Last Week in Event SPACE: Evergrande, Yahoo Japan, Samsung Biologics, Idemitsu, Sino Gas

Last Week in Event SPACE ...

• Evergrande Real Estate Group Limited (3333 HK)'s not so subtle buybacks place it very close to its theoretical public float limit
• Clarifying the artful complication of SoftAltabaYahooBank
• Korea FSC's ruling is a win for Samsung Biologics Co., Ltd (207940 KS)
• Buying the dips in Idemitsu Kosan Co Ltd (5019 JP) is a good idea, and buying the dips on the Idemitsu/ Showa Shell Sekiyu Kk (5002 JP) ratio is a better idea.
• An unduly pessimistically reaction to Sino Gas & Energy Holdings Limited (SEH AU) resources and reserves update

Evergrande Real Estate Group Limited (3333 HK) (Mkt Cap: $34.5bn; Liquidity: $88mn)

Evergrande decided that its stock is cheap most every day from the 3rd of July through the 13th, buying something approximating 8-10% of the real float. The buying activity has not been subtle. And in that 10 day period, the stock has outperformed a basket of 9 other HK-listed China developers by ~15%.

• The data rather strongly suggests the company has been buying in short, sharp bursts.
• Calculations suggest they could buy another 11.65mm shares before running into a limit imposed by the requirement to maintain a minimum float of 22.04% of shares outstanding.
• Some people might think the stock is a short if the company cannot buy back any more, but they would be playing in a situation where the company has shown no qualms in trying to move the share price against shorts in sharp bursts, and where the float is even smaller than before.

(link to insight: Evergrande (3333 HK) - Buyback Limit Almost Reached. What Next?)

Yahoo Japan Corp (4689 JP) (Mkt Cap: $18.6bn; Liquidity: $54mn)

Both Yahoo Japan and Softbank Group Corp (9984 JP) provided clarity on the selldown of Yahoo Japan shares by Altaba Inc (AABA US) and the shuffling of Softbank Group's interest in Yahoo Japan affiliates.

• Softbank Corp will commence a Third-Party Tender Offer to purchase 613,888,888 shares of Yahoo Japan at ¥360/share. Altaba will tender at least the number of shares to be bought.
• Yahoo Japan will concurrently launch its Own Share Tender Offer at ¥360/share to buy back 611,111,111 of its own shares. Softbank Group Japan Corporation has agreed to tender that number of shares. This is a buyback of 12% of shares outstanding.

• Travis remains bullish on Yahoo Japan. There is a buyback, the stock is still at the wrong price, and we now have a reason for Softbank to sell the story of e-commerce, mobile broadband services, etc in its IPO of Softbank Corp/Mobile. We also have less overhang and Altaba's hands are untied in its disposition activities.

links to Travis' insight:
SoftAltabaYahooBank: Artful Complication with Clarity
Altaba and Yahoo Japan - More Artful Than I Thought Possible

Samsung Biologics Co., Ltd (207940 KS) (Mkt Cap: $25.3bn; Liquidity: $98mn)

In Korea FSC's final ruling on BioLogics' accounting fraud case, the only violation cited was the failure to make a public disclosure about the Biogen call option before 2015. BioLogics won't face any further stock trade suspension since this violation is related to the company's failure to make a public disclosure, which wouldn't have had any impact on the company's earnings or equity.

• As to the accounting fraud case of whether BioLogics deliberately overstated its profit and valuation prior to listing in 2015 by shifting the status of Samsung Bioepis from subsidiary to affiliate, the FSC findings were inconclusive, and sent back this specific charge to the FSS for further review.
• Though not a declaration of innocence, deferring to the FSS for a further review is, according to Sanghyun Park, a subtle way of not humiliating the FSS to the general public. It would be extremely difficult for the FSS to obtain new evidence/material to reverse the FSC's decision.
• Because BioLogics won't face any delisting risk since the most important allegation against it was, for all intent and purpose, dropped and dismissed, selling in the shares (down 6.3% on Friday) appears overdone.

(link to Sanghyun's insight: Samsung BioLogics (207940 KS): Korea FSC Ruling Summary & Clarifications)

Idemitsu Kosan Co Ltd (5019 JP) (Mkt Cap: $8.7bn; Liquidity: $89mn)

Idemitsu and Showa Shell Sekiyu Kk (5002 JP) both announced their boards had executed a plan to merge the two companies on 1 April 2019 by having Idemitsu acquire all remaining shares of Showa Shell in return for issuing new shares. The companies plan to execute a Definitive Agreement (i.e. decide the merger ratio) by October 2018 and hold EGMs for shareholders to approve the merger in Dec 2018.

• A side agreement for an Idemitsu buyback by December may be designed to push Idemitsu's share price on a relative basis.
• On a profitability basis, Travis expects Idemitsu is still favored by simple arithmetic multiple metrics. Showa Shell is more expensive than the rest of the industry in Japan.
• On balance, Travis would still want to be long Idemitsu vs Showa Shell.

(link to Travis' insight: Idemitsu and Showa Agree To Merge - Interesting Side Agreements, Own the I/SS Ratio)

Tencent Holdings Ltd (700 HK) (Mkt Cap: $458bn; Liquidity: $750mn)

Travis discussed Tencent's proposed Spin-Off of its Tencent Music Entertainment (1426984D CH) ("TME") subsidiary. The IPO is said to value TME at US$29-31bn as a "conservative" number. This compares to Spotify Technology SA (SPOT US)'s listing valuation of US$29.5bn and compares to TME's US$12.3-12.5bn valuation in late 2017 when Spotify bought 9% of TME in a share swap transaction between the two companies (in that transaction, Tencent's 7.5% stake in Spotify valued it at US$20bn).

• A listing of TME could have all kinds of knock-on effects: it could mean a spinoff to Tencent investors - that could possibly impact the Naspers/Tencent Holdco relationship; it could mean a liquidity event for Spotify itself; it could mean a large profit event for Tencent in H2 as it deconsolidates TME. Lots of moving parts discussed in this insight.

(link to Travis' insight: Tencent Proposes Spin-Off of Tencent Music Entertainment)

DHG Pharmaceutical JSC (DHG VN) (Mkt Cap: $567bn; Liquidity: $0.3mn)

The same day DHG announced that it had received approval from the State Securities Commission to raise the foreign ownership limit to 100%, Taisho Pharmaceutical Holdings (4581 JP) said it wished to conduct a public tender offer to purchase 9.23mn shares or 7.06% of shares outstanding, which would take the company to a holding of 41.84mn (32.00%).

• With a very low minimum pro-ration, this does not look particularly attractive as an outright long opportunity until the price falls further, and even then, Travis expects that investors will be more than happy to sell at a premium given current expectations for growth. The Tender Offer is expected to commence by end-July and will go for 30-60 days.

(link to Travis' insight: DHG Pharma (DHG VN) : Japan's Taisho Pharma To Lift Stake in Tender?)

Sino Gas & Energy Holdings Limited (SEH AU) (Mkt Cap: $345mn; Liquidity: $2.8mn)

Shares declined 6.67% to A$0.21/share on Wednesday, having recovered from an intraday low of A$0.18. The market reacted to a reserves and resources update which stated a 56% decrease in net 2P reserves.

• I held discussions with both Sino Gas’ IR and their media spokesperson. No MAC is triggered by this announcement. The new numbers are in line with SEH's production plan announced last October, and Lone Star's DD was based on that specific production plan.
• The announcement also mentions LS and SEH will "continue to work together", and this relates to the mechanics of the scheme (court dates, shareholder meeting etc) as opposed to issues thwarting the deal.
• The independent expert’s report is due out later this month, early next. The scheme meeting is still on target to be held in September. Shares closed at $0.22 on Friday. I'd get involved at these levels.

Hong Kong Aircraft Engineering Co., Ltd. (44 HK) (Mkt Cap: $1.5mn; Liquidity: $0.9mn)

HAECO, which is subject to a privatisation offer from Swire Pacific Ltd (19 HK) at HK$72/share, recently announced the Scheme Document will be now be dispatched on or around the 28 September, delayed from 1 July previously. The delay was not a surprise. HAECO's interim results are due out the first week of August; therefore the scheme doc would be expected to include these latest financial figures.

• The key risk to the deal remains the 10% blocking condition or 2.501% of shares out or 4.16mn shares. The presence of Independent shareholders are recent AGMs has been on a declining trend.
• Currently trading at a 4.8%/13.5% gross/annualised spread when incorporating a maximum dividend and a 27 Nov settlement. I'd still take that spread. The offer has been declared final and there will not be a counter.

(link to my insight: HAECO's Tighter Spread After Scheme Doc Delay)

Mineral Deposits Ltd (MDL AU) (Mkt Cap: $260mn; Liquidity: $0.3mn)

Eramet (ERA FP) announced its A$1.75/share Offer had gained control of MDL shortly after MDL's board of directors reversed its early position, and recommended shareholders accept the Offer.

• If Eramet acquires a relevant interest of at least 90% of MDL AND has acquired at least 75% of the securities it offered to acquire, Eramet will compulsorily acquire MDL shares. Alan Gray held 14.43% as at 4 July and unless it tenders, compulsory acquisition will not be afforded.
• But should Eramet obtain greater than 75% of MDL, it will be able to pass a special resolution at a meeting of MDL shareholders - after the close of the Offer - including the winding up the company. Eramet had 76% of the voting power as of Friday.

(link to my insight: Eramet Clinches Mineral Deposits in Hostile Bid)

Pgg Wrightson Ltd (PGW NZ) (Mkt Cap: $343mn; Liquidity: $0.1mn)

PGW has been in play since majority-shareholder Agria's forced delisting late last year from the NYSE, and the subsequent OIO investigation. It would be a significant decision by the OIO to conclude Agria is not of "good character", however, a recent precedent does exist.

• The upside from here would appear to be modest. Forward earnings guidance is flat to down and pricing metrics are approaching full value when referenced to peers and precedents.
• However, PGW is New Zealand's largest agricultural services company and arguably warrants a premium to domestic peers and precedents. An offer pitched ~NZ$0.75/share or 10.9x forward EV/EBITDA looks fully priced.

(link to my insight: PGW And A Question of Character)

Very briefly ...

• Elliott Int'l discloses it has 5.12% in Alpine Electronics Inc (6816 JP).
• The Offer Document for AAG Energy Holdings Ltd (2686 HK) was dispatched on the 5 July and according to CCASS, 54.95% have now tendered, which (presumably) includes the irrevocables from Barings (25.21%) and Warburg (25.21%). The Offeree Document is expected to be posted on or before the 19 July. First closing is the 2 August, the last date to accept the offer is the 16 August, and remittances on the 27 August.
• The offer for Orient Overseas International Ltd (316 HK) is now unconditional in all respects. The Offer will remain open for acceptance until 4:00 p.m. on Friday, 27 July 2018. Settlement is seven business days from tendering acceptance.
• ANTYA Investments Inc. believes Broadcom Corp Cl A (BRCM US) tilt for CA Technologies could signal that the smartphone business has peaked; and if Broadcom is no longer a growth stock, should it maintain its 3x EV/EBITDA multiple? Broadcom Limited – From Leading Edge to Over the Edge. Multiple Compression Forthcoming!
• IHH Healthcare Bhd (IHH MK) announced it would subscribe for 235.3mn new shares (31.1%) in Fortis Healthcare Ltd (FORH IN) at 170 rupees/share. IHH will also make an open offer for an additional 26%, also at 170 rupees.
• Athaporn Arayasantiparb, CFA provides a recap of Thailand's M&A landscape in the first half of the year in his insight: Thai M&A: Boldest Deals of 2018.

Hyosung Corporation (004800 KS) (Mkt Cap: $4.1bn; Liquidity: $130mn)

With Hyosung's resumption of trading on the 13 July after its 29 May suspension, Douglas Kim provides an analysis as to how the shares of Hyosung and its four subsidiaries may trade from here. His sum-of-the parts valuation of Hyosung suggests an implied market cap of ₩6.6tn, 39.9% higher than the current market cap of ₩4.7tn. The three key positives of this split-off include a transition to a simpler structure, a potential for a higher valuation of its core businesses, and a transition stage from father to son ownership.

(link to Douglas' insight: Hyosung’s Transformation into a Holdco + Four Subsidiaries (Part 3): What's Next?)

Cosco Capital Inc (COSCO PM) (Mkt Cap: $835bn; Liquidity: $0.01mn)

Johannes Salim, CFA's stub valuation on COSCO suggests a NAV discount of 57%, more than 2 SD below its 5-yr average. Further analysis indicates that the widening NAV discount has nothing to do with the corporate governance discount given quiet acquisition activities the past 12 months. COSCO's 51%-holding in Puregold Price Club Inc (PGOLD PM) accounts for 65% of the NAV. COSCO is, however, very illiquid.

(link to Johannes' insight: Cosco Capital: Widening NAV Discount (More than 2 SD Below 5-Yr Average) Not Justified)

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. 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.