Last Week in Event SPACE - Fast Retailing, Hyundai Heavy, Japan Display, Qualcomm, Intouch

Last week, Fast Retailing Co Ltd (9983 JP) may be materially impacted should the BOJ revamp its purchase programs; a decent arb return in Hyundai Heavy Industries (009540 KS) as the first round offering price is set; Japan Display Inc (6740 JP)'s fundraising headline is negative but the underlying trends look increasingly positive; Qualcomm Inc (QCOM US) should ditch its NXP Semiconductors NV (NXPI US) bid and accept Broadcom Limited (AVGO US)'s final offer; and Intouch Holdings Pcl (INTUCH TB) is at its "cheapest" level in near-on five years.

Fast Retailing Co Ltd (9983 JP)(Mkt Cap: $40.1bn; Liquidity: $329mn)

Travis Lundy dissected the BOJ's asset purchase programs, which do not appear in danger of ending. If the BOJ continues to purchase ¥5.7tn of ETFs per year in the same proportion as they do now, there will be an ingravescent impact on a small number of stocks, including the reduction of Fast Retailing’s existing float by 40% in the next two years.

• To avoid that - and it should be avoided - there are two possible solutions: either the BOJ changes what indices it buys; or the Nikkei Inc changes the composition methodology of the Nikkei 225 Average.
• IF you believe that the Nikkei may change the index in order to reduce the BOJ and other ETF buyer's impact on single names, Fast Retailing would be a very large sell as the float would increase 150%, by Travis’ account. FamilyMart UNY Holdings Co Ltd (8028 JP) would see its float rise almost 60%. Travis also highlights a number stocks to short or go long should this change unfold.
• If you ever wanted to understand the history and implementation of the BOJ asset purchase program, this insight is one for the shelf for future reference.

(link to Travis’ insight: The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?)

Hyundai Heavy Industries (009540 KS) (Mkt Cap: $7.2bn; Liquidity: $31mn)

The first round offering price was set on the Jan 29 at ₩106,000 and Jan 31 was the ex-rights date for this rights offering.

• At the current price of ₩130,000 (as at the close on Friday) and applying a final offer price of ₩106,000, the arb profit size for the lower end of the subscription right price will be ₩8,270 which will give a 6.36% return. The upper end of the subscription right price will offer an arb profit of ₩6,304 which will be a 4.85% return (excluding transaction costs). Full workings are expounded in Sanghyun Park ’s note.

(link to Sanghyun’s insight: Hyundai Heavy Rights Offering - Status Update)

Japan Display Inc (6740 JP) (Mkt Cap: $1.2bn; Liquidity: $22.4mn)

A Nikkei article reported that JDI could face delays raising funds with a large Chinese player, as BOE and Hon Hai back away from a potential investment due to a government-backed pivot towards chip manufacturing, not displays.

• Mio charts a different tack from the article. He & SC Capital had previously discussed in Japan Display--IPhone X Weakness May Be a Godsend that JDI's capital requirements are less pressing now and the urgency of a shift to OLED is not as high.
• A Toshiba Memory IPO could also leave the INCJ with significant excess capital and some of it could be deployed in JDI. Sony is also a player which could be interested in funding JDI/JOLED with its resurgent profit and even its mobile division starting to generate small but steady profits.
• If restructuring costs are lower than expected and Full Active Display demand is strengthening then JDI's capital requirements should be lower. If the company only needs, say, ¥50-100bn, Mio believes a combination of the INCJ and Sony could very comfortably accommodate that.

(link to Mio’s insight: Delay in Financing Partnership - This May Be Contrarian but We Like This News)

Celltrion Inc (068270 KS)(Mkt Cap: $31.6bn; Liquidity: $481mn)

The KRX officially said on Feb 7 that Celltrion Inc (068270 KS) would be listed on the KOSPI on Feb 9 leading to a massive index rebalancing activity on Feb 7 & 8, and huge selling in Celltrion on these two days prior to the Feb 9 listing day. Short sellers utopia right?

• Short sellers appeared in droves, touching 1mn shares on both the 7^th & 8^th. Or ₩600bil in total or 1.7% of market cap. It’s been 7 years since short sellers went this large in Celltrion. Shares declined 9.92% on the 7^th, but after an additional 6.84% decline on the 8^th, shares reversed and ended the day up 6.02%. Bizarre.
• The focus is now on another index rebalancing. It is estimated that about ₩30tn worth of passive funds are mirroring the KOSPI 200, and about ₩1tn worth of passive money will newly flow into Celltrion around the time when it joins the KOSPI 200 on Mar 8.

(link to Sanghyun’s insight: KOSDAQ 150 Rebalancing & Celltrion Short Selling During Feb 7-8)

Kakao Corp (035720 KS) (Mkt Cap: $8.2bn; Liquidity: $146mn)

A total of 8,261,731 GDRs got listed on the SGX on the 2 Feb and ~83% were converted (on a 1:1 basis) in the first few days into underlying shares. That still leaves 17% remaining.

• Taking in into account foreign selling in the underlying shares, Sanghyun estimates only 30% of the converted GDRs were actually turned into profit. That leaves ~70% of the converted shares sitting in the hands of arb traders who are biding their time to unload their Kakao underlying shares. Or about 6-7% of the total number of issued shares.
• This means a short-term stock overhang. Arb traders aren’t going to sell all of their shares at once. But given Kakao's struggle in the local stock market (mainly due to the Korean government taking a stricter stance on the cryptocurrency exchanges), a rush for the exit from arb traders cannot be ruled out.

(link to Sanghyun’s insight: Kakao GDR-Underlying Share Conversion Status Update)

Qualcomm Inc (QCOM US) (Mkt Cap: $92.4bn; Liquidity: $723mn)

As widely speculated, Broadcom Limited (AVGO US) returned with an improved and final offer of $82 per share, up from $70. Arun George believes Qualcomm shareholders should accept.

• The offer price places an EV/Sales of 5x for Qualcomm’s standalone ops, a slight premium to the median takeout EV/Revenue of 4.8x for major semiconductor M&A deals since 2015.
• Aran also considers the risk-reward on antitrust merger clearance to be attractive as Broadcom is disposing of overlapping product lines and is also providing a chunky reverse break-up fee.
• Broadcom’s offer is premised on either Qualcomm acquiring NXP Semiconductors NV (NXPI US) at $110/share or the transaction being terminated. Elliott Management owns 6% of NXP and values the company at $135 per share. Acceptances for the offer are at 1.7%. It’s a big ask for Qualcomm to convince shareholders to bid against the odds for NXP, one with uncertain regulatory timelines, and one that will lead to Broadcom walking.

(link to Arun's insight: Qualcomm: Just Say Yes to Broadcom)

Toyo Kohan Co Ltd (5453 JP) (Mkt Cap: $660mn; Liquidity: $3.4mn)

Toyo Seikan Group Holdings L (5901 JP) announced a Tender Offer to buy out minorities of its 47.5%-owned subsidiary Toyo Kohan.

• This deal has a minimum condition of Toyo Seikan getting over 66.7% of shares held. If they achieve 90%, Toyo Kohan will buy back minorities directly. If only 67%, Toyo Seikan will ask for a shareholder meeting to approve a reverse share split so that Toyo Kohan squeezes out all investors with less than one round lot.
• Though a decent premium against the 3-month average, the Tender Offer of ¥718/share is not a significant premium vs. the last close of ¥626/share and is probably too cheap by a turn of EBITDA in terms of getting the right price for minorities.

(link to Travis’ insight: Toyo Seikan To Take Out Toyo Kohan Minorities)

Changyou.com Ltd (ADS) (CYOU US) (Mkt Cap: $1.6bn; Liquidity: $8.7mn)

The original proposal, at US$42.10/ADS, was considered low-ball. Then again, Chinese ADR/ADS privatisations tend to dance to a different beat and can be well worth your while taking your cause to the courts. So when the Chairman stated that he was reviewing the proposed purchase price, how much lower can this offer go?

• Pranav Rao believes a binding proposal (if announced) will (or should) not be below ~US$37/ADS, which works out to roughly 2x CYOU's cash and cash equivalents, and 9x LTM earnings ex-cash and 6.6x forward EV/EBITDA, the average of the China Mobile Games Adr (CMGE US) and Shanda Games Ltd (GAME US) proposals.

(link to Pranav’s insight: CYOU: Shanda Games 2.0?)

Kawasaki Kasei Chemicals Ltd (4117 JP) (Mkt Cap: $123mn; Liquidity: $1.1mn)

Air Water Inc (4088 JP) announced it would launch a Tender Offer to buy out minorities of its 47.0%-owned subsidiary Kawasaki Kasei, a producer of chemicals for the dye and pigment industries and for pesticides. The Tender Offer is at ¥340/share, which is a 20-year high or 10+x EV/EBITDA on a trailing 12mo EBITDA.

• That’s probably enough to push this through although EBITDA is expected to not quite double between March 2018 and March 2021, using the company's own management forecasts. That’s places the offer price at more like 5x EV/EBITDA 2021E.
• Simplex holds around 12% but according to Travis, but their small-cap activist/engagement funds have not been publicly noisy.

(link to Travis’ insight: Air Water To Take The Rest of Kawasaki Kasei Chem)

Ucs Co Ltd (8787 JP) (Mkt Cap: $313mn; Liquidity: $0.2mn)

As previously speculated in Travis’ insight Japan CVS Sector: Boots On the Ground, FamilyMart UNY Holdings announced it would conduct a share exchange to clear out minorities in UCS. The cash value of ¥1,830/share is +80% from that insight a year ago.

• There will be a vote for a consolidation and squeeze-out of minorities on April 6th which will be carried because of UNY's 81% stake in the target, and UCS shares will be delisted at the end of April. The merger will take place on May 1st, and investors will get their money at the end of July.
• So ... what to do? Not much. This deal will get done. Even if every single minority investor votes against – and it's not clear people would be upset with the price - it still gets done. If you had good terms for leverage, you would buy this at a discount of a bit more than 2%.

(link to Travis’ insight: UCS (8787 JP) Minorities To Get Squeezed Out)

Calgon Carbon Corp (CCC US) (Mkt Cap: $1.1bn; Liquidity: $28.6mn)

CTFN updated the Calgon Carbon-Kuraray Co Ltd (3405 JP) deal regarding CFIUS approval with sources indicating "nothing is getting done in 30 days … and 75 days is absolutely normal for Japanese deals".

• CFIUS has been backlogged for a while, so entering into an extended investigation is not an immediate indication of an issue. Several other CFIUS attorneys contacted by CTFN agreed the additional time is indicative of what has become the “new norm” at CFIUS when it comes to reviews.

(link to CTFN’s insight: Calgon Carbon-Kuraray Extended CFIUS Review Routine)

Very, very briefly in M&A land ...

Tai United Holdings Limited (718 HK) (Mkt Cap: $757mn; Liquidity: $0.9mn)

I briefly touched on this unusual takeunder (discussed in Pranav’s insight Tai United: Unconditional Take-Under) after it gained 21% one day, before falling 11% the next. It closed down 14% this week, 6.8% just on Friday; but at $0.96/share, it is still trading through the $0.92 offer price.

Shui On Land Ltd (272 HK) (Mkt Cap: $2.6bn; Liquidity: $8.5mn)

Shares closed up 2% for the week, but boosted by a 10.73% gain on Friday on the largest volume (264mn shares or 3% of o/s shares) since its 2006 listing. Last week I mentioned the company had released an announcement that Lo Hong Sui, the controlling shareholder, is in "talks with banks for financing and has from time to time been reviewing options with respect to his interest in the Company".

Intouch Holdings Pcl (INTUCH TB) (Mkt Cap: $5.6bn; Liquidity: $13.4mn)

Intouch's discount to NAV is at a 12-month low while the Intouch/ Advanced Info Service Pcl (ADVANC TB) ratio is nudging a five-year trough. That brief, July 2013 low occurred when Temasek (via affiliate Cedar) reduced its holding in Intouch. It also coincided with Intouch bidding for a digital TV license, but ultimately opting out.

• Thaicom announced an operating loss in FY17 after booking impairment provisions. It is also at loggerheads with the government over satellite usage, which has resulted in shares halving in the past year. Yet Thaicom comprises only 2% of Intouch's NAV. And net assets at the stub level remain static.
• From a long-term viewpoint, Intouch is cheap, be it on a discount to NAV, on a simple Intouch/AIS ratio or in terms of the dividend spread.

China Everbright Ltd (165 HK) (Mkt Cap: $3.5bn; Liquidity: $7.7mn)

China Everbright Ltd (165 HK) is around the "cheapest" inside a year. 3.95%-held China Everbright Bank Co A (601818 CH) ("CEB") and 27.5%-held Everbright Securities Co (A) (601788 CH) ("CES") comprise 98% of market cap. My discount to NAV of 28% compares with a 12-month average of ~22%.

• The stub comprises private equity funds management in HK, with net assets (as at 30 June 2017) of ~HK$28bn allocated to global PE projects, secondary market investments, structured finance, fund incubation - amongst others.
• There is clear value in these stub ops as reflected the March 2017 listing of 33.6%-held China Aircraft Leasing Group Holdings Ltd (1848 HK). CEL also sold 65mn shares in CES in the 3Q17 (reducing its holding to 1.74bn shares), the first reduction (or any change for that matter) in its stake since CES' listing in 2009. This paves the way for a further selldown. My discussions with management also indicate an intention to list medical, logistics and education companies this year, dependent on CSRC approval.

Green Cross Holdings Corp (005250 KS) (Mkt Cap: $1.6bn; Liquidity: $3.9mn)

GCH looks fully priced at a premium to NAV of ~25% against a 52-week average of ~13%, if inputting book value for the de-consolidated stub ops.

• Around 90% of Holdings' revenue and 80% of EBITDA is sourced from 50.1%-held Green Cross Corp (006280 KS) ("Corp"), according to Bloomberg FY16 data. Even applying Corp's multiples to the de-consolidated stub ops equates to a premium to NAV. I can't see a justification for this although the premium first occurred near-on a year ago.

Links to my insights:
Keeping Intouch
StubWorld - Set-Up & Unwind Extremes: China Everbright; Green Cross