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Japan Post Holdings

Last Week in Event SPACE: Japan Post, Chinese Estates, NIPPO Corp, Hopson/Evergrande, PICC

375 Views10 Oct 2021 07:05
SUMMARY

Last Week in Event SPACE ...

  • Plus, other events, CCASS movements (flagging possible Offers and IPO lock-ups), and Mood Spins.

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

M&A - ASIA

Japan Post Holdings (6178 JP) (Mkt Cap: $31.3bn; Liquidity: $52mn)

The Offering for Japan Post has materialised. It is 1,027,477,400 shares or roughly ¥950bn (US$8.3bn) of shares. This one is really easy. It is really, really simple. Underwritten. No greenshoe. It is the world's largest cleanup trade. And because the government is unlikely to ever add more money to the pot, this is likely the last equity offering Japan Post Holdings will ever do.

  • There is about $1.8-2.6bn to buy in very short order for passive upweights. Because there is no greenshoe, that will mean this will get oversold by local brokers. That will also mean about US$1.8-2.6bn of index selling at the combined closing prices when the up-weights occur. Given that occurs around the time of the annual TOPIX FFW rebalance for Jan-March fiscal year-end names, there could be considerable noise out there in the last couple of days of October.
  • The major indices which matter are MSCI (MSCI, Corp Events), FTSE (Ground Rules, Corporate Actions & Events), Vanguard (similar to FTSE), TOPIX (Guidebook, FFW Methodology), Nikkei 225 (Guidebook), JPX Nikkei 400 (Guidebook, FFW is TOPIX). There are also some others which are related to the above families in ESG-land and Russell-Nomura indices which will also be impacted. A general guide to passive indices used in Japan is shown in JAPAN PASSIVE: Who Owns What 2021?Given the proximity to month-end and the other month-end-related index changes for the TSE indices, it is possible the TSE would ad hoc decide to align the buying with those flows.
  • The questions about how many shares the upweight will be are dominated by not only the increase in float shares (1.027bn shares more) but how the FFW coefficient will be applied. Usually, MSCI and FTSE will do the appropriate thing and amend both at the same time. TOPIX does not have to. Right now, the effective weight is 60% but the implemented weight is 78.44% for TSE because shares held by the government are not counted in shares outstanding, so TSE Index Shares are about 1.1644bn today. That number will increase, but it is not clear that the FFW would be amended at the same time, or not. If it were amended, it would move higher.
  • Separately, JPH has decided it will buy back shares. Unfortunately, the number and mechanism are less impactful than one would have hoped, but one cannot disregard. If the Offering prices at ¥900/share and then climbs 20% over 6 months, the average might be ¥1,000/share over the period and that would mean a buyback of about 15-16 days of ADV to spend the ¥100bn.

    That would be about 15% of ADV over the period (using 3-year ADV as a reference), and about 20-22% of eligible volume.

Chinese Estates Holdings (127 HK) (Mkt Cap: $0.7bn; Liquidity: <$1mn)

After being suspended on the 29 September pursuant to the Hong Kong Code on Takeovers and Mergers, Chinese Estates, a leading property developer in Hong Kong, has now announced an Offer, by way of a Scheme, from its founder, Joseph Lau, and his wife Chan Hoi Wan. The consideration is $4.00/share, a 37.9% premium to last close, but an impressive 83.5% premium to the close on the last full trading day. The Offer price will NOT be increased. Lau and Chan control 74.99% of the company. Disinterested shareholders comprise 21.41% of shares out, therefore the blocking stake at the forthcoming Court Meeting is 2.141% of shares out. The headcount test applies.

  • Optically, Lau and Chan appear to be getting Chinese Estates at a bargain. And in essence, they are. But the current realised plus unrealised losses on the Evergrande (3333 HK) holding is HK$10.4bn, which dramatically alters what is deemed to be book value, and therefore the implied valuation metric under the Offer.
  • This looks done. But any association to Evergrande brings an additional risk premium. And it's not a super large deal, and HK deals this year have been a shocker.1

(link to my insight: Chinese Estates (127 HK): $4.00/Share Offer)

Nippo Corp (1881 JP) (Mkt Cap: $4.3bn; Liquidity: $15mn)

Activist investor Oasis Management Company issued a press release calling on NIPPO to conduct an active market check to achieve a higher price, and says it believes NIPPO shares are worth "over JPY5,600" apiece. Travis does not disagree. In his first insight, he said the ¥4,000/share TOB price was ¥1,500-2,000/share light. The Oasis Press Release is worth reading. That makes three activist shareholders who have opined. Expect more noise.

  • For investors, it is worth digging through the structure and process to figure out how ENEOS (and NIPPO and GS?) are taking advantage of minorities. The statements and the actions do not necessarily agree with each other and the fiduciary duties of ENEOS and NIPPO.
  • And as is usually the case in these situations, it is worth getting out your cowbell. At just over ¥4,000, it is still an interesting bet. Too far above ¥4,000 and it becomes a more aggressive bet.

(link to Travis' insight: NIPPO (1881 JP) Gets MORE Cowbell as Oasis Objects)

Evergrande Property Services (6666 HK) (Mkt Cap: $7.1bn; Liquidity: $42mn)

Evergrande (3333 HK) is suspended due to a material transaction. EPS due to a possible general Offer; and the intriguing part, Hopson Development (754 HK) suspended due to the acquisition of a company "and the relevant possible mandatory offer to acquire the shares of the" company. China's state-backed Global Times said Hopson will buy a 51% stake in EPS "and the deal could be valued at more than 40 billion HKD" ($5.1bn). One of those media sources appears to be Cailian Press, which also has SOE affiliation. Jiemian.com, Cailian's sister publication - the two merged in February 2018 - reckons the fine print on a deal won't be known for a few days.

  • Much of the media focus is on the implied HK$40bn price tag for EPS as a whole. That would imply a 27.7% discount to last close, or an FY21E PER of 8.2x against its peer basket average of 11.4x. That may well be the price discount in a rescue-type situation, but probably not another shareholder will tender into. But right now, that valuation is purely indicative. When news first hit the tape yesterday morning, the initial interpretation was Hopson was paying $40bn for a 51% stake. If it is HK$40bn for a 51% stake, that would be considerably different and other investors might get involved.
  • If the deal is at HK$40bn for 51%, then the stock will go up (though there may be no chance to buy it before it prices there).
  • If the deal is at HK$40bn for 100%, of which they will buy 51% from Evergrande, that means the bulk of any selling pressure to be done by Evergrande disappears. That should relieve some pressure on the stock.

Links to:
my insight: Hopson Navigates Evergrande's Fire Sale
Brian Freitas' insight: Hopson (754 HK) To Buy 51% of Evergrande Property Services? Upcoming MGO & Potential HSCEI Changes

Japan-based Information Asset Platform business Pipedo HD Inc (3919 JP) announced on 30th September 2021 that they had received a Management Buy-out Offer (MBO) from the CEO and Advantage Partners. The Deal will be structured as a Tender Offer. The Offer Price is ¥2,800/share in cash and the Tender Offer Period is open from 1st October 2021 to 15th November 2021. The Settlement Date will be 22nd November 2021. Despite initially trading through Terms, Pipedo shares are currently trading marginally below the Offer Price. Link to Janaghan Jeyakumar's insight: Pipedo HD (3919 JP): Advantage Partners MBO.

Construction materials testing company Intega Group Ltd (ITG AU) has announced it has entered into a Scheme Implementation Deed (SID) with Dutch outfit Kiwa. The SID is struck at A$0.90/share, a 58% premium to last close. The deal is the culmination of a strategic review announced on the 9 June to "maximise value" for its shareholders. Apart from the standard shareholder approval attached to a Scheme, the transaction is subject to FIRB approval. Should that regulatory approval not occur before 31 December 2021, Intega is permitted to pay a special dividend of A$2.3mn each month (~A$0.005/share) between 1 January 2022 and 30 June 2022. These dividends will be in addition to the A$0.90/share cash consideration. Crescent Capital Partners, with 52.1% of shares out, supports the SID. This looks done and should trade tight to terms. Link to my insight: Intega (ITG AU) Enters Scheme With Kiwa.

Liquid chemical storage and handling outfit Dragon Crown Group (935 HK) (DCG) has announced a pre-conditional Offer from Guangdong Great River Smarter (002930 CH) (GGRS). The Offer price is HK$1.28/share, a 8.47% premium to last close. The Offer price will NOT be increased. No dividends are expected to be declared. The pre-conditions, which cannot be waived, include approvals from NDRC, MoC, SAFE, the Shenzhen Stock Exchange, plus shareholder approval from GGRS. The key condition to the Offer is valid acceptances not less than 90% of shares out. Irrevocables totaling 86.91% (primarily from Ng Wai Man, the founder, chairman & CEO) have been received, therefore this requires a further 3.09% to get over the line. This looks all stitched up - play the spread here. Link to my insight: Dragon Crown (935 HK)'s VGO Is A Done Deal.

STUBS

I estimate the discount to NAV at ~51% against a one-year average of ~47%. The simple ratio - PICC/PICC P&C - is currently 0.33x vs its long-term average (since PICC's listing in December 2012) of 0.4x. 1339's A continues to trade at a massive premium to the Hs of ~150%. There is a tendency when the A-share premium trends lower, the implied stub narrows. But there has been considerable disconnect of late.

  • Evergrande Exposure? This is potentially a key contributor to PICC's weakness. Back on the 23 April 2015, PICC entered into a strategic cooperation agreement with Evergrande towards the establishment of a "long-term, steady and mutual-beneficial cooperation". But it's probably the impairment losses from bank loans as the main risk here, and it would be useful to know Industrial Bank Co Ltd A (601166 CH)'s exposure to Evergrande. Reportedly the Bank is exposed to ~RMB8bn. According to this article, the risks are "controllable" - it is pretty standard for bank loans to downstream Evergrande JVs to be collateralised.
  • The current NAV discount and implied stub are around all-time low levels. The market is assigning HK$27.4bn less for the stub ops since the beginning of this year, and HK$19bn since the beginning of August. The widening in the NAV appears to have overshot any perceived Evergrande exposure. At the same time, the earnings of the unlisted stub ops continue to improve. Should the NAV start to narrow, go long PICC, short PICC P&C, with a near-term target discount of ~45%, around its longer-term average.

(link to my insight: StubWorld: PICC (1339 HK)'s All-Time Low Vs. PICC P&C (2328 HK))

In arguably the simplest holding company structure out there, the ratio of the parent (Heineken Holding NV (HEIO NA)) over the Opco (Heineken NV (HEIA NA)) is currently around a nine-year low. Link to my insight: StubWorld: Heineken And The Lager Picture.

Sk Chemicals Co Ltd/New (285130 KS) announced it will improve the company's dividend policy and complete a bonus issue. In SK Chemicals - Announces A Big Improvement in Dividends and Bonus Issue, Douglas Kim's base case NAV valuation of SK Chemicals suggests a valuation of ₩530,140/share, representing an 82% upside from current levels. This is based on the current market valuation of SK Bioscience (68.4% stake), 8x OP of SK Chemicals' core business, and a 50% NAV discount.

EVENTS

A relatively little-known (to foreigners) satellite broadcasting channel company called Nippon BS Broadcasting (9414 JP) (familiarly known as "BS11") announced its FY results (FY-end is 31 August), with a 27-page presentation, announcing a change in the COO as the current COO becomes CEO on 17 November upon the AGM. The company also announced that a shareholder (becoming better-known US-based Japan activism gadfly RMB Japan Opportunities Fund LP) had put forth a shareholder proposal for the upcoming AGM, and the directors have come out against it. There are times when shareholder proposals are crazy. There are some where they may be ill-advised (either in the time spent on the tilt which will go nowhere, or in the idea that the proposal is so egregiously substantive that more study would be needed than could be afforded in the short period to the next vote. This proposal, however, is not one of those. And the answer is... well.... BS. Link to Travis' insight: What Is BS Governance? That Is BS Governance!.

The long and sordid history of the takeover of Invesco Office J Reit (3298 JP) was widely covered in these pages. The most recent event was the significant index deletion on 30 August 2021. After the close on the 30th, the Invesco Office announced its plans to hold an EGM before the end of October which would approve an extension of the fiscal year so as to not trigger the adverse local tax treatment as per the previous insight (Invesco Office Index Deletion Monday 30 Aug) and others. It held that EGM today, and today unitholders agreed to consolidation and squeezeout. The announcement confirms that the consolidation (reverse stock split) of 2,200,662 units to 1 will take place on 12 November 2021, and that the last day of trading of the investment units will be 8 November 2021. There are other details about payment for the units inside, and astute investors will remember that this particular announcement triggers another index event. Link to Travis' insight: Invesco Office - Last Index Deletion and Residual Arb

TOPIX INCLUSIONS!

Japan-based systems integration company Simplex Holdings (4373 JP) was listed in the First Section (which will, in future, be named the "Prime Market") of the Tokyo Stock Exchange (TSE) on 22nd September 2021. When a company gets listed on the TSE First Section, it subsequently gets included in the TOPIX Index and as a result, TOPIX-tracking funds will have to purchase the stock during an Inclusion Event which presents interesting trading opportunities for active investors to generate sharp market-neutral returns in the space of few trading days. Alternatively, this can also be considered as a key point in time where short-term IPO investors could decide if they wanted to exit their positions by utilising this liquidity event. In TOPIX Inclusion: Simplex Holdings (4373 JP). Read more:, Janaghan looks at the timeline and the parameters of the Inclusion Event and the potential trading opportunities surrounding it.

M&A - EUROPE

At the long-awaited auction for Wm Morrison Supermarkets (MRW LN), CD&R increased its bid to 287p against a bid of 286p made by Fortress. Fortress could have withdrawn just as Carlyle did in the tussle with Philip Morris for Vectura (VEC LN), but preferred to make its rival pay a bit extra. The consideration represents an implied equity value of £7,032 mn and an implied EV of £10,113 mn. This also represents 9.1x EV/Fwd EBITDA and 20.4 Fwd P/E. Link to Jesus Rodriguez Aguilar's insight: CD&R/Morrisons: Final Offer and Spread.

M&A RISK ARB WEEKLY ROUND-UP

This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks. I number 39, mostly firm, deals around the region.

INDEX REBALS

OTHER M&A & EVENT UPDATES

CCASS

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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

Name

% chg

Into

Out of

Tianyuan Health (557 HK) 62.54%PrudentialOutside CCASS
Hygeia Healthcare Group (6078 HK) 13.51%MSOutside CCASS
Bank of Qingdao (3866 HK) 11.17%AMTDChina Merchants
International Entertainment (1009 HK) 10.44%H&SABCI
Shanghai Henlius Biotech (2696 HK) 21.42%CitiCMB
Heng Hup (1891 HK)19.20%ShenwanOutside CCASS
Source: HKEx
The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Shanghai HeartCare Medical Technology (6609 HK) 16.06%CMBOutside CCASS
Chi Kan (9913 HK)55.91%China TonghaiForwin
Tam Jai (2217 HK)70.88%GuotaiOutside CCASS
Bairong (6608 HK) 10.71%CICCOutside CCASS
Source: HKEx

I listen to a bunch of music when writing insights. Here are a handful of tunes, old & new, that piqued my interest during the week: Lee Moses' Hey Joe, Funk Inc.'s The Thrill Is Gone, Tony Allen & Hugh Masekela's Slow Bones (Cool Cats Mix), Unloved's When A Woman Is Around.

What are you listening to?

Enjoy your Sunday!
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