Last Week in Event SPACE: Naspers, Japan Display, Wesfarmers, Bunge

Last Week in Event SPACE ...

The bigly Tencent Holdings Ltd (700 HK) placement by Naspers Ltd (NPN SJ) is well supported, however, it is not apparent this ultimately helps to narrow the Holdco discount; reports of Apple Inc (AAPL US) developing microLED in-house is a timely opportunity for Japan Display Inc (6740 JP) to transition to an auto-focused company; is the sum of Wesfarmers Ltd (WES AU)'s parts greater than the whole?; what we know about interested parties circling Bunge Ltd (BG US); Toc Co Ltd (8841 JP) is a potential takeover target following a large buyback; and shareholder movements suggest a new placement for 361 Degrees International (1361 HK).

Naspers Ltd (NPN SJ) (Mkt Cap: $118.4bn; Liquidity: $371mn)

It produced a bullish score on Sumeet Singh's quant framework piece, and the first sale of Tencent Holdings Ltd (700 HK) by Naspers (189.978mn shares at $405/share) didn't disappoint, closing at $420/share on Friday, down only 4.42%.

• Assuming MSCI is right about how much passively tracks the MSCI Emerging Market Index, the placement would represent about 40% of float, suggesting some 40-50% of the deal will be bought by the passive funds who NEED to buy in order to own a larger portion of the float.
• And this deal will actually raise Tencent's weight in MSCI China and MSCI Emerging Markets, which makes underweights that much more punishing if the stock continues to climb faster than the market.

• On Tencent, Travis Lundy takes issue with the consensus expectations for earnings growth. The OP growth suggested either means a rocket-fuelled growth in margin on existing assets or more IPOs of subs.
• Travis views Naspers as trying to "prove" that it is doing the right thing by its investors, by using the cash proceeds to "reinvest the money (over time) in its existing classifieds, online food delivery business, and fintech businesses." For Naspers' investors seeking a handout, that's probably not what they want to hear.

• And as per the placement terms, Naspers has undertaken to not sell more shares for three years. This means the Naspers Holdco trade is still a bad deal as a stub trade and Naspers is really only a way to trade directionality on Tencent. The adjusted Naspers' discount closed at 36% on Friday - roughly flat from the previous day - against a 12-month average of ~33%.

links to:
Sumeet's insight: Tencent Placement - Huge Deal in Size, Small in Relative Terms - Succumbing to the HoldCo Discount
Travis' insight: Be Careful What You Wish For - Naspers To Sell up to US$10bn in Tencent

Japan Display Inc (6740 JP) (Mkt Cap: $1.1bn; Liquidity: $12.6mn)

Mio Kato's in-depth insight addressed Apple's in-house development of MicroLED screens and concludes the news to be something which should not greatly concern investors. The timeline (at least 3 years out, but possibly even more) should serve as further motivation for JDI to complete its transition to a more auto-focused company while allowing it to take advantage of strong demand from Apple in the meantime.

• Mio is also somewhat cautious about Apple's attempts to bring so many things in-house at a time when there are signs of the smartphone market decelerating significantly and of consumer rejection of high ASPs. If Apple is indeed successful, the greatest potential beneficiary is likely to be Hon Hai Precision Industry (2317 TT), perhaps in partnership with Innolux Corp (3481 TT).

(link to Mio's insight: JDI: Giving Our Thesis a Full Active Refresh + Apple MicroLED Development)

Hyundai Glovis Co Ltd (086280 KS) (Mkt Cap: $5.3bn; Liquidity: $18.6mn)

Glovis was up 13.3% MTD mid-week, before closing up 7.7% on Friday. As Hyundai Motor Group needs to transition to a Holdco structure, Sanghyun Park believes Glovis buying Hyundai Mobis Co Ltd (012330 KS)'s stake (16.88%) held by Kia Motors Corp (000270 KS) to be the desired conversion scenario.

• Financing such a purchase still needs to be ironed out. Glovis can sell its CKD business unit for ~₩4-4.2tn and get additional money by issuing new rights (20%) worth about ₩1.1-1.2tn. Together, this will be ~₩5-5.4tn, enough to buy a 23-24% stake in Mobis. Holdco premium or intrinsic value uptick for Glovis? Sanghyun Park opts for the former and sees value as a long-term investor.

(link to Sanghyun's insight: Hyundai Motor Group Restructuring Update - Attention Is Now on Glovis)

Wesfarmers Ltd (WES AU) (Mkt Cap: $36.6bn; Liquidity: $87.3mn)

Morningstar discussed the Coles' demerger and expects the reduced diversification of Wesfarmers post-demerger to exhibit increased earnings volatility. It is also sceptical the sum of the split parts is larger than the combined entity and doubts the demerger materially lifts the outlook for free cash flows of the existing businesses. Morningstar maintains an A$37/share share fair value estimate vs. Friday's close of A$41.81.

(link to Morningstar's insight: Wesfarmers’s Demerging of Coles Has Positives, But Our DCF-Based FVE Is Unmoved)

Bunge Ltd (BG US) (Mkt Cap: $10.1bn; Liquidity: $145mn)

Pranav Rao discussed Glencore Plc (GLEN LN)'s reported tilt for Bunge back in May 2017 and also the reported standstill agreement between the two companies.

• There are also reports that Archer Daniels Midland Co (ADM US) has made an approach for Bunge, although such a takeover would come with considerable regulatory risks, not least in the US. Pranav would be long at current levels.

(link to Pranav's insight: Bunge: Don't Go Against The Grain)

Toc Co Ltd (8841 JP) (Mkt Cap: $1.1bn; Liquidity: $0.8mn)

TOC is a real estate operator based in Tokyo controlled by the Ohtani family of New Otani Hotel fame. Their other claim to fame is a Wholesale Center called the TOC Building in Gotanda. The company was the subject of a lowball MBO in 2007, defeated by a hostile acquiror who overbid.

• In the GFC and the aftermath, noted Japanese activist Effissimo bought a large stake and continued building it, ending with 18% of votes late last year until in December, the company bought back 16% of the company in a single ToSTNeT-3 buyback. Insiders now have super-majority and the company will cancel 24% of the shares outstanding at end-March.
• Travis discusses the reasons why he thinks TOC is a takeout target. 40+% of the company’s floorspace is up for redevelopment of a near-50-year-old building, which would hit earnings and employment, and the Chairman and directors are at or past retirement age, and may be unlikely to see the end of the redevelopment while working. Insiders and friendly shareholders have a super-majority so a deal is just about picking a partner. And the stock is the cheapest asset in the space on an earnings basis until they do.

(link to Travis' insight: TOC's BIGLY Buyback Makes It a Takeout Target )

Cuckoo Homesys Co Ltd (284740 KS) (Mkt Cap: $712mn; Liquidity: $4.2mn)

Cuckoo Holdings Co Ltd (192400 KS) announced it will do a tender offer for Homesys in a ₩254.2bn deal. Homesys' swap price of ₩178,500 is final, while Holdings', tentatively set at ₩98,275, will be finalised on the 17 April.

• Holdings needs to increase its take in Homesys, currently at 16.82%, to more than 20% to meet the current Holdco requirement, and more than 30% to meet the new requirement which will soon be introduced. This share swap targets 31.73% of Homesys' total shares. Sanghyun believes the higher % will enable CEO Koo Bon-hak to move his 33.1% stake in Homesys to the Holdco (Holdings). By doing so, he will hold 64.81% in Holdings.
• As seen in SK Discovery Co Ltd (006120 KS) / SK Chemicals Co Ltd/New (285130 KS), the trade is to buy Homesys and short Holdings. However, it's still early days, and such a trade currently backs out a loss of 2.6% using Friday's closing prices.

(link to Sanghyun's insight: Cuckoo Holdings & Cuckoo Homesys Tender Offer Event Summary)

SK Discovery Co Ltd (006120 KS) (Mkt Cap: $409mn; Liquidity: $10.7mn)

Discovery's official swap price was set at ₩42,230. If you have one Chemicals share and tender it during the tendering period (Mar 26 - Apr 16), you will get 2.62138 Discovery shares. As of Friday's close, if you buy and tender Chemicals shares, your gross return will be an okay 2.23%, excluding transaction costs.

• As with the BGF Co Ltd (027410 KS) share swap, there may be multiple entry points throughout the tendering period to buy Chemicals and Short Discovery. But not right this moment as the arb yield is relatively low at 2.19% using Friday's close.

(link to Sanghyun's insight: SK Discovery & SK Chemicals Tender Offer - Final Swap Price & Status Update)

Below is a table of Travis' TOPIX inclusion insights for the week. Mkt Cap & Vol are in US$mn. Clicking on the emojis takes you to the insights.

• Of interest ...
  • Hinokiya Holdings Co Ltd (1413 JP)
    • This is a relatively big inclusion - 27-30 days of trading volume - for an unknown company, or ~US$25mm. There is not a lot of foreign and/or financial interest in the company.
    • Given the high dividend yield, some of the individual shareholders may not want to sell it. Looks squeezy.
  • Ishihara Chemical Co Ltd (4462 JP)
    
    • This is a relatively big inclusion - 27-45 days of trading volume - or US$22mn. Travis believes this situation also looks squeezy.
      
  • Ck San Etsu Co Ltd (5757 JP)
    • This is a relatively big inclusion ~US$30mn or so at last price. The "financial institution" holders appear to be cross-holdings for 80% or more of the category. Foreigners appear to hold almost no stock. There is no analyst coverage, but it is starting to get big enough for someone to cover it.
    • The fundamentals are trending well. The stock is not overly expensive on a PER basis and OPMs and EBITDAMs have been trending up on a rolling basis the last few quarters.

Ito En Ltd Preferred Shares (25935 JP) VS Ito En Ltd (2593 JP) Ratio

The Ito En Preferred/Common pair is the only one of its kind in Japan and despite the preferred being 27+% of the number of shares outstanding it has only 10% of the volume liquidity, and because it trades at a significant discount, it has even less proportional value liquidity.

• Travis wrote about this trade in December, catching the all-time low on the ratio. It has since rebounded 20%. He noted in December that the ratio performance was negatively correlated to directional performance of the common shares. Since then, while the ratio is up, Ito En common is down. The prefs have risen however because the company has been buying them back on market at a rate of 28% of ADV since Feb1. That ends Monday morning with a ToSTNeT-3 buyback of the prefs. You might think that a decent time to exit.

(link to Travis' insight: Ito-En Prefs Buyback Ends Monday Morning)

Swire Pacific Ltd (19 HK) / Swire Properties Ltd (1972 HK)

Following the FY17 results for the Swire Group companies, consensus estimates indicate deteriorating earnings at Swire Pac's stub level - by ~HK$400mn on a deconsolidated basis. Despite the discount to NAV slightly below the one-year average (21% vs. 20%), I do not see a catalyst or specific positive in the unlisted stub assets. Morningstar has fair value estimates of $87 and $28 for Swire Pac and Swire Prop against Friday's close of $80.80 and $28.05 respectively. (Btw, the commissioning of one of its ships to search for MH370, even at US$100k/day for 3 months, equates to ~2% of the marine divisions' yearly revenue)

(link to my insight: StubWorld: Swire, First Pacific)

Briefly ...

Wynn Resorts Ltd (WYNN US)

Steve Wynn unloaded his entire stake in WYNN this week via two tranches - 4.1mn shares (@US$180/share or US$738.9mn) on Wednesday and 8mn shares (@US$175/share or US$1.4bn) on Thursday. Galaxy Entertainment Group Limited (27 HK) acquired 5.3mn shares at $175/share to give the Macau operator 4.9% in WYNN. My current discount to NAV for WYNN is 13.6% vs the 12-month average of 10.7%.

(link to my earlier insight on Wynn: StubWorld - Wynn, Wheelock)

361 Degrees International (1361 HK) (Mkt Cap: $669mn; Liquidity: $1.1mn)

Shortly after announcing its FY17 results (23% below consensus), 318mn shares (15.4% issued shares) transferred into CCASS on the 14 March. With the expiry of the 6-month lock-up attached to the last placement occurring towards the end of this month, I'd tilt towards another placement.

(link to my insight: 361 Degrees - A New Placement?)