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Jardine Matheson Holdings

Last Week in Event SPACE: Jardine Matheson/Strategic, Xiaomi, Vocus Comms, Sanken Electric, Cocokara

409 Views14 Mar 2021 07:53
SUMMARY

Last Week in Event SPACE ...

  • Plus, other events, CCASS movements, 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

Jardine Strategic Holdings (JS SP) (Mkt Cap: $18.2bn; Liquidity: $15mn)

We now have a long-awaited transaction to collapse the circularity. And just like that it is also done and dusted. Under the terms of the Acquisition, Strategic shareholders (other than Jardine Matheson Holdings (JM SP)) will receive US$33.00/share in cash. The Acquisition will be implemented by way of an Amalgamation under the Bermuda Companies Act, which requires approval by a majority of at least 75% of the votes cast by Strategic shareholders. Matheson, holding 84.89% of shares out - is entitled to vote on the amalgamation resolution, assuring Strategic shareholder approval.

  • There have been numerous comments in the media that the Offer is low-balled. It is - and serious questions have been raised as to governance standards. But the risk to holding Strategic shares has been present ever since the Jardine's group moved the primary listings of their companies to the UK's Standard Board in 2014 from the Primary Board.
  • The Standard board is anything but standard. Under a standard listing, the Jardine stable of companies (expect Jardine Cycle & Carriage (JCNC SP)) are NOT required to obtain the approval of shareholders by way of a special resolution for the cancellation of the listing of any of their shares. The other areas of the UK Listing Rules that no longer apply to Matheson & co as a result of the transfer to the standard listing are in respect of significant transactions, related party transactions. Although Matheson is a party to this takeover for Strategic, it can still vote its 84.89% at the forthcoming shareholder meeting. In a similar vein, Matheson does not require shareholder approval for this related party transaction.
  • Strategic minority shareholders could challenge this offer in court. Appraisal rights are afforded under the Bermuda Companies Act - where Strategic is incorporated - under section 106. Yet case history, in say the Cayman Islands, for example, where a number of dissentient shareholders have taken their cause to the courts with respect to US-listed Chinese companies being privatised, the uplift in the offer consideration versus time value of money, is less than ideal. The question of ‘fair value’ has not been dealt with in Bermuda to the same level of detail as it has been in the Cayman Islands, however, there have been cases that have advanced the question of what constitutes ‘fair value’.
  • I would expect shareholders of Dairy Farm Intl Hldgs (DFI SP) and Mandarin Oriental Intl (MAND SP) to eventually receive similar offers to that of Strategic - Matheson will hold >75% in each. Hongkong Land (HKL SP) is cheap at 0.3x P/B, but Strategic/Matheson only holds 50.4%, so a takeover may be less likely to DFI and MAND.
  • And Matheson? Given the complexity of the circularity, potentially LOs avoided Matheson and opted to invest directly in Strategic, which has direct stakes in the key listed entities. Collapsing the circularity could stimulate greater interest in Matheson via its cleaner structure. Especially with certain listcos (MAND, HKL, JCNC) trading cheap. My pushback is twofold - the current discount to NAV on a proforma basis is tight at 14%. And given the less-than-ideal mechanics under the Standard listing, there will always be the future risk a derisory offer is pitched for Matheson.

links to my insight: Jardine Matheson: Collapsing The Circularity & Jardine Strategic: What's Yours Is Mine
link to Brian Freitas's insight: JM SP/JS SP: Acquisition and Index Implications

Sanken Electric (6707 JP) (Mkt Cap: $1.2bn; Liquidity: $10mn)

A month ago, known active (and occasional activist and concentrated investor) Effissimo Capital Management announced an unsolicited partial Tender Offer to purchase 4,834,343 shares of Sanken to take it from 9.97% to 30.00% at ¥5210/share. The announcement was deliberately couched in terms to make it seem friendly. Effissimo is not going for negative control, or seeking to interfere with management in any way. They say they just want more stock. Since then, Allegro MicroSystems (ALGM US) shares - Sanken's 52% subsidiary which it listed in November (and the key value driver for Sanken Electric), have fallen nearly 20% from just under US$31/share on 8 Feb the day after the announcement to US$25.14 yesterday. And Sanken itself has fallen back down to ¥5300/share, ~1.7% above the Tender Offer Price.

  • Travis Lundy still expects that the price of Sanken might go up to and even through the Tender Offer Price, and might act a bit like the Keihanshin Building (8818 JP) Tender Offer. He still think this could get squeezier after the tender offer IF Effissimo gets their shares; and there may be a "functional put" below ¥5200/share if Effissimo decides to buy in the market what they could not buy in the Tender Offer. Travis thinks it possible that if the shares do not go below the terms, BUT the market starts to fall further, that Effissimo might extend a couple of weeks just to see if "fatigue" sets in. He does not think they need to bump the price yet.
  • If you are an arb, there is nothing to do here for now, yet. If it goes below terms, Travis would buy it. Given how much time there is left, he would be relatively aggressive below terms. If you are a long-term long-only investor, you have to decide whether you like the growth profile of the company and the sector.
  • Is It Worthwhile Doing the Long Sanken Short AMS Trade? Maybe. One Equity Partners will want to get out of the stock in AMS that it owns. Effissimo on the other hand wants to buy 20% of Sanken 2% lower. And people may or may not sell it to them, but there will be "negative overhang" if they do.

(link to Travis' insight: Effissimo, Sanken, and Allegro - Thinking About the Future) and the original insight Effissimo Launches Unsolicited/Hostile Partial Tender On Sanken Electric)

Vocus Communications (VOC AU) (Mkt Cap: $2.6bn; Liquidity: $13mn)

The fifth time's a charm it would seem. On the 8 February, Vocus announced it had received an indicative, non-binding proposal from Macquarie Infrastructure and Retail Assets Holdings (MIRA). The proposal was a Scheme at $5.50/share, a 25.6% premium to last close, valuing Vocus at ~A$3.4bn. This was the fifth approach for Vocus since mid-2017. Vocus and MIRA/Aware Super have now entered into a Scheme Implementation Deed. The consideration under the Offer remains unchanged at $5.50/share. Vocus' board unanimously recommends the Offer.

  • In August 2018, Vocus, led by CEO Kevin Russell implemented a "two-three year turnaround", involving a "major reset" of its strategic priorities, cost, and leadership, with a primary focus on growth. Russell said the bid values the success of the telco's three-year turnaround plan. Regarding the Vocus NZ IPO, Russell added that there are two paths to explore: either IPO a little later or pursue consolidation opportunities with funding coming from MIRA and Aware.
  • I estimate a trailing EV/EBITDA of 14.2x for Vocus under the Offer, exceeding that under the Offers from AGL and EQT. This also compares to the average for telco/infrastructure Offers of 12.3x - excluding AGL's lofty metric for Australian Power & Gas in 2013. This looks done. Currently trading at a gross/annualised return of 1.3%/3.7%, assuming payment mid-July. Not a lot in it, but a safe bet at these levels.

(link to my insight: Vocus Comms (VOC AU): MIRA/Aware's Done Deal)

Cocokara Fine (3098 JP) (Mkt Cap: $1.7bn; Liquidity: $9mn)

As regular readers of the series on Matsumotokiyoshi Holdings Co., Ltd. (3088 JP) and Cocokara Fine (3098 JP) over the past nearly two years will know, Travis has expected Cocokara to benefit on the exchange ratio. He thought the ratio that was reached - 1.7 Matsukiyo shares for every share of Cocokara - was a little light, and not just because the ratio announced was lower than the closing price pre-announcement. Now Singapore-based fund Hibiki Path Advisors announced that it opposed the merger ratio of this combination.

  • The deal as announced is light, and disfavours Cocokara shareholders. Hibiki Path Advisors of Singapore, who dabbles in making noise in Japanese companies, has said they don't like the ratio. Another activist is high up in the shareholder register. Travis expects another several percent could be found who objects. All told, that probably gets objectors into the teens. It may be difficult to get objectors to 30+% which is likely what is needed to vote this deal down in June. If it is voted down, it would have to be renegotiated, or MatsuKiyo would have to do a tender offer. In either case I expect it would be delayed.
  • The stock is relatively illiquid. Those who buy in the market at above terms in the next 10 days are likely to be buying from people who would have voted FOR the deal, so the amount that it trades above terms before fiscal year-end may be a worthwhile indicator. He expects that to block this deal it would require a proxy fight - a literal one, with letters and phone calls and everything. That happens quite rarely.
  • The other possibility is that activist shareholders get ISS and Glass Lewis on their side. This situation is less egregious than many which ISS and Glass Lewis already approve so he is not overly hopeful they will recommend voting against. Retail and Domestic and Foreign Passive will be the swing voters. If the ratio trades up small, Travis wouldn't mind betting on a bump, but he thinks the likelihood of a bump is likely relatively small. He would not short the ratio if it goes up 10%.
  • In A Quick Run Through Fundamentals Before The MatsumotoKiyoshi and Cocokara Fine Merger, Oshadhi Kumarasiri discusses the combined entity’s fundamentals, including revenue and OP drivers, likelihood of meeting medium term targets, the feasibility of extracting ¥30bn in synergies and the valuation.

Vitalharvest Freehold Trust (VTH AU) (Mkt Cap: $0.2bn; Liquidity: $1mn)

On the 9 November, VTH received an all-cash cash Offer of $1.00/unit from Macquarie Infrastructure and Real Assets (MIRA), by way of a Scheme. Should the Scheme not be approved by unitholders, MIRA is offering to buy all of VTH's assets for A$300mn in cash, which requires a reduced shareholder approval threshold. On the 17 November, Macquarie Agricultural Funds Management (MAFM) and VTH entered into a SID, for A$1.00/unit. The SID covered both the Scheme and asset sale. On the 1 February, an agreement was reached whereby MAFM would pay an additional A$0.025/share from rent received in the first half the year up to 31 December. The combined value of the distribution - be it under the Scheme or the asset sale - would be A$1.025/share.

  • 25 days later, VTH announced a non-binding Offer from Roc Private Equity of A$1.08/share by way of a Scheme, which also incorporates an asset sale component in a similar proposal to that of MAFM's. VTH said it had assessed the proposal and determined that it would be reasonably likely to result in a superior proposal. The unitholder meeting to vote on MAFM's offer, initially to be held on the 4 March, was subsequently postponed.
  • MAFM has now matched Roc's Offer of A$1.08/share, plus extended the payment of the A$0.025/share dividend. A unitholder’s meeting to vote on the MAFM's Scheme will be held on 29 March. That puts the ball back in Roc's court to not only trump MAFM's Offer, but also find the necessary funding. But even if Roc ups its Offer, MAFM is still afforded matching rights under the SID, such that it has five business days to equal or surpass Roc's revised Offer, if any.
  • Trading at a gross/annualised spread of 1%/11% (at the time of the insight). Roc may return to fold. Buy here or a spread or two below on the possibility this competitive bidding situation extends. Otherwise, this is a done deal.

(link to my insight: Vitalharvest (VTH AU): Macquarie Ups Its Offer)

Vedanta Ltd (VEDL IN) (Mkt Cap: $11.3bn; Liquidity: $59mn)

Three weeks ago Vedanta reached new two-year highs reaching to INR 195.00/share. Travis wrote in Vedanta Soars Beyond Indicative Open Offer Level. Not Expensive that the stock was indeed quite a bit higher than the Indicative Open Offer level of INR160 - above which it had traded since December - but that it was not expensive. Q3 earnings had turned out to be quite respectable. Since then, oil, iron ore, aluminum, copper are all up, and zinc and silver are down slightly. Theoretically, the combination of all these factors should mean VEDL would outperform its Hindustan Zinc (HZ IN) subsidiary in the short term, and indeed that has been the case.

  • On a dividend-adjusted basis, VEDL is now trading 78% above where "sources close to the matter" said VEDR could pay (as a maximum) in late September-early October last year. After the failure of the Delisting Offer, VEDL fell to a 40% relative underperformance vs Peers since 31 Dec 2019. That 'discount' has now collapsed to just 5-8% (tough to know real-time because of different time zones of trading).
  • VEDR has raised US$1.2bn to launch its Open Offer on Indian subsidiary Vedanta Limited. US$1.2bn gets you into the INR 235/share area. This Open Offer will have a bookbuild and a pro-ration just like the Reverse Book Build auction before but there will not be a variable price.
  • Travis thinks it may be difficult for VEDR to get the 10% of shares out it seeks, no matter the price. Being temporarily generous will get more. Being stingy will not, but if this is an exercise of passing from left hand (undeclared ownership) to right hand (official ownership), all they have to do is make it look believable, but if a large chunk of the foreign holding is now "Friends of Agarwal", that means the eventual squeezeout is just LIC and individuals. And that may take a very long time.
  • For a commodity trade, it is still pretty good, and cheap to peers, but that is a different play. For a long-term squeezeout play (another Delisting Offer in a year), he has my doubts. He expects that to be a much longer timeframe. Travis doesn't like calling tops in bull market moves. But he thinks the "easy money" is behind us near-term.

Mainstream Group Holdings Ltd (MAI AU) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

On 9th March 2021, Australia-based third-party fund administration services provider MAI announced they had signed a Scheme Implementation Deed to be acquired by Hong Kong-headquartered Vistra in an all-cash deal that valued the company at a market cap of ~A$170mn. The Offer Price is A$1.20 per share in cash. The Offer Price of A$1.20 is an all-time high for the stock. However, the Offer Price translates to a weak premium of +8.6% to the pre-announcement closing price. The transaction will be conditional on the receipt of regulatory approvals and Target shareholder approval. The Deal is expected to be completed in June 2021. Following the announcement of the Deal, MAI shares closed above terms at A$1.22.

  • This is a friendly all-cash Deal. The Target Board has agreed to the transaction and has unanimously recommended shareholders to vote in favour in the absence of a superior proposal. MAI Major shareholders Byram Johnson, Martin Smith, and John Plummer who collectively hold 37.9% have agreed to vote in favour of the transaction. The other directors of Target Co have also agreed to vote in favour. Together with the above-mentioned top 3 shareholders, I estimate such favourable shareholders to collectively account for at least 38.8%. Another substantial shareholder - Forager Funds - has been gradually selling their stake in the market. They have reduced their stake from 10.77% on 20th Feb 2020 to 8.37% on 23rd Feb 2021 at price points below the Offer Price offered in this Deal.
  • MAI is a high-growth company that has achieved strong growth in Funds under Administration in the last few years. In October 2020, they announced that their Funds under Administration surpassed US$210bn with sharp increase in clients belonging to the US Private Equity Space - a key growth area for the company. Since this announcement was made, the shares have gained +40%. in ~4.5 months. Based on Capital IQ consensus projections, the Offer Price translates to an EV/EBITDA (June 21E) of 14.4x, and the EBITDA CAGR for the next two years are estimated to be 28%+. On a growth-adjusted basis, the Offer Price seems light.
  • Janaghan Jeyakumar would get LONG at or below A$1.23 during the go-shop period. Since the fall to the undisturbed price is not very large and since the Offer Price appears light on a fundamental basis, he would be tempted to play 'Bumpitrage' during the go-shop period. In the absence of a superior proposal, he would expect the current deal to complete, but if the stock stays above the A$1.20 deal price all the way through the deal period, the buyer may feel they need to bump to convince shareholders who bought above terms to tender.

(link to Janaghan's insight: Mainstream Group (MAI AU): Go-Shop Provision Makes It Interesting)

Sakai Ovex (3408 JP) (Mkt Cap: $0.2bn; Liquidity: $2mn)

Last month, an MBO was launched on Sakai at ¥2850/share. It was launched at an all-time high, but it was the wrong price. And one of the well-known value players in Japan knew it was the wrong price, because he was the bidder as was discussed in Sakai Ovex MBO - Wrong Price (And the Bidder Knows It). Travis suggested a bump might be necessary. This past week, the Bidder for Sakai Ovex announced they had raised their bid from ¥2850/share to ¥3000/share, for a bump of 5.26%. A little arithmetic will tell you this is STILL the wrong price.

  • It's a bump. But it is not enough of one. The fact that they have bumped with more than two weeks to go rather than at the last minute suggests the bidders are very aware of the problem. That shareholders have not made them even more aware of the problem by going substantial or by bidding the shares higher is a sign of reluctance to engage, or occupation elsewhere.
  • Travis is not sure where the reluctance should be. This should be a higher-priced company. It was trading too cheap. There is an activist involved who is basically buying the company for free given the loans being made, and if someone were to get more heavily involved, there is a considerable buffer in place. Net cash + non-affiliate securities are more than half the market cap. The remaining market cap has considerable net assets associated with it.
  • If one assumes the net cash+securities are worth 1.0x book, and the short-term assets could be financed up to 2x forecast EBITDA and cash paid out, this is a ¥4,000 stock trading at 2+x book and high teens ROE over the next three years - assuming OP falls 40% vs the last three years. As Travis constantly suggests to shareholders, Japan Needs More Cowbell. Investors need to learn to defend their turf/assets/biftek.

(link to Travis' insight: Savai Ovex MBO - A Very Weak Bump follows Sakai Ovex MBO - Wrong Price (And the Bidder Knows It))

In Panasonic in Talks to Buy Blue Yonder; Supply Chain Management Likely to Be a Key Growth Driver, Shifara Samsudeen, ACMA, CGMA focuses reports than Panasonic Corp (6752 JP) is set to acquire Blue Yonder, a leader in the US supply chain software market for ¥700bn (approx. US$6.5bn). Blue Yonder is mainly focused on supply chain management and Panasonic in May 2020 bought a 20% stake in the former for about ¥86bn.

In Youzan Technology IPO Quick Look- Great Headline Numbers but Client Growth Is Slow and Churn Is High, Sumeet Singh runs a ruler over Youzan Technology's (YT) listing by way of introduction, as its parent China Youzan Limited (8083 HK) aims to distribute its shares in YT and pay some cash on top and delist. That proposal was discussed in China Youzan (8083 HK): Proposal Towards Relisting Youzan Tech.

EVENTS

Xiaomi Corp (1810 HK) (Mkt Cap: $74bn; Liquidity: $606mn)

Unexpectedly, on 10 March 2021, MSCI delayed its announcement about a possible deletion of Xiaomi from its indices until 12th March pending the possibility that Xiaomi obtains an injunction in the suit against the U.S. Defense and Treasury depts that it filed 29 January, seeking to remove Xiaomi from an official list of companies with ties to China's military. Xiaomi said its suit that the U.S. decision to designate the company as a "communist Chinese military company" was "factually incorrect" and asked the Washington DC District Court to declare the decision illegal.

  • FTSE deleted on 11 March. Volume was significant and the closing print hit down vs the 4pm print for 350mm+ shares which was just under half the volume on the day. S&P selldown is 12 March. It should be much smaller in scope. MSCI had been expected 12 March but delayed on the possibility of an injunction, but even if there is an injunction, that would apply to the Treasury Dept, not MSCI, and leaving it to the last day is both odd and slightly risky (there is no guarantee of execution in the closing auction mechanism in Hong Kong.
  • Xiaomi's buyback wording is weird - "unless the circumstances are exceptional" tells you they think the circumstances are exceptional and are pre-signalling it so they can go to the Exchange and say today "hey, I think circumstances are exceptional. Don't you?" and see if they say anything. If they got guidance circumstances are exceptional, they might have been in the market Monday.
  • The buyback announcement was not a promise they would be in the market before 24 March, but it was likely guidance, which was voluntary, that there would be support for the stock for those who did go in the market to buy the MSCI deletion-induced weakness.
  • But the circumstances got MORE exceptional in the early hours of Saturday morning Asia time.
  • Xiaomi got the District Court of Washington DC to grant injunctive relief on its ban on Court presumption it was likely to win its case against the Defense Department, and MSCI announced that it would NOT delete the stock Monday as had been widely expected.
  • The lack of MSCI deletion is a surprise. There are NOT a lot of shares to sell Monday. But likewise, this may dampen the need to do a buyback (certainly the ability to call circumstances on Monday and beyond "exceptional".
  • There will be a bounce because Xiaomi has sharply underperformed indices since 14 Janaury, but it may not be the same flavor of bounce enjoyed by previously deleted names.

links to:
Travis' insights: Will Xiaomi Get the National Team Bounce? & FTSE & S&P To Delete Xiaomi This Week; MSCI To Come and Brian Freitas's insight Xiaomi (1810 HK) Buyback: Surely Not at These Prices? followed by the latest addition discussing the court injunction MSCI Interrupted - Is The Xiaomi Ban Court Injunction A Game Changer? by Travis.

Shinsei Bank (8303 JP) (Mkt Cap: $3.8bn; Liquidity: $19mn)

11 weeks ago , for the end of 2020, Travis published my report 2021 High Conviction - Shinsei Bank idea. Since the close of the next day, the shares are up 46.7%. A large part of that performance has been due to the rise in the TOPIX Bank Index - up 26.7% in the same period. Much of that move has occurred in the past five weeks as The Great Rotation, driven by higher rates, a steeper curve, and inflationary expectations, has propelled last year's losers to this year's winners, and Tesla Motors (TSLA US), SaaS stocks, junk stocks, and others have underperformed. But there were a couple of other bits in the story too. A buyback, an asset sale, and understanding of the float dynamics given the over-arching goal of Shinsei and its shareholders is to be able to get the government out of its shares (and accompanying oversight) it purchased in March 2000.

  • SBI Holdings (8473 JP) is buying more shares. LOTS more shares. Aggressively. The last shares reported purchased were above ¥1700/share. SBI reported on 9 March 2021 it owned 37.55mm shares which was 14.50% of shares outstanding. It is, however, 17.45% of voting rights. Buying another 2.54% of voting rights is easy, and requires no pre-approval. Travis would not be surprised if SBI is aiming at obtaining 19.99% of voting rights be end-March. That would mean buying another 5.1-5.2mm shares. Getting above 20% is another matter.
  • Shinsei Bank is buying more shares for its buyback program, but that could easily be done by the end of this week or early next week. Shinsei may have "material non-public information" regarding the sale of its stake in Jih Sun Financial in the last week of March. If Shinsei sells the Jih Sun stake, Travis expects the increase in capital adequacy will allow the bank to be strong in buying back shares.
  • Near-term, the impetus to float reduction will likely slow dramatically. Travis doesn't doubt SBI's intentions to try to get to 20%. It may even intend to take Shinsei as an equity affiliate and go above 20%. But the prior approval process to go over 20% might keep them out of the market for a little bit. Travis would buy any major dips. He would NOT short the stock into strength.

Sawada Holdings (8699 JP) (Mkt Cap: $0.3bn; Liquidity: $1mn)

Sawada made an announcement (Japanese only) that its main operating entity, its 60%-held Mongolian Bank operating subsidiary Kahn Bank LLC had received a notice from the Mongolian Central Bank. The notice had three main points, that: a) the voting rights and dividend rights of "qualifying shareholders who became so without pre-approval from the Mongolian Central Bank might be suspended if shares sold by 30 June 2021 (with some technical detail in this portion); b) That changes in the number of shares held, and the fact that they are held, by qualifying and/or eligible shareholders must be pre-approved by the Mongolian Central Bank; & c) that Sawada Holdings must identify the natural person behind its own shareholdings by 30 June 2021.

  • The amendments to the Mongolian Banking Law discussed in Sawada Holdings - Change of Paradigm Means Opportunity a month ago are one thing. This appears to possibly put further constraints on how Sawada Holdings might deal with the situation going forward.
  • Listing and IPO appear feasible. The selldown of 60% of the bank to the general public appears less feasible. There will have to be institutional holders, and those institutional holders may need to be pre-vetted to buy from the Qualifying Shareholders who sell. This will take time, and there are five banks trying to do this at the same time.
  • Travis thinks the Bank of Mongolia is eventually going to have to bend to the reality that if it wants best in class transparency, ownership of financial institutions by major foreign banks in acceptably strong governance jurisdictions and domestic institutions would be preferable to forcing the sale of major banks to a collection of domestic tycoons. But how it gets there is anybody's guess.
  • Late in the week, Sawada announced that the shareholder affected by the cancellation of voting rights has agreed to go below 20% by end-June. That too will require BoM approval, but it's a start.

(link to Travis' insight: Sawada (8699 JP) Stuck Between Mongolian Central Bank Idealism and Reality)

Back in December, Kerry Logistics Network (636 HK) IPO'ed Kerry Express Thailand (KEX TB). Last month Kerry Properties (683 HK) and Kerry Logistics Network (636 HK) ("KLN") announced a pre-conditional Partial Offer from S.F. Holding (002352 CH). This is an ongoing transaction - see Kerry Logistics (636 HK): SF Holdings' Pre-Conditional Partial Offer. Shangri-La Asia (69 HK), majority-owned by the Kerry Group, is well up on its March 2020 COVID low, and up 9.5% YTD. Around half of its hotels are in China, which have witnessed a strong uptick in local leisure and corporate traveling, generating positive EBITDA as early as June last year, the first time since the first outbreak of the pandemic. In Shangri-La Asia (69 HK): Stay Safe, with shares currently trading at 0.6x P/B against a pre-COVID average multiple of 0.8x, this is worth a second look.

TOPIX INCLUSIONS!

Meiko Electronics (6787 JP) (Mkt Cap: $0.7bn; Liquidity: $3mn)

Meiko is a Japanese designer and manufacturer of double-sided/multi-layer through-hole PCBs and slightly complex PCBs of other sorts, with factories in Japan, China, and Vietnam, and sales around the world. It is not a really exciting or terribly glamorous business, but it gets 10% EBITDA margins on that unglamorous business. The stock was listed on JASDAQ in 2000 but never bothered to make the jump to TSE. Now Meiko has announced that it had applied for such a reassignment in order to improve social creditworthiness, expand the investor base, and provide more financial flexibility. This may be the first explicit application by a JASDAQ-listed stock in the new TSE1 Listing Criteria era and as a TOPIX pre-event trade, it is worth a look.

  • If approved, this will end up being included in TOPIX somewhere from end-July to end-September, with an inclusion event worth about 10-15 days of ADV and probably on the order of US$50mm to buy using current pricing and historical volume patterns. It looks like there is 13-16% of Real World Float to buy in a TOPIX inclusion.
  • Fundamentals are not terribly compelling. It is not cheap and Travis sees no "hidden assets" and growth is expected but not a given. Significant debt could cause the company to use any stock price strength and the occasion of the TSE1 move to issue shares to reduce indebtedness. Its lenders would be happy for that as the debt load is a bit high. Given the leverage of the capital structure, it would take a 20% move in the stock price from here to raise the EV to forward EBITDA multiple by 1.0x turns. That means that it could possibly move a fair ways before getting completely overheated.
  • All in, this is a 'cautiously bullish" trading opportunity.

M&A - EUROPE

Nordax Bank AB, an operating subsidiary of Nordax Group AB (NDX SS) announced on 4 March that it intends to launch a tender offer to acquire Norwegian Finans Holding (NOFI NO) at NOK 95 per share in cash. This values the equity of Norwegian Finans at NOK 13.7 bn. Sampo Oyj and Nordic Capital Fund IX, which hold a respective 6.33% and 16.40% stake in Finans Holding, have agreed to exchange Finans shares for those of Nordax. Finans shares are trading above the offer on expectations of a sweetened offer. In Norwegian Finans Holding - Nordax Bank: Let the Negotiations Begin, Jesus Rodriguez Aguilar is long with a target price of 103.03.

Apollo Global Management Inc (APO US) has agreed to acquire Athene Holding (ATH US), the life insurance company it created at the height of the financial crisis, in an all-share deal worth $11 bn. Consideration. 1.149 APO US x 1 ATH US. The implied value is $56.94 per share for Athene (based on 5 March closing prices and using 191.6 mn of Athene Class A shares), for a total consideration to Athene shareholders of $11,018.6 mn, or an implied transaction value/assets of 5.45%, and 6.9x Fwd P/E. Jesus reckons play the spread in Apollo Integrates Athene.

ION Capital and Singapore's sovereign wealth fund GIC have offered to acquire Italian financial services group Cerved Information Solutions S (CERV IM) for €1.86 bn. There is a minimum acceptance condition of more than 90%, antitrust approval, and approval from the Office of the Italian Prime Minister. Link to Jesus' insight: Cerved Group - Castor Srl: Sweet Opportunity in Loans Gone Sour.

STUBS

In A Tale of Two Brazilian HoldCos; We Prefer Bradespar (BRAP4 BZ) Over Itausa (ITSA4 BZ), Victor Galliano reckons Bradespar SA (BRAP4 BZ) is an attractive investment, as a discounted vehicle through which to gain exposure to iron ore miner Vale SA (VALE3 BZ). He believes that the current 25% discount to the NAV at Bradespar is excessive, and that this should narrow in the near term. Vale’s fundamentals are robust, supported by s strong iron ore price and, as an exporter, benefiting from a weak BRL.

H/A MONITOR

Spreads were mixed this week with 48 out of 100 observed pair spreads narrower and 52 wider. The big winner on the week was Financials with spreads 119bp narrower on average. Banks and Big Insurance generally narrowed.

  • Overall, it was a lackluster performance, and one cannot say spreads won't move wider, but at 40% discount (and an arithmetic average upside of 87% for each liquid H to reach parity with its A), this spreads are wide.
  • 10-day cross-market spread volatility continues to be high at 26% annualised. This is down off highs in the low 30s a couple weeks ago, but the long-term average is quite a bit lower.
  • Watch for a new H/A weekly monitor later today.

INDEX REBALS

HSI Index Rebalance Preview. Potential inclusions in the index at the June review are Smoore International (6969 HK), Nongfu Spring (9633 HK), China Resources Beer Holdings (291 HK), Sunac China Holdings (1918 HK), Country Garden Services Holdings (6098 HK), China Gas Holdings (384 HK), JD Health (6618 HK), Hansoh Pharmaceutical (3692 HK) and Xinyi Solar Holdings (968 HK). Link to Brian's insight: HSI Index Rebalance Preview: Potential Changes in June.

STAR50 Index Rebalance June Preview. A maximum of 5 changes are permitted in a single review. At the June review, Brian sees Suntar Environmental Techn-A (688101 CH), Shenzhen Qingyi Photomask Ltd (688138 CH), Traffic Control Technology Co (688015 CH), Hillstone Networks Co Ltd (688030 CH) and Ningbo Solartron Technolog-A (688299 CH) being deleted from the index. The likelier inclusions are Ninebot Ltd (689009 CH), CanSino Biologics Inc (688185 CH), Sansure Biotech Inc (688289 CH), VeriSilicon Microelectronics (688521 CH) and Cathay Biotech Inc (688065 CH). The less likely inclusions are Beijing Huafeng Test & Con-A (688200 CH), Zhejiang Orient Gene Biote-A (688298 CH), Bio-Thera Solutions Ltd (688177 CH), Hangzhou Raycloud Technolo-A (688365 CH) and HitGen Inc (688222 CH). Link to Brian's insight: STAR50 Index Rebalance June Preview: Selloff Presents Opportunity.

ASX200 Index Rebalance. There are 6 inclusions and 6 exclusions in this review. This is more than what we expected - we had 3 adds and 3 deletes, and another 2 potential adds and 2 potential deletes. The inclusions are Codan Ltd (CDA AU), Champion Iron (CIA AU), Hub24 Ltd (HUB AU), Nickel Mines Ltd (NIC AU), Nuix Limited (NXL AU) and Pilbara Minerals (PLS AU). The exclusions are Bravura Solutions (BVS AU), Gwa Group Ltd (GWA AU), Sandfire Resources Nl (SFR AU), Smartgroup Corp (SIQ AU), Service Stream (SSM AU) and Tassal (TGR AU). Link to Brian's insight: ASX200 Index Rebalance: More Change Than Expected.

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

Guorui Properties (2329 HK) 22.50%ZhongrongOutside of CCASS
Global Mastermind (8063 HK)12.48%Global MastermindOutside of CCASS
Echo International (8218 HK) 12.04%BluemountOutside of CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Values (1740 HK)10.60%ZhongtaiOutside of CCASS
Kwong Luen (1413 HK)12.66%SpaceOutside of CCASS
Source: HKEx

A Selection of Interesting (to me) Links From The Week …

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