Last Week in Event SPACE: Nexon, Japan Display, NTT/Docomo, Naspers, Harbin Electric, Glow Energy

Last Week in Event SPACE ...

• Media coverage of the Nexon (3659 JP) deal has been strangely uninformative, which means this situation is riskier and noisier than it needs to be.
• Japan Display (6740 JP)'s Hakusan facility has proven to be a white elephant and many observers would probably be glad to see the back of it.
• Oscillators oscillate and the NTT (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP) ratio is nudging the top of the five-year range; but stay positive NTT vs Docomo a while longer because of the skew in expected fundamentals.
• The treatment of Naspers Ltd (NPN SJ)'s NewCo N is considerably complicated by the nature of the Netherlands-SA tax treaty - it is NOT a small thing. And it is not as people expect.
• Harbin Electric Co Ltd H (1133 HK)'s unprecedented transaction should still get up as investors withdraw tendered shares.
• We flagged it - Global Power Synergy Company Ltd (GPSC TB) kickstarts the delisting Offer for Glow Energy Pcl (GLOW TB).
• Plus, other events, CCASS movements and Mood Spins.

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

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

In his third detailed installment on Naspers' Euronext spin-off, Travis Lundy delves further into the index effects and other considerations.

• As of when he wrote, Travis expected Naspers to tighten its discount to NAV in the next month until the Election and event as investors anticipate that NewCo N could trade at a materially (for an arb) tighter spread than Naspers does now.
• The index effects were that there should be a net sell because of the rule in the FTSE/JSE Africa Ground Rules saying only inward listing shares should count. This was as warned by the JSE in their March 25th announcement.
• The question as per his Discussion note (if you don't appreciate the piece, you don't get a heads up when Discussion notes pop up) added overnight is whether the JSE will follow its own Ground Rules or will include foreign float.
• On Friday, Naspers announced that the spinoff was being delayed. The EGM is now scheduled for late August and listing would be in September, presumably with the election in September as well.
• Watch this space!

(link to Travis' insight: Naspers ➔ NewCo Spinoff III: The Most Interesting Arb In The World. Again)

Japan Display (6740 JP) (Mkt Cap: $535mn; Liquidity: $12mn)

JDI's smartphone business has always been a love-hate story as the smartphone market offered significant potential but also kept the company trapped in a cycle of low profits, restructuring and falling morale. JDI has now announced the Hakusan facility will have production suspended from Jul until Sep, reassess whether a restart is viable and potentially book a ¥40-50bn valuation loss; the Mobara facility will close its back end V2 processing line which is on the books at ¥300m; and the company has invited applications for voluntary retirement from 1,200 of its 4,635 strong workforce.

• While this does not seem to be confirmed, barring a significant change in Apple's volumes or a shift in JDI's share of its volumes, the complete shuttering of Hakusan seems a likely possibility. The shuttering of Mobara's back end line and the cuts to overseas sales offices also point to JDI giving up on retaking business from Chinese manufacturers (at least on its own).
• Mio Kato, CFA doesn't consider the operational picture to be terrible as long as the company can rectify its balance sheet. But TPK, which was expected to contribute US$230mn of the initial $550m (¥60bn) in capital from the Suwa consortium, has pulled out. Cosgrove Global Limited and Topnotch Corporate Limited (collectively US$130mn) are AWOL; and Harvest has bumped its portion to US$200mn from US$190mn. JSI is still short about US$200mn.
• Even if JDI is able to pull off this capital raise successfully, significantly reducing its net D/E including advance payments, common equity would be negative and almost all of the equity would be made up of preferred equity.

(link to Mio's insight: Japan Display: Shrinking of Mobile Arm a Necessary Move but Capital Raise Vital)

NTT (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP)

In his pre-earnings piece talking about the balance of forces of the respective buybacks, Travis had initially expected that near-term pressure would favour NTT Docomo because he expected the NTT buyback of up to ¥200bn would be for the purpose of buying back shares from the government, which had originally proposed a budgeted amount of ¥160bn. That is no longer the case as of the May 10 announcement, and now the "calendar" looks different.

• For NTT to finish its current buyback program by the deadline at end-July, it will have to buy 16% of ADV every day. For Docomo to finish its buyback program through next April, it will have to buy back 11% of ADV every day.
• NTT will almost certainly launch another buyback in Q2 or Q3 to buy back shares from the government through an off-market method, to buy ¥160bn (32mm shares? (1.7%)) or more. He thinks the size of that buyback could be increased.
• The NTT/Docomo ratio is now at a high point - ~5% below a 5+year high at the time of his insight - but NTT remains 2 PE turns cheaper than Docomo, growing faster, and the incremental EPS upside due to buybacks may still belong to NTT this year.

(link to Travis' insight: NTT/Docomo Ratio & Buyback Progress)

Nomura Holdings (8604 JP) (Mkt Cap: $11.6bn; Liquidity: $54mn)

Nomura Holdings announced its Board of Directors had approved a buyback program to buy up to ¥150bn and up to 300mn shares or 8.6% of shares outstanding and 9.06% of shares out ex-Treasury shares. The period eligible for the execution of the buyback will run from 19 June 2019 through 31 March 2020. It will, however, buy back up to 12-13% or more of Real Float in the company.

• The Nomura/Daiwa Price/Tangible Book Ratio is near an all-time low. Nomura's PBR has rarely been substantially cheaper than Daiwa's PBR, and this suggests this is not a bad place to be long Nomura and short Daiwa. A 10% accretive buyback won't hurt things.

(link to Travis' insight: HUGE Nomura Holdings (8604 JP) Buyback)

Nomura Research Institute Lt (4307 JP) (Mkt Cap: $11.4bn; Liquidity: $21mn)

NRI announced a Tender Offer to buy back 101.9mm shares for ¥160n or 13.52% of shares out. The tender offer is going to be launched at ¥1570/share which was a 9.25% discount to the split-adjusted close of ¥1730.

• In many buybacks, there is a market impact. Not here. In many situations where the erstwhile one-time parent sells down a stake, it increases the float. Not here. This buyback will have no index effects.
• The main reason why this is good for investors is the better use of capital - the action lifts EPS and lowers PER. Running 1x EBITDA of net debt is better than 1x EBITDA of net cash if you have an extraordinarily reliable stream of cash flows.
• On a net basis, this should be good for the stock. It is not a reason to decide to like the stock if you did not like it before.

(link to Travis' insight: Nomura Research Tender Buyback - 14% Additional EPS Accretion)

Briefly ...

Bubang Co Ltd (014470 KS) announced a stock swap for Cuchen (225650 KS) shareholders into Bubang shares. Cuchen will become Bubang's wholly-owned subsidiary and will be de-listed. Cuchen shareholders will get Bubang shares at a 1 to 2.2078197 ratio. The swap arb yield was ~9% at the time of Sanghyun's insight - but these are tiny market cap stocks: Bubang is ₩200bn and Cuchen is ₩90bn. (link to Sanghyun Park's insight: Bubang/Cuchen Stock Swap: Current Swap Arb Yield Is at 9%)

Nexon (3659 JP) (Mkt Cap: $13.2bn; Liquidity: $34mn)

Late Thursday, a flurry of articles announced the deal was possibly off. Talks with Kakao Corp (035720 KS) - with whom the Seller had been negotiating most recently - had been unable to come up with a number suitable to Kim Jung Joo. The flavour of many of the articles was that Kim Jung Joo had been asking too much money. This was a fear addressed in Travis' Nexon: Deal Structure, Valuations, Question Marks two months ago and Nexon: Continuing Question Marks a month ago. The overall structure of this deal is a mess, making it less attractive for some, or even, all parties on the buy side.

• IF pricing is as far apart as it appears from reading between the lines in the articles, then this is something which should have shown up in the soap opera diaries run by the local media this past spring. Indeed, at times it did get reflected, but one could never be sure whether it was buyside bankers "negotiating" in public or whether there was no chance that KJJ's price would ever be reached.
• It is not clear what price this is. The range of numbers thrown around is ₩10tn to ₩15tn, but it is never clear whether this is for the 98.64% stake in NXC or if the ₩15tn number is for the whole of Nexon without the other assets in NXC such as Stökke, the bitcoin exchanges, the commercial real estate in NYC, and the VC investments made by NXC and its subsidiary NXMH. And if it is ₩15tn, is that EV? Or market cap?
• Both Sanghyun and Travis believes there is still a deal to be done and would continue to buy on dips. The owner of a 47% stake wants out. A deal lengthening out is actually great for traders who believe the deal will get done. A good asset will get sold, and time allows for more time to trade around expectations and path in an otherwise noisy environment.

links to:
Travis' insight: Nexon!!! [Question Marks Intensify]
Sanghyun's insight: Nexon Sale: How We Should Interpret ETNews Report

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $874mn; Liquidity: $3mn)

21 days have now elapsed since the Closing Date on the 20 May. Shareholders who have tendered are entitled to withdraw shares should they so choose. And on the 14 June, ~9.5mn shares were withdrawn and moved back into CCASS. As of this past Friday, that number is ~87.5mn (~13% of shares out), sending the acceptance level to ~74%, compared to 85.84% at the time of the extension - some shares tendered after the extension. Shares are down 7% on the week.

• Shares initially withdrawn were parked in brokers suggesting local punters looking to sell. The number of brokers with withdrawn shares has now swelled to 25+ so the picture is more complicated as to investor's intention. 2.5% alone has moved into Standard Chartered.
• The number of shares traded prior to shares being withdrawn is sufficient for the Offer to turn unconditional - assuming they were all tendered. Furthermore, for shares withdrawn and sold, the buyers of those shares are only likely to tender. On balance, I still believe this Offer will get up. But it's more complicated following the withdrawals - there is no precedent for this situation in Hong Kong - which will only serve to push the Offer turning unconditional right up to, and possibly only on, the Second Closing Date.

(link to my insight: Is Harbin Electric Coming Unglued?)

Glow Energy Pcl (GLOW TB) (Mkt Cap: $4.2bn; Liquidity: $7mn)

Late on 19 June 2019, GLOW released a statement on the Stock Exchange of Thailand website (GLOW website link for the same doc) noting it had received a letter from Global Power Synergy Company Ltd (GPSC TB) which recently completed a Tender Offer on GLOW, obtaining 95.25% of the shares, that it intended to support the board of GLOW if it decided to conduct a Delisting Offer (as is expected). The letter from GPSC to the SET and the public is here.

• The Delisting Offer will be at THB 90.8136, with a net cashout of THB 90.56-57/share. I flagged this situation (Glow Energy: An Imminent Delisting Offer?) on 30 May and Travis a day later in GLOW For It! Be GLOWful... And Full of GLOW... (Trading Tactics). The stock traded low 82s for a week after that.
• The shareholders meeting to approve the delisting will be held on the 13 August. Based on the shortest timeframe from a shareholder meeting to payment of 91 days from analysing prior delisting offers, that places a payment date for GLOW the second week of November.

(link to my insight: GPSC Announces Delisting Offer Intent for GLOW)

China Automation (569 HK) (Mkt Cap: $183n; Liquidity: $0.2mn)

Xuan Rui Guo, CAGL's chairman, and Ascendent Capital Partners (AACL) have announced a privatisation by way of a Scheme at $1.50/share cash, an 11.94% and 47.78% premium to last close and one-month VWAP. The Offer Price is also a 27.12% premium over the closing price on 30 April, being the last full trading day prior to the issuance of the initial announcement. The headcount test applies as CAGL is Cayman incorporated. Independent shareholders hold 25.44% of the company.

• Back in 2016, Xuan (assisted with financing from AACL) launched a conditional mandatory general offer at $1.20, which resulted in Xuan and ACCL holding 50.25% and 24.19% respectively.
• Assuming a similar multiple for the general hospital acquired in 2017, the Offer implies the petrochemical segment ops are being acquired at just 0.4x P/B.
• The Scheme Offer Price appears to be short-changing minorities, but there's probably not a lot they can (or want to) do - shares are illiquid and the premium to the unaffected price is decent, with the price around a three-year high. The gross/annualised return of 7.9%/24.7% is wide, reflecting CAGL's low liquidity, the possible blocking stake risk, and the timeframe to completion. On balance, this appears a reasonable risk/reward. The Offer Price is not final.

(link to my insight: China Automation's Scheme Should Get Up)

China Power New Energy Development Co (735 HK) (Mkt Cap: $814mn; Liquidity: $2mn)

On the 28 March, SOE State Power Investment Corporation (SPIC) announced an intention to privatise CPNED by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available. The Scheme Document has now been dispatched. The Scheme Meeting is to be held on 12 July with payment expected on 28 August. The IFA has given a "fair and reasonable" opinion and recommends independent shareholders take the cash option.

• China Three Gorges (CTG), CPNED's largest shareholder with 27.10%, had given an irrevocable undertaking to vote for the Scheme in the initial announcement and to elect the share alternative. The SFC has now concluded CTG is deemed not to be acting in concert and is therefore permitted to vote at the Scheme Meeting.
• This appears a pretty clean deal, with a decent premium (41.9% to last close) which is above the highest close since CPNED's listing by way of introduction on the 18 July 2017; liquidity is unattractive; zero analysts cover the stock; and the previously-planned injection of nuclear power assets is not happening. I'd recommend shareholders vote for the Scheme and take the cash. The stock is currently trading tight at a gross/annualised spread of 1.5%/8.1%.

(link to my insight: China Power's Scheme Document Dispatched)

Circor International (CIR US) (Mkt Cap: $915mn; Liquidity: $8mn)

On May 21, 2019, Crane Co (CR US) went public with its proposal to acquire Circor for $45 per share in cash, which was originally made to Circor’s CEO/President on April 30, 2019 and in a letter to Circor’s board of directors. This proposal was rejected by Circor’s board on May 13 without making receipt of the proposal public, even though the Circor annual meeting (on May 9, 2019) was held during the pendency of the board’s review of Crane’s proposal.

• Crane has now formally commenced a cash tender offer for Circor at $45 per share. The offer will run through July 16, 2019, unless extended. The tender offer document discloses that Crane and its subsidiaries own approximately 1.3% of the outstanding CIR shares. The offer is conditional on a majority in number tendering, Crane having entered into a definitive merger agreement with Circor, and anti-trust approval.
• Circor’s response to the tender offer announcement was that “consistent with its fiduciary duties and in consultation with its independent legal and financial advisors, the CIRCOR board of directors will carefully review and evaluate Crane’s tender offer…”.
• The conciliatory approach has gotten Crane nowhere and while a bumped proposal could have been a logical next step, Crane opted to formally launch the offer before proceeding with further steps. This tender offer doesn’t change much as Circor’s defenses remain very difficult to breach without the board’s acquiescence. But there are wranglings - the prospect of 15.2% shareholder Gabelli and Co. proposing alternative board members at the next annual meeting might turn the tide. John DeMasi remains optimistic this situation will ultimately work out well for shareholders of Circor if Crane stays the course.

(link to John's insight: Crane Co. Launches Unsolicited Tender Offer for Circor – Gloves Off, Pressure On)

Wheelock (20 HK) / Wharf Real Estate Investment (1997 HK) / Wharf Holdings (4 HK)

I estimate Wheelock's discount to NAV is trading around its narrowest inside a year. The narrowing this month was probably triggered by the possibility of a rate cut following comments from the Fed's Richard Clarida, late May. Development property accounts for 54% of Wheelock's stub GAV.

• Of the property peers, only Hang Lung Properties (101 HK) has performed in line with Wheelock since the beginning of the month; on a six-month view, only Swire Properties (1972 HK) has beaten its performance. Both HLP and Swire have large investment property exposures in China, unlike Wheelock's stub ops.
• On a look-through basis, Wheelock is relatively cheap on a price/book metric at 0.44x vs peers at 0.54x. This is not a new development - both Wheelock (& Wharf) have consistently traded at a P/B discount to peers. Wheelock's current P/B discount to peers is the narrowest in the past year; and compared to WREIC and Wharf, only Wheelock is trading above its one-year average.
• In the last 12 months, Wheelock has increased its stake in Wharf to 66.05% from 63.03%; and has also added 1% in WREIC. With Wharf's P/B trading almost on par with Wheelock, a case could be argued for Wheelock to further buy shares in Wharf. On balance, it is difficult to justify Wheelock's recent outperformance, with respect to its current value, relative to peers, and after Goldin Financial Holdings (530 HK) recently renege on an HK$11.1bn land deal.

(link to my insight: StubWorld: Wheelock's NAV (Unjustly) Narrows; A Case For Naspers' NAV To (Further) Narrow)

Briefly ...

Melco International Development (200 HK) announced the circular for Melco Resorts & Entertainment (MLCO US) purchase of 19.99% in Crown Resorts (CWN AU) has been delayed until 26 July.

KT Corp (030200 KS) / (KT US)

KT Corp is showing signs of recovering from the sell-off (down 4% at the time of Brian Freitas's note) seen post the MSCI consultation note and subsequent confirmation of deletion of the name from the MSCI Global Investable Market Indexes. MSCI has deleted the stock from the indices since the security is not accessible for purchase by international institutional investors. The premium on the ADR had dropped from around 9.5% to parity.

• Brian recommended investors holding the local listing to convert part of their holdings to the ADR with a view to playing a bounce in the ADR premium. The ADR headroom has been reducing gradually and now stands at around 6.5m shares.
• Event-driven traders can sell the KRX listed single stock futures while buying the ADR. The futures have been trading around fair value. Mind the gap between Korea close and the US open. Brian expected the ADR premium to move up to 5-6% levels as the ADR headroom starts to shrink further and as the local stock continues to remain restricted to foreign investors.

(link to Brian's insight: KT Corporation - ADR Premium in Focus)

• Villa World Ltd (VLW AU) has extended AVID Property's due diligence for a "short time" to facilitate a binding proposal.

• Netcomm Wireless (NTC AU)'s Scheme gets up - just. 86.6% For, 13.4% Against. The effective and implementation dates are the 20 June and 1 July.

• The combination of East LLC and West LP have acquired 93.8% of the shares in Nitto Fc Co Ltd (4033 JP) through the Tender Offer. It will now proceed to a share consolidation, squeeze-out, and delisting.
• Results on the KDDI Corp (9433 JP) tender offer for Kabu.Com Securities (8703 JP) are out.
  KDDI bought 126.5mm shares which should get the combination of KDDI and Mitsubishi Ufj Financial (8306 JP) to just over 90%. In this case, the 90% stake by the owners does not get an early windup. There will be a windup based on the squeezeout of minorities after a vote to deconsolidate because there are two owners combining to get to 90+% and not a single owner.
• Asia Satellite Telecom Holdings Ltd (1135 HK) is suspended pursuant to the Hong Kong Code on Takeovers and Mergers.

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, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.