Last Week in Event SPACE: Japan Post, Crown, OUE Hospitality, Hanjin Kal, Lynas, IFAR, Genworth

Last Week in Event SPACE ...

• With a substantial amount of stock to be sold to the public, Japan Post Holdings (6178 JP), Japan Post Bank (7182 JP) & Japan Post Insurance (7181 JP) need to learn how to tell their story better.
  • JBH's sell-down in JPI is almost like an IPO in that the placement is ~3x the original IPO size and will get a lot of foreign investor attention.
• The deal that almost was - for now - as Wynn Resorts (WYNN US) folds on its bid for Crown Resorts (CWN AU).
• It appears that Oue Hospitality Trust (OUEHT SP)'s stapled security-holders are effectively being asked to finance the redemption of Oue Commercial Real Estate Investment Tr (OUECT SP) CPPUs in return for an NAV-per-unit uplift.
• Death and taxes as Hanjin Kal Corp (180640 KS) gains 75% in the past week.
• The current price does not reflect the risks to Lynas Corp Ltd (LYC AU).
• The Anthoni Salim-lead Offeror may need to sweeten its bid for Indofood Agri Resources (IFAR SP) for the deal to get up.
• A 40% gross spread to terms highlights the regulatory risks attached to the Genworth Financial Inc Cl A (GNW US) transaction.

• Plus other events, CCASS movements and Mood Spins.

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

Japan Post Holdings (6178 JP) / Japan Post Bank (7182 JP)

On 9 April 2019, after a press release by the Ministry of Finance saying that it had commenced the selection procedure for underwriters to assist on such a sale, the Nikkei carried an article saying that the government would sell down a stake in JPH from its current 60-odd percent to a level of "over one-third" (presumably a level relatively close to one-third and a share) which is the minimum ownership level mandated by the Postal Service Privatization Act. The proceeds of the sale are designed to raise money for reconstruction related to the 2011 Tohoku Earthquake.

• Currently, the MoF owns 2.5595bn shares out of the 4.5bn shares outstanding which is 56.88%, but net of the 10.34% holding in treasury shares. MoF has voting rights of 63.3%. Another Nikkei article suggested the news meant a maximum sale of approximately 1.06bn shares out of those 2.56bn shares held to bring the position down to 1.5bn shares exactly.
• JPH is also selling shares in Japan Post Insurance this week to get to 62% of voting rights post-Offering, given the results of the buyback earlier this week. It is no longer a very big step to get to less than 50%. This is discussed in Japan Post Insurance Offering - Now It Gets Real by Travis Lundy.
• With the deposit cap raised from ¥13mm to ¥26mm as of April 1, a reduction in JPH's holdings in JPB needs to come soon as well. Sumeet Singh reckoned it probably made more sense to go short after JPB's results release on 15th May, and hedge it with a long in JPH, as JPB still accounts for over half of its NAV. JPH is also relatively cheap and just 5% off its all-time lows. While JPB is still 10% above.
• Optically, short JPH vs long JPB looks like a trade here, but Travis Lundy thought the dynamics bode better for a longer-term watch and wait on being long JPH as it will figure out how to get JPB shares sold better and its own shares sold better.
  

links to:
Travis' insight Japan Post Holdings - The Future Is Complex, But Interesting
Sumeet's insight: Japan Post Holdings and Japan Post Bank - Early Thoughts on a Choice of Two Trades

Amorepacific Group (002790 KS) / Amorepacific Corp (090430 KS)

APG's discount to NAV veered towards its widest inside a year, however newsflow, liquidity, and financial performance side with APC. This parent/sub relationship has been a steady staple from a number of Smartkarma contributors, with Curtis Lehnert's most recent call for an unwind trade the correct one.

• Stub ops primarily comprise budget cosmetic brands Etude, Innisfree and Espoir. However, the influx of numerous health and beauty stores competition make for a challenging environment. Etude, which accounts for 20% of the stub's revenue continues to operate in the red; and Innisfree (60% of stub revs) returned a double-digit profit decline in 2018.
• APC is not without its own issues, recording a 16% decline in earnings in 2018 but APG's stub ops are underperforming to a greater extent. Despite the apparent optical attraction, APG's fundamentals don't support an obvious set-up trade here; APC has a liquidity advantage and greater newsflow - it recently announced its Laneige brand debut in Europe.

(link to my insight: StubWorld: Amorepacific Is "Cheap", Again; Kingboard Cleans House)

Hanjin Kal Corp (180640 KS) / Korean Air Lines (003490 KS)

Hanjin's shares have gained a staggering 75% this week following the second-generation owner's death. Unlike other chaebols, Hanjin hasn't prepared much for the next generation's ownership. The late Cho owned a 17.84% stake in Hanjin Kal. His three children have a total 6.95% with other special affiliated persons another 4.14%, bringing the total to 28.93%. KCGI (12.8%), the local activist fund, has recently launched a very hostile battle against the Cho family. NPS, which can side with KCGI any time, has 6.70%. Potentially KCGI may attempt to buy additional Hanjin Kal shares to take over the management, possibly with the help of Korea NPS.

• Then there's inheritance tax. Sanghyun estimates the total tax for the three children will total about ₩180~200bn. They don't have that cash lying around, raising the speculation that they would increase Hanjin Kal's dividend over the next 5 years to raise tax money.
• Plugging in Sanghyun's numbers, I see Hanjin at a 12% premium to NAV. That looks a short - once the exuberance settles.

(link to Sanghyun's insight: Hanjin Kal Short Idea: Current Situation & Trade Approach)

Kingboard Holdings (148 HK) / Kingboard Laminates Holdings (1888 HK)

I calculate KBC's discount to NAV at 44%, slightly narrower than its 12-month average of 47%. The Kingboard group was in the news late last week after KBL launched a voluntary unconditional offer for 88%-held sub Kingboard Copper Foil Hldgs (KCF SP). Travis discussed this delisting offer in his insight Kingboard Starts Voluntary Unconditional Offer for 88% Held Sub Kingboard Copper Foil.

• KBL has been trying to take KCF private for more than a decade, but this time the price is higher (& reasonable) and it only needs a little over 2.00% of shares out to accept in order for them to be in a position to delist KCF.
• This is a small (S$55mn) clean-up deal and will have a limited impact on KBL, and in turn KBC, but it does marginally help streamline the group structure. Accounting for just 35% of the NAV, this is a weak-ish parent/sub relationship, and these levels do not portend a strong set-up argument.
• The KCF delisting offer does raise the question of whether KBC may decide to remove Elec & Eltek Int (ELEC SP)'s Singapore listing, seeing as it only needs a further 1.6% to force delisting, or indeed table a delisting offer, similar to Sound Global (967 HK), with ≥75% for & ≤10% against voting condition, with all shareholders entitled to vote.

(link to my insight: StubWorld: Amorepacific Is "Cheap", Again; Kingboard Cleans House)

Japan Post Insurance (7181 JP) (Mkt Cap: $13bn; Liquidity: $10mn)

JPI announced on April 4th after the close that Japan Post Holdings (6178 JP) would offer 168.1mm shares of Japan Post Insurance to the public, with another 16.9mm shares offered in an over-allotment. This was big news as it is almost 31% of the shares outstanding of Japan Post Insurance and will dramatically increase its float.

• In addition, JPI announced it would conduct a buyback for up to 50mn shares (with a spending limit of ¥100bn) on the ToSTNeT-3 off-hours auction-like trading system on a day or days between April 8th and April 12th. On the 5th after the close, it announced the whole ¥100bn for 37.411mm shares to be done this past Monday morning.
• On balance, Travis was slightly bearish as he expected the shares to fall back in price on Monday 8 April, but there was a significant possibility of a squeeze. Indeed the shares squeezed, then fell back on Thursday and Friday.
• This is a cheap insurer at just over 0.4x Price/EV. While not the cheapest in Japan, it is cheap on a global basis, and has a large footprint on a global basis. As it loosens the handcuffs of JPH ownership, it will surely aim to expand the lifetime value of each customer. Margins are currently constrained because of restrictions on products and services.
• On Friday, Travis wrote about bidding for the shares. Travis has no qualms about buying at a 3% discount to Fridays close. 4% would be even more welcome. If the stock goes down again on Monday AND you get the accretion AND you get the discount, that will make for a very attractive buying opportunity. But he noted investors should bid absolute levels rather than discounts because there was no telling what might happen Monday.

links to Travis' insights:
Japan Post Insurance - The ToSTNeT-3 Buyback
Japan Post Insurance Placement - Bidding Time

Lynas Corp Ltd (LYC AU) (Mkt Cap: $990mn; Liquidity: $7mn)

Lynas held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister the previous Friday in which he said "the company, or even Lynas, would be able to operate in Malaysia if they promise that raw materials coming to Malaysia are cleaned."

• Lynas sees that it needs to expand facilities in Australia and will likely present plans to do so in the next few weeks. The reference by the PM to Cracking & Leaching (C&L) outside of Malaysia, and his reference to "another company" willing to do so, as well as Lynas' comments about growing with the market, support from JARE and Japanese customers, and their ability to fund new projects suggests that this is the new news.
• While the Environment Minister is dead set against Lynas renewing on old terms, the real question Lynas is facing here is whether the Malaysian cabinet as a whole is willing to change the status quo or will stick with it in return for concessions to build a C&L plant as quickly as possible in Australia.
• Travis believed the current price reflected a bid put forth which was conditional on the same outcome as the market had assumed prior to December 4th, and the market price for those conditions were in place at the time of its proposal. If Malaysian operations are renewed, he expects the "fair" price for Lynas is probably a bit above where it was trading (i.e. the bid price) but if there are delays in renewal, a temporary shutdown until an Australian C&L facility is built, or significant capex required, there could be more equity or more risk taken on favouring lenders not shareholders.

(link to Travis' insight: Lynas Investor Briefing - Looks Like More Capex Ahead)

Briefly ...

The Nikkei reported this past Thursday that both Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) are freezing their plans to expand capacity of their Gigafactory 1, citing the volatility of Tesla’s production and sales as a key reason. Distancing itself from Tesla could prove beneficial for Panasonic’s longer-term growth. However, this production halt does raise concerns about the ability of the company to continue to lead the market in terms of capacity and thus its ability to spread R&D costs over a wide base. (link to Aqila Ali's insight: Panasonic: Freezing Investments in Gigafactory or Freeing Itself from Tesla?)

Sanghyun discussed Asiana Airlines (020560 KS) bailout, wherein KDB made it clear that there will be only two ways here: a massive rights offer and asset selloff. (link to Sanghyun's insight: Asiana Airlines Bailout: KDB Demands a Massive Rights Offer)

Crown Resorts (CWN AU) (Mkt Cap: $6.3bn; Liquidity: $15mn)

After initially announcing Crown was in confidential discussions with Wynn Resorts (WYNN US) concerning an acquisition of Crown by way of a Scheme, several hours later, WYNN said it was terminating deal talks. But it does not remove the reason for a deal. The Crown commentary indicated that they were not averse to doing a deal. That would suggest James Packer is not either.

• If Wynn wants to expand its footprint into the hemisphere and James Packer wants to arrange his affairs, a deal somewhere should be in the offing. This deal may just get pushed to the back burner before coming back to the fore. Several years ago, Archer Daniels Midland Co (ADM US) launched a proposal at Graincorp Ltd A (GNC AU). Months later there had been no apparent communication and the shares drifted off and then, all of a sudden, there was an agreed deal.

• Given Crown's gradual withdrawal from Macau and Las Vegas, and James Packer's personal circumstances, an improved cash portion vs scrip may be in order in any future deal. The fact that Packer's resulting stake in the merged entity was deliberately structured to get him to a shade under 10% - to slip under the Nevada Act - suggests an increase to the scrip portion would be limited under such a deal, and smaller suitors would find such a deal tougher.
• Whatever deal may have been in the offing now appears to be off. Or not. Publicly it is off and therefore the insight below was an exercise in what might be rather than what is likely to be in the very short-term. Or perhaps this opens up Crown to other suitors.

(link to my insight: Wynn's Whale Of A Deal For Crown Off the Hook)

OUE Hospitality Trust (OUEHT SP) (Mkt Cap: $965mn; Liquidity: $1mn)

OUE Commercial Real Estate Investment Tr (OUECT SP) and OUEHT announced a Proposed Merger, whereby OUEHT unitholders would receive a combination of cash and OUECT shares (S$0.04075 + 1.3853 shares of OUECT) for every share of OUEHT held.

• The deal is another medium-large REIT merger to create a LARGER NewREIT. The benefits for shareholders are further scale, some debt headroom on a netted basis (though Travis had questions about this), greater liquidity, possible re-rating and index inclusion.

• The deal is not awful for shareholders of either REIT though Travis thought it was substantially better for OUECT holders than OUEHT holders. While not great for OUEHT shareholders, the uplift in NAV suggests that IF shareholders are OK with the marked value of OUECT assets, this is probably an OK deal, though where margins come out of the trough is unclear.
• Travis thought it gets done at the stated terms. If anything, he wanted to be long OUEHT vs OUECT without taking an outright view because if there is a complaint, it will be on the OUEHT shareholder side. It looks like OUEHT shareholders are being asked to finance (with their additional debt capacity) a redemption of the OUECT CPPUs.

(link to Travis' insight: OUE Commercial REIT & Hospitality Trust Merger Proposed)

Indofood Agri Resources (IFAR SP) (Mkt Cap: $288mn; Liquidity: $0.2mn)

IFAR has announced PT Indofood Sukses Makmur Tbk, its controlling shareholder with 74.52%, has made a voluntary conditional cash offer of $0.28/share - a 7.7% premium to last close - for all IFAR shares it does not own. Any dividend declared will reduce the consideration under the proposal. The Offer is conditional on PT Indofood holding 90%.

• This strikes me as an Offer requiring a bump to get it over the line. Although the takeout price appears okay on fundamentals (~10x EV/EBITDA by my calcs) relative to peers, the takeover premium of ~21% - using the one-month VWAP - is not a knock-out, and the see-through value into Salim Ivomas Pratama (SIMP IJ) is inexpensive at 0.4x P/B.
• Having recently bounced off multi-year low levels against a weak(ening) global demand backdrop for palm oil, PT Indofood could afford to impart some justice to long-suffering minorities and raise the Offer price. This deal is small beer (US$67mn) for PT Indofood.
• You have a hard floor of S$0.28. I would look to own it here on the prospect PT Indofood gives a small kiss to the consideration price, which has yet to be declared final.

(link to my insight: PT Indofoods' Voluntary Offer for 74% Held Sub IFAR)

Briefly ...

Xenith Ip (XIP AU) unanimously recommended IPH Ltd (IPH AU)'s updated offer. This is a done deal and will trade tight to terms. Conditions include the termination of the QANTM scheme implementation deed and Xenith shareholder approval. The Scheme meeting is tentatively scheduled for the week commencing the 15 July with an expected implementation date early August. (link to my insight: Xenith Caves And Recommends IPH's Superior Offer)

Korea's news outlet Maeil Economic Daily reported that the main bidding for the Nexon sale was pushed back to next month, out from this month. (link to Sanghyun's insight: Nexon Sale: Bidding Pushed Back to Next Month - This Is All About Tencent)

Genworth Financial Inc Cl A (GNW US) (Mkt Cap: $1.9bn; Liquidity: $17mn)

On October 23, 2016, Genworth announced that it had agreed to a cash offer for all of the company’s outstanding stock at $5.43/share by China Oceanwide. Nearly two and half years later, certain regulatory conditions remain outstanding. Those approvals include SAFE, FINRA and Canadian approval

• The NDRC has given the green light (back in Oct 2018), so presumably China is simply waiting on all other approvals first. The transaction can actually close without FINRA approval.
• The Canadian regulator? This centers on national security matters, including date protection and safeguarding personal information. Both parties have answered all question to the regulator. CFIUS and New York State signed off on the Enhanced Data Security Program presented. Sounds almost political although the Chinese/Canada spat is a recent development.
• Trading at a 40% gross spread - in line with the average since the deal was announced. The market is sceptical the deal will not close, however Robert Sassoon reckons this is an attractive proposition.

(link to Robert's insight: MergerTalk:China Oceanwide/Genworth Financial (GNW US) - A Friend In The Spread)

• Summit Ascent Holdings (102 HK)'s ED and deputy chairman John Wang has resigned. As per the 2018 interim report, Wang had 5% in Summit. Together with First Steamship (19.21%) and Kuo Jen-Hao's 6.44%, both of whom previously announced are in negotiations to sell, total 30.65%, above the 30% MGO threshold. Mmm ...

• FIRB has approved BGH Consortium's acquisition of Navitas Ltd (NVT AU).

• Hong Kong International Construction Investment Management Group Co., (687 HK)'s Composite Offer doc is out. The first closing date is the 2 May. This is unconditional so payment is 7 business days from acceptance. The IFA as given a fair & reasonable opinion.

• Bravura Solutions (BVS AU) has submitted a non-binding indicative proposal for Gbst Holdings (GBT AU) at $2.50/share in cash.
• Panalpina Welttransport Holding (PWTN SW) announced its proposed agenda for the May 9 AGM. Thomas Kern is proposed as chairman of the board, and there is a proposal for no dividend to be paid.

• The Kosaido Co Ltd (7868 JP) Tender Offer by Bain Consulting (purchase entity BCJ-34) failed. They got 5.4mm shares out of the 12+mm needed to cross the line, so no go.

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