the Offer is to increase MCO's stake in MRP. More a technicality.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.

Often these moves can easily be explained - the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.