Last Week in Event SPACE - Henderson, Akatsuki, Lotte

This week, is Henderson Land Development (12 HK) truly the bastion of affordability? Game-on for Akatsuki Inc (3932 JP) and the Lotte Shopping Co (023530 KS) restructuring gradually unfurls.

(Market cap and liquidity noted below are in US$. Liquidity is assessed on a 3-month average)

Stub

Henderson Land Development (12 HK) (Mkt Cap: $27bn; Liquidity: $20.5mn)/
Hong Kong & China Gas (3 HK) (Mkt Cap: $26.7bn; Liquidity: $20.4mn)

• The HK property index is currently nudging all-time highs. Leading that charge is Henderson, up 14%/26%/28% on a 1M/6M/1Yr basis vs peers of 4%/9%/7%.
  • This has resulted in a material dislocation with HKE, worth 41% of market cap.
    

    

    Source: Annual Reports, HKEx
  • There was no new news this week to account for Henderson’s +8% gain – nor the 5.8% increase alone on Friday, pushing the stock to an all-time high. Various news sources suggest the fall in the HK$ to 7.8278 against the US$, potentially removes concerns the HKMA will lift the short-term Hibor to defend the peg. Possibly.
  • My take is that sentiment is pivoting off the government’s perfunctory efforts to source affordable housing. And Henderson commandeers 45mn square feet of farmland, the largest amongst all property players. With an estimated book value of HK$250/sqft.
  • CE Carrie Lam is establishing Starter Homes (think smaller, plain-vanilla apartments) to source longer-term land supply. My chat with Morningstar suggests Carrie’s policy address next month may provide more details on this home starter program. However critical issues such as restricting overseas buyers or addressing the influence of developers on the property market remain noticeably absent.
  • The case for Henderson (via the pilot arbitration scheme or regular channel negotiations) is taking the land premium applied to a small parcel of its farmland, then subsequently extrapolating that figure across its entire agricultural portfolio. Even HK$927/sq.ft translates to a boost in book value of $7.60/share or ~14% of its current share price. However, how and when some of this land will be converted for public use or forfeited to the government is indeterminate. Expecting Henderson to fully monetize this land bank anytime in the foreseeable future appears charitable.
  • It’s a weak-ish stub - HKE accounts for 33% of NAV. Henderson's current implied stub is at a 0.73x P/B, which is punchy vs HK-listed peers. The question of affordability - or a road map towards lower prices - remains unanswered. As Harry drolly puts it:

    

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Wheelock & Co Ltd (20 HK) (Mkt Cap: $15bn; Liquidity: $7.9mn)/
Wharf Holdings Ltd (4 HK) (Mkt Cap: $28.2bn; Liquidity: $37.4mn)

• I revisited the Wheelock/Wharf relationship and how the in-specie will play out. I argued aligning with Wheelock premised on the expected wider NAV post in-specie and Wharf’s modest upside from current levels, even attributing full values for the spin-off and remaining Wharf vehicles.
  • Morningstar similarly considered the value accretion from the spin-off to be limited.
  • Wharf handed back some of its outperformance towards the close of the week. I believe this has more to run.

(link to insights: StubWorld - Set-Up/ Unwind Extremes: Japan Post, Wheelock (6 Sept 2017); Wharf Demerger Proceeds with Opportunity of Privatization)

Event

Nikkei 225 Inclusion

Recruit Holdings Co Ltd (6098 JP) (Mkt Cap: $37bn; Liquidity: $83.9mn)
Japan Post Holdings Co Ltd (6178 JP) (Mkt Cap: $56.1bn; Liquidity: $29.2mn)

• Travis Lundy discussed the addition of Recruit Holdings Co Ltd (6098 JP)and Japan Post Holdings Co Ltd (6178 JP) to the Nikkei 225, and the removal of Meidensha Corp (6508 JP) and Hokuetsu Kishu Paper Co Ltd (3865 JP). All positions will be benchmarked on September 29th at the close.
  • For Recruit’s inclusion, Travis estimates $1.5-1.7bn to buy, or 16-22 days worth of ADV to buy over the next 17 days. “That sounds a bit squeezy. It probably is.”
  • The TSE indicates 1.102bn shares of float, however, Travis' Real World Float™ is about 825mm shares, so the inclusion is about 10% of "real float."
  • On Japan Post, the inclusion tallies ~26-29mm shares against ~800mn shares up for sale later this month from the government, so “it is effectively a non-event”. I briefly touched on the Government sell down last week.

(link to insight: 2017 Annual Nikkei 225 Rebalance Analyzed)

Lotte Shopping Co (023530 KS) (Mkt Cap: $6.3bn; Liquidity: $21.6mn)

• Sanghyun Park discussed the ongoing Lotte restructuring narrative. To qualify as a holdco under Korea's holdco law, a Holdco must have 20+% in listed affiliates (and 40+% in unlisted affiliates). With the exception of Food, the newly created Lotte Holdco needs to increase its stake in the three affiliates (Confectionery, Shopping, and Chilsung) through a tender offer.
  • A second merger (the Holdco+Hotel Lotte merger) will likely take place sometime next year subsequent to Hotel Lotte IPO. An IPO reduces Lotte Japan Holdings stake in Hotel Lotte, elevating Chairman Shin Dong-bin's controlling stake in the merged entity of 'Holdco+Hotel Lotte'. Assuming Shin is not convicted, wherein a delay in the merger is expected.
  • But wait, there’s more. Not only that, Hotel Lotte owns a 12.7% stake in Lotte Chemical Corp (011170 KS). And Lotte Co., Ltd. owns a 31.3% stake in Chemical. As Hotel Lotte owns a 31.1% stake in Lotte Co., Ltd., the Holdco needs to merge with Hotel Lotte if Lotte wants to place Chemical under its holdco system. Confused? Sanghyun provides a helpful org chart:

    

  • Sanghyun provides further speculation on how this matryoshka doll-type structure unfurls. I recommend reading his insights to come to grips with those possible scenarios. Sanghyun will also follow up shortly on holdco/opco valuations.

(link to insight: Lotte Group Restructuring Part 5 - Issues Regarding Hotel Lotte & Financial Affiliates)

Hyundai Electric & Energy (267260 KS)(Mkt Cap: $758mn; Liquidity: $9.4mn)
Hyundai Construction Equipment Corporation (267270 KS) (Mkt Cap: $1.1bn; Liquidity: $12.8mn)

• Hyundai Electric & Energy (267260 KS) and Hyundai Construction Equipment Corporation (267270 KS) have decided to do a massive capital increase through a new rights offering, plus issue 1:1 bonus shares.
  • The final offering price will be finalized on Nov 6 for E&E and Nov 1 for CE. These bonus shares will be issued on Dec 8 for E&E and Dec 5 for CE, with the listing on Dec 11 for E&E and Dec 6 for CE.
  • E&E's proceeds will be applied to acquiring stakes in overseas affiliates whereas CE will apply proceeds to capex.
  • 20% of the rights will be allocated to ESOP of both companies. Of the three large shareholders, Hyundai Robotics (267250 KS) will likely participate, as will NPS; whereas Kcc Corp (002380 KS) probably be interested.
  • Sanghyun will follow up with valuations on E&E and CE.

(link to insight: Hyundai E&E & Hyundai CE Rights Offerings - Specifics & Market Reactions)

TOPIX Inclusions

Travis covered 4 of these this week, so it deserves a separate heading. The inclusion event for all four will be at the close of October 30 2017.

Akatsuki Inc (3932 JP) (Mkt Cap: $1.1bn; Liquidity: $65mn)

• This mobile phone game development company is potentially the most interesting of all four inclusions.
  • A traders' hotel, with 600,000 -1,000,000 shares exchanging hands on average over a 15-day period or 15-20% the calculated float. Yes, punting, but traders aren’t taking their positions home.
  • The upside is that this is expected to be one of the fastest-growing TSE1 stock available, and it will not be overly expensive on account of its growth rate. And with a $1bn market cap, expect more street coverage. The pushback? Akatsuki is up 400% this year, and the inclusion accounts for just one day of buying.

(link to insight: TOPIX Inclusion - Low ADV to Buy but Lotsa Growth In There)

Nakamoto Packs Co Ltd (7811 JP) (Mkt Cap: $121mn; Liquidity: $0.4mn)

• Nakamonto prints or coats materials for “food packs using a gravure process (a rotary printing press technology using engraved cylinders to print)”
  • At the (then) current price of ~¥3300/share, the inclusion event is worth some US$7-9mm, or around 20 days of ADV on recent trading.
  • Travis believes the stock may have a little pre-positioning already as its inclusion was not unexpected. On balance, he suggests the price risks are still tilted to the upside.

(link to insight: Nakamoto Packs (7811) TOPIX Inclusion Event)

Pro Ship Inc (3763 JP) (Mkt Cap: $157bn; Liquidity: $0.2mn)

• Pro ship is “an application developer for business software (accounting, fixed asset management, and sales management software) “.
  • Travis believes the stock probably had zero pre-positioning on account of its low ADV.
  • “If KBL and Fidelity don't sell, the inclusion is probably 22-25% of the available float. If they do, all bets are off.”
  • The company’s fundamentals are okay, though multiples have increased in the past year. Travis suggests price risks are still tilted to the upside.

(link to insight: Pro-Ship (3763 JP) TOPIX Inclusion Event)

Besterra (1433 JP) (Mkt Cap: $160bn; Liquidity: $0.9mn)

• Besterra generates 98% of revenues from dismantling old steel plants, factories, and similar facilities.
  • The inclusion accounts for around 10 days of volume yet at 48x March 2018 numbers, it’s not inexpensive, the business not ring-fenced, and this inclusion has been very well flagged. There could be some overhang.

(link to insight: Besterra (1433 JP) TOPIX Inclusion - Not Inexpensive)

M&A

CWT Ltd (CWT SP) (Mkt Cap: $1bn; Liquidity: $2.6mn)

• HNA Holding Group Co. Limited (521 HK) announced all pre-conditions have been satisfied and will now make a voluntary general offer.
  • Shareholders, including the founder of CWT, owning 65.13% have given an undertaking to tender into the offer, which takes care of the 50% minimum acceptance condition.
  • Assuming the Offer Doc is dispatched on the 22 Sept, Pranav Rao expects payment on the 4 Oct.

(link to insight: CWT Limited: Pre-Conditions Satisfied, and Offer Announced)