Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World

Infigen Energy (IFN AU) (Mkt Cap: $0.5bn; Liquidity: $2mn)

UAC Energy (75% owned by AC Energy, which is a wholly-owned subsidiary of Ayala Corporation (AC PM), and 25% owned by UPC Renewables) has launched a Takeover Bid on an unsolicited basis for Infigen at A$0.80/stapled security. The stake claimed and filed is 12.82% which is 9.9% outright and a Total Return Swap of 2.92%. Interestingly, The Children's Investment Fund (TCI) announced earlier the same day of the Offer that it had raised its stake to 33.09% from 32.62%. TCI was, according to the AFR yesterday, widely tipped to be a seller at the right price.

• This is a starting salvo. How power/energy markets, rates, volatility, politics evolve may determine whether there is market appetite to push it near-term. Travis expects this goes to FIRB first, and takes six months. I expect that any negotiation which happens between UAC and Infigen management will be slow-walked because there is no need to get agreement at A$0.90 before FIRB comes out.
• This asset is sub-scale, and sub-scale assets trade cheaper than large scale assets. This could be an attractive target for someone like Shell to bolt on to their Erm Power Ltd (EPW AU) acquisition of late 2019. They want "green cred" and adding this would give it some. Brookfield sold in February at a price 10% lower. That suggests that after two years, they could not get traction with management, or did not feel a bid was likely to be successful. Travis expects they were low-balling their bid.
• This stock may be "dead money" near-term, but on the whole Travis would rather be long than not.

• On the 6 April, an initial substantial shareholder announcement (15.45%) was made by Apex Opportunities, an entity controlled by Infrastructure Specialist Asset Management, a trustee of Diversified Infrastructure Trust/Infrastructure Capital Group (ICG) and OPSEU Pension Plant Trust Fund (OPTrust). This stake was bumped to 17.61% on the 22 April.
• On the 6 May, PEP noted Apex's holding, and that it would be challenging to implement the Scheme if Apex were to vote against the resolutions. So PEP reached out to Apex such that Apex's consortium members could take an equity position in the Elemental/PEP group holding structure. If an agreement could be reached, a revised proposal would be tabled.
• And so it was on the 29 May, Zenith announced Apex had joined PEP/Elemental's proposed Scheme. There are no other material changes to the Scheme implementation deed announced on the 6 March. This was previously viewed as a clean takeover situation. You have an agreed deal, a solid premium to last close, together with major shareholders support - albeit with a rollover for key shareholders. I expect this deal to get up. But it is not a particularly liquid arb situation.

Melco International Development (200 HK) / Melco Resorts & Entertainment (MLCO US)

I see Melco's discount to NAV at ~28%, bang in line with its 12-month average. But it's Lawrence Ho's insider buying that is worthy of a discussion. According to the HKEx, Lawrence has added 2.06% in Melco or 31.5mn shares year-to-date, taking his direct take in Melco to 57.95% and elevating his look-thru stake in MLCO to 33%. Technically, >30% gives a shareholder "control" in the company - largely premised on the fact 30% is the takeover trigger threshold, and is sufficient to block an unsolicited takeover offer. Therefore, Lawrence could collapse the Melco Holdco structure and maintain control.

Evergrande commenced buying back stock for the first time in two years on 4 May 2020. At the time, because of various options which had been exercised before their expiry (since the end of the buyback in 2018), they had the ability to buy a certain number of shares. The shareholder permission granting of a general mandate to the Directors to "repurchase Shares not exceeding 10% of the existing issued share capital of the Company at the date of passing this resolution."

• But that wasn't the actual flexibility. The actual limit was closer to 208mm shares because of the Exchange rule limiting them to a float of 22.04% or more. As of the previous Friday's close, that room to repurchase shares was halved at 103mm shares. The first half took 17 trading days out of the 18 since they started buying back shares. The pace slowed a bit after the initial flurry of larger orders, but even if they average 5 million shares/day, they will reach their limit by end-June.

SIA has now announced the distribution of the rights and the rights not taken up. A surprising number of rights were NOT taken up. The announcement does not say the division of the distribution between those who will be allocated the excess rights in order to cover oddlots and those which will be distributed to Excess Rights Applications. The likelihood of another 14% gain on SIA shares is now sharply diminished. This is because there is no V-shaped recovery in the shares to come. Arithmetically, with 150% more shares, EPS will fall 60% on a pro-forma basis. That is not a recipe for seeing the shares at their old price. People looking at charts need to not look at stock price but look at EV "price". Another 10% higher on the shares would get Forward EV to the same level as calendar Q4 2019.

• Near-term? there may be selling pressure. If you have shares or borrow and are inclined to sell to buy back, Travis expect there is an opportunity to do so on 3-5 June. Long-term? there should be no V-shaped rebound. The shares are substantially de-levered from before. That means a lot less EPS and theoretically, a lot lower capital structure volatility on a gross basis (shares should be less volatile than before. Medium-term? Travis would not be surprised to see the shares run a bit too far because float is small, there are still shorts, borrow will become easier next week again, and coming out of lockdown will mean people will feel better about doing things.
• Comparatively? Cathay Pacific Airways (293 HK) and others which have not raised capital are still operating under the old share price paradigm. Theoretically, their shares should be more volatile than SIA's. That introduces theoretical beta vs realised beta problems for those who manage risk. Cathay still needs capital. SIA doesn't, and can get another S$6+bn from Temasek over the next year in the form of MCBs. And Cathay still needs capital and will likely still get diluted from here.
• And about the MCBs? Something of a disaster of an offering. Out of S$3.496bn, only S$145mm will be tradable. It is possible that these have a very lonely life on the exchange. It also means that aggressive market-makers will be able to trade these at the bond equivalent spread of 10 cents on exchange.

CPI released an announcement that it had received permission from the China Securities Regulatory Commission (CSRC) to issue up to but not more than 125,734,000 GDRs which corresponds to a newly issued number of A-Shares of China Pacific Insurance (Group) Co., (601601 CH) (CPIC) of not more than 628,670,000. That comes to an underlying value of US$2.5bn or so, though one might expect a decent discount at issue. The company also announced a cornerstone agreement with Swiss Re agreeing to buy a number of shares which would not exceed 1.5% of the resulting post-offering outstanding number of shares. Required remaining approvals are the FCA and the London Stock Exchange.

• The Trade? Bid for and get LSE-listed GDRs of CPIC, then sell the A-share equivalent (GDR ratio-adjusted) of what you can buy on Shanghai. If you did not get enough, buy more on the market on the LSE once they start trading, then sell a commensurate quantity in Shanghai. If your A-share portfolio is 3% CPIC, and you can buy at a 15% discount, you will earn 45bp outperformance on your entire portfolio just from this trade. There is no other FX to hedge. It is a USD-denominated A-share. It will deliver an amount in RMB equal to the CPIC share price.
• At the end of 120 days when the GDRs become fungible, check with your broker how they will be converted (the brokers will probably either sell A-shares VWAP or something similar, but check the method they will "price" your GDRs at), and then do the opposite. If the broker sells the A-shares VWAP on Day X, then you should buy A-shares on Day X, VWAP. The reason you do this is that the conversion the broker will do is not a 'real' conversion. You don't get A-shares. You get the money from them selling A-shares on your behalf. To keep the exposure, you need to buy A-shares while they are selling them.
• The other trade? If you are a hedge fund and want to buy a large block of stock cheap, and you like the insurance sector as a whole, buy a block and you are long a slow-rolling block trade where the discount will shrink over the next four months, but you may not make anything just from your long position in the GDR. But you have a bigger buffer against loss. It is effectively a "cornerstone" buy of a block of A-shares where you are locked up for just over four months. But it's a big enough discount to care.

SK Biopharmaceuticals (BIO SK) could reopen the Korean IPO market with its listing that is expected later this month. With 19.58m shares being offered in the IPO at a price range of KRW 36,000 - KRW 49,000 per share, there is a possibility that the stock could get fast entry into the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and other global indices bringing in passive flows and supporting the stock price. In SK Biopharmaceuticals - Fast Index Entry Possibilities, Brian Freitas takes a look at a few details of the IPO and assesses the likelihood of the stock getting fast entry into indices that have significant assets benchmarked to them.

STOXX Ltd., the operator of Qontigo's index business has announced the changes to the STOXX Europe 600 index for the upcoming review. The rebalance will be effective as of the opening of European markets on 22 June and passive funds will need to trade at the close on 19 June. There are 21 inclusions and exclusions in this review. As discussed by Brian in STOXX Europe 600 Index Review: Adds Outperforming Deletes, based on passive assets tracking the STOXX Europe 600 index and the associated size and sector indices, there is significant volume to trade on quite a few stocks. The adds have significantly outperformed the deletes over the last year, with the bulk of the outperformance coming over the last few months

FTSE Russell has just announced the results of the June index review for the FTSE China A50 Index (XIN9I INDEX). The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June. As discussed by Brian in FTSE China A50 Index Review - Couple of Changes, there are 2 additions and 2 deletions in the June review. The additions are Beijing-Shanghai High Speed Railway (601816 CH) and WuXi AppTec Co Ltd (603259 CH) and the deletions are 360 Security Technology Inc. (601360 CH) and Boe Technology Group (000725 CH).