Last Week in Event SPACE - Mirae, Softbank, NTT Docomo, Kakao, A/H Shares

Last week, Mirae Asset Daewoo Securities Co Ltd (006800 KS)'s rights and arb opportunities; IPO'ing its mobile unit will provide a better understanding of Softbank Group Corp (9984 JP)'s NAV; a thorough analysis of NTT Docomo Inc (9437 JP)'s buyback; pricing for Kakao Corp (035720 KS)'s GDR offering is fixed - now what?; and how is Southbound positioning impacting Hong Kong's A/H shares.

Events

Mirae Asset Daewoo Securities Co Ltd (006800 KS) ("MAD") (Mkt Cap: $6.3bn; Liquidity: $33.8mn)

After Douglas Kim’s insight last week, Sanghyun Park discussed arbitrage opportunities to be explored based on common-pref spreads surrounding MAD’s rights offering.

• Class B prefs carry pre-determined dividend rates just like regular bonds, facilitating the price estimation. Applying a numerator comprising common and prefs, ex-treasuries; and a denominator of the FnGuide consensus NP for FY18 of ₩585bn (with the assumption of 7% ROE on the ₩700bn), backs out a possible yield of 3.0122%, which in turn translates to an estimated price for the class B prefs of ₩5,288. This is close to the tentative offer price of ₩5,000.
• The trade? Buy Mirae Asset Daewoo common shares right before the ex-rights date (Jan 23) and sell them right on the ex-rights day. You’ll get dinged on transaction costs, but not pay for the subscription rights. And go short on the common futures with the March maturity. Bear in mind these are perpetual prefs – forget about simply capitalising on the common-pref spread.
• Of note, Mirae Asset Capitals which owns a 18.62% stake in MAD, may not want to go for a full subscription in this rights offering because of the holdco conversion rules. This may allay potential concerns raised in last week's wrap. Ratios, workings and other fun stuff, all in Sanghyun's insight. Well worth a read.

(link to Sanghyun's insight: Mirae Asset Daewoo Pref Issuance - Arbitrage Opportunity Assessment)

Softbank (9984 JP) (Mkt Cap: $91.4bn; Liquidity: $477mn)

Pelham Smithers discussed a report by the Nikkei that Softbank (9984 JP) plans an IPO of its mobile unit this year. The “neither deny nor refute” response by management would suggest advanced talks. Certainly, a listing of SoftBank Mobile is a logical solution that would place a stock market price to all substantial subsidiaries, along with its most substantial affiliate (Alibaba (BABA US)).

• The news is undoubtedly positive for Softbank because (1) it increases the ability to value SoftBank on a NAV basis and (2) it should reduce the conglomerate discount applied to such valuation.
• If the Nikkei is correct, that 30% sale places a value of ¥6.7tn for SoftBank Mobile, which looks low. Pelham backs out an EV/EBITDA multiple of 6.75x, which prices SoftBank Mobile at ¥7.9tn. If priced around these levels, then SoftBank’s fair value goes to ¥10,000 ~ 11,800, depending on the tax rate. Softbank closed at ¥9,184 on Friday.

(link to Pelham's insight: SoftBank (9984) - To List Mobile Unit?)

NTT Docomo Inc (9437 JP) (Mkt Cap: $96bn; Liquidity: $118mn)

NTT Docomo announced it has bought back 75,678,037 shares at ¥2,681/share, for a total expenditure of ¥202,892,817,197. The original announcement noted that NTT (Nippon Telegraph & Telephone) (9432 JP) would tender 74,599,000 shares into this tender offer, which means others tendered 1.079mm shares.

• As NTT Docomo did not repurchase shares otherwise during October to December, it has ¥97.1bn to buy in 44-51 days. Taking into account the buyback guidelines prohibit i) purchasing shares on the open if the print is above the previous day's close; and ii) purchasing shares at a level which creates a new high on the day, or in the last 30 minutes, Travis Lundy estimates the buyback could account for 20.8-24.1% of eligible average volume - not counting the problem of the open being higher, or volume at new highs.
• Historical evidence (the last two buybacks) indicates NTT Docomo will try to buy back shares such that the NTT sale into the tender was equivalent to 68.3% of shares bought back. Travis also expects NTT Docomo will come quite close to completing its buyback in ¥ terms.

links to Travis’ insights:
NTT Docomo Tender Offer Complete; ¥97bn Left To Spend
NTT Docomo ¥97bn - Will They Spend It? The Data

Kakao Corp (035720 KS) (Mkt Cap: $8.8bn; Liquidity: $136mn)

Douglas’ SoTP valuation analysis of Kakao Corp (035720 KS) suggests ₩12.0tn in implied market cap or ₩176,622/share, which represents ~28% upside from current levels. This includes a ₩349.7bn (~3% of Kakao’s market cap) for its 25.85% stake in Dunamu, the operator of UPbit cryptocurrency exchange, after taking a hatchet to current trading volumes and margins.

• This conservative base value for UPbit is prudent given a high probability the Korean government bans all trading of cryptocurrencies on exchanges in Korea.
• Kakao Corp (035720 KS) fixed the GDR offering price at ₩129,004 on the 18 Jan, a 3.7% discount to then closing price of ₩134,000; but a ~10% discount to the 3-day VWAP of ₩144,485 according to Sanghyun. Arguably short sellers not only dragged down the 3-day VWAP, but also forced Kakao to go for the maximum allowable discount (10%) by eventually pulling down the Kakao share price to ₩134,000, down 14.65% from the Jan 9 closing price of ₩157,000.
• Douglas continues to have a positive outlook on Kakao Corp shares, with short-sellers in retreat and improving overall sentiment. Indeed, pure GDR investors and ‘passive’ GDR arbitrage hunters won’t like seeing the price of their underlying shares decline continuously since their GDR price is now fixed. Sanghyun"s bet is that active short sellers will take a wait-and-see approach rather than jump to any risky move.
• The share price closed at ₩138,000 on Friday, which gives a 6.9% GDR-underlying share price spread.

links to:
Douglas’ insight: Kakao: SoTP Valuation & Cryptocurrency Exchange Optionality
Sanghyun's insight: Kakao GDR Issuance Update

CJ O Shopping Co Ltd (035760 KS) (Mkt Cap: $1.3bn; Liquidity: $7.6mn)

Shopping announced it would merge with CJ E&M Corp (130960 KS) on a 1: 0.4104397 ratio, with Shopping the surviving entity.

• While the ratio slightly favours E&M, Douglas likes Shopping here as it should enable Shopping to be more proactive in investing in higher returns on capital projects. As such, there is a greater chance of investors placing a higher P/E multiple, compared to CJ E&M, which already has a high P/E ratio of 24x 2018 earnings.
• Sanghyun weighs in on the discussion and is piqued why the merger is even occurring in the first place. The reasons for the merger don’t add up. He thinks it may be related to CJ OliveNetworks, which is key to the CJ Group's restructuring process and is the only company in which CJ's next generation holds significant stakes.
• For Lee Sun-ho to take over his father's CJ Corp controlling stake, he faces a 50% inheritance tax rate bill, or ₩1.15tn vs. his ₩0.5tn stake in OliveNetworks. Why not take E&M’s surplus cash – and 22.02% stake in Netmarble Games Corporation (251270 KS) and a 71.33% stake in Studio Dragon Corp (253450 KS) – and use this wealth transfer to boost CJ O Shopping's commerce business, which will indirectly benefit CJ OliveNetworks' own retail commerce business? It’s a concinnity approach.

links to:
Douglas’ insight: CJ E&M & CJ O Shopping Merger Analysis
Sanghyun's insight: CJ O Shopping & CJ E&M Merger Summary

Share Classifications

Travis published a new H/A Spread monitor which looks at recent changes in H-Share and A-Share spreads based on various influences and sector patterns, notably Southbound data.

• Most spreads have narrowed over the past 20 days, some significantly. Several large spreads had significant net Southbound flows as a percentage of volume, notably Yanzhou Coal Mining Co H (1171 HK), Everbright Securities (H) (6178 HK), Haitong Securities Co Ltd (H) (6837 HK), Livzon Pharmaceutical Group Inc (1513 HK), Air China Ltd (H) (753 HK), Zijin Mining Group Co Ltd H (2899 HK), Sinopec Shanghai Petrochemical Co Ltd (338 HK), and Huaneng Power Intl Inc H (902 HK)(all listed here had Southbound flow higher than 20% of volume over the last five days).

(link to Travis’ insight: H/A Shares Discounts & Southbound Flows)

M&A

Mantra Group Ltd (MTR AU) (Mkt Cap: $927mn; Liquidity: $8.1mn)

Pranav Rao revisited this arb and notes that the NZCC approval condition has been satisfied, while FIRB is expected to rule favorably. The scheme vote should also be relatively straightforward, with large shareholders having sold down their stakes in the recent past.

• The ACCC has delayed its decision on the transaction, and that could impact the timeline to completion.
• In addition, Pranav's peer group of global hotel operators is up 17% since the transaction was announced, further widening Mantra's discount on a forward PE and EV/EBITDA basis. Moreover, he would not write-off early rumblings that suggested other parties might make a play.
• Pranav would be long at current levels given the reduced downside following the rally in global hotel operators, and for the chance of a counter-bid.

(link to Pranav's insight: Mantra Group: Status Update)

China High Speed Transmission Equipment (658 HK; "CHSTE") (Mkt Cap: $2.6bn; Liquidity: $8.7mn)

Last September, Fullshare Holdings Ltd (607 HK) (Mkt Cap: $10.7bn; Liquidity: $16.4mn) made a voluntary, conditional scrip offer for CHSTE. That offer closed with Fullshare & concert parties owning 82.99%, with a subsequent disposal carried out to meet the minimum free-float requirement. Fullshare has now announced an MOU with a third party to potentially dispose of its entire stake in CHSTE via a partial offer.

• Partial offers are pretty thin on the ground in Hong Kong. The last one of note was the offer for Grand Baoxin Auto Group Ltd (1293 HK), which was covered extensively by Travis. A key condition was the approval from the SFC.

• A complete disposal of its stake in CHSTE at its current price of $12.50 would give Fullshare at most ~HKD 0.77/share. Fullshare closed up 9.7% on Friday. Fullshare is not a stock we embrace, as discussed in China High Speed Transmission: Fullshare Makes An Offer and CHST/Fullshare: IFA Deems Offer Fair, But Concerns Persist; while Glaucus Research has its own view on the stock.

(link to Pranav's insight: CHSTE: Fullshare To (Potentially) Dispose Stake)

Very, very briefly ...

• Tat Hong Holdings Ltd (TAT SP) (Mkt Cap: $279mn; Liquidity: $0.4mn). After flagging interest back in September, a pre-con (reg approvals including Mofcom) offer at $0.50/share was announced last week. The offer has a 90% acceptance condition with irrevocables of 59.74% in the bag. TAT closed at $0.49/share on Friday. Volume since the announcement has averaged US$1.6mn.

Stubs

• Sembcorp Marine Ltd (SMM SP) was on the receiving end of an early week boost, largely due to noise from the CS conference and the release of a new report discussing a re-rating (recovery in new orders and improving balance sheet). The recommendation and price target remained unchanged. In addition, a SMM + Keppel Corp Ltd (KEP SP) merger appears to be doing the rounds, again. Sembcorp Industries Ltd (SCI SP)'s discount to NAV is ~30%, bang in line with its 12-month average.
• Aeon Co Ltd (8267 JP) was coming up “cheap” versus 43%-held Aeon Financial Service Co Lt (8570 JP) accounts for ~16% of my NAV. Overall, it is difficult to get excited or pinpoint catalysts with the stub level ops - comprising one-stop malls and shopping centres in Japan, China, and the ASEAN region - which face increased competition.
• First Pacific Co (142 HK) was also coming up "cheap" vs.Indofood Sukses Makmur Tbk P (INDF IJ), however, the big news is the threat of a third entrant (possibly China Telecom) into the Philippines telco market, a move the Duterte administration hopes will stir up the current duopoly. Philippine Long Distance Tel (TEL PM) (28% of First Pac's NAV) is down ~10% since reports of a third player first surfaced in late November. Expect ARPUs to come under pressure should a third player enter. The discount to NAV could certainly widen from here.
• Early in the week, Wharf Holdings Ltd (4 HK) paid HK$12,451mn for a development site in Kowloon Tong, or HK$28,531 (US$3,646) per square foot, a record for Kowloon. Interestingly the purchase was not done byWheelock & Co Ltd (20 HK). Management does not appear to have any differentiated guidelines as to who buys what, which does not help distinguish between buying Wharf or going long Wheelock's stub assets. Wheelock's discount to NAV is currently 29% vs. the 12-month average of ~25%.

(link to my insight: StubWorld - Set-Up & Unwind Extremes: Sembcorp, Aeon, First Pacific)

TOPIX Inclusions!

Zojirushi Corp (7965 JP) (Mkt Cap: $904mn; Liquidity: $4.5mn)

Zojirushi, a well-known Japanese thermos/hotpot/rice-cooker/small kitchen appliance maker, announced it had been approved to switch its listing venue from the Second Section of the TSE to the First Section of the TSE as of February 5th. The TOPIX inclusion event will take place at the close of 29 March 2018.

• This looks like a pretty good inclusion trade. It was not signaled. The ROE this year is expected in the high 8% level. At 15.4x J-GAAP EPS post-offering, this is not overly expensive for a well-known, and well-respected brand on a PER multiple. The company has net cash of ~¥25.4bn. On a net-cash PER basis, the multiple is ~11x. The EV/EBITDA ratio is <7x. Coverage (currently 2) could rise as it enters TOPIX and enters the tradable universe of more people.
• Travis would want to be long this in near-space as he expects the stock could run.

(link to Travis’ insight: ZOJIRUSHI: Offering, TSE1 Move, & TOPIX Inclusion)

SFP Dining Co Ltd (3198 JP) (Mkt Cap: $568mn; Liquidity: $1.5mn)

SFP Dining, a company with 11 branded restaurant chains, announced it would expand its buyback program from buying up to 550,000 shares (1.88% of shares out) for ~¥1.2bn to buying up to 3.767mn shares (13.07% of outstanding) for up to ¥7.68bn. This tender/buyback will likely trigger a TSE1 listing announcement sometime in the near future. The timing of a TSE1 listing announcement is unclear but if the announcement were made in early March, TOPIX inclusion would be made at the close of trading 26 April 2018.

• There are theoretically 1.1-1.3mm shares to buy for the inclusion, which represents 13-15% of "calculated float", but Travis expects a very large portion of that float is likely to be unwilling to sell - 36,000 shareholders want to keep receiving their annual coupons (kabunushi yutai) for free meals, worth 4% a year. These shareholders won't ditch their coupons for a 10-30% gain in the share price.
• Travis expects early buyers of several hundred thousand shares could represent a significant chunk of the float on this trade. With TOPIX passive funds buying irrespective of the stock price, fundamentals, or illiquidity, there could easily be a decent squeeze on these shares in the next three months.

(link to Travis’ insight: SFP Holdings (3198) - BIG Buyback Means TSE1 Eligibility)