Last Week in Event SPACE: OFAC's Humdinger, China Mobile, NTT, Car Inc, Pressance, Tianneng Power

Seven weeks after the original Trump Executive Order 13959, New York Stock Exchange announced that it was commencing immediate delisting procedures on the ADRs of Chinese mobile telephone companies listed in the US - namely China Mobile Ltd Spon Adr (CHL US), China Telecom Corp Ltd (Adr) (CHA US), and China Unicom Hong Kong (Adr) (CHU US) - the ADRs of China Mobile (941 HK), China Telecom Corp Ltd (H) (728 HK), and China Unicom Hong Kong (762 HK) respectively. Four days later the NYSE walked that back after consultations with regulators. That appeared to upset some people in the administration, so Treasury Secretary Mnuchin had a call with the NYSE after which articles suggested the NYSE might walk back the walk-back and delist the ADRs after all.

• If you were long the ADRs and wanted to be able to get out of the stocks but want to wait until later, Travis Lundy expected you would need to convert the shares to their underlying Hong Kong shares prior to January 11 so that you are not accused of "transacting" in the shares after 11 January. The rule is that US Persons cannot transact after 9:30am 11 January, which would mean selling on Monday 11 January Hong Kong time would be within the rules, but it appears MSCI and FTSE have decided to play it safe and delete them as of this past Friday's close.
• Travis' insight of 5 January 2021 titled China Mobile (941 HK): Probably Too Cheap was predicated on his understanding that the OFAC list of subsidiary tickers would be the final arbiter. That understanding was based on the clarifications made in the FAQs in late December, then on 4 January, and on his confidence that the OFAC had been in communication with the global index providers who are generally better equipped at dealing with this kind of thing than are exchanges.
• Longer-term, for European, Asian, etc funds who do not need to deal with the EO 13959 or for other funds, that means that there could be a buying opportunity coming imminently, especially on China Mobile. Short-term, it means the shares are likely to go down.
• Travis would not rule out the possibility of political interference in the endgame here. If you NEED to sell or NEED to close out a position, sell and take the lumps. There is no good news here except for people who really like a good deal. The other "saving grace" to this situation is that the shares of China Mobile will be cheap at day end, and the index selling will be done.

Links to Travis' insights:
OFAC Clarifies The Clarifications of Its Clarifications
MSCI and FTSE Give Investors One Day To Sell The China Telcos
China Mobile (941 HK): Probably Too Cheap
& Brian Freitas' insight: Liquidity Needed for MSCI & FTSE Deletions TODAY - China Mobile, Telecom, Unicom

After first announcing the possible spin-off and separate listing of Tianneng Battery Group ("TBG") on the 9 November 2018, ("TPI") announced on the 15 December that the proposed A-share listing on the Star Board had been approved by the CSRC. An Offer Price of RMB41.79/share has now been announced. That is 36% higher than the Indicative Offer Price of RMB30.65 flagged in the June 2019 prospectus. Listing is expected to take place between mid-late Jan, according to my conversation with TPI's IR. TPI was up 204% in the past year and 35% since the CSRC approval. The relatively lacklustre share price response to TBG's pricing would indicate TPI's pricing is full.

• Pricing surprise? No. The indicative price of RMB30.65 in June of last year was roughly based on FY18 earnings and preliminary results into the 1H19. TBG's LTM net profit of RMB1.8bn is 49% above FY18's profit. A 36% bump in the IPO price is well within reason. Media are reporting the IPO is 3,901x over-subscribed.
• After the spin-off, TBG will account for ~96%+ TPI's NAV - applying the indicative price of RMB41.79 for TBG, and 10x earnings for the stub ops. The indicative holding in TBG accounts for 198% of TPI's market cap.

When NTT announced its takeover of NTT Docomo Inc (9437 JP), the immediate market reaction was to sell. This was seen as a sign that NTT was going to "take responsibility" for giving money back to customers. Travis wasn't sure why. Spending ¥4trln to buyback ¥200bn of minority interest net income was the equivalent of an enormous buyback. And given that doing so did not reward the government, which still holds more than one-third of NTT, in any way, NTT had to continue to reward the government through returns to shareholders - i.e. dividends and buybacks.

• When shares fell, NTT in November made clear that it was a) going to change things around at the NTT Docomo subsidiary - the CEO was out even before the Tender Offer ended - and b) was going to continue providing returns to shareholders. It announced a buyback on 8 November which was going to have big impact. Investors who had to sell NTT Docomo in the Tender Offer will now have to spend their money elsewhere. That could come to NTT.
• NTT will be buying stock reasonably aggressively - 12.3% of trailing ADV on average - over the next three months, with the number being more like 16-18% of eligible volume (NTT can rarely buy the open, and cannot participate in the last 30 minutes of the day).
• NTT is cheap. NTT is the red dotted line in the charts above. Street analysts aren't there yet. The trade is to be long NTT vs KDDI Corp (9433 JP) and vs Softbank Corp (9434 JP). Travis prefers Softbank Corp. The buyback impact is lower, the room to expand dividends is higher, and forecast earnings for Softbank Corp may see some ructions after the acquisition of LINE lowers Z Holdings EPS.

Following the Luckin Coffee (LK US) debacle and the ensuing fallout (discussed in Car Inc (699 HK) - Needs A Hire Purpose and Car Inc (699 HK): MBK's Firm Offer), on the 13 November MBK tabled a pre-conditional general cash Offer of $4.00/share for Car, a 17.99% premium to last close. The pre-conditions to the Offer may be waived, either in whole or in part; the Offer is subject to only a simple merger case by SAMR; the UCAR SPA has now completed; and the Offer is subject to a 50% tendering condition - with MBK holding 47.41% at the completion of a SPA with UCAR, together with irrevocables. This looks done. Yet, the gross spread has steadily widened since the 28 December. What gives?

• A simplified SAMR review has an 'average' review period of 30 days, which has come and gone. There was also an article out there that eHi Car Services Ltd (EHIC US) believes MBK's acquisition of UCAR's stake in Car was a breach of an earlier contract.
• Warburg/Amber Gen has been gradually reducing their stake, from around 14.76% of shares out at the time of MBK's firm Offer, to 7.1822% as of the recent SFC announcement. Warburg/Amber Gen was willing to sell to UCAR for $3.10/share back on the 2 July last year. But reducing every day on 1/3rd volume does make investors nervous - do they know something?

• I believe this deal remains on track to complete, and well ahead of the pre-con long stop date. I previously expected the pre-cons to be wrapped up within 2-3 months of the Offer announcement, as the regulator puts this fiasco behind them. MBK also has an excellent completion rate on firm deals. Some investors may prefer enter post-SAMR approval. I would buy here.

(link to my insight: Car Inc (699 HK): Are We Missing Anything?)

PPB holds 18.48% in Wilmar, which accounts for ~64.5% of its market cap. It's a decent parent/sub relationship, although liquidity is very much in favour of Wilmar. The big news for Wilmar was the listing of Yihai Kerry Arawana Holdings Co Ltd (300999 CH) on the 15 October last year. This was discussed in Wilmar Is A Buy After YKA’s Listing and Wilmar: YKA's Pricing & Cheap Rump Stake. Wilmar has been slowly retesting its recent high in August, but remains at a significant 77% discount to NAV. I'd continue to recommend buying Wilmar outright here. Wilmar's wide discount to NAV illustrates "mispricing" for HK & Sing /China cross-border holdings, a situation I expect to unfold after Tianneng Power International (819 HK) spins off its battery ops on the Star Board.

LG Corp (003550 KS) / LG Chem Ltd (051910 KS)

Subsequent to the demerger/spinoff late November (discussed in 2021 High Conviction: LG Corp's Decade-Low Stub), LG Corp has marginally narrowed its discount to NAV, yet still exhibits a decade-low implied stub value - net of all key listed holdings. In LG Corp: Updated SoTP Valuation Analysis & Timing of Key Upcoming Catalyst Events, Douglas Kim provided an update on the timing of key events, such as the LG Energy Solution IPO and the possibility of a dividend payout increase this quarter. The pushback. US-headquartered Whitebox has come out with a statement saying that the "spin-off does nothing to address LG’s most pressing issue, which is the unprecedented discount at which the company trades relative to its assets and, accordingly, inferior return to shareholders." Whitebox owns ~1% in LG Corp. Like Douglas, I consider the current discount level for LG Corp to be unjustified. You can use single stock futures to sell LG E, LG H&H, and LG Chem. Or there are pockets of borrow for each at select brokers.

(link to my insight: StubWorld: PPB/Wilmar, LG Corp, China Motor/Yulon Motor)

On 4 January Entain (ENT LN) confirmed that it had received proposals from MGM Resorts International (MGM US) regarding a possible offer. The last offer has been 0.6 MGM US x 1 ENT LN. By using the median of comparables 14.6x EV/Fwd EBITDA, the implied valuation for Entain would be 1,537p. This was 11% above MGM's offer at the time of Jesus' insight. In MGM's Prospective Offer for Entain, he is long Entain. Entain has rejected the bid, saying it "significantly undervalues" the company.

In SpinTalk: Multiple Envy Propels XPO Logistics' Break-Up Move To Get Its Mojo Back, Robert Sassoon discusses Xpo Logistics (XPO US)'s management proposal to break up the company into two, one a Logistics company, the other a Transportation company, on a tax-free basis to its shareholders. The market has responded warmly to the plan, but the shares still reflect a wide valuation gap to purer play peers whether in the logistics segment or in the transportation category. This leaves the prospect of substantial value upside over the next 12 to 18 months, which will be all the greater should XPO at the same time deliver on its goal to deleverage its balance sheet.

Following a series of optimistic updates about China Oceanwide's progress towards raising the required funds to finally complete its acquisition of Genworth Financial Inc Cl A (GNW US), the deal appears to be back on life support at best. But, while the more than 30% drop in the GNW share price in reaction to the latest development suggests otherwise, in MergerTalk: Why Genworth Financial Should Now Consider Breaking Off Its Engagement To China Oceanwide Robert believe GNW is far less dependent on a successful outcome for this transaction than it was 4 years ago when the merger was announced.

Following the first round of restrictions in April 2020, Kose Corp (4922 JP)’s share price underperformed Fancl Corp (4921 JP) and Kao Corp (4452 JP) by 49% and 9% respectively in the April-July 2020 period. Since then Kose has outperformed Fancl 31% and Kao by 56%. As Japan prepares for a second round of “soft lockdowns”, Oshadhi recommends in Japanese Cosmetics Pair Trade Opportunities As Japan Prepares to Declare a State of Emergency that investors reposition their investments in Japanese cosmetics to Short Kose and Long Fancl and Kao.

This update is the latest in a series dating back to Legend's Conversion of Domestic Shares in June 2018. To date, 20 companies have sought approval to convert their domestic shares into H shares, which would then be eligible to be listed and traded on Hong Kong's stock exchange. 13 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Only two of those have seen any noticeable movement in the converted shares. In the past four months, two companies have withdrawn their application to convert their domestic shares, citing further improvement in the rules and regulations of the domestic capital market, among other factors.

• Full conversion provides the means for (mainly state) investors to exit or reduce their holdings, and improve the liquidity of the listed companies. It may be viewed as an overhang on those companies given the go-ahead to convert. But permitting a company to convert its domestic shares is ostensibly an endorsement from higher up as to the existing internal framework and operations of the company. Sentiment-wise, that should positive.

(link to my insight: Full Circulation Of H-Shares: January 2021 Update)