Last Week in Event SPACE: Naspers, First Pac, Toshiba, Nissan, Entertainment One, Huaneng Renew

Last Week in Event SPACE ...

• Naspers (NPN SJ) appears to have baked in most of the upside from the Prosus (PRX NA) spin-off. Near-term there could be a rush to the exit out of Naspers into Prosus, which means the Naspers-Prosus spread could trade wider than originally envisaged.
• Apart from a brief period of investor enthusiasm and a narrowing of the NAV discount in 2013 after First Pacific Co (142 HK) actively invested in operations at the parent level, the last five years have exhibited a downward (widening) drift in the NAV discount, with little to no respite when exiting stub assets.
• While the results do not point to Toshiba Corp (6502 JP)'s buyback propping the stock up against an avalanche of selling, it doesn't inspire any great confidence either. As a restructuring play perhaps the story has merit, but given the continual write-offs and sudden expenses is it worth the risk?
• With an already low support base, inflating his bonus by altering the timing of performance benchmarks may be one issue too many for Nissan Motor (7201 JP)'s CEO Saikawa.
• Huaneng Renewables Corp H (958 HK) looks set to become the third Hong Kong-listed, clean-energy company subject to a privatisation or change of control in the past six months.
• Entertainment One (ETO LN) is a Bump Bet, but probably not a great one. It may, for the moment, just be a chance to play in the mud.
• Plus, other events, CCASS movements (including IPO lock-ups) and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)

Naspers (NPN SJ) / Prosus (PRX NA) / Tencent Holdings (700 HK)

With a little under a week until Proxus, the largest single listing (that is not an IPO) commences trading, I've pieced together pro-forma NAVs for both Prosus and Naspers, to highlight the value to be unlocked from the spin-off under various discount scenarios. Applying a 15% and 25% discount to Prosus and Naspers respectively - or a look through of ~36% - provided 1.2% upside at the time of the report. A look through of 32%, similar to where Naspers was trading would require post-Naspers to trade at a 20% discount, keeping Prosus at 15%. A 20% discount for post-Naspers appears optimistic. Naspers is now at 34% or an estimated 3.1% to be unlocked from the spin-off.

• In Travis Lundy's opinion, Prosus should trade at a premium to Naspers because of the tax basis differential between the two shareholding structures. This becomes more apparent if Prosus liquidates all assets on Day 1 of its listing, and distributes the proceeds to shareholders - the bulk of which goes to Naspers. That in and of itself does not trigger a tax event. But Naspers distributing those proceeds to its shareholders does. And buying back its own shares would impose CGT on some shareholders, but only those who choose to sell.
• Referencing DLCs suggests Prosus should trade at a 10-20% premium to Naspers. A premium for Prosus is also warranted as shareholders have direct access to any e-commerce asset spinoff, whereas Naspers has indirect access. It could be years in the making, but it is present, and is worth a % or three, and more as time goes on. In addition, the more people who elect to take Naspers N vs Prosus, the more it benefits those who choose to take Prosus.
• In terms of flow dynamics based on ownership levels, index participation, index changes, the spinoff dynamics, etc, there will be ownership changes with elections (deadline 13 Sep), and ownership changes in the first 9 trading days as MSCI will be a net buyer on the 16th, and FTSE/JSE indices and FTSE EM/DM will be a net seller on the 20th. There will be a chance to arb between JSE-listed and Euronext-listed.
• The wild card is that Naspers can/could mitigate the spread risk. When Prosus distributes assets to its shareholders, some of those will come to Naspers as a 70+% shareholder. Naspers can use the capital reduction proceeds to buy back its own shares on the market as long as they are trading at a discount to Prosus shares. If Naspers deems that to be a worthwhile effort, that may keep the spread from widening too much over time. But this mechanism can only unfold further down the track because for the moment, Prosus is still consuming cash, and Naspers/Prosus wants to grow the e-commerce assets (through more acquisitions/bolt-ons and investment).

links to:
my insight: Pro-Forma NAVs As Naspers Discount Narrows Ahead Of Prosus Listing
Travis' insight: Naspers & Prosus - Another Think Part II: Indices, Flows, and Ownership
Sumeet Singh's insight: Prosus IPO Part II - A Lot of Future IPO Candidates for Emerging Markets - OLX, PayU, Byju & Swiggy
Patryk Basiewicz : Naspers/Prosus (NPN SJ / PRX NA) - Analysis of the Two Discounts

First Pacific Co (142 HK) (Mkt Cap: $1.7bn; Liquidity: $1mn)

First Pac announced its 2019 interims the previous week. Updating my model for those figures sees the discount to NAV at ~60%, its lowest level not just inside a year, but the lowest since August 2011.

• At the time of the investment into the Singaporean plant, First Pac's discount to NAV was ~45%. It narrowed to ~25% by 2013 year-end, before steadily falling. You would need to go back to early 2010, when First Pac was a passive holdco, to see a consistently wider NAV discount. First Pac's volume, or lack thereof, has also played a role in ongoing weakness - YTD it is US$1.8mn and for three-months, it's US$1mn, compared to US$7+mn in 2013. For a complex holding company's company, straddling multiple countries and currencies, the low liquidity all but extinguishes investor interest when the discount touches the current levels.
• Holdcos, as a form of value trade, aren't working well at present. There are numerous holding companies attributing materially negative value to stub operations. Arguably markets will (or should) eventually revert to intrinsic value, however, there appears less an appetite, and patience, when no catalyst (such as collapsing the holdco structure, buybacks) is apparent. This sums up First Pac.

(link to my insight: StubWorld: First Pacific's Discount Back To Passive Levels)

Nissan Motor (7201 JP) / Renault SA (RNO FP)

On August 3, it was reported that Nissan and Renault were in talks to reduce Renault's stake in Nissan, but it never came. But recent developments - such as news Nissan CEO Saikawa was found to have received improperly high compensation - are starting to point to this actually going through and perhaps relatively soon, with perhaps an MOU this month.

• Saikawa has had a frosty relationship with Renault CEO Thierry Bolloré. If Saikawa steps down, it potentially paves the way for a change in leadership that allows the Alliance to survive based on cooperation rather than capital ties. Renault reduces its stake in Nissan to the point that Nissan's stake in Renault regains voting rights. Nissan blesses the FCA merger and Jean-Dominique Senard and France get their grand win headline. Saikawa takes the blame for Nissan's poor performance and the next CEO takes over at the bottom and gets to claim credit for the ensuing recovery.
• Nissan's market cap has declined significantly recently, and the current bill to take Renault's stake down to 20% is ~¥650bn. Nissan has about ¥1trn in net cash in its automotive segment. If the two companies wanted to maintain similar voting rights in each other, Renault could sell 23.4% of Nissan, which would take it down to 20%. If Nissan were to purchase between 11.2% to 20.0% of its shares and then cancel them, that would leave Renault with a stake between 22.5% to 25% in Nissan - likely similar to Nissan's doubled voting rights.
• Mio Kato, CFA is still bearish the alliance, but less so. On balance, he feels that Nissan is the safest bet here on the long side. The company is at 50% of book, operational conditions have hit bottom and he feels that the potential hard catalysts skew highly positive for the company.

(link to Mio's insight: Nissan: Tying Up Loose Ends)

Nikkei 225 Rebal

After the close on Wednesday, The Nikkei Inc announced that M3 Inc (2413 JP) would join the Nikkei 225 and would replace Tokyo Dome Corp (9681 JP). This appears to be a little bit of a surprise given the lack of buildup in excess volumes, even though M3 was on the shortlist of the Consumer sector for most event analysts (the other names commonly thrown around were ZOZO Inc (3092 JP) and Kenedix Inc (4321 JP), and Tokyo Dome has been on the cusp of being deleted for years. All in all, these should not be too surprising.

• This is a BIG inclusion on M3. It should be 62-72mm shares to buy, out of float of about 270mm shares, so almost a quarter of shares in Real World Float. It is also 30-35 days of volume. 80% of the shares available in Real World Float belong to Actively-Managed foreign portfolios. Of those, 60% of those foreign active holders (120mm shares) are the top four foreigners. If they do not sell, the amount to buy is over 40% of the remaining float.
  • M3 is NOT cheap at 70x trailing PER and and 64x March 2020. It is 35-40x EV/EBITDA. It is growing, and the business space it is in should continue to grow for years and years and years. Travis would not be short.
• It is a long time coming for Tokyo Dome. This too is 30+ days of ADV. And it represents a need for existing float to increase by 35% and perhaps for retail shareholders to own 50% more than they own now. After the exclusion, this stock will become much more difficult to borrow over record date. And given its position, and its debt, Travis expected that the shares may remain rangebound for years to come.
  • However, some people may make a fuss about 2020 and the Olympics and a large number of visitors using its hotels, spas, and facilities, not to mention sporting events. If you think retail punters will get excited by this trade sometime in the next several months as we approach 2020, it may be worth buying the dip. The real reason anyone wants this stock long-term is either an event to monetize or to get the baseball tickets and either use them or turn them into cash.

(link to Travis' insight: Nikkei 225 Rebal - M3 IN, Tokyo Dome OUT)

Toshiba Corp (6502 JP) (Mkt Cap: $xxmn; Liquidity: $xmn)

As Toshiba comes towards the end of its large year-long buyback (the company disclosed that it had purchased 85% of the value allocated by the end of Aug), given the sheer scale, it is somewhat surprising that Toshiba's shares trade 1% below where they were the day before the buyback announcement. That is a 9% outperformance vs. TOPIX but that sort of implies that the company has so far spent ¥597bn to generate ¥171bn of market cap outperformance - not stellar.

• Toshiba is projecting that they will actually return to a ¥10bn net debt position by the end of this fiscal year. Given that the company had a ¥646bn net cash position at the end of 1Q, Mio feels this is conservative but there are significant cash outflows on the horizon. Still, Toshiba is trading at 10x EV/OP and about 1.6x book as guided for FY20E. Even using consensus' high EPS estimates, that only puts the RoE in line with Hitachi Ltd (6501 JP).
• Mio also has concerns about the degree of transparency on the various write-offs and losses being paid out using the huge windfall from the Toshiba Memory sale - even assuming the ¥350bn is still relevant - and the 2017 share issuance. To what extent does this imply lower than disclosed profitability at Toshiba's existing operations? The deteriorating profitability of Toshiba Memory is negative in two ways: equity affiliate losses and postponement of any potential IPO.

• As the buyback ends and with more than a year of restructuring already having passed will Toshiba still be regarded as a special situation? And if not, what happens to those multiples? If you are a long-only what is your incentive to buy Toshiba now? If you like the memory business you could just wait till it lists because if the listing is delayed you probably don't want to own Toshiba stock just for an equity affiliate position when so much else is going on.

(link to Mio's insight: Toshiba: Approaching the End of the Buyback and the End of Net Cash)

Briefly ...

There are two FTSE China A50 Index rebal inclusions, China Int'L Travel Service (601888 CH) and Shanghai International Airport Co, Ltd. (600009 CH) and two exclusions China Railway Construction-A (601186 CH) and Bank Of Beijing Co Ltd A (601169 CH). It's not particularly exciting. In terms of expected days to trade, Brian Freitas estimates just 0.98, 1.11, -0.78 and -2.85 for CITS, Shanghai International, China Railway and Bank of Beijing respectively. As there isn't much volume to trade relative to ADV or free float, there are no obvious trades. (link to Brian's insight: FTSE China A50 Index Review - Two In, Two Out)

The HSCEI dividends futures expiring in December 2020 have sold-off around 7% (at the time of Brian's report), mainly driven by a 4% weakening in the CNYHKD FX rate and a 7% drop in the HSCEI index. In this Insight, he updated the HSCEI constituents half-yearly results and the upcoming index rebalances and concluded that the dividend futures are still pricing in a degree of pessimism. The risk/reward is skewed in favour of buying the 2020 dividend futures (at the levels at the time of the insight) in anticipation of a reversion back towards his estimated fair value derived from fundamentals. (link to Brian's insight: HSCEI Dividends - Buy the Dip)

Huaneng Renewables Corp H (958 HK) (Mkt Cap: $3.6bn; Liquidity: $6mn)

Following the suspension of its shares the previous Friday pursuant to the Hong Kong Code on Takeovers and Mergers, HRC has announced its major shareholder, China Huaneng with 52.7%, has indicated its intention to make a conditional voluntary cash general offer for all the H shares, other than those H shares already owned, which could result in a privatization and delisting of HRC. No price was mentioned. This is the third Hong Kong-listed, clean-energy company subject to a privatisation or change of control in the past six months. China Huaneng is also in talks to acquire a 51% stake in Gcl New Energy Holdings (451 HK) (see New Development In GCL’s New Energy)

• HRC is incorporated in the PRC, therefore, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a scheme-like vote and a tendering acceptance condition.
• According to CapIQ, Wellington (a 2.93% holder, 309mn shares) was an active buyer of HRC in the 3Q18 when HRC traded around $3.00/share. HRC traded above $3.00/share late July 2018. The last H share placement in May 2017 was done at $2.61/share. Prior equity offerings were done at $2.50 and $2.71 after the IPO (@ $2.50/share) in 2011.
• This is an Indicative Offer. There is no guarantee a formal offer is forthcoming. However, China Huaneng is active in this space. I would buy shares at the current price expecting an eventual Offer to come at a significant premium.

(link to my insight: Huaneng Renewables Targeted Amidst Clean Energy Privatisations)

Australian Unity Office Fund (AOF AU) (Mkt Cap: $330mn; Liquidity: $1mn)

On the 3 July, Abacus Property (ABP AU) and Charter Hall (CHC AU) announced an A$3.04/unit Offer by way of a scheme, a 3% bump to its initial pitch in early June. The "best and final" proposal was indictive and non-binding, and primarily subject to the satisfactory completion of confirmatory due diligence. This week, AOF entered into an SIA with ABP/CHC. The terms remain at $3.04. The Scheme Meeting is expected to be held on the 1 November.

• ABP/CHC's initial Offer for AOF was at a 10.5% premium to the then-latest NTA, compared with the 2.4% premium for IOF, the 1% discount for AJD and the 15% premium for PLG. The premium to NTA under the revised Offer is 9%. Comparable deals in Australia in the past nine years were transacted at a 1.8% premium to NTA. The highest premium to NTA for precedent transactions was 8.2%.
• AOF closed A$0.02/unit through the initial terms twice after the property revaluation update on the 26 June - having traded tight to (& occasionally through) terms since the initial announcement. It has not closed through terms since the July bump, supporting the view the Offer terms are full.
• The implementation date is the 18 November. This is a done deal and trading accordingly with a gross/annualised return of 1%/5%.

(link to my insight: Australian Unity (Finally) Enters An SIA With Charter Hall and Abacus)

Briefly ...

Sanghyun Park discusses the possibility of Hitachi Chemical (4217 JP) going to Lotte Group, the politics behind it and thoughts on the Lotte Chemical (011170 KS)/ AM merger. (link to Sanghyun's insight: Lotte SDB's Hitachi Play Checkup)

Entertainment One (ETO LN) (Mkt Cap: $3.6bn; Liquidity: $15mn)

On the 23rd of August, US-based leading toy-maker Hasbro Inc (HAS US) reached an agreement to acquire UK-based entertainment company Entertainment One through a Statutory Plan of Arrangement at an all-cash offer price of £5.60 per share which translated to a market cap of £2.8 billion. The Offer Price translates to premia of 26%, 31%, and 35% to Entertainment One's undisturbed price, 1-month VWAP, and 3-month VWAP, respectively.

• The Peppa Pig franchise is the obvious star of the show here, and growing the fastest. But there is a lot of TV production, film production, and there is some music in it.
• The library is, for the moment, an appreciating asset and re-use and streaming rights are only going to grow. Good visual media can spin-off toys. Toys can spin-off media. Music from the media can be re-used elsewhere and/or marketed. Licensing is a big thing and licensing popular things is big money.
• There are a few obvious candidates to come over the top, but the stock is not cheap, and one has to really, really like Peppa Pig. In terms of odds, Travis is not sure this is a great buy here. One has to have a quite strong opinion that a deal at 620p or better is forthcoming. At least 50% or better. Either that or a 90% probability someone else who presents a better integration plan comes in at 600p. I don't have that level of confidence either. So from a risk-adjusted situation, this doesn't present itself too well.

(link to Travis' insight: Hasbro Bets on Peppa Pig. Someone Else Bets On More Oink.)

• Scheme Shareholders approved Acacia Mining (ACA LN)'s Scheme at the Court Meeting Friday.

• The Offerors (China Huaneng Group) have completed preliminary due diligence on Gcl New Energy Holdings (451 HK). "GNE has been responding to further issues raised by the Potential Purchaser during the due diligence process and has been discussing on the solutions to the abovementioned issues." Sounds like there may be some skeletons.

• As expected, the CSRC has waived China Baowu's obligation to make an MGO for Maanshan Iron & Steel H (323 HK)'s A-shares. All the equity transfer conditions of the equity transfer agreement have been fulfilled and should now be completed before the end of September. An unconditional MGO for the H-shares will follow shortly thereafter.

• Shareholders of Kidman Resources (KDR AU) approved the Scheme with 94.65% FOR, 5.35% Against, in terms of the votes. The FOR/Against for holders was 79.19%/20.81%. The implementation date is the 23 September. Of interest, only 53% of the shareholder votes were present or via proxy.

• Northern Star Resources (NST AU) has lodged the Bidder's Statement with ASIC in regards to its Offer for Echo Resources (EAR AU). The Target Statement is expected to be lodged around the 18 September.

• According to local media - there is no announcement on the Philippine Competition Commission's website - the PCC has requested more information on the San Miguel (SMC PM)'s takeover of Holcim Philippines (HLCM PM). The PCC Chair Arsenio Balisacan said "under the rules, if the commission is not able to decide on the case within 30 days and needs more information to effectively evaluate the case, it asks the parties to provide more information." So that suggests we have entered Phase 2 of the review, which could take up to 60 days.

• Xiaomi Corp (1810 HK) Officially withdraws its CDR application. This one isn't coming back for years. Doing a CDR is doing a kind of national duty if it isn't raising capital, and Xiaomi wanted capital - not to do its duty.

• ams AG (AMS SW)'s Tender Offer for OSRAM Licht AG (OSR GR) has been launched. The pre-existing offer from Bain and friends at €35/share has been extended to October 1.

• Sankyo Co Ltd (6417 JP) announced the results of its own-share buyback Tender Offer to buy back up to 22,000,000 shares from Marf Corporation. In the end, 20,006,500 shares were tendered. That is a buyback of just under 25% of voting rights. It is really big. Remarkably, the stock has hardly moved (when considering the accretion).

• Greene King PLC (GNK LN) announced its Q1 numbers. Like-for-like (LFL) sales grew 1.5% over the last seven weeks - including the World Cup - and, on a two-year basis, were up 2.4%. LFL sales were down 1.8% for the first 18 weeks, reflecting the tough comparatives of last year’s successful World Cup and good weather. On a two year basis, LFL sales for the first 18 weeks were up 1.0%. LFL net income was down 4.2% for the first 16 weeks, driven by softer LFL beer sales following last year’s comparatives. In Brewing & Brands, total beer volumes were down 6.5% for the first 18 weeks and own-brewed volumes were down 7.9%.

• ASIC has registered Villa World Ltd (VLW AU)'s Scheme Booklet. The Scheme Meeting will take place on the 11 October with an expected implementation date of 30 October.
• Ruralco Holdings (RHL AU) shareholders approved (92.83%) the Scheme from Nutrien Ltd (NTR CN). The implementation date is the 30th September.
• Robinson Public Company (ROBINS TB)'s Delisting Offer was approved by shareholders. A Tender Offer (for 25 biz days) will follow shortly. The delisting date will be two weeks after the close of the Tender Offer.

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.

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