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Last Week in Event SPACE: OFAC's Longer List, TOPIX Free Float, PCCW, Jardines, Toa, Guoco, Sansan

401 Views17 Jan 2021 06:52
SUMMARY

Last Week in Event SPACE ...

  • The naming of additional companies by the DoD - such as Xiaomi Corp (1810 HK) and Air China Ltd (H) (753 HK) - so many months after the initial listing seems either to be a last-minute Trump thing or to be an effort to enforce greater decoupling from China.
  • In long-signalled and "somewhat easy-to-predict" index rebalances such as TOPIX Free Float Weight, JPX Nikkei 400 rebalances, and MSCI SAIRs and FTSE quarterly rebalances, judging pre-positioning is a matter of amalgamated microstructure detail, and whether the people who do these things have put them on, or whether they have found better things to do.
  • Reports are emerging PCCW Ltd (8 HK) is in the cross-hairs to be deleted from the MSCI in the May review.
  • Jardine Matheson Holdings (JM SP) continues its aggressive buybacks ahead of the blackout, yet the simple ratio (JM/Jardine Strategic Holdings (JS SP)) looks unsustainable.
  • Shareholders are closing in on the 33% level to effectively block the Toa Oil Co Ltd (5008 JP) deal.
  • Is the proposed delisting transaction for GL Ltd (GLL SP) an interim step towards reloading another Offer for Guoco Group Ltd (53 HK)?
  • Sansan Inc (4443 JP) approval to move from the MOTHERS section to the First Section of the Tokyo Stock Exchange will be a very large TOPIX inclusion event.
  • Plus, other events, CCASS movements and Mood Spins

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

EVENTS

Trump Exec Order Amended, DoD Adds 9 Companies and Two Big Sells, OFAC List To Get A Lot Longer

This past Thursday, the Department of Defense added 9 more companies to its list (for the first three lists click here, here, and here) and this new list includes Xiaomi Corp (1810 HK) and the parent company of Air China Ltd (H) (753 HK). A Wall Street Journal article out on the 14th of January Asia time noted the imminent naming of a number of other names, and also noted that OFAC would release a list with 100+ subsidiaries of already-listed names. FTSE and MSCI are currently determining their treatment for CNOOC Ltd (883 HK) (and its ADR), based on the revised OFAC List of 8 January, and separately on the 14th FTSE acknowledged the new changes.

  • The inclusion of Xiaomi is something of a surprise. The inclusion of the parent of Air China will cause significant US Person selling. Travis Lundy expects the new OFAC list of subsidiaries to look much like the lists in Trump's Executive Order on Chinese Military Companies and OFAC Makes a Longer List of Trump Names of China Military Cos.
  • Travis would expect all of the companies to see selldowns until near when the MSCI and FTSE deletions take place, then he would expect SouthBound and non-US Person Foreign Investors to take the other side of the selling, then ride the shares back up. This has happened on the other names so far (all the major HK names shown (I view Nanjing Panda Electronics H (553 HK) as having been irrelevant). Travis does not see the pattern changing.
  • China has an interest to see non-US Persons profit from this and to see the shares of affected names rally after having been sold by US Persons.

Links to:
Travis' insight: Trump Exec Order Amended, DoD Adds 9 Companies and Two Big Sells, OFAC List To Get A LOT Longer
Brian Freitas' insight: POTUS Executive Order: Xiaomi (1810 HK) Makes DoD List; Index Deletion Upcoming

The Delayed TOPIX FFW Rebalance

The previous Friday, the TSE belatedly released its annual TSE Free Float Weight adjustments for stocks with fiscal year ends in March. Normally this comes out in October, and is executed at the end of October, but for the 2020 Free Float Weight Rebalance, as per an announcement made by the TSE on 22 June 2020, special measures were taken in light of the covid-19 pandemic, and the rebalance was delayed by 3 months. There are no major surprises that Travis Lundy sees. Some buybacks from the market have led to slightly lower FFW coefficients. Some secondary offerings have led to increases in FFW coefficients. As discussed in Japan Post Insurance Update - Three Reasons To Buy. Any Overhang Slightly Higher, one of the big names to the buy side is indeed Japan Post Insurance (7181 JP).

  • The relative ownership of TOPIX and JPX Nikkei 400 can be found in JAPAN PASSIVE: Who Owns What 2020? Travis generally look at these trades as better traded on the back end and where those who have an axe to go against the rebalance flow can start doing so a day or two before the inclusion and into the inclusion.
  • Travis expects JPI remains a buy for more reasons than just this event. I note that if JPI buys back shares from JPH and cancels them with effect in any given month, the next month-end should see a selldown. I do not know if the TSE would do an ad hoc FFW change due to such a dramatic buyback.
  • Toyota Motor (7203 JP) is a big sell. NTT (Nippon Telegraph & Telephone) (9432 JP), which is a favourite combination flow-based and fundamentals-based trade of Travis' from the long side, will see a one-day flow-based sell which will mostly offset the buy flow from the remainder of the buyback which was discussed in NTT's Big Beautiful Buyback Is Not The Only Reason to Own. For those who like the back end of the trade (Feb-March buybacks, fundamental forecasts raised vs KDDI), the rebalance may be a good entry point.

(link to Travis' insight: The Delayed TOPIX FFW Rebalance: $32bn To Trade)

STUBS

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

A number of corporate developments have unfolded at PCCW over the past year including a partial offer from Richard Li (PCCW: Partial Offer To Lift Li Above 30%), lifting his stake above the general Offer threshold level of 30%; partially in-specie-ing its stake in Pacific Century Premium Developments (432 HK), such that the property developer is no longer consolidated; selling NOW TV to HKT Ltd (6823 HK); and selling non-core related investments in Malaysia. The Partial Offer led to a significant narrowing in PCCW's discount to NAV, where it has steadfastly remained. Despite the gradual cleaning of house, and Li's move to consolidate greater control, PCCW's stub ops - ex-HKT - stubbornly remain in the red (on an EBITDA basis), as they have done so for near-on a decade.

  • According to some peoples' calculations, PCCW is set to be deleted at MSCI's upcoming May index review. The potential trade is 180-300mm shares or ~US$100-170mn, or around 24-40 days of volume. That is a lot to sell if the MSCI Deletion comes to pass.

  • With the MSCI deletion on the horizon, is now the time to offload PCCW, or wait until the FY earnings which should be out mid-Feb - the FY19 results were released on the 13 Feb? Will there be any more corporate activity between now and the May (expected) announcement? Ultimately one of the incumbent Chinese telco operators - probably Unicom, as it already has an 18.46% stake in PCCW - takes out HKT. Li will want to be along for that ride. Either this takeover transpires via the privatisation of PCCW - unlikely as there are too many "other" businesses at the parent level - or a takeover of HKT.

  • There remain few positives in PCCW's stub ops. The increasing trend since mid-2018 of an increasing net debt position at the parent level, is also a cause for concern. To me, the economics of the NOW sale/PCPD in-specie/Partial Offer do not support the persistent narrowing of PCCW's discount to NAV. The pending MSCI deletion adds further weight.

  • PCCW appears to be fully priced at 2+STD on a NAV discount. If you are currently in, I would look to unwind here. I would look to reverse the stub - Short PCCW, Long HKT - on the risk of MSCI deletion.

(link to my insight: PCCW (8 HK): Possible MSCI Deletion)

TBS (9401 JP) / Tokyo Electron (8035 JP) (TEL)

TBS (formerly Tokyo Broadcasting Systems) continues to plumb fresh stub lows as a chip shortage propels TEL. Its ~3.8% stake in TEL accounts for ~75% of TBS' market cap. As recently discussed by Scott Foster in Tokyo Electron (8035 JP): Semiconductor Shortage Points to Stronger Year Ahead, the world's largest carmakers face a shortage of semiconductors, as chipmakers set aside reserves for companies producing gaming devices, smartphones, and tablets. According to the FT, automakers are "lower down the chain than companies like Apple and HP .... (the) auto sector doesn't pay as much for the semiconductors."

  • Indirectly, TEL manufactures roughly the same percentage as automotive/total semiconductors, according to Scott. Aside from Denso Corp (6902 JP), which is 26.7%-held by Toyota Motor (7203 JP), automakers don't make semiconductors and therefore do not buy directly from TEL. TEL does supply to Renesas, which supplies Japanese automakers; to Rohm, which is more than 30% exposed to the auto industry; and most if not all other semiconductor makers through its near-monopoly on track (photo-resist processing) and high share of the etch market.
  • Investors in TEL should continue to benefit from this shortage, even if the shares appear to be overbought. The Street has bumped TEL's target price by 4% and 22% in the past one/three-months.
  • Separately, and as discussed by Travis Lundy in The Activism at TBS - There's a History, And There Is NEW Activity, But Don't Hold Your Breath, TBS has long rebuffed calls from activists to sell its cross-holdings. "While there is tremendous value in the shares, it is not clear that TBS has any interest in selling its assets other than little by little - TBS announced a announced a pre-tax gain ¥29.739bn last month on the sale of some shares in Recruit Holdings (6098 JP) - providing a little cash to shareholders here and there, and investing the rest."

(link to my insight: StubWorld: TBS/Tokyo Electron, Intouch/Gulf, Jardines' Buybacks)

I see the discount to NAV at 14.7%, compared to 21% when I last wrote on this holdco back in August - StubWorld: Gulf's Questionable Stake In Intouch. At the time of that insight, Gulf said it has approved its investment in Intouch up to 10% of shares out, from 7.99%. 10% was achieved on the 6 October, making Gulf the second-largest shareholder behind Singtel (ST SP) (21%).

  • In a somewhat belated announcement, Gulf announced on the 30 December "that the Board of Directors’ of the Company on October 6, 2020, November 30, 2020 and December 29, 2020 has resolved to approve the Company’s additional investment in the ordinary shares in INTUCH in aggregate of up to 5.00 per cent." As at 30 December, Gulf held 14.39%.
  • Taken at face value, Gulf will only buy another 0.61%. But Gulf hasn't established a hard ceiling on its potential future holding in Intouch.
  • Gulf is not a shareholder I am comfortable with long-term. Investors invest in Gulf for its qualities as an energy/power-related investment, not for its portfolio management skills. This is a peculiar investment. If you bought into Intouch back in April - Intouch: Temasek Trims Stake; More To Come - when Intouch was at 36% discount to NAV, it's been a great trade. I would unwind here.

(link to my insight: StubWorld: TBS/Tokyo Electron, Intouch/Gulf, Jardines' Buybacks)

On the 23 October, JM announced an intention to invest up to US$500mn in a share buyback program through to 30 June 2021. Any shares repurchased would be canceled. JM has now repurchased 7.35mn shares (at the time of the insight) at a cost of US$399mn since that announcement, at an average price of US$54.2/share. Shares acquired accounted for roughly 34% of daily volume. On the 5 January alone, JM acquired 2.33mn shares for ~US$131mn. The average ratio of the buybacks since October is 2.12x. The highest-paid is 2.22x.

  • I've confirmed that JM imposes a 30-day blackout ahead of the full-year results, in line with the relevant disclosure rules. Full-year results came out on the 5 March last year, so JM technically has another 3 weeks of buybacks before taking a breather. This may result in the simple ratio declining during this blackout period.
  • JM is not restricted from reloading another buyback program. Once this buyback is done, it would still have ~US$500mn left over from the Jardine Lloyd Thompson Group P (JLT LN) sale. Why not continue to buy its own discounted stock, which in turn owns a 40%+ discounted entity? At an adjusted 12% discount to NAV, JM is trading tight compared to JS' "cheap" 42% discount.
  • Previously I advocated setting-up a Long JMH/Short JSH up to 2.10x. It was 2.22x at the time of the insight. The long-term simple ratio average (back to 2002) is 1.8x. The ratio is unlikely to revert back to this long-term average any time soon. But at these levels, mindful of the NAV discount for both JM and JS, and with the blackout commencing early next month, I would be unwinding here, with a view to going Long JS/Short JM.

(link to my insight: StubWorld: TBS/Tokyo Electron, Intouch/Gulf, Jardines' Buybacks)

In his insight SK Holdings: Sum-Of-The Parts Valuation Analysis & Key Catalysts, Douglas Kim provided an updated sum-of-the parts valuation on SK Holdings (034730 KS). His base case valuation of SK Holdings is ₩448,850, which represents a 54% upside from current levels. He considers the 6 key factors that will impact the share price are: a big investment ($1.5bn) in Plug Power; SK IE Technology's IPO; and the sale of SK Lubricants; K Telecom's higher share price trend.

M&A - ASIA

China Machinery Engineering (1829 HK) (Mkt Cap: $1.4bn; Liquidity: $1mn)

CMEC has announced a pre-conditional Offer from its controlling shareholder, state-owned Chinese National Machinery Industry Corporation, also known as SINOMACH. The Offer price is HK$3.70/share, a 45.10% premium to last close, and a 118.93% premium to the average closing price over the previous 30 trading days. The Offer price will not be increased. The pre-conditions, which cannot be waived, include approvals from NDRC, MoC, and SAFE. As CMEC is PRC incorporated, this delisting proposal is by way of a Merger by Absorption, which involves a Scheme-like vote from disinterested shareholders. There is no tendering acceptance condition attached to this delisting.

  • The average premium for past Merger by Absorption deals is 48%, which would have backed out a possible fair value of ~$3.80. This is effectively what transpired. Plus CMEC's share price gained 56.4% since the 29 December, on larger-than-average volume, evidently on news leakage.
  • This appears a relatively clean deal. The Long Stop date is the 13 January 2022, but this should be completed well before. Merger by Absorption transactions are typically wrapped up in around four months.
  • Play the spread here. Assuming payment mid-May, I would expect CMEC to trade around $3.45-3.50, or a 6-7% gross spread, and an 18-23% annualised spread. This privatisation is still being done too cheaply, given the low PER under the Offer and CMEC's large cash pile - net cash of ~HK$8.8bn (using my calcs, netting off large contract liabilities) or ~57% of the implied market cap under the Offer . But no other suitor will emerge. And CMEC is not particularly liquid.

(link to my insight: China Machinery Engineering (1829 HK): Delisting Offer From Parent)

Toa Oil Co Ltd (5008 JP) (Mkt Cap: $0.3bn; Liquidity: $1mn)

On 15 December, Idemitsu Kosan (5019 JP) launched a Tender Offer for subsidiary Toa at what was an extraordinarily opportunistic price - ¥2450/share. Some might call this price insultingly low. This pricing process fairness problem was discussed in some detail in Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008). Just prior to the offer being made, large shareholder Cornwall Capital had been increasing their stake and coincidentally announced an increased stake of 18.22% on the same day as the announcement, and up to 20.83% as of 24 December. If one adds the 20.8% held by Cornwall Capital (including the 2.6% purchased above terms since the announcement) plus the 9.2% which have traded above terms not purchased by Cornwall, that gets one to 30.4%, which is reasonably close to a blocking stake.

  • Travis continues to think the trade is to be long Toa Oil. He would not be surprised to see a decent bump. The right way to see this end would be to have a Grand Bargain. JXTG would come over the top to buy it at ¥5000/share, Idemitsu would sell into it, and others willing to accept a still-low price (but high enough to be acceptable given upcoming maintenance work) would too.
  • Idemitsu would book a profit from selling its consolidated subsidiary well above book, would take the cash, see its consolidated debt reduced (from Toa going off-balance), and could merge Fuji Oil (and its higher debt load) into Idemitsu at a premium and still take a negative goodwill bump from doing so. It would be a win for everyone. The problem is that Grand Bargains in heavily-regulated industries require Serious Regulatory Consideration, and importantly, This May Not Be In The Official Plan so it would likely take a fair bit of time to get everyone's ducks in a row, even if it makes total sense.
  • In the meantime, waiting for this grand bargain, one might simply have to wait for Idemitsu to bump it. Travis expects existing shareholders are close enough to 33% to cause this to fail otherwise.
  • UPDATE: Cornwall Capital announced it had increased its position in Toa from 20.86% (as of the last report) to 21.89% (as of the 6th of January).

(link to Travis' insight: Toa Oil (5008) Tender Offer Update - Looks Bumpity)

GL Ltd (GLL SP) (Mkt Cap: $0.5bn; Liquidity: <$1mn)

Guoco Group Ltd (53 HK) has made a voluntary conditional cash Offer for 70.84%-held GLL. The Offer Price of S$0.70/share is a 25% premium to last close and 0.73x P/NAV. The acceptance condition is 90%, including Guoco's stake, although Guoco reserves the right to reduce this to 50% (or waived altogether). Save for the acceptance condition, the Offer is unconditional in all other respects. This appears a relatively listless Offer premium, pitching GLL at a level below the COVID drop-off in Feb/March last year.

  • Of greater interest is whether this privatisation attempt is an interim step to reloading (another) take-private Offer for Guoco. I see the NAV discount at ~33% versus the 12-month average of 21%, having narrowed to ~5% last March on speculation of a privatisation reload. The last (failed) Offer, back in 2018, was pitched at a 30% discount to NAV as per the Scheme document.
  • You could play the spread with GLL, but the company is super illiquid, and there can be no guarantee the Offer will be extended, or the acceptance condition waived. I would avoid this arb. I would prefer to pick up Guoco here, on the expectation this take-private approach for GLL is a precursor to a new Offer being tabled; or simply on the basis Guoco is trading wide to its 12-mth NAV discount.

(link to my insight: GL Limited (GLL SP): Privatisation Offer Renews Interest In Guoco)

Vedanta Ltd (VEDL IN) (Mkt Cap: $8.9bn; Liquidity: $63mn)

Just over four weeks ago on 8 December 2020, Vedanta Resources (VED LN) promoter Anil Agarwal was on CNBC-TV18 in India saying that the promoter (Vedanta Resources, himself, the associated companies) had no plans at all to increase their stake in Vedanta Resources (VED LN) and no plans to make an open offer. He said the same in an interview with ETNow on 10-11 December. On 9 January 2021, VEDL released an announcement that it would launch a Voluntary Open Offer to purchase an additional 371,750,500 shares (10% of shares out) of VEDL at Rs. 160/share, spending about US$800mm to get there.

  • When the shares were INR 150, Vedanta Resources appeared to find it difficult to find sellers of 5% at INR 160. When the shares are INR 180, I expect they will find it more difficult to find sellers at INR 160. Since VEDR bought 5% at INR 160, A Peer Basket is up 12% and Hindustan Zinc is up 22%.
  • Travis expects there is a reasonable chance the Open Offer represents a put option for a portion of a holder's shares. I expect that put option is available on close to 50-60% of the shares one owns because I believe 15-25% of the shares outstanding are not for sale at this price or INR 160. If the stock drops several percent from here (whether Peers and HZL fall or not), the put option gains significant value.
  • If the stock UNDERPERFORMS peers by several percent in any near future, that will become an even better trade to put on because a) you get the discount vs peers as presumably the basket of peers will track larger-scale commodity trends and multiples, and b) the put has incrementally more value and delta so one can effectively scale the long side (VEDL) larger than the hedge because of the embedded put.
  • Investors/traders can effectively "buy the dip" because of this implied long gamma positioning. Travis would still want to be long VEDL vs a basket of peers, especially if he could source short exposure on HZ.

(link to Travis' insight: Vedanta (VEDL IN) Promoter To Launch an Open Offer To Buy More)

CEI Limited (CEI SP) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

After the market-closed on Monday 11th January, Singapore-based electronic components manufacturer CEI received a Pre-conditional Voluntary Offer from a wholly-owned subsidiary of AEM Holdings (AEM SP) valuing the company at S$100mn. The Offer Price will be S$1.15/share and there will be an all-cash option (default choice) and two other cash and scrip combinations from which CEI shareholders will be allowed to choose. The Offer Consideration is "Final" and the Acquirer does not intend to revise the Offer Consideration. If AEM ends up acquiring 90% or more of the total shares, AEM intends to exercise its right to compulsorily acquire the remaining shares.

  • The Offer Price is a 3-year high for CEI and it translates to premia of +20.6%, +23.8%, +26.1% to CEI's 3-month, 6-month, and 1-year VWAPs respectively. The EV/EBITDA (LTM) and PER (LTM) of 10.7x and 15.5x, respectively, are higher than the estimated medians of 8.8x and 11.6x for peers. The EV/EBITDA (LTM) multiple of 10.7x is also higher than the estimated average of 8.6x for other comparable takeover deals involving similar-sized electronic component manufacturing companies in the past.
  • CEI shares last closed at S$1.14 and there are three options for the form of consideration. If the Deal closes in March/April, this could be a fairly attractive short-dated rate-of-return trade.

(link to Janaghan Jeyakumar's insight: CEI Limited (CEI SP): Privatization Deal by AEM Holdings (AEM SP) Trading with a View to Complete)

China Renewable Energy Investment (987 HK) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

China Renewable is a micro-cap clean energy play in China. Last April, 55.66% of issued shares moved within CCASS, from HSBC into BEA. This is Hkc Holdings (190 HK)'s stake. The movement may simply have been an administrative matter. But given the flurry of M&A activity in the PRC renewable energy space, it was worth speculating on the matter. Both China Renewable and HKC are now suspended pursuant to the Hong Kong Code on Takeovers and Mergers. Should an Offer be tabled, this would be the fifth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in the last two years - and seventh in which interested parties have been circling.

  • Oei Kang - chairman and CEO - controls 74.83% of China Renewable directly and indirectly (via HKC). Should he wish to privatise China Renewable by way of Scheme, independent shareholders comprise 25.17%, therefore the blocking stake at a Scheme meeting would be 2.517%. No single shareholder has such a stake. China Renewable is incorporated in the Cayman Islands, therefore the headcount test applies. It is possible a third party is the suitor here, and the Oei family provides an irrevocable to support a Scheme Offer, all but assuring one leg of the Scheme conditions (≥ 75% for, ≤10% against).
  • The median PER, P/B, and premium to last close for the recent clean energy privatisations were 10.1x, 0.8x, and ~56%. The confers a possible range of HK$0.23-HK$0.58/share, compared to the current price of HK$0.19/share.
  • What else looks interesting? In the clean energy space, I previously singled out China Datang Corp Renewable Power (1798 HK), however, shares are up 118% in the last year and is now trading at 1.0x+ P/B. China Suntien Green Energy (956 HK) Apt Satellite Holdings (1045 HK) is also worth a look.

(link to my insight: China Renewable Energy (987 HK): Possible Privatisation Offer)

Local media are reporting Hyundai Motor Co (005380 KS) and Apple Inc (AAPL US) plan to sign a partnership deal by March 2021 to develop autonomous electric vehicles and start production around 2024 in the United States. Despite the tremendous share price performance of Hyundai Motor so far in 2021, in Apple EV + Hyundai Motor = An Ideal Marriage or A Relationship Doom to Fail?, Douglas believes there could be some more legs to this story in the coming weeks, mainly because there could indeed be some credible synergies of these two companies (Apple & Hyundai Motor) working together to compete against Tesla.

TOPIX INCLUSIONS!

Serverworks (4434 JP) (Mkt Cap: $0.4bn; Liquidity: $4mn)

On Friday after market-close, Tokyo-based cloud integration company Severworks announced (J-only) they had received approval to move from the MOTHERS Section to the First Section of the Tokyo Stock Exchange as of 15th January 2021. TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 25th February 2021.

  • The estimated inclusion parameters are reasonably attractive. Janaghan estimates the Inclusion quantity to be 400,000-480,000 shares. This translates to an Inclusion Size of ¥1.7 - 2.0bn and an Impact of 5-6 days of volume based on 3-month ADV. The company has not launched any substantial equity offerings in the run-up to its Inclusion Event. In the last ~6 months, the company's share price has declined by around 60%.
  • Business is booming but it seems too expensive vs peers from a fundamental angle. This is a high-growth business. On an LTM basis, the current share price translates to EV/Revenue, EV/EBITDA, and PER multiples of 3.4x, 56.9x, and 68.9x, respectively, which are significantly higher than the average multiples of 1.5x, 11.0x, and 24.9x for a basket of peers. The "problem" (the reason why Serverworks is unlikely to merit a double-digit EV/Revenue multiple like some cloud names) is that they get low GPMs.
  • Trading this is a risky proposition ahead of earnings on 14 Jan. If earnings are better-than-expected, the bounce could have longer legs because of double demand. If earnings/forecasts are worse than expected, then this is an obvious avoid. Avoid until earnings clarify potential bullishness or avoid altogether.

Sansan Inc (4443 JP) (Mkt Cap: $2.2bn; Liquidity: $16mn)

Japan-based business card digitisation company Sansan announced they had received approval to move from the MOTHERS section to the First Section of the Tokyo Stock Exchange on the 21st of January 2021. This was one of the eight picks highlighted in TOPIX Inclusions: New Regulations! Who Is READY? 2.0 at the end of November 2020, and so far it is the third stock among those eight listed to graduate to TSE1 after SRE Holdings Corp (2980 JP) and Base Co Ltd (4481 JP). TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 25th February 2021.

  • The Index Inclusion Parameters are attractive. Janaghan estimates the Inclusion quantity to be 1.8-2.2mn shares. This translates to an Inclusion Size of ¥12.9-15.4bn and an Impact of 8-9 days of volume based on 3-month ADV. The company did not launch any equity offerings in the run-up to this event. This is a more Bullish Scenario in the supply/demand balance than most of the recent TOPIX Inclusion Situations.
  • Multiples are very high but the business has very high growth potential and other SaaS businesses are currently more expensive. Their current share price translates to a EV/Revenue(LTM) multiple of 15.4x. Although this appears expensive on an absolute scale, it is worth noting that Revenue, EBIT, and NP are expected to grow at CAGRs of 28%, 66%, and 85%, respectively during FY20A-FY23E.
  • Janaghan would BUY and be Bullish until the Inclusion Date (25th February 2021)

(link to Janaghan's insight: TOPIX Inclusion: Sansan Inc (4443 JP))

Alps Logistics (9055 JP) (Mkt Cap: $0.4bn; Liquidity: <$1mn)

The TSE announced that Alps Logistics would move to the TSE's First Section. It meets all the new TSE1 Listing Criteria which went into effect November 1st, but probably applied under the old rules. In any case, this is big news. That's good. However, someone appears to have figured this news out three days ago. Since Tuesday AM, the stock was up 32% (at the time of the insight).

  • This has been ramped up dramatically in the last few days in very large volume. Someone appears to have gotten the word about the TSE1 inclusion early. Despite that, only 750k shares have traded, which is less than one-third of the 2.5mm which need to be bought. If we assume that every share which has traded has actually changed from one investor to another (very likely to NOT be the case because I expect the 750k shares in the last three days has included lots of day-traders and market makers), then there are still 74 days of 3mo ADV to buy.
  • The stock is quite cheap to peers, but is expensive to its own history. And the governance shown by the Alps Alpine (6770 JP) parent when Alpine Electronics (6816 JP) was taken over was atrocious.
  • Despite the fact that it has moved quite sharply in the last few days, there is a LOT of buying to be done. Travis expects the trade is to be long the shares. Still. Travis also expects that the large owners who own this on an active basis are not going to be happy at 4x EV/EBITDA. I expect they need another couple of turns before they get out.

(link to Travis' insight: TOPIX Inclusion: Alps Logistics (9055))

M&A - EUROPE

On 7 January, Veolia Environnement SA (VIE FP) increased its bear-hug on Suez (SEV FP) by sending an open letter to the Board of Suez on 7 January and appealing to shareholders at the same time. The offer, which is not formal, values ​​Suez at €11.3 bn, but Suez still considers it hostile and is trying to put pressure, while the French government continues to quietly mediate for an agreement. In Veolia Steps up Pressure on Suez, Jesus Rodriguez Aguilar says Veolia intends to file a voluntary offer at €18 per share - the same price at which it acquired a 29.9% stake from Engie-, which values ​​100% of Suez at c. €11,252 mn, an implied EV of c. €22,180 mn.

On 8 January, SOF-11 Klimt CAI S.à r.l., an affiliate of Starwood Capital, announced its intention to launch a takeover offer to acquire the remaining 70% of Ca Immobilien Anlagen Ag (CAI AV) it does not already own. The consideration is €34.44, in cash, equivalent to CA Immo's undiluted EPRA NNNAV - and 10.2% discount to EPRA NAV - with no minimum acceptance condition. Considering the resilience of the German prime office sector, and the pipeline of CA Immo, an improved offer representing a 10% premium to current EPRA NNNAV could be justified, or €38.34 per share, 11% premium to the current bid, and c. 4% 21e FFO yield. On this basis, Jesus recommends in CA Immo - Starwood: Mandatory Offer to go long CA Immo.

Iberdrola, via its subsidiary Avangri,d announced the acquisition of PNM Resources (PNM US) on 21 October. The hurdles are being cleared and the transaction is expected to close by the end of December. PNM began trading on 12 January at $48.41, which represents a gross spread of 3.75%, attractive for a low-risk deal that is almost certain to close by the end of December 2021. In PNM Resources - Iberdrola, Work-In-Progress, Attractive Spread, Jesus recommends going long. PNM.

After Carrefour SA (CA FP)'s shares fell after the French government showed its opposition to a possible merger with Alimentation Couche-Tard (ATD/B CN), Jesus recommends in Carrefour - Alimentation Couche-Tard Non-Binding Offer, buying Carrefour based on his DCF valuation.

INDEX REBALS

In a very quick about face, State Street has announced that they will resume investments in the sanctioned entities and will be back to full replication from 14 January. This is most likely a result of calls for SSGA to be replaced as the manager of the Tracker Fund. Link to Brian's insight: HSI and HSCEI: Collateral Damage of the Executive Order.

H/A MONITOR

The previous week saw a gentle rebound in Quiddity H/A Share Recommendations (mixed long/short the spreads). Spread momentum was no longer the big factor. The big factors this week were the New Year leading to a) big jumps in spivvy sectors, and b) large selldowns in MSCI deletions of Trump China Military Names and the last-minute deletions of the three China telcos.

  • The National Team / Southbound AGAIN bought the Trump EO names, this week in magnificent size as the MSCI deletions took effect. SMIC (981 HK) and the three names in Industrials (1800 HK, 1766 HK, and 1186 HK) all saw very significant net southbound buying.
  • Every H-share in a liquid H/A pair in the Energy, Materials, and Utilities space were up.
  • In addition, the H-shares in Health & InfoTech were up strongly too.

OTHER M&A & EVENT UPDATES

CCASS

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

Name

% chg

Into

Out of

SingAsia Holdings Ltd (8293 HK) 13.33%EasyDBS
Tree Holdings (8395 HK) 10.45%Shun LongOutside CCASS
Summi Group Holdings Ltd (756 HK) 22.70%HTFOutside CCASS
Vertical (8375 HK)25.00%KingswayOutside CCASS
Ching Fai (8537 HK)10.00%ValuableOutside CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Hygeia Healthcare Group (6078 HK) 13.48%MSOutside CCASS
Confidence (1967 HK)18.78%ReganOutside CCASS
True (8657 HK)13.91%HSBCOutside CCASS
Roiserv Lifestyle Services (2146 HK) 13.48%Yue XiuOutside CCASS
Source: HKEx
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