bullish

Oriental Land

Last Week In Event SPACE: Keisei/Oriental Ld, Nat'l Storage, Sembcorp, Leyou, Accordia Golf, Samba

411 Views05 Jul 2020 07:56

SUMMARY

Last Week in Event SPACE ...

With Tokyo Disneyland opening this past Wednesday, Keisei Electric Railway Co (9009 JP) was coming up "expensive". However, it is Oriental Land (4661 JP) that was/is trading rich ahead of the theme park reopening.
Abacus Property (ABP AU)'s increasing investment in National Storage REIT (NSR AU) rekindles takeover talks.
On 8 June, Sembcorp Industries (SCI SP) and Sembcorp Marine (SMM SP) announced that there would be a giant restructuring of the Sembcorp group. Despite the fact that the shares in both are down, the longer-term direction of SCI shares should be up. Bigly up.
Sony Corp (6758 JP) has reportedly joined the party to takeover Leyou Technologies (1089 HK).
Accordia Golf Trust (AGT SP) has finally announced an okay buyout proposal.
As it is, the reward/risk is a little iffy on the Samba Financial Group (SAMBA AB) / National Commercial Bank (NCB AB) non-binding transaction. But it is a BIG DEAL as hard EM bank deals go.
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)

STUBS

Keisei Electric Railway Co (9009 JP) / Oriental Land (4661 JP)

From its March low, Oriental Land has gained 18%. I see the FY21E PER at 250x, which looks disproportionate, but the stock is at a (little) more measured 48x FY22E PER, factoring in a return to "normalcy". FY22E EV/EBITDA of 23x is, however, pretty hefty.

Oriental Land's peripheral businesses such as hotels, restaurants and rail connections, which are heavily reliant on park visitors, will be challenged. And consensus forecasts have historically had a tendency to be overly optimistic on forward earnings. There is a high degree of optimism baked into the share price, and although shares have come off 9% (at the time of the insight) from its recent high on the 11 June, pricing appears elevated.
An alternative to a Long Keisei, Short Oriental trade, is to go long Keisei against a basket of more expensive peers. Being at the eastern edge of the Tokyo conurbation, Keisei is a beneficiary of Tokyo’s positive demographics versus Japan-wide peers, a key factor in driving growth (or lack of de-growth) over the longer-term.

(link to my insight: StubWorld: Keisei Electric And Taking The Mickey. Plus First Pac and Swire)

Also in the insight link above:

At a ~79% discount to NAV, First Pacific Co (142 HK) has never traded wider. First Pac may be cheap, but the company only trades ~US$1mn/day, plus it's a cross-border Holdco into the Philippines and Indonesia. Now would be a good time for the company to undertake buybacks or some other restructuring initiative to narrow the NAV discount.
I see Swire Pacific (A) (19 HK)'s discount to NAV at ~46%. The discount and the implied stub have never been wider/lower since Swire Properties (1972 HK)'s listing in January 2012. In Cathay Pacific's Government Stop Gap, I viewed Swire injecting HK$5.3bn to maintain a largely similar stake in a heavily debt-laden airline, when the likelihood of necessary refinancing/rights issues possibly 2-3 years out (or earlier), did not warrant a narrowing in the discount NAV. That is being played out. Swire is cheap on a look-through P/B of 0.22x. Only property-peer Great Eagle Holdings (41 HK), another holdco, is marginally cheaper, yet it is also illiquid. The peer basket P/B average is 0.4x. But the Cathay overhang remains - it may still be too early to set-up the stub here.

Jesus Rodriguez Aguilar revisits a number of European holdcos (Heineken NV (HEIA NA), Groupe Bruxelles Lambert Sa (GBLB BB), and Investor AB (INVEB SS)) in Selected European Holdcos and a DLC: June Report

M&A - ASIA

National Storage REIT (NSR AU) (Mkt Cap: $1.3bn; Liquidity: $11mn)

Since Gaw Partners (on the 27 Feb), Warburg Pincus (28 Feb) and Public Storage (PSA US) (18 Mar) abandoned their proposals, NSR completed an institutional placement of 191.1mn shares (24% of shares out) at $1.57/stapled security on the 6 May, raising A$300mn. Abacus Property (ABP AU) became a substantial shareholder on the 15 May, and after being excluded from the May placement, it bumped its stake in NSR to 8.09% on the 1 July from 7.09%. Abacus has been an active acquisition player in this space, and as far back as 2005 - it is unlikely to stop here.

Abacus was last discussed on Smartkarma in its bid for Australian Unity Office Fund (AOF AU) in late 2019, where it teamed up with Charter Hall (CHC AU). That proposal (discussed in Starwood's Tilt for AOF: Fifth Time Lucky?) came unglued following an unorthodox share sale triggering an ASIC interim order, which was ultimately voted down by AOF shareholders.

Abacus raised A$250mn in July last year to ostensibly fund its portion of the AOF Offer. According to its 1H20 results (page 31), Abacus has a maximum target group gearing of up to 35%. It was 26.8% after the settlement of 99 Walker Street (A$311mn) and A$63mn of self-storage acquisitions earlier this year. This suggests Abacus can take on a further A$450mn before breaching its gearing limit. Abacus has a market cap of $1.8bn against $1.96bn for NSR. Trading at 0.9x P/B, a scrip offer for NSR is out of the question. To take over NSR, Abacus needs to partner up.
In National Storage REIT: Just Plain Nasty, I recommended buying NSR at 0.7x P/NTA. That was the right call. NSR now has a market cap, netting off the $300mn placement, almost exactly in line with its undisturbed value prior to Gaw approaching the company in January this year. In its 1H20 results released on the 26 Feb, the NTA per stapled security was A$1.77, up 9%. Taking into account the May placement and 2H20 earnings, I estimate the NTA is roughly the same. At ~A$1.90/share, or ~7% above my estimated NTA, NSR is looking fairly valued. But there is upside from here should a bidding situation unfold. Gaw & Warburg tabled indicative proposals at a 24% premium to the NTA; Public Storage's was 36%. Downside appears limited.

(link to my insight: Renewed Takeover Talks for National Storage After Abacus' Stake Creep)

Accordia Golf Trust (AGT SP) (Mkt Cap: $0.5bn; Liquidity: $1mn)

There is now - after 7 months - an official Divestment Proposal for a purchase consideration of ¥61.8bn for the 88 golf courses, which is 0.06% higher than the initial indicative proposal amount from ¥61.76bn to ¥61.8bn. The Consideration is effectively the same as proposed last November less the run-rate of dividends since. It is a premium of 4-5% above NTA and NAV, and 13-18% above "value" for the TK interests. This is not an enormous premium but it is not bad. There aren't that many golf course buyers out there and trust/REIT interests in Japanese assets are trading wide-ish.

Transaction costs for the divestment and winding up of the trust, which would become a cash trust for purposes of the Listing Rules, are about 3%. That means Net Consideration Per Unit is likely to be (using a SGDJPY rate of 77.00) about S$0.722/unit. That will be split into two or more payments with roughly 92% of the Divestment Consideration at the TK level (94.8% of total net consideration to unitholders) to be paid out in the 25-day period after Completion, which is expected in Q3. JFTC approval and EGM approval are needed. The first payment could be made by end-Sep.
If you own and this trades at S$0.72 or higher, and you want to be long something else, sell immediately. If you are an arbitrageur, S$0.715 gets you 2.5-3.5% annualized. S$0.71 probably gets you 5.0-6.5% annualized if you buy now.
If you are a long-only investor and you want to "hide out" in something which won't move, you could pay up to S$0715 and you probably would not lose money, but beware that you are long JPY so you'd want to hedge into SGD. The forward will cost you something because of the interest rate differential.

(link to Travis Lundy's insight: Accordia Golf Trust Buyout... A Gimme But.... )

Leyou Technologies (1089 HK) (Mkt Cap: $1.1bn; Liquidity: $1mn)

Leyou has been the subject of interest from Tencent Holdings (700 HK)-backed iDreamsky Technology Limited (1119 HK) since September 2019, and Zhejiang Century Huatong (002602 CH) since May. Bloomberg is now reporting that Sony Corp (6758 JP) was "weighing a bid" for Leyou.

The next-generation consoles of Sony and Microsoft are expected to be launched towards the end of 2020. According to Leyou, the sales of PS4 and Xbox One in 2019 had both declined 20% to 30% year-on-year, and the decline was further accelerating. Existing players also showed less purchasing desire for games on current-generation consoles when expecting the launch of new ones. The two combined factors contributed to the drop of 10% to 20% yoy in sales revenue and subscription businesses of Sony and Microsoft.
To secure a toe-hold into China’s growing console development talent, Sony launched the China Hero Project in mid-2016, an initiative to promote and invest in PS4 games funded by Chinese developers. The feedback on PS5, notably the look, has been generally been positive. The trailer is pretty cool. But Chinese gamers are more concerned with what games the regulator can and cannot let them access. For Sony to consolidate and improve upon its market share, it needs local game content - this is where Leyou comes in.
This is still a pre-event and there is no guarantee a firm Offer will emerge. But there are now three interested parties, assuming Bloomberg sources are sound. And major shareholder Yuk Kwok Cheung Charles wants out. Downside appears marginal with respect to peers and the undisturbed price - Leyou's peer group is up 30% on average since Leyou's announcement in September, and 22% YTD. The rumoured CVC/iDreamsky Offer price is ~$3.11/share. I'd get involved - one of these indicative/informal offers from this triumvirate can be expected to turn firm shortly.

(link to my insight: Sony In The Mix To Takeover Leyou?)

Sanyo Chemical Industries (4471 JP) (Mkt Cap: $1bn; Liquidity: $2mn)

Sanyo Chem and Nippon Shokubai (4114 JP) had - as described in the press meeting on 13 April where the two companies announced a delay in their merger - already decided everything there was to decide about the merger, EXCEPT earnings deterioration at Shokubai suggested a need to revisit the ratio, so the two companies delayed their merger by 6 months. They now want to get the ratio announced by year-end. Then form the Holdco in April 2021 and be fully integrated less than a year later. That means investors have but 5-6 months left to trade this. So why is the ratio still at the old merger terms?

The Sanyo Chem CEO Ando-san made zero bones about it. He said the only reason for the delay was to reassess price. That suggests to Travis something more than a 5% move. Perhaps Sanyo Chem is looking at a 10% bump? Perhaps more? The current market ratio is trading 0.56% above the original announcement price, which is about the same level as the price ratio before the deal was first announced over a year ago (and after which Sanyo Chem's FY20 OP forecast fell 13% and Shokubai's fell 60+%). If you think there could be 10% upside vs 0.56% downside, that sounds like a good reward:risk.
Any number of fundamental ratio observations suggest a 15-20% bump would not be remiss. Sanyo Chem has a ~40% stake in a new polymer resin battery company where lithium-ion batteries cost 60% less to make and are safer than normal lithium-ion. They are partnered with the guy who invented the idea. To Travis, if the deal breaks tomorrow at current pricing in the market, Travis'd rather be long Sanyo than Shokubai.
If you own Nippon Shokubai, look to switch into Sanyo Chem at 0.82-0.85. If you are interested in the combo, get long Sanyo Chem. If you like the ratio bet, Buy Sanyo Chem and short Nippon Shokubai.

(link to Travis' insight: SanyoChem/NipponShokubai - Ratio Is a Buy)

Viglacera Corp (VGC VN) (Mkt Cap: $0.4bn; Liquidity: $1mn)

The board of Vietnam Electrical Equipment JSC (GEX VN) (also known as Gelex) - the second-largest shareholder of well-known Vietnamese construction material maker and industrial park developer Viglacera - "officially" announced its intention to purchase more shares in Viglacera through a public offer. Gelex currently holds 24.97% of Viglacera, with direct ownership of 5.54% and indirectly through its subsidiary Gelex Electric (19.43%). The largest shareholder is still the Ministry of Construction at 38.85%. The number of shares to be bought is 95,000,000 (21.19%), which would bring their holding to almost 207mm shares and ~46.51% of shares out.

This is the start of a process. It may be a few months before we know the price. Determining the Tender Offer Price, there are minima, and because the filing has not been made yet, depending on how long it takes to make the filing, the floor price might be quite a bit higher than where it would be if they filed on Friday (VND 17,917).

The timing of the Tender is unclear, but so is the timing of the Ministry of Construction's possible divestment. It is eminently possible that Gelex is going to launch its Tender Offer before the MoC is prepared to sell, and that it will achieve a 46+% stake by buying the extra 21.2% from the public, which would be about 59% pro-ration. This would suit Gelex and probably suit the MOC as well. It is possible also that the MoC will participate to the extent of the Tender Offer quantity (95mm shares), in which case minimum pro-ration would be ~37%.

We do not know the min pro-ration, We do not know the price. How much does MoC want? What price will Gelex pay? The price will be decided, Vietnam style, by the General Director, in the filing to the State Securities Commission. The trade will be to buy the stock on dips. For the moment, this looks like it goes in the "too-hard" bucket until the price moves away from the 95mm shares = VND 2 trillion price level. Travis also believes the stock is relatively inexpensive on a fundamental basis given the practically ideal space that it is in.

(link to Travis' insight: Gelex Officially Decides to Go After Viglacera - A Vietnamese Pre-Event)

Iberdrola SA (IBE SM) has raised its bid in Infigen Energy (IFN AU) to A$0.89/share. Iberdrola has despatched its Bidder's Statement and First Supplementary Bidder's Statement. UAC Energy has declared their A$0.86/share bid Wholly Unconditional (they have 13.4%). Here is UAC Energy's Second Supplementary Bidder's Statement. Infigen Board reiterates support for Iberdrola bid and rejects - here is the First Target Statement. An AFR StreetTalk article suggested that an Australia-based infrastructure fund with A$2.5bn in AUM in various windfarms, pipelines, and similar named Infrastructure Capital Group may be poised to make a run at Infigen with a position of just under 5%.

The AFR is reporting that a determined hedge fund has given Metlifecare Ltd (MET NZ)'s chairman Kim Ellis until this past Friday to re-engage with EQT, or be shown the door. This hedge fund reckons it has the support of more than 25% of shares out. MET believes that is an overstatement with only 15% of shares out in hedge fund hands. According to the article: "Metlifecare had approached EQT to work out a revised deal but the price was too high; then EQT came back with a subsequent offer, which was considered too low. The hedge funds now want talks to be fired back up."

Vantage International (15 HK) has received an Offer by way of a Scheme. The Offeror is Ngai Chun Hung, a director, with 50.2% of shares out. The cancellation price is HK$0.90/share, an 80% premium to last close. The price will not be increased. Independent Scheme shares total 33.5% of shares out, therefore the blocking stake is 3.35%. Bermuda incorporated - the headcount test applies. No mention of dividends

EVENTS

Sembcorp Industries (SCI SP) (Mkt Cap: $2.2bn; Liquidity: $14mn)

In the three weeks since the 8 June announcement, forward forecasts for SCI and SMM business have fallen, but not dramatically. SCI shares opened sharply higher vs their pre-announcement price of S$1.53/share, but from the open of trading post-announcement, they have underperformed FTSE Straits Times Index by 1.5%. SCM shares have fallen sharply. The move on SCM was predictable. Travis thinks there is further to go. The move on SCI is interesting, and while optically it looks like the fall in SCM share price matters because the current SCI includes future spinoff shares as a large portion of its "value." If the value of the dividend to be received falls, the shares cum dividend will fall.

But investors are missing the forest for the trees. If SCM shares fall a further 50%, the implied value of SCM shares and SCI ex-SCM shares is about 50% each of the current S$1.82/share price. In fact it slightly favours SCM still. But future SCI will generate 90% of the combined two-company EBITDA in 2020-2021, and 95% of the EBITDA attributable to SCI ownership.
The forward implied PER and EV/EBITDA of SCI are too low. A couple turns higher on EV/EBITDA out to 2022 would get the business closer to where peers trade, and that would imply a significantly higher share price (in effect a tripling of the implied SCI share price, or a doubling of the current price). To get to a 10x PER would require a near-doubling of the current share price.
The Trade is to get long SCI. The timing is tough. The classic "spinoff trade" is to buy the parent in order to get the spinoff, then sell the parent as soon as the spinoff spins. This trade is the opposite. If you could hedge your SMM now, you would, and SCI ex-SMM on a forward basis is a great thing to buy. The problem is hedging is difficult or impossible. There is not much borrow at all. As long as SMM shares continue to fall in price, there may be reluctance on the part of many to buy SCI shares. That is short-term wise long-term foolish in my opinion.
The next 30% down on SCM shares will lower the "real-time TERP" by 10%. The thing which SCI is going to spin off to you is the "real-time TERP." If you are a spinoff investor, watch for the right timing. But if we are talking about future SCI having 50-100% upside or more, and the TERP of SMM having downside of 10-20% (20% fall in TERP would get you to a trading price well below S$.20/share), timing matters less than you think it does. A large investor should look at what the business is on a forward basis. Sure you will get SMM shares dumped on you, and you can sell them for what you think you should, but the SCI stub is the prize.

(link to Travis' insight: Thinking About Sembcorp Industries' Future - Be Bigly Bullish)

In Hankook Technology Group: Chairman's 2nd Son Takes Over But It Is Not Over Yet!, Douglas Kim discussed news that Hankook Technology Group (000240 KS)'s Chairman Cho Yang-Rae sold his 23.59% stake to his 2nd son Cho Hyun-Bum in a block deal. As a result, the 2nd son Cho Hyun-Bum's stake in Hankook Tech will increase from 19.3% previously to 42.9%.

As announced in India's 2019 Union Budget and confirmed by the Ministry of Finance in October 2019, the Foreign Portfolio Investment limit in companies was raised from 24% to the sectoral limits effective 1 April 2020. FTSE has now confirmed their implementation of the new Foreign Ownership Limits (FOL) in India. MSCI has just announced that they will defer the implementation of the FOL increases pending clarifications on the timeliness, quality and standardization of the data provided by NSDL & CDSL. In India Foreign Ownership Limit Increase - FTSE Flows Staggered, MSCI Defers Implementation Yet Again, Brian Freitas reckons Kotak Mahindra Bank (KMB IN) could be the biggest beneficiary of the changes since it will enter the FTSE indices. From the shareholding pattern ending 31 March 2020, there was just over 23% foreign room. However, the stock may not be added to the FTSE indices if the foreign room is below 20% as of 30 June 2020.

AMFI publishes a list of stocks every January and July to categorize stocks into large-cap, mid-cap and small-cap segments of the market. For the six months ending 30 June 2020, Brian sees quite a few changes due to the volatility in the markets and active fund managers will need to buy/sell these stocks to align with the new categorization. In India Stock Classification Changes - Active Portfolio Churn, Brian recommends going long stocks that are migrating upwards and sell/ go short stocks moving to a lower market cap category. The stock expected to move from mid-cap to large-cap are SBI Cards (SBICARD IN), Adani Green Energy (ADANIGR IN), Abbott India (BOOT IN), Indraprastha Gas (IGL IN), Cadila Healthcare (CDH IN), Alkem Laboratories (ALKEM IN), Tata Global Beverages (TGBL IN), Mrf Ltd (MRF IN) and Whirlpool Of India (WHIRL IN). The stocks expected to move from large-cap to mid-cap are Piramal Enterprises (PIEL IN), Yes Bank (YES IN), Power Finance (POWF IN), ACC Ltd (ACC IN), Kansai Nerolac Paints (KNPL IN), Rural Electrification (RECL IN), ABB India Ltd (ABB IN), Oracle Financial Services (OFSS IN) and Zee Entertainment Enterprises (Z IN).

JAPAN ETFs

A significant majority of companies have a fiscal year-end on 31 March. That leads to a huge number of AGMs at the end of June, with one or two days accounting for more than a quarter of listed companies' AGMs. It also means there are dividend ex-dates twice a year when 80+% of the dividends paid out by large Japanese companies on those two days alone. And that causes large dislocations in delta and style variance for a bit over a week. This was last discussed here. There are behavioural and style biases to do with the tax year and individual investors. Then there are behavioural and style biases to do with what foreign investors do (discussed before here and still relevant) - less seasonal but still significant. But you'd think that ETFs would be different. They are not. They too have a weird seasonality. And as discussed by Travis in The Annual Japan ETF Dividend Ding, it comes to a head this Monday-Wednesday.

M&A - UK

Cello Group Plc (CLL LN) (Mkt Cap: $0.2bn; Liquidity: $1mn)

On 1st July, UK-based Healthcare marketing services provider Cello announced they had received a Takeover Offer from US-based PE firm Arsenal Capital Partners. The Deal values the company at a market cap of £179mn. The Offer Price will be 161 pence and the consideration will be in the form of cash. The Shares of Cello are currently trading above terms at 162 pence. This is a friendly all-cash Deal. The board has agreed to the Terms and unanimously recommended Shareholders to vote in favour of the Deal. The Scheme requires approval from Target Shareholders representing 75% of Cello's Shares. Cello Target Shareholders holding 35.2% have already shown support.

If these irrevocables remain unchanged, the Deal could require Target Shareholders holding up to 42,416,117 shares out of the remaining 80,017,898 shares (outside the irrevocable undertakings and non-binding letters of intent) to vote in favour - an approval rate of 61.4%. Furthermore, any potential absenteeism (typical of shareholder meetings) could mean the actual requirement might be lower in reality. Janaghan Jeyakumar believes Target Shareholders might give the nod for the following reasons.
The Offer comes at an all-time high price and translates to healthy premia of 43.8%, 40.9%, and 28.3% to the undisturbed price, 3-month VWAP, 6-month VWAP respectively. The EV/EBITDA (LTM) multiple of 13.3x offered for Cello is higher than that offered for Huntsworth (HNT LN). Although the forecast EBITDA growth is higher for Cello, on a growth-adjusted basis, both EV/EBITDA multiples seem quite similar.
This transaction is expected to close in Mid-August. The expected timeline is quite similar to the Huntsworth - CD&R Deal which took approximately two months to complete. Avoid buying the stock above Terms. If the price drops below Terms, this could possibly become suitable for a short-dated Rate-of-Return Trade or a low-cost bump option, but Janaghan doesn't expect a bump. He expects the Deal to complete as-is.

(link to Janaghan's insight: Cello Health: Trading Above Terms, Bump Needed?)

M&A - SAUDI ARABIA

Samba Financial Group (SAMBA AB) (Mkt Cap: $14bn; Liquidity: $13mn)

Saudi Arabian banks National Commercial Bank (NCB AB) and Samba announced they had entered into a "Framework Agreement" on 25th June 2020 in order to begin "a reciprocal due diligence process and to negotiate definitive and binding terms of a potential merger" between the two entities. The two parties have also agreed on an Exchange Ratio Range on a non-binding basis. Based on the outcome of the due diligence process, the shareholders of Samba will receive between 0.736 and 0.787 newly issued shares of NCB in exchange for every share they hold in Samba. Right now, given the dividend differential, this is trading roughly at the lower end of terms.

This is a Non-Binding Deal. At this point, neither party is under any obligation to proceed with the Potential Transaction and there can be no assurance the Deal will be completed even if both Parties agree to a Binding Deal. If this turns into a binding agreement, the Transaction will be completed by way of a "merger" where National Commercial Bank will be the Merging Bank ("Surviving Entity") and Samba would be the Merged Bank ("Extinct Entity"). The parties expect to conclude due diligence and sign a definitive agreement within approximately 4 months.
This Deal is likely to require approvals from shareholders of both companies and the acceptance threshold is likely to be "three-quarter majority vote of shares represented at the meeting". But Public Investment Fund, Public Pension Agency, and General Organization for Social Insurance collectively own 41.5% and 54.9% of total shares outstanding in Samba and NCB respectively. However, according to Article 191 of Companies Law, "a partner who owns shares in the merged and merging companies may vote on the merger decision only in either company." This creates a weird situation and may need some clarification.
If you are inclined to think that this deal will be pushed through politically, then you probably want to own Samba. If DD is "successful" then it gets done at the top end. If you think it does not get done because like last year's potential deal between NCB and Riyad, there are differences in valuation, this could fall 15%. That suggests the reward/risk ratio here between the two banks is 1:3 or a 75% likelihood this gets done. All told, Travis would be hesitant to put this trade on right now without a feeling that Samba management might fight for a bit more upside. Travis would want at least another 1%/month relative upside. That could be a 1% wider spread in a month, or it could be this spread in 2 months.

(link to Travis' insight: Doing the Big Bank Samba in KSA)

M&A ROUND-UP IN JANUARY

For the month of June, 20 new deals were discussed on Smartkarma with an overall announced deal size of ~US$12bn. The average premium for the new deals announced in June was ~33% and the YTD average premium for all deals discussed on Smartkarma is 32%. The average for all deals discussed on Smartkarma in 2019 (145 deals all-in) was 31.5%.

(link to my insight: ((Mostly) Asia M&A: June 2020 Roundup)

INDEX REBALS

Nearing the last month of the NIFTY Index (NIFTY INDEX) review period that runs from February to July, four stocks are eligible for inclusion HDFC Standard Life Insurance (HDFCLIFE IN), SBI Life Insurance (SBILIFE IN), Divi'S Laboratories (DIVI IN) and Dabur India Ltd (DABUR IN) while the four lowest-ranked stocks by average free-float market cap and at risk of exclusion are Zee Entertainment Enterprises (Z IN), Bharti Infratel (BHIN IN), Gail India Ltd (GAIL IN) and Vedanta Ltd (VEDL IN). In NIFTY50 Index Rebalance Preview - Maxing Out The Limits, Brian thinks Avenue Supermarts (DMART IN) ranks very highly on market cap and is a constituent of the Nifty100 Index but it does not have listed Futures & Options (F&O), a prerequisite for inclusion. There is still time till end July for F&O to be introduced which would make the stock eligible for inclusion in the Nifty 50 index. The index rules allow for a maximum of 5 changes to the index constituents in a calendar year. With only one change in the March review, 4 changes in September would be the maximum permitted.

As discussed by Brian in NIFTY50 Ad-Hoc Index Rebalance: Vedanta Out, HDFC Life In the Index Maintenance Sub-Committee (IMSC) of NSE Indices Limited made an ad-hoc change to the NIFTY Index (NIFTY INDEX) excluding Vedanta Ltd (VEDL IN) and including HDFC Standard Life Insurance (HDFCLIFE IN) with effect from the close of business on 30 July to coincide with the Futures & Options (F&O) expiry. With this change, we expect three changes in the next regular rebalance in September. We expect the inclusions of SBI Life Insurance (SBILIFE IN), Divi'S Laboratories (DIVI IN) and Dabur India Ltd (DABUR IN) while the three lowest-ranked stocks by average free-float market cap and at risk of exclusion are Zee Entertainment Enterprises (Z IN), Bharti Infratel (BHIN IN) and Gail India Ltd (GAIL IN).

SK Biopharmaceuticals (326030 KS) is up a lot since its IPO. The question now on a lot of investors minds is the possibility of index inclusion. It is almost certain to be included as discussed by Sanghyun Park in SK Biopharmaceuticals: KOSPI 200 Inclusion Event and Brian in SK Biopharmaceuticals - Index Fast Entry Possibilities: KOSPI200, FTSE, MSCI.

SHANGHAI/SHENZHEN CONNECT

In Hong Kong Short Interest: From the Wuhan Lockdown, The Market Low, Until Now at end-May, I analyzed how shorts behaved in 2020, using specific notable points in time as reference points (at the time of the lockdown in Wuhan (23 Jan), the low of stock markets in late March) against where we were then. In something of a companion piece, this insight looked at the holdings via the Shanghai & Shenzhen Connect into Hong Kong stocks (i.e. southbound holdings) at these moments in time.

I've broken down these holdings into various industries, both in HK$ terms and as a % of the accumulated market caps of the companies into which the Shanghai/Shenzhen holdings are held. I've also looked into the top price to book companies via these connect holdings to gauge if any meaningful pattern emerges.

(link to my insight: Shanghai/Shenzhen Connect: Holdings From the Wuhan Lockdown, The Market Low, Until Now)

OTHER M&A & EVENT UPDATES

Vedanta Ltd (VEDL IN) is reportedly trying to upsize its US$2.5bn loan to US$2.75bn, leaving the $1.75bn to be paid back quickly on dividend payouts from HZL at the same level. In the evening of 2 July, the IMSC has decided to replace Vedanta from various indices on account of proposed voluntary delisting. The changes shall become effective from July 31, 2020 (close of July 30, 2020). This will affect the NIFTY 50, NIFTY Next 50, NIFTY 500, NIFTY 100, NIFTY LargeMidCap 250, NIFTY 200, NIFTY Metals, NIFTY Commodities, NIFTY MNC, NIFTY 50 Value 20, and a few others.
Skyworth Group Limited (751 HK)'s Offer doc has been delayed until the 31 July, from 8 July originally. This was largely to be expected.
SAIC Motor HK Investment Limited - presumably an entity under SAIC Motor (600104 CH) - will acquire 20.87% of shares out in Car Inc (699 HK) from UCAR, and 14.76% from Amber Gen - both at $3.10/share - taking its take to 28.92%.
A-Living Services (3319 HK) has received formal approval from the CSRC converting the H-share full circulation program, enabling the company to convert up to 900mn domestic shares & up to 86.66mn overseas-listed foreign shares into H shares.
Languang Justbon Services (2606 HK) has received formal approval from the CSRC converting the H-share full circulation program, enabling the company to convert up to 127.6mn domestic shares into H shares.
In its monthly update, CGN New Energy Holdings (1811 HK) says there is no update.
KKR acquired 427mn shares in First Gen (FGEN PM), or 11.9% of shares out, bringing its total to 12.55%, based on the initial holding - although this total % holding is not specified in the announcement. All shares tendered would be purchased, implying 100% pro-ration.
As expected, the dispatch of Jinmao Hotel & Jinmao (China) Hotel Investments and Management Limited (6139 HK)'s Scheme Doc has been delayed to the 17 August (6 days past my initial estimate) from 3 July.
Beijing Jingneng Clean Energy (579 HK) suspended pursuant to the Code on Takeovers and Mergers. Looks like another "clean energy" take out.
Perennial Real Estate Holdings (PREH SP)'s Offer Co is out. The first close is the 3 August.

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
GBA Dynamic (1189 HK)	18.71%	Emperor	Satinu
Bank Of Gansu (2139 HK)	13.76%	Guotai	Outside CCASS
China Touyun (1332 HK)	20.59%	Huarong	Outside CCASS
China Binary Sale Technology (8255 HK)	18.28%	MS	Outside CCASS
Golden Eagle Retail (3308 HK)	12.29%	Citi	Outside CCASS
Hong Kong Building & Loan (145 HK)	12.20%	Black Marble	Huarong
Cst Mining (985 HK)	10.14%	Get Nice	Kingston

Source: HKEx

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

Name	% chg	Into	Out of
China Bright Culture Group (1859 HK)	16.34%	Yue Xiu	Outside CCASS
JS Global Lifestyle (1691 HK)	10.59%	MS	Outside CCASS
Suoxinda (3680 HK)	34.02%	CMB	Outside CCASS