Last Week in Event SPACE - NTT Docomo, Hyundai Merchant, Interflex, AWE, NXP

Last week, NTT Docomo Inc (9437 JP) appears a better call than NTT (Nippon Telegraph & Telephone) (9432 JP); underwriters are holding 15% of Hyundai Merchant Marine (011200 KS) for those interested; Interflex Co Ltd (051370 KS) dodges a defect issue, but management trust is found wanting; AWE Ltd (AWE AU) trades through terms in a competitive bidding process; and Broadcom Corp Cl A (BRCM US) is sitting pretty after Qualcomm Inc (QCOM US)'s offer for NXP Semiconductors NV (NXPI US) gets dinged by Elliott.

Events

NTT Docomo Inc (9437 JP) (Mkt Cap: $93.5bn; Liquidity: $110mn)

If you can avail yourself of pre-paid corporate taxes, then NTT Doc’s Tender is your bailiwick. NTT (Nippon Telegraph & Telephone) (9432 JP) is such positioned and has agreed to tender 74,599,000 of its 2.47bn holding (63.32% of shares out) or 80% of the shares to be repurchased. NTT Doc is essentially returning capital to NTT.

• If not so positioned, institutional investors who tender shares will have withholding tax applied to the proceeds. That tax will be dependent on your jurisdiction's tax treaty. Such investors would be better served selling in the market and taking the CGT hit. The short takeaway from this tender is that NTT Doc will purchase most or all of NTT’s tendered shares.

• While NTT is cheaper than NTT Docomo and still represents solid value given its practice of increasing capital efficiency and returning capital to shareholders, Travis Lundy expects NTT Doc to outperform NTT in the near-term as buying pressure on NTT abates (its buyback finished on the 8th Dec), and NTT Doc's buyback enters full-swing.

link to Travis' insight on Docomo: NTT Docomo: Tender Offer Buyback Event
link to Travis' insight on NTT: NTT (9432 JP) Buyback Complete: Brief Pause Before The Next?

Hyundai Merchant Marine (011200 KS) (Mkt Cap: $923mn; Liquidity: $7.7mn)

Given the thin price spread between the current and offering price, only 0.99% of the rights were taken up by the public. The remaining 46.6mn shares will go to the two underwriters, KIS & KB Securities.

• HMM will still raise ₩600.0bn from these rights, but taking into account the 15% underwriting charge on the forfeited shares, actual proceeds will be ₩556.3bn.
• KIS & KB have no lock-up clause on these shares, equating to ~15% of shares out, a material overhang. Short interest in HMM has been climbing.
• However, with >5% each, KIS & KB are required to report any movement in their shareholdings. That’s unwieldy, while shares dribbled out to the market will negatively impact prices. In practice, KIS & KB will look to sell-down their stake via block deals. This may flush out long-term investors angling for a position in Korea’s revitalised shipping industry. Sanghyun Park believes this could lead to a mini price rally in the short-term.

(link to Sanghyun's insight: HMM Rights Offering Update - Current Situation Involving Two Underwriters)

Kumho Tire Co Inc (073240 KS)(Mkt Cap: $646mn; Liquidity: $17.5mn)

Korean media reported that the SK Group will inject ₩700bn into Kumho Tire Co Inc (073240 KS), via a rights offering. Should the deal go through – and Douglas Kim doesn’t foresee any regulatory pushback - SK Group would have at least a 30% stake in Kumho, which would be enough for management control. The SK Group has been the most aggressive Korean chaebol in conducting major M&A deals this year. It is clear that SK Group wants to become a bigger force in the automotive segment.

• At the time of this injection news, Kumho had a market cap of ₩635bn. This ₩700bn investment for ~30% stake (the exact % is not yet known) therefore involves a significant management control premium component.

• As part of the deal, SK will take over Kumho's China factories and has asked creditors to roll over the maturity of the existing debt in the company. Kumho has about ₩1.4tn in financial debt that is due within one year. The major creditors include Woori Bank and KDB Bank, who collectively hold a 42% stake in Kumho.

(link to Douglas’ insight: Korea M&A Spotlight)

Interflex Co Ltd (051370 KS) (Mkt Cap: $946mn; Liquidity: $34.5mn)

The company announced it had resumed the operation of 'some' production lines where the Apple defect issue occurred, and it would resume the remaining production lines for Apple Inc (AAPL US) by Dec 14. This 'official' response by the company is being interpreted by the market that the defect issue may not be as serious as initially feared.

• According to 'MoneyToday', a local newspaper, after a two-week suspension, Apple & Interflex agreed to resume operation of the two lines of FPCB as it was inconclusive the issue was Interflex's fault. Apple will continue its investigation, canvassing the TSP FPCB supply chain, before issuing a final verdict.

• But Interflex faces other trust issues after CEO Lee Gwang-sik dumped shares in late October, shortly followed by other senior management. All ahead of the defect news. Pure coincidence? The KSS said that it would launch an investigation into possible insider trading, which might involve shares sold by Lee.

(link to Sanghyun's insight: Update on Interflex Rights Offering & Defect Issue & Possible Inside Trading)

Akebono Brake Industry Co (7238 JP) (Mkt Cap: $375mn; Liquidity: $3.6mn)

Unlisted auto parts giant, Robert Bosch (unlisted) announced it is selling its 12.13% stake in Akebono Brakes via a public stock offering. That stake reduction removes the positive halo Bosch brings to the table.

• Akebono's consensus figures of FY3/19 PER of 9.1x and an EV/EBITDA of 3.5x, compares to the FY3/08 PER low of 8.3x (and again FY3/11) and the all-time low EV/EBITDA of 3.8x (also in FY3/11).

• Akebono is trading at 3.1x net debt/equity, but that is an improvement over the 3.5x at the end of FY3/17. SC Capital tilts positive on Akebono, but the question remains why Bosch opted to exit.

(link to SC Capital's insight: Akebono Brakes (7238)--Bosch to Sell Its 12% Stake)

Unison Co Ltd (018000 KS) (Mkt Cap: $292mn; Liquidity: $10.5mn)

Korea's oldest and largest wind power developer/operator announced a ₩41.9bn rights offering, with a tentative offer price of ₩3,225 and share dilution of ~13.99%. Jan 31 is the day for the final price determination; Feb 5-6 the subscription days for existing shareholders; and new shares will be listed on Feb 27.

• The rights offering will be set in similar fashion to HMM and Interflex, however, the discount is more generous at 25% (+5bps). Shares tanked 12.63% on Friday on the rights issue news. According to Sanghyun, rights offerings usually lead to a very negative investment sentiment among Korea's investors.

• However local institutions scooped up 1.5mn shares on the 13-14 Dec, having largely been absent this month and last. Possibly these institutions were positioning themselves ahead of Unison's addition to the KOSDAQ 150 index on Friday; and/or Korean government's new energy roadmap, which was officially announced on Dec 14.

• Sanghyun finds it hard to believe these local asset management companies who bought Unison in size, had no inkling about this rights offering. This could infer a wider range of trade opportunities attached to this offering.

(link to Sanghyun’s insight: Unison Rights Offering Review - Very Unusual Event)

M&A

AWE Ltd (AWE AU) (Mkt Cap: $386mn; Liquidity: $2mn)

Pranav Rao discussed China Energy Reserve and Chemical Group ("CERCG") all-cash offer for AWE Ltd (AWE AU) at A$0.73/share, a tiny 2.8% premium to its recently withdrawn proposal. He didn’t discount a competing bid. We were not disappointed.

• Three days later, Mineral Resources Ltd (MIN AU) came over the top with a superior all-scrip offer (1 MIN:22.325 AWE shares). That equates to an offer of ~A$0.81 vs. AWE's Friday close of A$0.83.
• AWE hasn’t come out supporting either bid. Unlike CERCG, Min Res has not publicly released its offer conditions. One of CERCG’s conditions was the confirmation of AWE's L1 & L2 license. My discussion with AWE indicates such a confirmation is not a risk.

(link to Pranav’s insight: AWE: What Is Dead May Never Die (But Rises Again Harder and Stronger)

Westfield Corp (WFD AU) (Mkt Cap: $14.9bn; Liquidity: $67.4mn)

Unibail-Rodamco SE (UL NA) is offering 0.01844 UL shares + US$2.67/cash for every Westfield share in a friendly transaction, supported by the Lowys and unanimous board approval on both sides. There is a small-ish amount to be had from OneMarket, which will be spun-off to WFD shareholders – if the deal goes through. That could add another A$0.045/share to the trade, according to Travis.

• The trade here is to short Westfield, although shares of both could be pressured as WFD shareholders take profits on WFD and arbitrageurs short Unibail-Rodamco to account for it.

• For fundamental investors, a merged Unibail-Rodamco/WFD would be a close second, in terms of market cap, to Simon Property Group Inc (SPG US), and Travis is betting the enlarged Unibail will take a crack at being more aggressive on both tenant mix and placement/appeal, and in terms of asset rotation.

(link to Travis’ insight: Westfield-Unibail-Rodamco: The Call of the Mall)

NXP Semiconductors NV (NXPI US) (Mkt Cap: $39.2bn; Liquidity: $328.4mn)

The odds on Qualcomm’s winning over NXP just narrowed after Elliott Management, a 6% shareholder of NXP Semiconductors NV (NXPI US), said Qualcomm’s $110/share offer was insufficient and $135/share was more indicative. Qualcomm responded that its offer is full & fair.

• Arun George believes this recent development plays into Broadcom’s court. Broadcom is expected to pitch a sweetened offer for Qualcomm if it abandons the NXP deal. Qualcomm will be challenged persuading its shareholders the merits of bidding over the top for NXP, an acquisition saddled with uncertain regulatory issues and timelines, which could result in Broadcom walking. Or bidding less.

• NXP tendering for Qualcomm’s offer was 2.4% at the last count. It needs 80%. Elliott may be working with other NXP shareholders, such as DE Shaw, to secure that 20% "against" threshold.

(link to Arun’s insight: Qualcomm: Pinned into an Uncomfortably Tight Corner, Elliott Values NXP at $135 Per Share)

Very, very briefly on M&A:

Mg Unit Trust (MGC AU) (Mkt Cap: $350mn; Liquidity: $0.8mn)

• The Federal Court of Australia handed down an A$650k penalty (a previously agreed upon sum) to reach a settlement with ASIC for failing to meet disclosure requirements in relation to the April 2016 price cut to farm suppliers.
• Trading 9.3% through the A$0.75/share offer from Saputo Inc (SAP CN). Rumours abound of a counter bid from various Chinese players.

Topix Inclusions!

Gunosy Inc (6047 JP) (Mkt Cap: $625mn; Liquidity: $6.8mn)

This leading (in Japan) news curation site/app company announced that the TSE had given it the nod, therefore the inclusion event will take place on 30 January 2018.

• This is a fast-growing company (34% yoy rev growth to May '18), high-priced stock (43x May 2018 & ~30x May 2019. It will get some notice from entering TSE1. It may even get analyst coverage.
• Travis expects 2.2-2.6mm shares need to be bought for the TOPIX inclusion, equivalent to 30-50% of Travis''"Likely Float". This inclusion should have an impact on the stock price.
• There's probably at least another 10-15% near-term without much overhang.

(link to Travis' insight: Gunosy (6047 JP) TOPIX Inclusion Event Interesting)

Nihon Plast Co Ltd (7291 JP) (Mkt Cap: $180mn; Liquidity: $0.7mn)

This inclusion event will take place on 30 January 2018. Depending on how TSE considers the offering, the inclusion involves around 1-1.8mn shares. This compares to the offering itself of 3.65mn, so there’s plenty of overhang.

• At 6.8x March 2018 forecast EPS (post-dilution) and 0.64x BVPS, Nihon looks optically inexpensive. And averaging the last 8 quarters of EBITDA places the company at 3.6x EBITDA.

• The stock will get some notice from entering the TSE1 but is unlikely to get analyst coverage. Still, the stock was totally beaten up ahead of the offering, which was placed within 1% of the 52-week low. Travis is not aware of any TSE1-listed auto parts companies in Japan this inexpensive and is probably a great “buy-on-dips” trade.

(link to Travis’ insight: Nihon Plast (7291 JP) Treasury Share Offering Priced - TOPIX Inclusion in January)

Totech Corp (9960 JP) (Mkt Cap: $325mn; Liquidity: $0.5mn)

The air-conditioning equipment, control equipment, and installation company announced on Monday that the TSE had given it the nod, therefore the inclusion event will take place on 30 January 2018.

• Totech is not overly expensive at 11.4x its own forecast of March 2018. It also pays a 1.6% dividend - there is no kabunushi yutai (shareholder coupon) program. The shareholder breakdown and volume patterns suggest there is not a huge amount of float.

• Air-conditioning is a stable business, and Totech has been growing its top and bottom lines over the past several years. The Tokyo Olympics and casino developments should add to this stability. As a trader, Travis would buy any dip after the first jump.

(link to Travis’ insight: Totech (9960 JP) TSE1 Reassignment and TOPIX Inclusion)

Stubs

Briefly...

Kingboard Chemical Holdings (148 HK) / Kingboard Laminates Holdings Limited (1888 HK)

After selling its 9.61% stake in Cathay Pacific Airways (293 HK) to Qater Airways for HK$5.162bn, KBC has applied those proceeds towards the purchase of a commercial building in London for HK$4.2bn or HK$9.8k/sqft.

• Subsequent to the Cathay sale in early November, KBC looked toppish at a 19% discount to NAV. That discount is now 28% against a 12-month average of 38%.

(link to my weekly round-up of interesting stubs: StubWorld - Set-Up & Unwind Extremes: AVIC, Macau Plays, Guoco, Hang Lung)