Last Week in Event SPACE: Sharp, Red Star, Minor Int'l, PICC, Legend

Last Week in Event SPACE ...

• Another step in the evolution of bringing Sharp Corp (6753 JP)out of Capital Structure Purgatory
• The arb on the Red Star Macalline Group Corp Ltd (1528 HK)'s big partial tender offer is okay but looks pretty good if you have stock borrow
• Minor International Pcl (MINT TB) goes major on NH Hotel Group SA (NHH SM)
• People's Insurance Co (Group) Of China (1339 HK) gets CSRC approval to list its A shares
• Legend Holdings Corp H (3396 HK) pioneers the full circulation pilot project

Sharp Corp (6753 JP) (Mkt Cap: $13.2bn; Liquidity: $30mn)

Last Tuesday the company released a statement that it i) plans to buy back the Class A Pref Shares at a discount to the normal acquisition price in the call option sometime in the next year; ii) will issue up to a maximum of ¥200bn to finance the purchase of the Class A Preferred Shares; and iii) an "inclination to acquiesce" to Class C Shareholders' request for Sharp to issue a call on "approximately 30%" of the Class C Preferred shares.

• Overall, Travis Lundy views this as a good deal for Sharp shareholders. Getting the Class A shares at a discount to face value is something of a coup. The net effect on "Real Dilution" should be considered to be ~¥35bn because Sharp does not need to call the shares at ¥220bn in a year's time in order to avoid massive dilution.
• The Offer could take place sooner rather than later - perhaps with an announcement as early as end-July. If management is quite proactive this month, trying to talk its new Capital Restructuring Plan, that would give an indication they want to do this early. If management is quiet, they might wait a bit.
• At ~11x adjusted EV/EBITDA (9-10x based on current "face" value and another 1.5x on the Class C shares), this stock is not cheap. But it might be squeezy if the story is told well near-term. Long-term, one either buys into the growth story Hon Hai is pitching, or you don't. Travis remains somewhat skeptical longer-term, but Apple has an incentive to broaden its supplier base, and Hon Hai still has investing clout, and is starting to exercise distribution power.

(link to Travis' insight: SHARP Capital Restructuring Announcement - Some Interesting Implications)

Very briefly...

SK Telecom (017670 KS) (Mkt Cap: $14.9bn; Liquidity: $35mn)

Reportedly SK Planet (98.1% owned by SK Telecom (017670 KS)) is close to receiving a ₩500bn investment for a 15-20% stake from PE-outfit H&Q. A deal may be finalised by mid-June. An investment will have a positive impact on both SK Planet and SK Telecom - SK Planet has been experiencing weak financials in the past couple of years due to excessive competition with other major e-commerce players including Gmarket, Coupang, Tmon, and Wemakeprice; while investors have been concerned that SK Telecom may need to inject additional capital into SK Planet.

(link to Douglas Kim's insight: SK Planet's 11st - Close to Raising 500 Billion Won for a 15 to 20% Stake)

Samsung Electronics Co Ltd (005930 KS) (Mkt Cap: $337bn; Liquidity: $622mn)

Sang Hyun Park addressed the regulatory landscape surrounding Samsung Life Insurance Co., Ltd (032830 KS) and discussed how the "no financial holding company is allowed to become the largest shareholder of any industrial company" and the (yet to be enacted) "3% rule under Insurance Business Act".

(link to Sang Hyun's insight: Five Regulatory Checkup Points for Samsung Life)

SK Chemicals Co Ltd/New (285130 KS) (Mkt Cap: $952mn; Liquidity: $4mn)

SK Discovery Co Ltd (006120 KS) will buy ₩50bn worth of SK Chemicals Co Ltd/New (285130 KS) shares by the end of the year either openly from the market or off-hours blocking trade. Discovery's Chemicals shareholding will increase to 32.19% from 27.19% (subject to change) after this share purchase. This is a pre-emptive move towards meeting the 30% rule which requires a Holdco to own at least 30% voting stake in all listed subsidiaries within a Holdco system.

(link to Sang Hyun's insight: SK Discovery - SK Chemicals Share Purchase Summary)

Red Star Macalline Group Corp Ltd (1528 HK) (Mkt Cap: $5.6bn; Liquidity: $7mn)

• This partial offer is being done as a slight arb. The company IPOed 315mm A-shares at the equivalent of HK$12.24 and is buying back 388mm shares at HK$11.78, a sharp discount to NAV.
• Minimum pro-ration is 36.6%, however, Travis expects proration to come in >60% on a non-borrow basis. Warburg Pincus is expected to tender all of their 301mm shares, or an overhang of 120mn shares if 60% filled.
• There is a RMB0.32/share dividend coming in late June, meaning the current ex-dividend buy price is a 9% discount, meaning at a 50% pro-ration, the breakeven is about HK$9.60. That's pretty good. But better if you have stock borrow. For a very good risk-adjusted trade, Travis suggests buying at HK$10.80 with no borrow or buying up to HK$11.40 with borrow.

(link to Travis' insight: Red Star Macalline - Big Partial Tender Buyback)

Minor International Pcl (MINT TB) (Mkt Cap: $5.2bn; Liquidity: $27mn)

Minor has agreed to acquire HNA Group's 26.5% in NH Hotel Group SA (NHH SM) for €622mn. After the conversion of bonds to shares, Minor's stake would be ~38%, exceeding the 30% Spanish ownership level threshold, triggering a takeover. At €6.40/share for the remaining shares, the deal size is €2.5bn.

• Athaporn Arayasantiparb, CFA is pretty pumped with the deal. If they don't do it now and the Baht weakens, the deal will only get more expensive later. Also, it is an asset Minor knows well (hotels) and one that is already starting to turn around. Minor trades in line with Central Plaza Hotel Pcl (CENTEL TB) but has much better operations.

(link to Athaporn's insight: Biggest Deal in 2018: MINT Becomes a Thai Starwood!!)

Briefly ...

Atlas Iron Ltd (AGO AU). Fortescue Metals Group Ltd (FMG AU) acquired a 19.9% stake and then stated it would not support Mineral Resources Ltd (MIN AU)scrip offer. The scheme vote is expected to take place next month. MIN has consented to waive the "No-talk" and "No due diligence" clauses in the Scheme Implementation Deed.

Iselect Ltd (ISU AU). The company confirmed it has received "several" unsolicited proposals. G Medical Innovation Holding (GMV AU), which owns iSelect's main competitor, Compare the Market, now owns 19.64%. A portion of those shares was understood to have been bought at A$0.80/share. Shares in iSelect closed at $0.86 on Friday.

OZ Minerals Ltd (OZL AU)'s offer for Avanco Resources Ltd (AVB AU) has been declared unconditional. The offer is set to close 14-Jun.

People's Insurance Co (Group) Of China (1339 HK) / PICC Property & Casualty H (2328 HK)

PICC closed in on a 12-month NAV discount low after announcing the Main Board Issuance Approval Committee of the China Securities Regulatory Commission (CSRC) has approved its A-share application. Though positive, the process has been well flagged and the NAV discount is nearly ~10 ppt narrower than when it received CSRC acceptance in September last year.

Jardine Matheson Hldgs Ltd (JM SP) / Jardine Strategic Hldgs Ltd (JS SP)

Shorting JM when the JM/JS ratio touched 1.785x (around an 18-month high) on the 28 May was the correct trade. In a prior insight, Jardine Maths on Jardine Stratospheric, I expected a reversion to the longer-term average of 1.70x+ (when the ratio was then ~1.50x), mindful of the circularity and given both stocks were now included in the MSCI. The ratio closed Friday at 1.69x. I wouldn't short JM here. However, I would recommend buying JS for its attractive discount to NAV.

(link to my insight: StubWorld: PICC's A-Share Offering, Jardines, Swire)

My ongoing series flags large moves in CCASS holdings over the past week or so (~10%), 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.

The movement in Legend Holdings Corp H (3396 HK)relates to the conversion of its domestic shares, which I discussed in my insight Legend's Conversion of Domestic Shares. My initial thoughts were that these converted shares will not be leaked out to the public. Upon further inquiries with the HKEx and analysts (the company did not respond to my queries), it is ambiguous whether these shares are in a closed loop like the Southbound Connect. In theory, as these shares are converted into H-shares, foreign investors should be able to buy the converted shares in the HK market.