Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala

Last Week in Event SPACE ...

• As Nexon Co Ltd (3659 JP)'s soap opera-esque "updates" on the control-change plod on, the "certainty" on this situation is less than great.
• In the next six weeks, two important games (BTS World and Seven Deadly Sins) for Netmarble Games (251270 KS) will be launched; the final bidder(s) for NXC Corp/Nexon should be known plus there should be clarity on the timeline for the Netmarble Neo IPO.
• Trump Trade Wars provide a positive backdrop for Lynas Corp Ltd (LYC AU) in the near-medium-term.
• From a tick-the-box perspective, Nissan Motor (7201 JP)'s new board looks highly diverse. If they take their jobs seriously and learn about auto manufacturing and sales, the board holds promise.
• Harbin Electric Co Ltd H (1133 HK)'s Offer is expected to get up after an unprecedented extension provides a last-minute reprieve.
• The Murakami Tender Offer for Kosaido Co Ltd (7868 JP) fails. Spectacularly so.
• Crane Co (CR US)'s proposal for Circor International (CIR US) will fail unless it bumps and opens up a dialogue with Circor's board.
• Ayala Corporation (AC PM) buys back shares from Mitsubishi, removing the placement overhang.

• 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)

Nexon Co Ltd (3659 JP) (Mkt Cap: $14bn; Liquidity: $37mn)

A lot of the media coverage of the Nexon situation appears to be a kind of breathless updating of possible changes in situation trafficked by gossipmongers. The level of trustworthiness to the "news" is low and outlets rarely note that what is now being reported does not report with what was previously being reported as "likely." Travis Lundy suggests the level of confidence one should have about the expectations the media is implying needs to be checked. There is simply not enough meat in the "facts" as reported to strongly inform market observers & participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even whether there could be a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

Delays were to be expected. and the possibility of significantly longer delays exists. The structure is convoluted - less easy than just buying Nexon outright. The structure could easily deter many buyers unless it is crystal clear that the rest of the stuff inside NXC is excluded from the sale. If delays are being implemented because major bidders can't get the funds, that is either bad news on its own, or there is something else going on. If KJJ really wants a great premium when he decides to sell, he may turn this deal down - whoever the winning bid comes from.

• The constant refrains about how Disney, EA, or Amazon might bid are probably misplaced. Travis Lundy doesn't see any of them bidding. The US-China Trade War means US corporate buyers are not going to be the best buyers of game assets where 50% of revenue and 100% of profits come from China.
• MBK/Tencent or KKR/Tencent is probably still the bidder to beat, as that consortium has been since the beginning. MBK would find it the easiest to take a sharp knife to costs. Tencent would find it easiest to buy 30-40% and then stay on the sidelines while someone else made it better. Neither Netmarble nor Kakao are likely to be the best buyers for this.
• This opportunity has been a great one to range-trade. In general, it has been "buy the dips, lighten up after it pops 5-10%. Rinse. Repeat." Travis now views this as a low-quality Bullish trade. It is lower quality than it was 3-4 months ago because of reduced ability to range-trade and harvest gamma before a decision is made. The time decay is perceived to be quite strong now. That means sizing would probably be smaller now than it was at the same price or slightly lower in January.

(link to Travis' insight: Nexon: Continuing Question Marks)

Netmarble Games (251270 KS) (Mkt Cap: $7.9bn; Liquidity: $20mn)

The three major drivers of Netmarble's stock price include the upcoming IPO of 80.6%-held Netmarble Neo (and the official global launch of the mobile RPG The King of Fighters Allstar game on May 9th), the launch of the BTS World game, and the eventual resolution of the NXC Corp/Nexon M&A situation.

• Douglas Kim believes a non-Netmarble Games entity such as MBK or Tencent Holdings (700 HK) will be the final bidder for Nexon. It was reported in early May that the Netmarble and MBK partnership broke off at the last minute as MBK determined it may not need a strategic investor to manage Nexon - key personnel in Nexon (excluding the founder Kim Jung-Joo) already play significant roles in directing and managing the company.
• The market has been concerned about Netmarble potentially overpaying for NXC Corp with overstretched debt financing, and if Netmarble fails to be the final bidder for NXC Corp, this is probably a positive for the company. If the final bidder is MBK (only), this will also have an added positive impact on Netmarble as there have been fears that if Tencent acquires NXC Corp, this will potentially add to the competitive pressures of the gaming industry in Korea.
• These events, followed by an announcement of the Netmarble Neo IPO and a successful launch of the BTS World game should also positively impact Netmarble. In terms of earnings pickup, the consensus expects Netmarble to experience a turnaround starting 2Q19, with operating profit estimates of ₩46bn in 2Q19, up from ₩34bn in 1Q19. The consensus expects the company to further improve its operating profit to ₩100bn in 3Q19.

(link to Douglas' insight: Netmarble Games: The Upcoming Netmarble Neo IPO, Launch of BTS World Game, and the Nexon M&A)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $1.1bn; Liquidity: $9mn)

Travis Lundy discusses the Lynas situation which appears to have changed dramatically this week. Lynas believes Malaysia will decide things the right way, which will mean the infamous December 4th Letter from the AELB (Atomic Energy Licensing Board) will be withdrawn, Malaysia approves the CondiSoil route for disposal of the WLP residue there now, and tthe license will get renewed with adequate transition time to enable continued buildup of WLP before sourcing of cracked and leached material exported from Australia can be arranged. This is the bet here.

• Travis thinks Lynas will need to create a new pricing system for its product. Its customers should be willing to pay a price which is not explicitly tied to Chinese onshore pricing with all the risk that entails. If its customers want to ensure Lynas stays in business, Lynas has to be able to charge what it needs to in order to stay in business. Western and Japanese companies with good technology to increase processing expertise to enable better product and higher margins will be happy/willing to engage with Lynas for the basic reason that Lynas is not Chinese. I'd note that they'd engage with the buyer of Lynas assets as well if Lynas went under, but the issue here is not bankruptcy but speed of increased capacity rollout.
• This would suggest that partner companies with cash to invest should be willing to project-finance some portions of the capital and/or expansion. If Lynas needed or wanted to raise capital by issuing a convertible bond of a few hundred million dollars, Travis expects doing so would be "easy" in the near-term.
• Travis is bullish the stock price near-term, not because of fundamentals, but due to the a) Trump Trade Wars being a good thing for product pricing and demand for access, and b) Geopolitical issues helping Malaysia come to the "right" decision regarding license renewal. He would not want to be short here anymore. Because the growth and value of long-term product pricing is so far out in the future, what constitutes "fair" for the stock is obviously tough to calculate with any confidence, so the "Bullish" label is really about covering the short.

(link to Travis' insight: Trump Trade Means Lynas Capex Easier)

Nissan Motor (7201 JP) (Mkt Cap: $26bn; Liquidity: $115mn)

The new board of Nissan, as proposed by Nissan's Provisional Nomination and Compensation Advisory Council established after the independent committee on governance proposed its measures in March, has 11 members, with two each nominated from Nissan and Renault SA (RNO FP) and seven coming in as independent directors.

• The board is now set up to be Team Renault, Team Nissan, and seven (theoretically) independents. The important angle here is to try to understand where the chips might fall if push comes to shove, because the Revised Alliance Master Agreement requires that Renault not propose measures to the shareholders which are not supported by the Nissan board, and not vote against measures which are proposed by the board. Doing so would breach the RAMA and would allow Nissan to buy more Renault shares.
• Only at the end of June - assuming all goes to plan - will the seven new members of the new Board take their seats. Renault pushing hard now when the majority of current board members will change in June seems to be insensitive to the nature of boards and board members' responsibilities. Should there be a strong dispute between Renault and Nissan about the process and timing of discussing deeper capital ties, Travis expects the ball to fall in the court of "Not Now" and "Not Yet."
• At 0.57x book on Nissan, it is difficult to be bearish. And it seemed pretty clear from the earnings meeting that Saikawa-san and others thought that the low forecast for FY19 (to March 2020) was reasonably conservative and was designed to flush out all the bad news. Nissan has decided to shrink its volume presence in the US to raise profitability per vehicle, and it is clear that there have been measures to reduce costs through redundancies.
• Travis remained inclined to think that RNO is the right trade to be long here compared to Nissan but is surprised that Renault is now down to such a low PBR. He was inclined to think that the significant slowdown in the Chinese market is a net headwind to both Nissan and Renault, but expects that the heightening of trade friction between China and the US could favour Japanese brands at the expense of US brands.

(link to Travis' insight: Nissan's New Board and Management Developments)

Briefly ...

One Equity placed out 6.5mn shares of Celltrion Healthcare (091990 KS) at a final price of ₩60,100, an 8% discount to last close, similar to the discount back in September last year. There is a 90-day lockup on One Equity's remaining 10% stake and it is possible Ion will reload. (link to Sanghyun Park's insight: Celltrion H Block Deals Priced at Floor: More Short Entry Points Should Be On the Way)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $991mn; Liquidity: $3.5mn)

With acceptances totaling 85.84% of shares out as at the Closing Date (20 May), just short of the 90% acceptance condition, in an unprecedented move, the SFC granted an extension for Harbin's Offer until the 19 July (Second Closing Date). If you're going to set a precedent, then make it a bold one. Two months of additional time provides ample room to source, locate, and encourage shares not tendered (4.16% of shares out) to tender.

• The withdrawal clause (Rule 17 of the Code) has now been clarified on the HKEx - the right-of-withdrawal of acceptances is triggered 21 days after the Closing Date (i.e. shares tendered are not irrevocable through to 19 July, as previously speculated in this insight). This is a voluntary right to withdraw - not compulsory - and assumes the Offer does not become unconditional before the expiry of the 21 days.
• ~28mn shares are required to be tendered for the Offer to get up and 27.5mn have changed hands since the extension announcement. The acceptance condition is likely to be satisfied shortly. An additional 5.7mn shares or 0.84% of shares out tendered on Friday.

(link to my insight: Harbin Electric: This Could Get Squeezy After Unprecedented Offer Extension)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $164mn; Liquidity: $1.5mn)

The long extended close of the Tender Offer for Kosaido by renowned Japanese activist Yoshiaki Murakami and his affiliate companies, ended in failure. Travis had been bearish the stock once the Tender Offer was announced and the stock popped to the ¥850 area, and the shares did not trade below ¥750 (the Offer price) for much time at all after the announcement, but even he did not expect the result of only 427,000 shares tendered. That is less than 2% of the shares they did not hold. 85% of shares out did not tender.

• Most people who bought in the past three and a half months are now (at the time of the insight) underwater on their investment, at a 70+% premium to the undisturbed price, after worse-than-expected results. And we have no resolution.
• It would be tough to sell the funeral parlor business for 1x book because in its best year in the past five it earned a 5% ROE. To trade at book it should be able to do a little better than that. The rest of the business has negative equity and a dire need for restructuring, which costs money.
• Travis is still bearish here and would not buy the dip in near-space. Even if the stock does not drop hard, it is pretty much dead money for a while. And while the stock trades below book, and there is a significant likelihood of bootstrap restructuring, Travis is inclined to think that transparency for shareholders will be no better than it has been for the last five years, which is pretty abysmal.

(link to Travis' insight: Murakami Group Tender for Kosaido Fails... Spectacularly)

Asiana Airlines (020560 KS) (Mkt Cap: $1bn; Liquidity: $48mn)

More than a month has passed since Asiana Airlines was officially put up for sale by the Asiana Airlines' main creditor (KDB) and Kumho Industrial (002990 KS), the leading shareholder of Asiana. Since then, a few chaebols that were initially mentioned as potential acquirers of Asiana including SK, Hanwha, CJ, Lotte, Hanjin, and Shinsegae groups - all have been very quiet in their willingness to purchase the company.

• Among these chaebols, Aekyung has shown the highest initial interest. It may require nearly ₩2.0tn to ₩2.5tn to acquire Asiana Airlines, which will likely involve additional rights offering/debt financing.
• Because of the uncertainty on timing and potential buyers wary of the high debt amount and lofty purchase price, expect Asiana to continue to trend lower in the next few weeks. There is a strong support in the low ₩5,000 level, meaning there could be a further 10-15% downside risk.

(link to Douglas' insight: Korea M&A Spotlight: Aekyung - The Leading Candidate to Acquire Asiana Airlines at Reduced Prices?)

Circor International (CIR US) (Mkt Cap: $850mn; Liquidity: $8mn)

Crane Co (CR US) announced a proposal to acquire Circor, a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45/share (cash), for a total equity value of $895mn and an EV of $1.55bn ($1.7bn if net pension liability is included). The proposal represents a 47% premium to last close. Circor rejected the proposal on the 13 May, so Crane has gone public to “make our proposal known to Circor shareholders so they can express their views directly to the Circor Board.”

• Circor’s EBITDA margins are lower than the mean/median of the comps and are the lowest of any company in the entire group, giving credence to Crane’s criticisms of Circor’s operating performance. From Crane's presentation, Circor is the worst performer amongst its peer group and also missed all five-year targets (set in 2014).
• John DeMasi reckons this deal will be an uphill battle for Crane if it decides to go “hostile” with a formal offer - it would fail without a board recommendation. The next step would be to increase their proposal to give Circor’s board an opportunity to show it is not totally intransigent. A $4 bump to $49 would be a meaningful interim increase (8.9%). If that doesn’t get Circor talking, the board would come under pressure from shareholders. Other bidders could be drawn out if it gets Circor talking.
• Even though this is a highly speculative situation (with downside of ~29% using Friday's close), John liked it (sized appropriately at the then-current price $41.37) because of the potential upside and confidence that an independent, competent board will listen to its shareholders if enough of them are loud enough for long enough.

(link to John's insight: Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted)

Mellanox Technologies Ltd (MLNX US) (Mkt Cap: $850mn; Liquidity: $8mn)

The past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratcheting up of trade tensions between the US and China - Nvidia Corp (NVDA US)'s $125/share Offer is conditional on the receipt of antitrust clearance from China. Financial media and pundits have been quick to reference Qualcomm Inc (QCOM US)'s failed bid for Nxp Semiconductors Nv (NXPI US) last year as why this may not bode well for the NVDA/MLNX transaction. But Robert Sassoon sets out a case as to why this deal may not be the right reference.

• He believes the Marvell Technology Group Ltd (MRVL US)/Cavium Inc (CAVM US) deal provides a more positive perspective on the prospects for NVDA/CAVM deal completion than QCOM/NXPI. Furthermore, the merger agreement expires on December 10, 2019, which also accommodates two three-month extensions. This leaves a long runway for the deal to obtain the required regulatory approvals, and a time buffer for the current political heat to cool down either through some type of trade agreement between US and China or progress towards one.
• Friday's closing price of $109.80 is only slightly above the pre-announcement price. In August-September 2018 period when speculation of a possible MLNX buy-out began, shares were trading in the $70-$80 range, at a valuation multiple of 9x-10x & 14x-16x prospective Non-GAAP 2018 EBITDA & PE. However, consensus estimates for 2019 are projecting a ~30% increase in both EBITDA and EPS, indicating little fundamental justification for a return to that range. This suggests limited downside for the shares of a fast-growing company that is trading at below peer multiples. On balance, the risk-reward profile of MLNX looks attractive from our standpoint.

(link to Robert's insight: MergerTalk: NVIDIA/Mellanox - Why We Think There Is More Opportunity Than Risk In The Widened Spread)

Briefly ...

Sprint Corp (S US) has received approval from the FCC for the merger with T-Mobile to proceed following concessions. The Justice Department approval is outstanding and Sebastian Ashton, CFA believes the outcome remains uncertain. He reiterates investors should look to exit the bonds at current valuations given they are trading at a premium to par, in order to mitigate deal risk exposure. If the merger fails, the company may face liquidity issues over the medium term given their deteriorating fundamental performance and negative free cash flow. (link to Sebastian's insight: Sprint Corp – One Regulatory Approval, Another to Go, How Likely?)

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

JCNC's discount to NAV of 14.4% is around its narrowest in the past 12-months and compares to an average of ~20%. The key trigger for JCNC's recent outperformance appears to be the cancellation of the offer for Bank Permata (BNLI IJ).

• Both Standard Chartered Bank and Astra hold 44.56% in BNLI, leaving minorities with 10.88%. First rumoured back in November/December, state-owned Bank Mandiri Persero (BMRI IJ) was understood to be the frontrunner to acquire the stakes held by Astra and St Chart.
• The speculated price sought by BNLI was 1.8x P/B, dropping to 1.6x, then 1.4x, before talks were allegedly abandoned last week. There has been no official announcement/comment (and in my own correspondence with the IR) from Astra on this sale. Astra's stake in BNLI accounts for 3.6% of its market cap - not a material %.
• JCNC is prodding its narrowest discount to NAV in the past year, having all-but reversed its 4Q18 lows. There may be further upside for JCNC, but it appears limited. BNLI is for sale and is currently trading at 1.0x P/B. I would not be surprised to see further dialogue initiated on a proposed sale.

Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

Ayala Corp's discount (at the time of my insight) to NAV had bounced off a 12-month low but still traded 2Stdevs+ from the average, and below the 12.9% level when I previously discussed this Holdco in greater detail in late April. ACs 1Q19 figures released on the 10 May did not endear investors to the stub ops.

• Mitsubishi's 6.58% stake remains an overhang - however, there appears no urgency for another placement with AC trading a YTD lows. On the assumption these share placements bolster full-year results (March year-end), Mitsubishi can afford to wait for a recovery in the share price. However, this assumes there is a near-term recovery with respect to this placement.
• This recent set of quarterly results at the parent level is not positive. Expect the discount to NAV to drift sideways, if not lower without the benefit of any positive newsflow at the stub ops - or on the placement - until 1H results announced around mid-August clarify the earnings direction for 2019.
• If Mitsubishi is indifferent to selling as its in-cost is a fraction of the current price, the spectre of declining (& a protracted decline in) stub earnings may tilt them to place shares earlier.
  • UPDATE: AC announced it had bought back 3.8m shares from Mitsubishi Corp at PHP 838, a 1.5% discount to the prior day's close. "This transaction completes their portfolio rebalancing exercise with regard to their Ayala holdings, which now stands and will remain at around six percent (6%)." Positive news for Ayala and a nice bounce - it closed the week at 11.5% discount to NAV against a 12-month low of 16% on the 21 May.

(link to my insight: StubWorld: JCNC In Unwind Territory As Astra's Bank Stake Stalls; Poor Stub Results Send Ayala Lower)

A number of Hong Kong spin-offs, including Haitong UniTrust International Leasing Co Ltd (1905 HK) (HUIL) and Xinyi Energy Holdings Ltd (3868 HK), have been announced recently. Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have also made announcements to spin-off certain divisions, although these remain subject to Exchange approvals and market conditions. Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent's operations ahead of these spin-offs.

• Haitong Securities Co Ltd (H) (6837 HK)'s implied stub ops appear slightly expensive versus peers. Haitong Sec has underperformed both its peers and HSI since the initial spin-off announcement back in March 2017. However, stub income halved in FY18 compared to a 28% decline on average for peers. At ~15% of market cap, this is a weak Holdco/subsidiary relationship. HUIL is expected to commence trading on the 3 June.
• Xinyi Solar Holdings (968 HK)'s performance and valuation (with reference to its stubs ops) relative to peers, appears overextended, notably for operations with declining growth and net margins. The implied stub is near a 52-week high. At between 35-45% of market cap, this will be a new Holdco/subsidiary relationship to follow, depending on XEH's volume. XEH is expected to commence trading on the 28 May.
• Legend Holdings Corp H (3396 HK)'s proposed spin-off of Zhengqi Financial has all the hallmarks of being a weak Holdco/subsidiary relationship; as does Kerry Logistics Network (636 HK)'s proposed spin-off and separate listing of Kerry Express (Thailand) on the stock exchange of Thailand. Tianneng Power Intl (819 HK)'s spin-off of its battery manufacturer may result in a stub to watch, however financial details of the spin-off are minimal, it still requires PRC approval, and the spin-off was previously attempted back in 2015.

links to insights:
SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int'l Leasing
SPINOFF: Xinyi Solar Spinoff of Xinyi Energy
SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

• Kidman Resources (KDR AU) and Wesfarmers Ltd (WES AU) have now entered into a SID - the price remains at $1.90. Conditions include KDR shareholder approval, IE concluding the Scheme is in KDR shareholder best interest and no MACs. The Scheme implementation is expected to take place in early Sept. Trading at a tight gross/annualised spread of 1%/4%.

• Including the acceptance facility, Ap Eagers Ltd (APE AU) holds 60.4% in Automotive Holdings (AHG AU).

• Approval from the Office of Trade Competition Commission was received on the 23 May, therefore Frasers Property (Thailand) Pcl (FPT TB)'s tender offer for Golden Land Prop Dvlp (GOLD TB) is expected to commence on the 5 June and conclude on the 8 August.
• 26.14% of shares out tendered into Glow Energy Pcl (GLOW TB)'s Offer giving Global Power Synergy Company Ltd (GPSC TB) a total stake of 96.25%.

• Hanergy Thin Film Power (566 HK)'s scheme and the special resolution for matters relating to the implementation of the Scheme were approved respectively at the Court Meeting and the SGM. The Court Hearing is the 4 June with an Effective date on the 6 June.

• The High Court has rejected Lo To Lee Kwan's bid to dismiss HSBC as trustee of Great Eagle Holdings (41 HK) family trust. There is no HKEx announcement on this - but here is the High Court judgement, with the conclusion beginning on paragraph 506. GE's discount to NAV bounced off its 12-month low of 58.7% and currently trades at 56.5% against a one-year average of 44.4%.
• New Sports Group (299 HK)'s unconditional offer closed with the Offeror and parties holding 75.46%. A temporary waiver from strict compliance with the public float was lodged with the SFC.
• Lafarge Malaysia (LMC MK)'s Offer doc has been dispatched.
• Indofood Agri Resources (IFAR SP)'s Offer has been extended until the 25 June (or such later date) and the Offer price has adjusted to $0.2775 for the final dividend of $0.0025.

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.