Last Week in Event SPACE - Kakao, Mirae, Minato, OOIL, Hitachi Kokusai

Last week, a possible ban on cryptocurrency trading further skews the Kakao Corp (035720 KS) GDR arb; the mechanics of Mirae Asset Daewoo Securities Co Ltd (006800 KS)'s rights are left wanting; the Minato Bank Ltd/The (8543 JP) merger gets interesting(er) for those investors still thirsty; a channel check on Orient Overseas International Ltd (316 HK)'s pre-conditions; and Hitachi Kokusai Electric Inc (6756 JP)'s Post-Tender Offer trades tight.

Events

Kakao Corp (035720 KS) (Mkt Cap: $8.9bn; Liquidity: $137mn)

Following the launch of its GDR roadshow on Monday, Sanghyun Park dived into Kakao’s valuation and at what price you would want to buy the GDRs. Sanghyun’s value for Kakao’s four 'anchor businesses' is about ₩7.7tn. That leaves a ₩1.8tn hole to the current market cap of ₩9.5tn. Is that reasonable for Kakao’s O2O and the 25.85% stake in Dunamu?

• The estimated daily net profit of Dunamu’s UPbit, the cryptocurrency exchange, is ~₩5.7bn or ₩2.08tn annually. That’s about ₩2.7-3.8tn for Kakao's stake in Dunamu on a 7.5x-10x PER range (after applying a 30% discount), assuming volumes continue at the current clip, which is not a given with alleged plans by the South Korean government to ban cryptocurrency trading. Kakao's share price rolled over 12% from its intra-week high after news of the possible ban.
• Street consensus assigns a TP of ₩150,591 (vs. the last close of ₩140,000 or 7.6% upside) for Kakao, with recent upgrades on the back of cryptocraziness in the range of ₩190,000 to ₩210,000.
• This suggests the market is divided on how best to value the O2O and cryptocurrency assets, with a range of zero to ₩5.8tn, implying 19% downside to the current price, or 42% upside.
• Overall, Sanghyun projects a ₩11tn valuation for Kakao (~16% upside), with the GDRs worth taking even at a much less generous discount (say 5%) to the reference price.

(link to Sanghyun's insight: Kakao Valuation Study for GDR Bookbuilding)

Mirae Asset Daewoo Securities Co Ltd (006800 KS) (Mkt Cap: $6.2bn; Liquidity: $34mn)

Mirae shares declined 13.5% immediately following the December 15th, 2017 announcement to raise ₩700bn through a rights offering, and as of the close Friday, remains 5% below the undisturbed mid-Dec price.

• Essentially Mirae will use the proceeds on numerous M&A opportunities in overseas markets (US, Australia, China, India, Vietnam, and Eastern Europe). With global equity markets into its 9th straight year of bull markets, Douglas Kim believes there is a high risk of potentially overpaying for acquisitions.
• Why not use the proceeds from the treasury shares for the overseas M&As? Those 5mn treasury shares are worth ₩1.06tn. Presumably, that would dilute Mirae Asset Capital's (“MAC”) (the largest shareholder) 18.6% stake.
• Yet media are reporting MAC may not fully participate in the rights offering. MAC recently sold its stake in Budongsan114 (an online real estate information site) to Hyundai Development Co Engg & Cnstn (012630 KS) for ₩45.7bn, leaving a ₩84.5bn shortfall for taking up its rights. MAC has no separate rights offering to gain more capital. Are these rights a good deal if the major shareholder does not fully participate?

(link to Douglas’ insight: Mirae Asset Daewoo Securities: A 700 Billion Won Rights Offering for a Global M&A)

Hyosung Corporation (004800 KS) (Mkt Cap: $4.3bn; Liquidity: $25mn)

Following Douglas’ write-up last week, Sanghyun discussed Hyosung Corporation (004800 KS) Holdco conversion. The divestiture will be finalised at an EGM scheduled for Apr 27, 2018. Hyosung Corporation (004800 KS) shares will be suspended for trading from May 30 to July 12, 2018. All of these 5 entities will be re-listed on July 13, 2018. The official spinoff date is June 1, 2018.

• Sanghyun’s back of the napkin value for the 5 entities is ₩5.9tn, ~28% above the market cap at the close of Friday. Hyosung share price gained 6.12% the day of the announcement (some news leakage probably) but has given that gain back, plus another 6%, with a fall this week alone of 9%. What gives?
• It probably doesn't help that Hyosung's CEO Cho Hyun-joon (14.27% stake) is at the centre of a prosecutorial investigation (including embezzlement and breach of trust), which casts a pall over Hyosung leveraging its treasury shares (5.26% of shares out).
• It is also not clear who will control what. Hyosung’s honorary chairman Cho Seok-rae's (a 10.81% shareholder) eldest son, Cho Hyun-joon, is expected to take over his father's place; while the youngest son Cho Hyun-sang (holding 12.21%) is expected to take over Hyosung Advanced Materials - one of the five new entities.
• Both brothers will implement several complex share swaps during this demerger event to take over their respectively assigned business units, but it is uncertain how these swaps will unfold. Until we have a dramatic change in the CEO situation or an improvement on the business side, Sanghyun expects the impact from this demerger to take longer than generally expected.

(link to Sanghyun's insight: Hyosung Corp Demerger - Procedures, Valuations & CEO Risk)

M&A

Minato Bank Ltd/The (8543 JP)(Mkt Cap: $798mn; Liquidity: $0.9mn)

Travis Lundy revisited the Kansai Mirai: The Most Interesting Arb In The World. The three-way merger has been announced, all the relevant banks have approved, the Holdco (Kansai Mirai Financial Group “KMFG”) has been created and shares of Kinki Osaka have been transferred. Now is the time to start thinking about what opportunities might lie ahead for the Tender Offers for Kansai Urban and Minato Bank.

• There is something of a put on KUB and Minato from the Tender Offer. Even if the whole market falls sharply in a month, the fill ratio will still be on the order of 25%, but as SMFG is tendering ALL their shares, the maximum pro-ration is about 33.2% for Minato Bank, and 30.4% for Kansai Urban.
• KMFG (e. KUB and Minato Bank) is currently trading at a discount to its 18-month average and is near the weakest level since the deal was mooted in February last year. Regional banking is a relatively boring business with a tight trading range. Travis suggests a KMFG Long vs Other Large Regionals Short is a decent, if low-expectations low-vol opportunity.
• Should the stocks fall after the tender, and regional banks as a whole do not fall, KUB/Minato shares will be relatively inexpensive into what could become a flow event with analyst coverage, possible additional index presence, and the stock popping up on active manager radar.

(link to Travis’ insight: Kansai Mirai: Interestingly Interestinger)

Orient Overseas International Ltd (316 HK; "OOIL") (Mkt Cap: $5.97bn; Liquidity: $7.7mn)

A channel check with OOIL re-confirmed our initial read on this pre-conditional VGO that a decision from CFIUS will not impact the transaction. As previously discussed on this platform, the acquirers - COSCO SHIPPING Holdings Co., Ltd (H) (1919 HK) and SIPG - will need to make a voluntary cash offer within seven business days of the pre-conditions being satisfied.

• Pre-conditions outstanding include approvals from MOFCOM, NDRC and SAFE. Given the acquisition is by a Chinese SOE, the deal knits in with the Belt and Road Initiative, and the Tung family – 68.7% shareholders of OOIL - have been Beijing loyalists, Pranav Rao does not see any risks from such approvals. Still, it is intriguing CFIUS was referenced thrice in the announcement. Reportedly - and unverified - COSCO has requested Mofcom not to sign off on the deal until CFIUS approval is received.
• Assuming a payment date of mid-March, Pranav would be a buyer of OOIL for a net annualized return of ~29%.

(link to Pranav's insight: OOIL: Channel Check)

Hitachi Kokusai Electric Inc (6756 JP) (Mkt Cap: $2.9bn; Liquidity: $16mn)

Post-Tender Offer squeeze-outs in Japan typically aren’t captivating, but with 23.3mn shares in minority hands or ~$650mm, Travis believes it is worth thinking about how those holders a) will react, and b) will trade.

• A chat with the company confirmed an EGM will likely be mid-February, and with the share consolidation effective date likely to be mid-late March, the cash consideration would hit the accounts sometime between mid-April to end-May.
• Assuming execution costs of ¥1-3/share, there is perhaps a ¥15/share return on the trade to hold for another 3.0-4.5 months. Travis suggests holding off until the delisting date is known, and the possibility the EGM documentation will tell the likely payment date. At such time, if there is still a ¥15 spread ex-execution costs, the annualized arb return will be pretty decent if levered.

(link to Travis’ insight: The Hitachi Kokusai Squeezeout)

Stubs

Sino American Silicon Products (5483 TT) ("SAS") (Liquidity: $19mn)/
Globalwafers Co Ltd (6488 TT) (Liquidity: $61mn)

SAS' 50.8%-held stake in Globalwafers is worth 2x SAS' market cap. There's a degree of justification for this - on a deconsolidated basis, SAS has perennially been in the red.

• The highly competitive solar product business has never really recovered from the Chinese glut which resulted in world prices for the solar-electric panel industry dropping 80% in 2008-2013. Worldwide installation capacity is increasing every year, driven by China, US, India & Japan. Gintech Energy Corp (3514 TT; "Gintech"), Solartech Energy Corp (3561 TT; "Solartech") and Neo Solar Power Corp (3576 TT; "NSP") are merging for a reason. On the flipside, the semiconductor wafer demand is strong, with Globalwafer's production line fully booked through 2019 for its 8” & 12” line.
• SAS is unquestionably an inexpensive entry point into Globalwafer. Without a specific catalyst, it may even get more inexpensive. Full-year results come out on the 23 March.

Wheelock & Co Ltd (20 HK)/ Wharf Holdings Ltd (4 HK)

Wharf Holdings Ltd (4 HK) has been on a tear since the beginning of the year, up 20%, and trading around a 15% discount to book value, which looks rich. I previously targeted a 20-30% discount range subsequent to the Wharf Real Estate Investment (1997 HK) in-specie.

• Wheelock bumped its stake in Wharf to 62% from 60.99% (as at 30 June) as per this 13th Dec 2017 disclosure, or ~32mn additional shares, shelling out ~HK$850mn if using the average price for that period. Peter Woo has also been increasing his stake in Wheelock over the past few years and has added another 23.5mn (29 Dec 2017) shares since the middle of the year, taking the Woo family stake to 61.78% and a look-through interest into Wharf of 38.3%. It is possible the Wharf-privatisation rumour is doing the rounds again, although the advantage of holding a 100% stake is questionable.

Intouch Holdings Pcl (INTUCH TB)/ Advanced Info Service Pcl (ADVANC TB)

Thaicom Pcl (THCOM TB)'s share price has roughly halved in the past year in response to drawn-out negotiations with the government over its existing and future satellites. Despite accounting for just 2% of its NAV, Intouch's discount has widened out to 23.5% (average is ~20%, but the 12-month high is 14%). On a simple Intouch/AIS ratio, the current low level has only briefly been exceeded in the past five years, around the time Intouch was bidding for a digital TV license, which ultimately did not transpire.

• Intouch is a very clean, passive Holdco structure. At the parent level, it does invest strategically through its subsidiary Invent, one of the largest venture capital companies in Thailand, and it has informed analysts that some of their successful startups will IPO in the future. This includes Ookbee, a major e-publication platform provider, in which Tencent Holdings Ltd (700 HK) invested last year; and Wongnai Media Co Ltd, a provider of food and lifestyle review portals.

(link to my weekly stub insight: StubWorld - Set-Up & Unwind Extremes: Sino-American, Wheelock, Intouch)

Topix Inclusions!

NEOJAPAN Inc (3921 JP) (Mkt Cap: $224mn; Liquidity: $1.5mn)

On January 11th, NEOJAPAN announced that it will list on the TSE on January 18, 2018. This will lead to a TOPIX Inclusion which is expected to take place at the close of 27 February 2018.

• This is a somewhat high growth, high-priced stock - NEOJAPAN provides internet application software for businesses and projects. Don't expect fresh coverage from the inclusion. But Travis expects a squeeze on the existing float as some 20-30% of Real World Float needs to be purchased for the TOPIX inclusion. The bet is that this stock will edge higher between here and the inclusion. If there is a dip, buy it. But only for smallcap players.

(link to Travis' insight: NEOJAPAN: TSE1 Promotion & TOPIX Inclusion)