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Xiaomi Corp

Last Week in Event SPACE: Jardines, Xiaomi, Tilt Renew, Kumho Petro, Kunlun Energy, Takeei/Rever

385 Views21 Mar 2021 07:51
SUMMARY

Last Week in Event SPACE ...

(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: $18.4bn; Liquidity: $21mn)

Following Jardine Matheson Holdings (JM SP)'s surprise announcement on the 8 March to acquire the 15.11% in Strategic Jardine Strategic Holdings (JS SP) it does not own, Strategic has now released its circular to shareholders. The special general meeting (SGM) will be held on the 12 April at 8AM - in Bermuda. There is no independent financial advisor casting an opinion on the fairness of the Offer consideration. The circular simply echoes that the Strategic's transaction committee unanimously recommends that independent Strategic shareholders vote in favour of the Amalgamation resolution at the SGM.

  • SIAS is organising legal representation in Bermuda court for minority shareholders of Strategic. Shares are trading at US$33.87 - some investors feel they have a free option on dissension.
  • My understanding is that there is basically zero chance of getting the shares out of CDP into individual names by the 31st March, given the various form filling, everything needing to be certified/notarised etc. Matheson no doubt knew this.
  • Matheson's defence will be that they are well within their rights, and within the rules of the Secondary listings in the UK, to make a derisory Offer. The fine print has been there for near-on seven years since the 2014 transfer from the Primary board to the Secondary. That looks set to be tested. The thinking is that investors will dissent, and Matheson may have to offer an out-of-court settlement to avoid a court showdown.

(link to my insight: Jardine Strategic: SGM On The 12 April)

Vedanta Ltd (VEDL IN) (Mkt Cap: $11.3bn; Liquidity: $61mn)

Vedanta Resources has upped the size of its offer from 371.75mm shares (10.00%) to 651mm shares (17.51%) and raised the price from Rs 160/share to Rs 235/share which means a total payment of Rs 152.985 billion, which is US$2.11bn. This takes them to 72.53%. It's on. The change in price is big. The change in size changes the risk parameters.

  • Minimum pro-ration is 39%. If one excludes the ADRs and LIC the minimum is 50%. I expect a number of people will not tender because they are bullish commodities and want to receive the dividend. Once done, if LIC is adamant at Rs 320/share, that has to be the next Delisting Offer Price. They could theoretically do one in the not too distant future, but I expect they may want to try to buy out Hindustan Zinc (HZ IN) first, or bid on the government's stake in BPCL. One is left with a residual breakeven price Rs 190-217 based on pro-ration range of 50-80%. I personally think it could end up even higher because I doubt LIC will participate, the ADRs cannot, and I expect a large number of individuals simply will not participate.
  • At this price, the stock will have caught up to its Peer Basket Price movement since 31 December 2019. The stock is high single digits PER against March 2022 and the company owes its shareholders about Rs 23/share in dividends in the next few months. This is not expensive vs Peers no a multiple basis. It is probably one turn too cheap vs historical spread average (EV/EBIT basis).
  • At Rs 226/share, this is neither here nor there. Travis Lundy thinks the residual will be cheap, but he expects the stock it will lose all event-y-ness for a while and then investors will have to deal with it. The next control event may be quite a ways off unless commodities continue a very strong rally. If you really like the stock and want to buy more at a price below the current price for AFTER the Open Offer, consider buying in the market a LARGE position, tendering it, then holding the residual position.
  • If you were looking for liquidity to buy a large position because you are uber-bullish commodities, there may be considerable chance to buy here as arbitrageurs unwind. For most investors, this is a VEDL vs Peers valuation spread trade, or a commodities bull market vehicle (and it is a good one for that). For event traders, this is probably it - one can probably sell here early or in the Open Offer.

(link to Travis' insight: Vedanta (VEDL) Open Offer Raised in Price and Size!)

Tilt Renewables Ltd (TLT NZ) (Mkt Cap: $2.1bn; Liquidity: <$1mn)

After announcing a strategic review of its 65.5% shareholding in Tilt on the 7 December, a day later, renewable energy specialist Infratil Ltd (IFT NZ) received a non-binding Offer, by way of Scheme, from AustralianSuper, Australia's largest superannuation fund. The NZ$7.43/share Offer was a 22.2% premium to Infratil's last close, and a lifetime high. This was discussed in Infratil (IFT NZ): Big Super's Infrastructure Grab. On the 4 February, Tilt said it has received a number of non-binding indicative proposals.

  • Tilt has now announced a binding agreement from Mercury NZ Ltd (MCY NZ) and PowAR by way of a Scheme. PowAR is a partnership between AGL Energy Ltd (AGL AU) and QIC on behalf of its managed clients, the Queensland Government Insurance Fund and the Future Fund, Australia's sovereign wealth fund. Under the proposal, Mercury will acquire Tilt’s New Zealand assets and, following that, PowAR will acquire 100% of the outstanding shares in Tilt for NZ$7.80/share, or a 99% premium to the undisturbed price.
  • Infratil and Mercury, holding 65.5% and 19.92% respectively, have agreed to vote in favour of the Scheme. Therefore the requisite Tilt shareholders’ approval is certain to be secured.
  • The Scheme is subject to some regulatory approvals including New Zealand's Overseas Investment Office and Australia's Foreign Investment Review Board. Mercury's majority shareholder is the New Zealand government, all-but assuring OIO approval. PowAR is backed by an Aussie sovereign fund, which similarly should smooth over any local regulatory hurdles.

(link to my insight: Tilt Renewables: Mercury/PowAr's Big Blow)

Takeei Corp (2151 JP) (Mkt Cap: $0.3bn; Liquidity: $4mn)

Japan-based wastewater management company Takeei and metal recycling company Rever Holdings Corp (5690 JP) announced after market-close on 18th March 2021 (J-only) that they had agreed to merge in a transaction that will see both companies joined under a new combined holding company. This is a friendly scrip Deal. Both managements have agreed to the terms and the Deal will be completed if the Acquirer Shareholders and Target Shareholders agree to the Transaction. Approval will be required from shareholders representing at least a two-thirds majority of the votes of the attending shareholders.

  • More interestingly, this merger could result in a TOPIX upweight for the entities. Takeei is listed in the First section and is already a constituent of the TOPIX Index. Rever is listed in the Second Section. As at the time of publication of TOPIX Inclusions: Who Is READY? 3.0, they were yet to complete their 1y wait post-IPO and would have been unable to meet some of the new Section Transfer Requirements (market cap and profit) at that time.
  • However, merging with a company that is already in the First Section gets them automatically into TOPIX as far as the other company that is there in the First Section is capable of retaining its designation. This route to Section Transfers could be viewed more favourably by some small cap companies following the recent introduction of stricter Section Transfer Requirements. The combined company is expected to be listed on 1st October 2020 and expect the company to be listed in the First Section (TSE Prime) given Takeei's current designation. The adjustment for this could take place at the end of October 2021. The inclusion event could be at the close of trading on 28th October 2021.
  • For the Arb, this is a friendly merger between two small-cap Japanese companies with high likelihood of completion. I expect this to trade tight to terms until completion. For the TOPIX pre-event trade - his is the most interesting part of the event. Janaghan Jeyakumar would be Bullish on both names mainly for this reason.

Vinythai Public Co (VNT TB) (Mkt Cap: $1.4bn; Liquidity: $3mn)

VNT announced PTT Global Chemical (PTTGC TB) (24.98%) and AGC Inc (5201 JP) (58.78%) have indicated their intention to delist VNT from the SET. PTTGC will offer to purchase shares at Bt39/share - a lifetime high. AGC will not tender any of its 57.78% stake in such an Offer.

  • At the shareholders meeting to be held on the 27 April, an independent financial advisor will share its suggestions toward the delisting and tender offer. Approval must be given at the meeting with no less than three-fourths of the total issued shares of the company, and also not more than 10% of total shares objecting. AGC and PTTGC collectively hold 82.76%, so this takes care of one of the voting limbs.
  • The announcement mentions "approvals in connection with the trade competition have been granted by the competition authorities in the relevant countries" must be obtained. This is not further elaborated upon. It is unclear which authorities this encapsulates, although I doubt there is an issue here. AGC already owns 57.78%. They control the company. Control is not changing hands here.
  • After gaining shareholders’ approval, VNT submits its delisting request form (F10-7) to the SET. The SET will consider the delisting request and will notify the result within 30 days. A Tender offer will then take place, with a maximum tender period of 45 business days. This done deal could all be wrapped up in the second week of August.

Japan Asia (3751 JP) (Mkt Cap: $0.2bn; Liquidity: $4mn)

The now four-month-long and more-than-sordid affair which is the Japan Asia Group MBO. Japan Asia on 9 March announced it would propose a poison pill measure to the June AGM. Unbeknownst to everyone at the time, CIE had been buying more - 2.29% from 4 March through 9 March. That was announced on the 12th and 15th. Japan Asia's stock went ex-dividend, awaiting an EGM for shareholders to approve. On the 17th of March, City Index Eleventh announced they would re-launch another Tender Offer at ¥910/share this time - the old Tender Offer Price of ¥1,210 less the ¥300/share special dividend which just went ex-. On the 18th, JAG announced CIE's plans, and got upset that CIE had not responded to the JAG "question" posed in the threat to introduce a poison pill.

  • If Travis had been long, for whatever reason, he would have sold on the 17th when the stock went ex-. Heck, he would have sold when the stock got back close to ¥1200 a couple of days ago. He would not be surprised if Murakami-san could get this deal done.
  • Travis would not be surprised if JAG toss out another special dividend to make him withdraw the new one. And if they did that, he would not be surprised if Murakami announced yet another Tender Offer.
  • This sounds like war. And a relatively strong rule in competitive/hostile tender offers is never sell early because the target of a hostile deal can always try to get someone else to pay more. It will be fun to watch, but Travis would not want to own the stock if it were still listed at the end of the Murakami Tender Offer.

(link to Travis' insight: Murakami-San Launches New JAG (3751) Tender Offer)

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

Roc has now bumped its non-binding proposal to A$1.12/unit, either via a Scheme or from proceeds from an asset sale. A permitted dividend of A$0.025/unit, similar to that under MAFM's Offer, would be bolted on to that. Roc added it expects to submit a binding proposal on or about the 31 March 2021. This latest salvo from Roc is sure to trigger matching rights for MAFM. Expect the Scheme Meeting on the 31 March to be delayed. Trading at a gross/annualised spread of 2.2%/20.6% - assuming late April completion. I'd get involved. MAFM is expected to at least match Roc's non-binding Offer, if not trump it. And Roc is not out of the picture to reload again.

(link to my insight: Vitalharvest (VTH AU): Roc Blinks, And Bumps)

Procurri Corporation (PROC SP) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

Singapore-based independent IT hardware reseller Procurri announced they received a Voluntary Conditional Cash Partial Tender Offer from an investment vehicle controlled by Singapore-based private equity fund Novo Tellus. The Offer Price for the Partial Offer is S$0.365 per share in cash and the Offeror intends to acquire 27.91% of the total number of shares. If the Offer is successful, the Offeror will hold in aggregate 51.0% of the company. The theoretical minimum fill ratio, if successful, is 39%.

  • The Deal has two key conditions. Shareholders’ Approval Condition: The transaction requires approval from Independent Shareholders representing more than 50.00% of the valid votes received from the Independent Shareholders. And a Minimum Acceptances Condition: Receiving acceptances from at least 82,127,488 shares. Senior executives of Procurri have confirmed they will Tender 50% of their holdings. This will amount to 17,352,418 shares (5.90% of total shares). Therefore, this conditions requires another 64,775,070 shares to be Tendered in this PTO at a minimum.
  • The event is avoidable. This is a small-cap company. There is not much juice. There is a minimum hurdle which may or may not be reached. If you are long-term holder looking to get out at the current price, now is your chance. Janaghan expects pro-ration will be relatively high. If you are an arbitrageur, the right price to buy and tender is lower.

(link to Janaghan's insight: Procurri Corporation (PROC SP): Partial Tender Offers Scant Opportunity)

GL Ltd (GLL SP) (Mkt Cap: $0.8bn; Liquidity: $2mn)

Back on the 15 January, Guoco Group Ltd (53 HK) made a voluntary conditional cash Offer for 70.84%-held GLL. The Offer Price of S$0.70/share was a 25% premium to last close and 0.73x P/NAV. The Offer carried an acceptance condition of 90%, including Guoco's stake, which could be reduced to 50%. It was a lacklustre Offer. The IFA agreed in the Circular, and said the Offer was not fair; but still opined it was reasonable. The Securities Investors Association (Singapore) (SIAS) chimed in, saying it thought the Offer was low-balled.

  • Guoco has now bumped the Offer by 14.3% to S$0.80/share. The Offer consideration is final and the Offer declared unconditional in all respects. Guoco had 83.4% in the bag, including its own 72.96% stake. The revised Offer terms fall outside the fair value range from the IFA, but there's probably enough here to test the 90% acceptance level, and afford Guoco the right to compulsory acquire shares.
  • And sure enough, Guoco gets >90% and will now move to compulsory acquire shares in GLL.

(link to my insight: GL Limited: Guoco Bumps & Declares Offer Unconditional)

The Tender Offer for Jih Sun Financial (5820 TT) by Fubon Financial Holding Co (2881 TT) closes on 23 March. There appears to be substantial regulatory support for the deal as a first among what may be many such future financial holding company consolidations. But there remain questions as to whether this gets done or not. As discussed in Travis' insight Jih Sun Financial Deal Down To The Wire, the trade from here, for the next short period, is to wait. He has recommended to be long the Tender Offer situation, as described in previous insights. IF the tender is not extended, and breaks, he would buy any large dip which caused Jih Sun Financial to underperform a basket of peers by substantially more than 10%. That would be as a long-short trade.

CK Asset Holdings (1113 HK) intends to acquire four assets held by the Li Ka Shing Foundation by issuing new shares in tandem with a share buyback - equivalent to the new shares issued - the effect of which would elevate the Li family's stake to 45% from 36%. CK Asset will issue 333mn new shares - around 8.3% of the total issued shares - at HK$51/share, worth HK$17bn to the foundation for the acquisition. It will follow this with a share buyback, also 333mn shares, at HK$51/share. The consideration share price is a 10% premium to the average closing price for the last 10 consecutive trading days. The target companies include a 20% equity in UK Power Networks, a 20% stake in Northumbrian Water, 10% of Wales and West Utilities, and 10% of Dutch Enviro Energy. The remaining stakes of these assets are held by the CK family, including CK Infrastructure Holdings (1038 HK), CK Hutchison Holdings (1 HK), and Power Assets Holdings (6 HK). The sale and buyback are interconditional. The key condition is the whitewash waiver vote such that the Li family is not obligated to make an MGO for CK Assets.

EVENTS

Xiaomi Corp (1810 HK) (Mkt Cap: $85bn; Liquidity: $618mn)

First, the US District Court for the District of Columbia granted a preliminary injunction against enforcement of the Department of Defense (DoD) restrictions that would have taken effect from 9.30am EST on 15 March and would have precluded US investors from buying Xiami. Next, MSCI announced that it would not delete Xiaomi from its indices following the company obtaining a preliminary injunction - this removed a 1.1bn share overhang. Then, FTSE announced that Xiaomi would be eligible for inclusion in the FTSE All-World and other indices from the June 2021 SAIR as long as there were no developments that would cause Xiaomi to fall within the scope of EO 13959.

links to:
Travis' insight: FTSE Likely, Ceteris Paribus, to Re-Include Xiaomi in June
Brian Freitas' insight: Xiaomi (1810 HK) - Back in the Game (For Now)

Kumho Petro Chemical (011780 KS) (Mkt Cap: $5.8bn; Liquidity: $133mn)

Kumho is in play. It is currently in a M&A fight for the control of the company between Park Chul Wan (Senior Vice President at Kumho Petrochem) and Park Chan Koo (Chairman of Kumho Petrochem). Park Chul-Wan reckons his uncle is making strategic blunders that are destroying shareholder value - such as acquiring a highly indebted resort - wants higher dividends, share buyback with cancellation, new business investments that may add additional long-term value, and the separation of ownership and management.

  • Park Chan Koo has 6.69%. Together with his kids, he has 14.8%. Park Chul Wan, has 10.03%. for now, the chairman has the upper hand.
  • There are huge inheritance taxes in Korea. Over the next several years, there is a high likelihood that Park Chan Koo may transfer his ownership to his son which at that time, his family will be beset with an material inheritance tax hit. If and when Park Chan Koo transfers his ownership and his family members pay for the inheritance taxes, the M&A fight between the Chairman's son (Park Joon Kyung) and Park Chul Wan would likely become more intense. Fun & games.

(link to Douglas Kim's insight: The M&A Fight for Kumho Petrochem - Time Is On the Side of Park Chul Wan)

Kunlun Energy (135 HK) (Mkt Cap: 9.2bn; Liquidity: $19mn)

Kunlun has outperformed peers substantially in the past month. Earnings should be out on the 23rd of March. First payment for the Disposal should be end-April. Second payment is ~two months after that, at latest. The Special Dividend should go ex- in June. If you buy the stock today at HK$8.08/share, you are buying roughly HK$5.20-5.50 of stock, and HK$2.58-2.88/share of Special+Regular Dividend. There may be more guidance about the quantum of the dividend in a week with earnings, but if not, it is largely defined as near HK$2.50 at a base case.

  • On an ex-dividend basis, this stock looks different, and is optically ridiculously cheap vs comps. The stock at HK$5.58 ex-dividend trades at 5.0-6.0x MktCap/EBT for 2021. Comps trade at an average of 10.7x. The stock at HK$5.58 ex-dividend trades at 3.5x EV/EBITDA for 2021 vs Comps average at 10.0x. You should know more next week. The future business is attractive. City gas distribution should not be that cheap.
  • Buy Kunlun Energy. If you spend HK$8.00, think about your equity position as being only HK$5.50. There are HK$2.50 in dividends which will be paid but which are not yet paid. Directors have not yet declared the Special Dividend but they are obliged to abide by the language in the Circular which tells you what it is as a base case (without counting any income since 31 December 2019). If you can get someone to sell you a call option on a post-dividend reference price +15% strike, Travis'd buy it.

(link to Travis' insight: Kunlun Energy (135 HK): It's Different Than You Think)

Imperial Hotel (9708 JP) (Mkt Cap: $1.1bn; Liquidity: <$1mn)

the Nikkei carried an article which said that today Imperial Hotel (9708 JP) had decided to renovate its flagship hotel Imperial Hotel Tokyo. This is a long-awaited development. One significant possibility is that Imperial Hotel does not remain independent. This is something to keep on one's radar screen. Travis doesn't see a huge amount of upside because he doesn't think the buyer has to pay up much. Shareholder structure says it is a done deal. But it is certainly something to watch.

  • He would definitely buy any big dips which show up. March last year was completely the wrong price. If it happens again, be prepared to buy a lot. It is NOT a trade where you will win an activist bump, or likely even an appraisal rights case. You just get the benefit of the event.
  • Also think about other winners. This whole project should be good money for NTT. Their buildings are expected to be done by 2025. These will be valuable, but that isn't the thing to note. The thing to note is that they would actually have done something with their copious real estate.

On the 29 January 2021, Shandong Chenming Paper A (000488 CH)/(1812 HK) announced the proposed listing of its domestic (B-shares) on the Hong Kong Stock Exchange, as H-shares. The circular is here, and shareholders approved the transfer on the 9 March. B-shares closed (at the time of my insight: Shandong Chenming Paper (1812 HK): The H/B Convergence Trade) at HK$5.49/share. Yet the H-shares - in which the B-shares will be converted into - are trading at HK$6.70/share. On the expectation of a 3-6 month timeline to complete the conversion, if you can source borrow on the H's, do so, and buy the Bs.

Heading into the lock-up expiry Sumeet Singh (in Tencent Placement Lock-Up Expiry - Block and Buyback Linked Holdco Trade Update) would be inclined to short Tencent Holdings (700 HK) and go long Prosus (PRX NA) or if you prefer Naspers (NPN SJ) (as it still has the buyback ongoing). The lock-up will expire on 23rd Mar 2021. Tencent will report its full-year results on 24th Mar 2021. The selldown in 2019 was done one day post-Tencent results announcement.

Baidu (BIDU US)/ Baidu (9888 HK) (Mkt Cap: $92bn; Liquidity: $2.8bn)
Bilibili Inc (BILI US) / Bilibili Inc (9626 HK) (Mkt Cap: $38bn; Liquidity: $0.9bn)

Baidu's and Bilibili's Secondary Listing on the HKEX (388 HK) is the 23 March. It will be tough for either stock to get Fast Entry into the Hang Seng China Enterprises Index (HSCEI INDEX) but a lot bit easier to get Fast Entry into the Hang Seng Tech Index (HSTECH INDEX). There is a high probability of Baidu being included in the Hang Seng China Enterprises Index (HSCEI INDEX) and the FTSE China 50 index at the September reviews, while there is also a possibility of inclusion in the Hong Kong Hang Seng Index (HSI INDEX) at the September review, though the probability is lower. There is zero probability of Fast Entry into the HSCEI, a medium probability of Fast Entry into the HSTECH and a much better probability of Fast Entry into the Hang Seng Composite Index (HSCI) if a large number of ADR holder register their shares in HK CCASS and if most of those holder move their shares out of the ADR depository.

Shinsegae Group (including E Mart Inc (139480 KS) and Shinsegae International Co (031430 KS)) have agreed to a stock swap worth ₩250bn ($221mn) with Naver Corp (035420 KS). The main reason, reckons Douglas in Shinsegae Group's Stock Swap With Naver & Entrance of SKT to Buy Ebay Korea, is for this stock swap is to strengthen the partnerships among these companies to compete more effectively in the Korean e-commerce sector against major players such as Coupang (CPNG US).

In Toshiba – The EGM Showdown,Mio Kato discussed Toshiba Corp (6502 JP)’s forthcoming EGM, the dispute with shareholders Effissimo and Farallon, and the potential implications of the vote, not just for Toshiba, but for Japan more broadly. Effissimo won its proposal and the Farallon proposal fails. The latter was probably expected. The former was less certain so it is a positive for governance overall and a welcome occurrence for Japan overall.
Changes in the BOJ ETF Buying

The Nikkei newspaper reported that the Bank of Japan would increase the range of fluctuation permitted around its long-term interest rate guidance policy to 0.25% plus or minus vs the current center rate of 0.20%. The bigger news in terms of markets is likely to be the news about ETFs. The BOJ has had a "Target ETF Purchasing Rate" of ¥6 trillion/year for the past few years though actual purchasing has fluctuated up and down with demand (and famously briefly popped last March in the covid-crash). The new guidance, according to the Nikkei, will be that the ¥6 trillion/year target will be abolished and the BOJ will only step in when markets get turbulent.

  • The Nikkei has an article saying the BOJ will sharply taper its ETF buys. That probably means all its ETF buys and J-REIT buys too. Given how much the BOJ has tapered buying over the past 9 months and especially over the past three months, the impact of the BOJ not being in the market will be
  • It could mean slightly more downside on down days, but the BOJ will apparently be in the market in "turbulent" times. I personally expect that means more of March 2020 and less of 4-5 March 2021 (when the market was down 140bp in the AM session each day and the BOJ bought).
  • Travis expects there will be no near-term discussion in the BOJ about selling. Not buying, and selling, are two different things. The stocks with a heavy ADV impact on recent buying are all small. Tiny in fact. The stocks with large dollar impact would see only 1-5% of ADV bought by the ETFs on days when the BOJ is buying. And that doesn't happen often. Travis doesn't see much impact at all. Though if anything, Travis would expect the BOJ might step in earlier than people think, just to make sure people are on their toes.

TOPIX INCLUSIONS

GiG Works (2375 JP) (Mkt Cap: $0.2bn; Liquidity: $6mn)

GiGhas announced a tachiaigai bunbai equity offering stating that they will be working towards to a move to the TSE Prime Market. The stock is currently listed in the Second Section of the Tokyo Stock Exchange and if they qualify for a move to the Prime market, that would trigger an Inclusion into the TOPIX Index. However, to be able to qualify for a such a move, the company will have to satisfy the relevant Section Transfer requirements. In this insight, we take a look at the potential of this company to satisfy the Section Transfer requirements, the possible timeline of events, and the upside potential of the event.

  • The company trades at 21x guided EPS which has a lower incremental OPM than the company has shown before when it grows revenue. That suggests EPS could be higher than guidance. With 20% sales growth and growth in OP, ROE in the high teens to low 20s, a 20x PER seems eminently reasonable. Growth investors do not sell into index inclusions unless the stock goes up a long way.
  • This is a relatively high turnover stock, but if this goes into TSE1 - something the company shows it has interest in - then the day-trader volume will disappear in short order as traders lift the offer. It looks like the company can get to its profit and Net Asset target by fiscal year end. The only thing currently likely to keep it from getting into TSE1 when it makes its application late this year is that the stock price hasn't gone up enough. The solution to that is for the company to promote its chances so other people push the stock price up.
  • This is a favourable setup.
(link to Janaghan's insight: TOPIX Inclusion Pre-Event: GiG Works (2375 JP))

FaithNetwork Co Ltd (3489 JP) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

FaithNetwork yesterday announced a tachiaigai bunbai offering to take place between the 26th and 31st of March. Normally, there will be an announcement on the day before the period starts, announcing the price of the offering (usually a 2-4% discount from the close on the day before the offering period starts (i.e. 25th March likely in this case)). The goal in this case is to lower family ownership so that the company will not be liable for taxation rates for "family-owned companies" which is what happens when the family owns more than 50% of the shares outstanding.

  • The Problem: Based on the TOPIX Advance announcement of early March, the index shares will be 1,307,250 (26.25% FFW) which means at an 18.5% ownership level, that would be 241,000 shares to be included in TOPIX at the close of trading on 30 March. The company will offer 245,000 shares. That is the size of the entire inclusion trade - dumped on the market - surprise-like - 3 days prior to the inclusion.

  • This changes the entire dynamics of the trade, and it is highly surprising that this would occur this late after the announcement of the ascension to the TSE1. It was not necessary or the TSE would have made reassignment conditional. This is by choice.

  • As a company, the fundamentals are still decent. As an Inclusion Event, the Inclusion Parameters have now changed. Sell if you are in it for the event.

M&A - US

Global Cord Blood (CO US) (Mkt Cap: $0.6bn; Liquidity: $1mn)

On the 4 June 2019, Cordlife (CLGL SP) announced a non-binding proposal for GCB, via the issuance of 2.497bn shares worth S$1.248bn or an indicative Offer Price of US$7.50/share. Some 18 months later, Cordlife announced the termination of the proposal. On the 2 March, less than a month after Cordlife walked away, GCB announced the receipt of a non-binding acquisition proposal from a wholly-owned subsidiary of Haitong International Securities Group (665 HK). The consideration under the proposal is US$5/share.

  • Despite a 9% gross spread to terms, I would not chase shares here. You have a broker oddly making the Offer; whereas a more suitable candidate (Cordlife) walked after 18 months of kicking tyres. It is also not clear why there has been no official announcement on the HKEx.
  • This remains a non-binding proposal - terms may be adjusted down, as occurred in the eHi Car Services Ltd (EHIC US) deal); plus you also have a question market over the timing to completion, as and when (or if) a firm offer occurs.
  • If shares drift back down to the undisturbed levels - around $4.16/share - I'd be more inclined to get involved.

(link to my insight: Global Cord Blood: Haitong Raids The Bank)

Bausch Health Companies (BHC US) (Mkt Cap: $12bn; Liquidity: $150mn)

Bacl on August 16, 2020, Robert Sassoon discussed the potential impact of the decision by Bausch to spin off its largest revenue generator, the Eye Health business (Bausch & Lomb), into an independent publicly traded entity. Although details behind the proposed transaction at the time were sparse, his initial assessment was that the proposed corporate restructuring event along with the company's debt reduction efforts promised to be a substantially value-creating one.

  • Since then, BHC has enjoyed a major elevation in its share price, up by more than 90% from the published share price (i.e., $17.48), bringing it to trade in our then assessed target range of $28-$34, at $33.43. However, there have been further developments since the publication of that insight, notably the ramping up of interest from activists. This has encouraged us to revisit the situation and to review his initial valuation thesis.

QUIDDITY WEEKLY H/A

Spreads narrowed sharply this week with 68 of 100 liquid spreads narrowing, 32 widening. The big winner on the week was Consumer narrowing 2.46% as every spread in the space narrowed despite five of six stocks falling in Hs (i.e. As fell even more). But overall, it was a decent week. Only two sectors saw spreads widen (Energy and Utilities), both accompanied by net southbound selling in the week to Wednesday (the last day to which we have granular name-by-name data).

M&A - EUROPE

On 14 March, IMMOFINANZ AG (IIA AV) announced its intention to launch a voluntary takeover offer to acquire the 72.5% stake in S IMMO AG (SPI AV) it does not already own for approximately €930 mn. Immofinanz currently holds approximately 26.49% of S Immo. S Immo indirectly holds 10.86% of Immofinanz. S Immo currently holds a 6% stake pct in CA Immobilien Anlagen AG (CAI AV). At the end of January 2021, Ronny Pecik (CEO of Immofinanz), was to step down upon the completion of the sale of his c. 10.7% stake in Immofinanz to Aggregate Holdings. And as pointed out by Jesus Rodriguez Aguilar in Game of Thrones in Austrian Real Estate, Aggregate Holdings is interested in CA Immo, which itself is the object of a bid by Starwood.

SHARE CLASS

Volkswagen (Pref) (VOW3 GY) shares are trading at a 27.7% discount to Volkswagen (VOW GR) ordinary shares, a level unseen since November 2009. In VW Spread: Not 2008 All over Again, Jesus reckons the discount in Volkswagen preferred shares will ultimately move towards a 10% discount.

PAIR TRADE

Following Jardine Strategic Holdings (JS SP)'s acquisition by Jardine Matheson Holdings (JM SP) a spot will open up on the FTSE Straits Times Index (STI) (STI INDEX) that will need to be filled to keep the number of index constituents at 30. Frasers Logistics & Industrial Trust (FLT SP) is the most likely candidate that to fill that vacant spot in the FTSE Straits Times Index (STI) (STI INDEX). Suntec REIT (SUN SP) is the only stock that is a member of the MSCI Singapore Free Index (SIMSCI INDEX) but not a member of the FTSE Straits Times Index (STI) (STI INDEX). That could soon end since Suntec is a potential deletion at the MSCI May SAIR.

(link to Brian's insight: Pair Trade: Long Potential STI Inclusion/ Short Potential SIMSCI Deletion)

INDEX REBALS

Global Clean Energy Index. The S&P Global Clean Energy Index is designed to measure the performance of 30 companies from around the world that are involved in clean energy-related businesses. There are two ETFs that are benchmarked to the index and these ETFs have seen massive inflows over the last year. This has caused liquidity issues in the underlying stocks and has led to S&P having multiple market consultations to reduce constituent concentration, easy liquidity limitations, and improve index replication. The changes due to these market consultations will cause large passive flows on the stocks. A few stocks have moved substantially over the last couple of months but there could be more in store for a few of them. Link to Brian's insight: Global Clean Energy Index: MASSIVE Changes Coming Up; 30-50% One-Way Turnover.

S&P500 Index Rebalance. There are 4 additions - Nxp Semiconductors Nv (NXPI US), Penn National Gaming (PENN US), Generac Holdings (GNRC US) and Caesars Entertainment (CZR US). To balance that out, there are 4 deletions - Flowserve Corp (FLS US), Sl Green Realty (SLG US), Xerox Corp (XRX US), and Vontier Corp (VNT US). Link to Travis' & Brian's insights: S&P500 March Rebalance: $18-21bn 1-Way & Global Clean Energy Index: MASSIVE Changes Coming Up; 30-50% One-Way Turnover.

FTSE Index Rebalance. The March Semi-Annual Index Review for the FTSE Global Equity Index Series (GEIS) becomes effective after the close of trading on 19 March. There are a lot of stocks that will have passive buying and selling across the region due to their inclusion/exclusion from the FTSE All-World and All-Cap indices, as well as stocks migrating between the two indices. Link to Brian's insight: FTSE Index Rebalance: India & Taiwan Perform Well; Identifying Reversal Candidates.

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

Geotech Holdings Ltd (1707 HK) 54.73%BocomHSBC
Magnus (1172 HK)28.00%Get NiceOutside CCASS
Itc Properties (199 HK) 10.00%OshidoriGet Nice
Chen Xing Development Holdings (2286 HK) 20.00%Shanghai PudongShanxi
Impro Precision Industries (1286 HK) 21.24%CitibankHSBC
Didi (8130 HK) 19.23%Shanghai PudongShanxi
Jinshang Bank Co Ltd (2558 HK) 10.30%Shanghai PudongShanxi
Sterling (1825 HK)37.50%YuzhouOutside CCASS
K Group (8475 HK)20.80%EasyOutside CCASS
China Best Group Holding (370 HK) 12.59%EmperorOutside CCASS
Vision Values Holdings (862 HK) 31.88%HalcyonHaitong
Sino Vision Holdings (8086 HK) 26.35%FreemanBoci
Kinetix (8606 HK)11.87%CNICepa
Gcl New Energy Holdings (451 HK) 10.79%Shun LoongGF
Source: HKEx

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

Name

% chg

Into

Out of

Autohome (2518 HK)49.48%DBOutside CCASS
SMC (2381 HK)75.00%MSElstone
E-star (6668 HK)69.81%UBSOutside CCASS
Hygeia Healthcare Group (6078 HK) 15.34%Outside CCASS
Source: HKEx

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

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