Last Week in Event SPACE: Nichii Gakkan, Car Inc, Mcdonalds, Lynas, Casetek, Unicom, Evergrande

In what should shock investors, on the last day of the Tender Offer period, the Nikkei Business Planet came out with an article saying Baring PE proposed to Nichii Gakkan founders that it could pay ¥2,000/share. The article says that Baring approached the bidders three times in the month of July, and were effectively rebuffed.

• If Travis Lundy were an investor and had tendered shares at ¥1670/share into this Tender Offer, he would have been on the phone to his Prime Broker immediately to pull them out when the story came out. He recommended to investors to do that. If he were in the investor seat now, Travis might be buying every share he could at ¥1670/share. This is a perfect set up for legal action. The question is whether people can get large enough to make it worthwhile.

• Baring PE Asia clarified that the proposal was friendly and was made to "certain members of the founding family". It does not clarify (like the article does) that those members were board members. But those board member(s) would have had a duty to all shareholders. Not disclosing is bad governance. And if the independent board members did not pursue this, it would have been bad governance. The duty of board members is to the shareholders and the company. It is not to a particular set of shareholders.

• As per the Tender Offer results, Bain owns 57.32% directly, and have an agreement over another 24.95% from the family. That gets them to 82.27%. That means it will go to EGM and investors will get squeezed out. An ugly finish.

(link to Travis' insight: A Modest (McDonald's Japan) Proposal)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $1.3bn; Liquidity: $9mn)

After its life-or-death ordeal, last year concerning the operation of LAMP in Malaysia, Lynas' operational visibility is looking remarkably clear. The A$425mn fundraising announced on the 17 August to fund a permanent disposal facility (PDF) in Malaysia and Kalgoorlie Rare Earths Processing Facility was expected.

• Rare earths are rare by name, but not by nature. But rare earth producing mines are. And because rare-earth processing has historically been a notoriously "dirty" business, the vast majority of production (80%) has fallen upon China. Outside China, Lynas has the honour of owning/operating one of the largest (& higher grade) rare earth mines. And as the largest listed producer of rare earth outside of China (~20% market share), places the company in good stead with the US amidst its ongoing stoush with China.
• Lynas' deal with the DoD is a small win, which could transform into a big win. Presumably this deliberately small facility (to avoid unnecessary, potentially uninformed public coverage), once built, would be fed concentrate from the Kalgoorlie plant, therefore sidestepping the residue backlash LAMP faced in Kuantan. If all goes to plan, expect the production output from the Texan facility to be ramped up.

• What is a "fair price" will be heavily influenced by sentiment. The backing from Australia's Federal and State government underpins not just Lynas' Kalgoorlie ops, but its overall business. FY21E 15.6x EV/EBITDA is punchy. But FY22E falls to 10x. The consensus target price has had a wide range over the past year, but coverage is expanding - up to nine brokers. The Trade. Currently trading at 2% below the TERP and 11% above where Wesfarmers made an opportunistic tilt for the company, at a time when Lynas' business hung in the balance. As the largest listed player outside China exposed to the rare earth sector, Lynas is a long-term buy.

(link to my insight: Lynas (LYC AU): Digging Into Unobtanium)

• The Chinese government is encouraging domestic electronics and semiconductor-related manufacturers to develop a homegrown supply chain in response to the ongoing US-China trade war and this is expected to adversely affect companies outside China. As a result, Pegatron, which is one of the largest contract manufacturers of iPhones, is preparing to face intense competition from companies based in mainland China, such as Luxshare Precision Industry (002475 CH) and others.
• From a fundamental perspective, the Offer Price seems light. Casetek has been experiencing strong demand for its personal computing products as a result of corporates shifting towards the work-from-home trend and the development of online education amidst the COVID-19 pandemic. Capital IQ consensus projections translate to revenue and EBITDA CAGRs of 23.6% and 17.0%, respectively, for the period 2019-2022. The Deal values Casetek at EV/EBITDA multiples of 5.4x and 3.2x on an LTM and NTM basis, respectively, both of which are well below the estimated means and medians for peers.

• However, the Acquirer controls around 60% of the Target. And this needs two-thirds of votes cast in the meeting to be held on 30th September 2020 which would require a maximum of 17% of the remaining shareholders (6.7% of the 40% not owned) to vote in favour. Janaghan Jeyakumar does not see any major regulatory concerns. Given that there is also some fundamental backing for a bump, he finds this deal to be attractive opportunity at anything resembling a normal spread.

Earliest this week, shares closed at INR 127.95. That is highest in the trade to date and +45.5% since the close of the trading day after Travis first wrote on the deal. Based on the proposed terms of the Bond Issue launched recently, the deadline for the In-Principle Approval from the Stock Exchange is October 1. That means the deadline to launch the RBB is 12 October. The deadline to own 90% - through payment of the deal or through the Counter Offer settlement - is 19 November. To be safe under a Counter-Offer and meet the OTHER condition, the deal would have to be launched prior to 12 October.

• Travis expects this means that the application into the Exchange will happen within the next 15-20 calendar days or so give them the extra room. The last possible day to submit an application "complete in all respects" for in-principle approval and allow time for the Counter-Offer to run its course appears to be 23 September. He expect it needs all its guaranteed funding in place by those dates too - bond or loan.

• There are expensive ducks being put in a row and there are "bonus ducks" behind for VEDR. There is good news behind based on last week's SC ruling on HZL. If this bond today is US$1.75bn or more, the target price is probably INR 170/share or more. At this point, I would also think August-end or September-end OTM call options might be interesting to buy.
• Thinking about the calendar, there is not much room to buy. I expect there could be as few as 15 trading days to buy before we get In-Principle Approval to launch by the Exchange. IF you want to make sure this gets done, buy ADRs and convert them as much as possible. Local shares can participate in the reverse Book Build auction and count towards reaching the 90% ownership threshold. ADRs do not.

Toshiba Corp (6502 JP) (Mkt Cap: $14.9bn; Liquidity: $45mn)

(link to Travis' insight: Toshiba TOPIX Inclusion - Jack Be Nimble, Jack Be Quick.... )

Nippon Paint Holdings (4612 JP) (Mkt Cap: $25.7bn; Liquidity: $37mn)

Nippon Paint has announced a deal which will take Wuthelam from 39% to about 60% ownership by Wuthelam subscribing to a third-party placement. Nippon Paint will use the funds to buy stakes in subsidiaries currently owned by Wuthelam. This is yet another major transaction by Wuthelam which gets Nippon Paint now finally under their control where there has been no potential exit for minority shareholders. The previous transactions have involved substantial negative premium paid to minorities (i.e. minorities give up far too much control for the financial benefit). The deal looks superficially positive due to the EPS accretion which is mostly a result of Nippon Paint’s extremely high PE, however, Mio feels this should be being lined up as a short.

• The major risk would be Wuthelam buying out Nippon Paint, but such a move is highly unlikely in the short-medium term and at these prices we are sceptical whether Wuthelam would go through with a buyout.
• Now that the JVs are fully consolidated Wuthelam does not appear to have strategic assets to easily swap for further stake increases so for the moment that risk seems low given that Wuthelam has not demonstrated enthusiasm to buy stakes in Nippon Paint at this price with cash.

(link to Mio's insight: Nippon Paint – Announced Deal Does Not Justify Share Price Run Up)
(link to Travis' insight: Nippon Paint: Wuthelam Swaps Income for Control: 5 to 59 in 15)

OOTOYA Holdings (2705 JP) (Mkt Cap: $0.2bn; Liquidity: $2mn)

On the 14th Ootoya announced that they would tie-up with online organic vegetable and meal-kit seller Oisix ra daichi (3182 JP). According to the Nikkei, Ootoya has been searching unsuccessfully for a white knight to come in over the top of Colowide’s bid. This is not surprising given stretched valuations but will this tie-up be enough to stave off Colowide’s TOB?

• If the TOB failed, and Colowide popped on the news, Mio Kato believes it is a short. Colowide last traded at ¥1,470. BPS is ¥267.17 for a 5.5x PB. The company has only once generated a double-digit RoE in the last 17 years (10.6% in 2010). Tangible BPS is -¥769.25.
• Mio believes being short both Colowide and Ootoya here would be attractive. Ootoya’s current price does not look sustainable regardless of outcome. If the TOB succeeds, the additional leverage would hurt Colowide and Mio believes the stock would fall, giving up a lot of its August gains. Colowide would also be taking on even more losses thanks to Ootoya’s weak operations. For Ootoya, it was probably overvalued before the offer and the offer was at a 46% premium.

China Evergrande Group (3333 HK) / Evergrande Health Industry (708 HK)

I estimate CEG is trading at a discount to NAV of 60% against a one year average of 50%. It has been lower, but only during the height (nadir) of the market-affected virus low. The 74.99% holding in EGI accounts for ~31% of NAV, so it's not a super-strong Holdco relationship. But that 74.99% stake in ERI currently accounts for 77% of CEG's market cap.

• The excitement over EHI is its foray into electric vehicles. EHI announced the acquisition of the remaining 17.6% stake in National Electric Vehicles Sweden AB (“NEVS”) for US$379.5mn. This backs out a value of US$2.2bn for NEVS. On 3 August 2020, EHI announced the first six models to be offered under the Hengchi brand. These models cover all major passenger car categories including sedan, sport utility vehicles and multi-purpose vehicles.
• But EHI is up 434.7% from HK$6.34 on 10 June 2020 to HK$33.9 on 5 August 2020. This was not lost on the SFC, which just completed an inquiry into the shareholding of the company and concluded there is a high concentration of shareholders. Short interest in EHI has spiked 6.6x times in a little over a month. That's 0.361% of shares out, but ~7% of Real World Float (as Travis Lundy would put it) - as per the SFC's recent shareholder breakdown. Shares are trading at 51x EV/revenue.
• The Trade. EHI's share price run-up appears unsustainable, irrespective of the company's intention to be the world's largest EV producer. CEG is a set-up here versus EHI. The trade risk is a bit like those looking to short Tesla Motors (TSLA US) - but Tesla trades at 15x ~15x trailing EV/revenue, and 12x this year. And EHI is not alone in China's EV market. Competitors include Li Auto, which raised US$1.1bn in a Nasdaq IPO late last month; Nio, which was listed in the US in 2018, and raised ~US$1bn back in April this year; Xpeng Motors, which has raised ~US$1bn in the last two months and just filed for an IPO on the US; and WM Motor - all of who have launched various models.

(link to my insight: China Evergrande (3333 HK): Set-Up Vs. Electrified Health)

• Alcon (ALC US) trades at a pretty rich 25X LTM EBITDA, which looks set to fall to 17x based on Bloomberg Consensus 2022 EBITDA. It would be reasonable to assume that it is unlikely that Bausch+Lomb would trade at those dizzy heights as things stand. The principal rationale behind this assumption relates to the leverage question. Furthermore, Robert Sassoon estimates that ~20% of the SpinCo's business will be made up by its eye pharma unit, which is more closely aligned to a specialty pharma business - Alcon does not have a pharma business. In Robert's valuation analysis, we have assumed multiples of 15x and 12x to our LTM and 2022 EBITDA estimates for the SpinCo.
• Robert arrives at a target value for pre-spin BHC of $28-$34/share on a Sotp's basis, or ~60%-95% above the prevailing share price of $17.49, even presuming no change in the Net Debt level from the latest reported figure by 2022. This leaves even more value upside on the table should the overall net debt level continue to decline as targeted by management.

Every now and then Travis throws himself on the mercy of the ho-humming crowd and writes about the Ito prefs. Why now? There is no catalyst. There is no expectation terms will improve. Travis has no expectation that the company will buy back the Pref Shares in inordinate quantities because it is trading very cheap to the common shares. He does not expect Itoen to merge the commons with the prefs. But if you think that it is possible that the Itoen Prefs might get to a 50% discount to the common shares sometime in the next five years, this is probably a good replacement trade, albeit very illiquid.

• The preferred shares are CHEAP at a 67+% discount to common shares. The common shares are expensive at 18x EV/EBITDA and 63x PER. The prefs are reasonable at <6x EV/EBITDA and 21x PER. Assuming you expect the commons to not perform well, the Prefs are a better way to get exposure. If you believe Itoen will eventually have better governance, the prefs should be bought back. If you expect buybacks on both, at some point the prefs should see he discount narrow as Itoen buys back prefs.
• Market liquidity is a problem. But if you hold it for years, you don't really need it. If you want a block, blocks are available. And in selling, the company has been amenable to ToST-Net3 buybacks in the past. This is a situation to be aware of. It is not for everyone, but for those who see the value, it is definitely for them.
• It would be worthwhile for owners of the pref to own a bit of common and to ask the hard questions. Are the prefs meeting the expectations of "extra yield" which were the excuse when listed? Is the fact that these look like a perpetual poison pill good governance? Should they be replaced with other dividend securities with more certainty as to principal risk? Since these were issued in August 2007, from an ex-rights price the common shares are up more than 100%. The prefs are down more than 30%.

The Index Maintenance Sub-Committee (IMSC) of NSE Indices announced the results of the September index review for the NIFTY Index (NIFTY INDEX). The rebalance will be effective after the close of trading on 24 September and passive funds will need to trade at the close (VWAP over the last 30 minutes of trading) on the day. There were three candidates eligible for inclusion and exclusion but the IMSC picked just two: Divi'S Laboratories (DIVI IN) and SBI Life Insurance (SBILIFE IN) were included, while Bharti Infratel (BHIN IN) and Zee Entertainment Enterprises (Z IN) were excluded. As discussed by Brian in NIFTY50 Index Rebalance - SBI Life Could Outperform on Index Inclusion, these changes are in addition to the adhoc change last month where HDFC Standard Life Insurance (HDFCLIFE IN) was added and Vedanta Ltd (VEDL IN) was excluded following the delisting proposal for Vedanta.