Last Week in Event SPACE - MitMotors, Celltrion, Hanwha, Nissan/Renault, Murray Goulburn

Last Week in Event SPACE, a notional free put option on Mitsubishi Motors Corp (7211 JP)'s Tender Offer; more downside in Celltrion Inc (068270 KS) is expected following the completion of the KOSPI 200 inclusion and ION's placement; Hanwha Life Insurance Co Ltd (088350 KS) joins the hybrid securities club, however, its risk-based capital ratio is a concern; a trial balloon for Nissan Motor Co Ltd (7201 JP) & Renault SA (RNO FP), but ultimately the French government needs to relinquish control; MG Unit Trust (MGC AU) bumps its initial distribution and progress is advanced with ACCC; and China Conch Venture Holdings Ltd (586 HK)’s rump stake looks fully priced. Plus CCASS movements.

Mitsubishi Motors Corp (7211 JP) (Mkt Cap: $10.5bn; Liquidity: $55.4mn)

MitMotors closed at ¥751 Friday, a whisker above the Tender offer Price of ¥749. A free money put option if you will.

• Passive index owners are unlikely to tender at these levels. Indeed, many investors will simply ignore the tender offer. If the stock falls several % below the ¥749/share a few days before March 20th (the close of the tender offer), the long-only community could tender just to eke out some profit, especially if the market falls much further.
• But if the stock does not fall further than here, Travis Lundy expects the Tender Offer Fill Ratio to be close to 100%. That means there is a significant Fill Ratio Delta between here and about 5-7% lower.
• One of the more interesting arbs in our event universe. And there are other trade options for long only, long/short and arbitrageurs, which I am sure Travis will happily walk you through.

(link to Travis' insight: MitMotors: The Arb Is Getting Interesting)

Celltrion Inc (068270 KS) (Mkt Cap: $38.2bn; Liquidity: $767mn)

Ion Investment’s Celltrion block deal, involving 2.24mn shares, was completed at a 9% discount to last close, for a deal value of ₩754.2bn. ION has a 6-month lock-up obligation on its remaining 12.4% stake in Celltrion. Apparently, the block sale was premised on the fact Celltrion's relative market size in its bio sector has grown too much. It probably helps ION's average purchase price since it began buying shares in 2010 is ₩20,413 per share, giving an absolute return on investment of 1812.6%.

• So how did this affect Celltrion's Mar 8 KOSPI 200 inclusion? The block deal was about two-thirds of what the ETFs mirroring the KOSPI 200 needed to buy according to Sanghyun Park, and he took the offering as a cue for short sellers to get involved and not wait until Mar 9.
• Shorting on the open on the 7^th March was not a bad level. Even better if you went short at the close the following day - shares closed down 7.9% on Friday. Celltrion's stock borrow balance was 23,027,305 shares (₩8.52tn), earlier the week, or 18.77% of the total shares. There’s more downside from here.

(link to Sanghyun's insight: ION's Celltrion Block Deals - Summary & Impacts)

SK Telecom (017670 KS)(Mkt Cap: $17.7bn; Liquidity: $41.6mn)

SK Telecom (017670 KS) announced on March 7th that it had partnered with the Macquarie Group to bid for ADT Caps, the second largest security service (alarm monitoring) company in Korea. It is up against a bid from another consortium led by CVC Capital Partners and GIC. Douglas Kim previously discussed SKT entering the fray in his note Who Will Buy The Carlyle Group's ADT Caps? At What Price? - Impact on SK Telecom & KT.

• Douglas views the announcement as negative due to the absence of synergies between telecom and security services; and the prospect of overpaying. A potential purchase price of ₩3tn compares to SKT’s 2018E net profit of ₩2.8tn. The seller is the Carlyle Group, who may favour SKT/Macquarie over CVC, even if the two bids are similar, given SKT is a major strategic investor.
• If the SKT-Macquarie consortium ends up winning this deal, the consortium could fund about 50-60% of price tag with debt and the remaining 40-50% with equity. SKT may need to fund about ₩600bn-₩800bn won of this deal with its cash, either by selling treasury shares (it has 10.1mn treasury shares worth ₩2.3tn) - unlikely as the shares are at a 52-week low - or cash on hand, of which SKT has more than ₩2tn.

(link to Douglas’ insight: Korea M&A Spotlight: SK Telecom Joins the Macquarie Consortium to Bid for ADT Caps)

Hanwha Life Insurance Co Ltd (088350 KS) (Mkt Cap: $5.3bn; Liquidity: $8.5mn)

Hanwha announced it would issue US$1bn worth of hybrid securities (or hybrid bonds) to increase its capital to meet IFRS 17 accounting requirements. Kyobo Life, Korea's No 2 insurance firm initiated this trend last year with its US$500mn raising, followed by Heungkuk Life (US$500mn), the leading mid-sized life insurance firm in Korea; while another mid-sized life insurance firm, KDB Life, is currently working on a US$300mn offering.

• Why issue overseas? Issuing in USD gets you access to ALL international investors - not just US investor -which typically translates into better bond yields. In fact, the overseas reception has been strong with Kyobo's issue priced at only a 3.95% bond yield, the record low at the time among US$ denominated hybrid securities issued by Asian insurance firms. Even Heungkuk Life's, a smaller player compared with the Big Three, was eventually was finalized at 4.475%.
• So that looks positive right? However according to 'K-ICS (Korea-Insurance Capital Standard)' which will be introduced in 2021 and replace the RBC ratio, Hanwha is the lowest. Hanwha's biggest problem is its relatively high exposure to fixed high interest insurance products, which it began selling in the 1990s.
• This means Hanwha Life's current capital adequacy situation may draw more attention than the previous two cases, and if you are a hybrid security investor, then you can afford to be a little less aggressive in pricing in this event. And Sanghyun believes this issuance alone will not be enough to address its capital adequacy situation, possibly further reducing the attractiveness for the issuance. This event may provide several interesting short selling entry points on Hanwha Life.

(link to Sanghyun's insight: Hanwha Life Insurance - US$1bil Hybrid Securities Issuance Summary)

Nissan Motor Co Ltd (7201 JP) (Mkt Cap: $43.9bn; Liquidity: $163mn)

Lots of excitement earlier in the week after CNBC said "Renault-Nissan's Ghosn has proposed a Dutch foundation to manage the carmakers”, followed shortly by reports which indicated the idea was in process and still faced hurdles, culminating in the official line from the Renault-Nissan-Mitsubishi Alliance: "any discussion about a share transaction involving Renault, Nissan, or the French State is pure speculation."

• Dutch Foundation? Each share of the two listed companies have equal earnings and cash flows through jointly owned operating entities and an equalisation agreement. Not unlike Unilever PLC (ULVR LN) and Unilever NV (UNA NA)
• Travis believes these media reports were merely trial balloons. Certainly, this is much more easily talked about and much less easily enacted
• There have been arbitrageurs playing this trade for 12-14yrs and there have been a lot of noise along the way. The political side has ramped up in the last couple of years. A political detente was reached two weeks ago, with a specific mandate, as proposed by Ghosn, to "make the alliance irreversible".
• As Travis wrote two weeks ago in the preceding thinkpiece insight, the French state may have no choice but to give up some control to get what it says it wants. It cannot hope to dictate French nationalist industrial policy to a company which would affect the disposition of workers and shareholders of foreign companies.

(link to Travis' insight: Renault/Nissan/Mitsubishi - Moving Quickly? Maybe Not)

Samsung Heavy Industries (010140 KS) (Mkt Cap: $3.5bn; Liquidity: $43.7mn)

If you opted out of simply short selling before the first round of price determination, and/or scooping up shares immediately before the ex-rights date and dumping next day; you can still buy subscription rights and short during the subscription rights trade period (27 Mar - Apr 2).

• This is isn't a risk-free trade and as seen in the case of Hyundai Heavy Industries (009540 KS)'s rights offering, a very focused and concentrated effort to bring down the price on Apr 9 (second round price determination) would be required, according to Sanghyun.

(link to Sanghyun's insight: Samsung Heavy Rights Offering - Current Situation Update)

Mg Unit Trust (MGC AU) (Mkt Cap: $397mn; Liquidity: $0.4mn)

Pranav Rao updated the Murray Goulburn transaction following the ACCC's SoI and Saputo's discussions about a divestment plan for the Koroit plant. Recent updates include a higher net value per share/unit of A$1.15-1.20 and a larger initial distribution of A$0.80 per share/unit (up from A$0.75). The Explanatory Memorandum will be dispatched on 14-Mar-18 and the shareholder vote on 5-Apr-18. The transaction is expected to complete on 1-May-18.

• The remaining A$0.35-0.40 of net value after the initial distribution will be distributed after the ACCC and unitholder actions have been resolved.
• The ACCC is not seeking pecuniary charges against MGC; therefore the unitholder class action will determine the timing (which could exceed 2 years) and the value of the remaining distribution. It’s an interesting long-dated option against the current A$0.11/unit investment (using Friday’s close) for those with a higher risk appetite.

(link to Pranav’s insight: Murray Goulburn - Risk Distribution)

Tox Free Solutions Ltd (TOX AU) (Mkt Cap: $522.9mn; Liquidity: $4.6mn)

With shares now trading ex-interim dividend of A$0.05/share Morningstar has brought its fair value estimate in check with the A$3.425/share all-cash acquisition offer from Cleanaway Waste Management Limited (CWY AU).

• The payment comprises an A$0.58/share fully franked special dividend and a scheme consideration of A$2.845/share – exceeding Morningstar’s fair value estimate of A$2.30. In the absence of a superior proposal, it recommends Tox shareholders vote in favour of the scheme. The scheme booklet is out and the scheme meeting will be held on the 6 April.

(link to Morningstar's insight: Corporate Action: Vote in Favour of the Solution to Cleanaway Tox Free Shares)

J-Lease Co Ltd (7187 JP) (Mkt Cap: $68.9mn; Liquidity: $0.9mn)

The TSE has approved reassignment (presumably contingent on the successful offering of 400,000 shares between March 7th and March 12th) and TSE1 listing on March 13th. The TSE1 reassignment triggers the inclusion into the TOPIX Index, which is expected to take place at the close of trading April 26, 2018.

• Travis is not overly bullish. The inclusion is probably 500-600k shares, which appears pretty well-baked in. There will likely be no coverage of the stock for quite a while, though if revenue growth continues anywhere near the current pace, this stock will be a grower. Longer-term, the stock may be worth looking at.

(link to Travis' insight: J-Lease (7187 JP) - Smallcap TSE1 Promotion & TOPIX Inclusion)

Greens Co Ltd (6547 JP) (Mkt Cap: $190mn; Liquidity: $0.9mn)

Greens - a hotel management business (also running associated restaurants and event/banquet halls) - announced on March 2nd that the TSE had approved the company's application for reassignment to the TSE's First Section as of March 23rd, triggering a TOPIX Index inclusion. This inclusion event will be at the close of trading April 26, 2018.

• While float will increase to handily cover the inclusion, this is a stock which could continue to do well and it is not overly expensive.
• Nomura covers it with a Buy rating and a ¥2000/share price target vs. Friday's close of ¥1,607. This looks like a deal to get long and a small-cap stock to own and/or investigate further.

(link to Travis' insight: Greens (6547 JP) - Smallcap Offering & TOPIX Inclusion)

China Conch Venture Holdings Ltd (586 HK) / Anhui Conch Cement Co Ltd A (600585 CH)

Trading at a 20% discount to NAV against its 12-month average of 34%, for a Holdco largely viewed as a proxy for Anhui's A shares, this appears an unwind candidate.

• Of note, Shanghai southbound flow into CCV has gathered pace since the beginning of February, averaging (on a net basis) ~40% of the volume traded vs an average of 6% over the past year. Shanghai southbound now accounts for 5.66% of issued shares, up from 2.36% since the beginning of the year.

China United Network A (600050 CH)/ China Unicom Hong Kong Ltd (762 HK)

Back in late August, I discussed the mixed ownership reform plan. Given the two companies are essentially one & the same, I favoured Unicom over CNC on account of the cheaper valuations and that essentially played out, before finally reversing at the beginning of February.

• Unicom is trading at an FY18 PER and EV/EBITDA of 23.1x and 4.15x vs. CNC's 50.08x and 5.56x. That looks attractive. Morningstar has a fair value of $10/share. With the restructuring all but complete and absent newsflow, the recent CNC momentum does not look sustainable.
• It is interesting to note that the Shanghai southbound holdings into Unicom have more than halved to 0.45% (as of Friday's data) of outstanding shares in the last year - a net decline of ~170mn shares. Around ~1.5% of daily volume.

(link to my insight: StubWorld - Set-Up & Unwind Extremes: China Conch, China Unicom)