Last Week in Event SPACE: Shinsei Bank, Huifu Payment, Vedanta, Cardinal Resources, Jih Sun Finance
Last Week in Event SPACE ...
- Expect a more robust buyback than this year, which allows Shinsei Bank (8303 JP) to return capital to shareholders, proving that they can, and to do so while shares are depressed.
- The management-led Offer for Huifu Payment Limited (1806 HK) is effectively done with the irrevocables from pre-IPO investors.
- The fact that the promoter is willing to pay INR 160.00 after Vedanta Ltd (VEDL IN) had gone ex- on a INR 9.5/share dividend makes a mockery of the "sources close to the deal" who were trying to tell everyone just before the offer that INR 128 was the highest the promoter could go.
- Nord Gold exits, Shandong Gold Mining Co., Ltd. (1787 HK) bumps, and Dongshan enters, as Cardinal Resources (CDV AU)'s end-game unfolds.
- The Offer for Jih Sun Financial (5820 TT) is not a huge premium, but is most likely to be successful because of the two owners who currently own 60%
- 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)
M&A - ASIA
Shinsei Bank (8303 JP) (Mkt Cap: $2.6bn; Liquidity: $15mn)
Shinsei has a high enough Basel III capital ratio at 11.2% to be able to buy shares back in larger size than they have been doing. The sale of Jih Sun Financial (5820 TT) (see below) should free up a considerable amount of capital which could be used to buy other assets to increase profit, or to buy back shares. Given shares are near a seven-year low, and a large percentage of the shares are simply not for sale, a good way to execute a buyback using freed up capital is through an Own Share Tender Offer. Shinsei is also in a uniquely good place to execute this kind of buyback. Doing so would please long-suffering active foreign shareholders, would allow for a rise in price through a substantial lowering of share count at a price well below Tangible BVPS, and encourage other new entrant shareholders to be willing to buy at a higher price given the strong capital action.
- Given covid-19 has resulted in uncertainty, and vaccine availability and time will ensure more certainty (and NZ (where UDC is) has had a great rebound), Travis Lundy expects Shinsei management will be more willing to be slightly more aggressive with its RWA/capital usage, and right now, its own shares are really, really cheap avatars of businesses they want to buy.
- If share prices rise 50% between here and May 2021, that may change the arithmetic somewhat, but it is a high-quality problem to have for shareholders. Comparatively speaking, there are VERY few other Japanese banks willing to buy back 5-10% of shares out per year, and even fewer who are recycling assets and capital.
- Get long Shinsei vs other banks. Executing such a buyback and seeing the shares trade at half of book after such a corporate action would see the shares at ¥2,350/share. That is a long way north of here.
(link to Travis' insight: 2021 High Conviction - Shinsei Bank)
Huifu Payment Limited (1806 HK) (Mkt Cap: $0.5bn; Liquidity: $1mn)
Third-party service provider Huifu announced a Scheme such that shares will be cancelled in exchange for either $3.50/share cash, a 26.8% premium to last close; or 2.709677 new shares in the Offeror. Neither the cash nor the scrip consideration will be increased. The Offeror is an unlisted vehicle owned as to 70.7030%, 24.6620%, and 4.6350% by Zhou Ye, Mu Haijie, and Jin Yuan, who are directors of Huifu. These directors and concert parties hold 17.61% of shares out, and will be required to abstain from voting at the Scheme Meeting. Key Scheme conditions include at least 75% of Disinterested Shares voting FOR & not more than 10% of the votes attached to ALL the Disinterested Shares against. Irrevocables totaling 828.738mn shares out or 63.59% have been received. That satisfies the 75% limb. The headcount test applies as Huifu is Cayman incorporated.
- The irrevocables shareholders - Sampoerna, Bain, Keystone, FIL/Eight Roads, Pacven, and Bright Journey - are all pre-IPO investors. All irrevocables will elect the scrip alternative. In effect, this Offer is winding back the clock to Huifu's unlisted days, with a roughly similar shareholding structure.
- As Scheme docs are normally delayed in Hong Kong, I estimate this could be wrapped up in mid-May, This may be further delayed to incorporate FY20 results. FY19 results were released on the 25 March this year. The long-stop date is the 30 June 2021. This transaction looks done. I'd buy at $3.32 - around a 5.4%/14.8% gross/annualised spread at the time of the insight - assuming completion mid-May.
links to my insights:
Huifu Payment (1806 HK): Scheme Offer
Huifu Payment (1806 HK): Early Withdrawal?
Vedanta Ltd (VEDL IN) (Mkt Cap: $7.6bn; Liquidity: $63mn)
The Vedanta promoter Vedanta Resources (VED LN) unit Vedanta Holdings Mauritius II has announced an Accelerated Purchase of Shares of VEDL. The promoter seeks to buy in an Offer To Buy ~185 million shares or 4.98% of shares outstanding at a price between INR 150.45 - 160.00/share (a 0.0% to 6.3% premium to the BSE close of INR 150.45 today 23 December). This comes a short time after the parent raised funds at 13% to lengthen the existing debt schedule by repaying debt maturing earlier. This event is not completely unexpected.
- The fact that the promoter is willing to pay INR 160.00 in a block after the company has recently gone ex- on a INR 9.5/share dividend makes a mockery of the "sources close to the deal" who were trying to tell everyone just before the offer that INR 128 was the highest the promoter could go.
- Travis expects some investors may decide the stock has run up enough - the shares are higher now than they ever got between the launch of the delisting proposal and the failure of the delisting offer, and at INR 150.45, the shares are effectively at INR 160.00 on a pre-delisting offer failure basis because of the INR 9.5 dividend paid in October.
- If Travis had considerable flexibility to trade and a certain amount of "tax efficiency", he would be inclined to offer out his shares in the high 150s. If he did not have tax efficiency but he thought INR 150-160 was full and he would be happy to sell all his shares at that price, he would not hesitate to offer his shares out at the appropriate price. He does not, however, think this price extraordinarily high in terms of value, or in terms of relative value vs peers or vs the dividends still owed at the end of this fiscal year.
(link to Travis' insight: Vedanta Promoter Launches Offer to Buy 4.98%)
Cardinal Resources (CDV AU) (Mkt Cap: $0.4bn; Liquidity: $1mn)
On the 25 November, Ghanaian firm Engineers & Planners Company formally launched a A$1.05/share all-cash offer. Shandong Gold Mining Co., Ltd. (1787 HK) immediately bumped its Offer to A$1.05/share. On the 11 December, Nord Gold raised its Offer to A$1.05/share. Shandong has now announced it will increase its Offer to A$1.075/share provided it holds at least 30% of Cardinal shares by the 31 December AND Nord gold's on-market Offer is not extended beyond the 23 December.
- A little under an hour after Nord Gold announced it had closed its Offer - citing the indicative $1.075/share Offer from Shandong was beyond what it could justify - Dongshan, an Emirati-Russian JV, announced its intention to make an off-market cash bid for Cardinal Resources (CDV AU) at A$1.20/share. a 12% premium to Shandong's current offer of A$1.075/share. Cardinal advises shareholders to take no action at this time. This is as yet an indicative, highly conditional Offer - subject to funding and DD - not a firm proposal.
- After abandoning its takeover, Nord Gold opted to accept Shandong's offer, elevating Shandong's holding to 240.34mn shares, or 43.39%, with an additional ~22.8% of shares out who have stated an intention to accept Shandong offer. The intention of that 22.8% may now change following Dongshan's indicative proposal. Shandong's Offer is unconditional and has the unanimous backing of Cardinal's board. It also has matching rights under the BIA to any superior offer. Shandong's offer tentatively expires on the 31 December.
- If you are already in, then continue to ride out the end game. Otherwise, buy around terms on the expectation one of the competing players continues to push the share price higher.
links to my insights:
Cardinal Resources: Shandong's Indicative Bump
Cardinal Resources (CDV AU). Exit Nord Gold, Enter Dongshan
Jih Sun Financial (5820 TT) (Mkt Cap: $1.7bn; Liquidity: $1mn)
Fubon Financial Holding Co (2881 TT) has announced a board decision to conduct a Tender Offer to take control of Jih Sun at NT$13/share. The offer will be contingent on gaining 50.01% of the shares and Fubon will buy any and all shares tendered if it clears that hurdle. This is not a huge premium, and comes to only a small premium to book value (1.05x) but is most likely to be successful because of the two owners who currently own 60%. Buy the deal at a decent spread to terms to expect that it gets done on time.
- This deal comes pre-blessed by the Financial Supervisory Commission which approved on Thursday apparently. It is interesting because last month a 24% stake acquisition by a foreign corporate (non-financial) was nixed by the FSC, and this would represent the first time that a domestic financial holding company has been taken over by another domestic financial holding company.
- Jih Sun has been up for sale for a few years. The company has never delivered on its promise of making money after it was bailed out in 2006 by Shinsei Bank, allowing it to get to the business of making money. In 2009 it had to be bailed out again, resulting in a nice profit in 2010, but it has taken 10 years to get back to that number again. The takeover multiples are 19x that 10-year record TTM Income and 1.05x book, which is higher than three main listed comps in the same market cap range.
- The other trade. This will generate ¥60bn+ worth of cash, and much more importantly, will reduce the capital requirement for Shinsei Bank (8303 JP). This should be really bullish Shinsei - Travis expects they will do more buybacks with the proceeds. See Travis' Shinsei insight above.
(link to Travis' insight: Fubon Financial Tender Offer for Jih Sun Financial)
FGV Holdings Bhd (FGV MK) (Mkt Cap: $1.1bn; Liquidity: $5mn)
Following fractious allegations over a land lease agreement (LLA), on the 8 December, government-backed FELDA announced a possible mandatory takeover (MTO) of FGV at RM1.30/share. FELDA, which held a 36.61% stake in FGV, had entered into conditional SPAs to buy the 6.1% and 7.78% stakes held by Kumpulan Wang Persaraan and Urusharta Jamaah for RM658mn. Those SPAs have now completed and an unconditional MTO is triggered. It is unconditional as FELDA now holds 50.49% when taking into account parties acting in concert. This deal is done. Expect shares to trade tight to terms.
(link to my insight: FGV Holdings: Low-Ball MTO Triggered)
SHK Hong Kong Industries (666 HK) (Mkt Cap: $0.1bn; Liquidity: <$1mn)
After privatizing Allied Properties (H.K.) (56 HK) recently, Allied (373 HK) has now made an Offer for 75%-held SHK, by way of a Scheme, at $0.21/share (cash), a 50.00% premium to last close. The Offer price is final. SHK is HK-incorporated, therefore there is no headcount test. Should the Scheme complete - and I see no specific hurdle why it will not - AGL would have privatised its two key holdings, and at 0.4x P/B, may well be the next take-private target.
- The blocking stake at the Court Meeting will be 102.8mn shares or 2.502%. Lin Wan-Qaing holds 329.16mn shares or 8.0% of shares out, having first gone through 5% on the 22 December 2017, paying at an average price of HK$0.1520/share. These shares appear to have been bought from Argyle Asset Management. Lin has added to his stake largely at prices below the Offer price. Presumably, he has been sounded out about the deal - the deal is dead without his backing. He has not given an irrevocable to vote in favour of the Scheme.
- AGL, at 0.4x P/B is cheap. The Lee family controls 74.95%. Taking the company private, with say a 30% premium, would cost the family ~HK$3.8bn. That's a lot. But the bulk of AGL's assets comprise its 100% stake in APL, which was taken private a 0.3x P/B. There is still a lot of upside for the family taking AGL private around here.
(link to my insight: SHK (666 HK): Allied Group Further Cleans House With Scheme Offer)
On the 15 December, amaysim announced WAM Capital Ltd (WAM AU) was offering AYS shareholders the choice of A$0.695/share in cash, or A$0.833/share in WAM scrip, or a combination of both, in an off-market takeover. The Offer had limited conditionality - shareholder approval of the mobile ops to Optus, and the standard regulatory approvals. And no MACs. Now micro-fund RAMcap's CEO Richard Matthews has been in contact with AYS seeking a meeting to elaborate on a proposal for RAMcap to make a scrip takeover offer for AYS. The bid consideration of the proposed offer, comprising either A$0.85/share in its less leveraged fund (ORD offer), and A$0.90/share for the more leveraged portfolio (REDP offer).
- AYS has questioned RAM liquidity, and that it is a small fund up against WAM, a billion-dollar entity. Neither of these inferences appear to be in dispute. RAM countering it intends to provide liquidity in June and September adds considerable uncertainly to its proposal. RAMCap has ~A$10mn of assets under management and since conception two years ago, primarily focuses on - and agitates - small-cap Aussie gold miners. In September last year, RAMCap attempted to, and failed to, remove Troy Resources (TRY AU)'s director John Jones.
- On the 2 November AYS entered into an SSA to sell its mobile ops to Optus Mobile for A$250mn, in cash. Once the sale completes, AYS previously expected to distribute between A$207.2mn - A$225.7mn (A$0.67-A$0.73/share) via three tranches. The distribution was to include a fully franked dividend of A$0.26/share. The intention of both WAM and RAM's Offers are to acquire AYS before the Optus payment, then wind AYS up.
- If you can take advantage of the franking credits under the mobile distribution, get involved around here, but preferably a spread or two lower. Then look to potentially sell your AYS shares in the market - or exchange them into WAM shares if the Offer has been extended. I would not in any way chase the implied value under RAMcap's proposal.
(link to my insight: Amaysim (AYS AU): A WAM RAM Stoush)
STUBS
Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)
JCNC's shares outperformed subsequent to the MSCI deletion announcement on the 10 November, with the discount to NAV narrowing ahead of its deletion on the 30 November. JCNC has since retraced and is now at a multi-year low (i.e. multi-year high discount) to NAV. I see JCNC at a ~39% discount to NAV. JCNC is down 36% in the past year compared to -11% for 50.1%-held Astra. The current implied stub of negative S$10.10/share is at a level not seen since July 2015, and compares to the long-term average of negative S$3.00/share. There has been a tendency for shares to bounce off this extreme level in the previous four occurrences in the past eight years.
- There have been ongoing rumours about JCNC undertaking a rights issue. I think there would be considerable pushback from shareholders if a rights issue was proposed at the current 0.8x P/B. The US$749mn rights issue in June 2015, was done at ~1.2x. Assuming the next rights issue (as and when) is proposed at a similar level, this suggests JCNC has 50% upside from here. Of interest, should JCNC conduct a sufficiently large enough rights offer, the free float will likely clear the MSCI semi-annual threshold, suggesting it would probably be added back to the MSCI Singapore Index.
- In my insight Jardine Matheson: Buybacks Ahead Of Schedule, I flagged HJM's aggressive buyback under its US$500mn program announced on the 23 October. I see the ratio at 2.24x. I estimate JM has repurchased 3.5mn shares at a cost of US$183mn since the start of the buyback program, at an average price of US$52.08/share. The buyback is also indirectly lifting JS.
Astra accounts for 92%/77% of JCNC's NAV/GAV. Since the beginning of October, the market has assigned S$2.8bn LESS to JCNC's stub ops. JCNC's MSCI deletion is now done. The sentiment for Indonesian autos is upbeat, and Astra is back to February levels. Investors should be buying JCNC here. I would look to set up the stub - Long JCNC, Short ASII, with a view to mean reversion. Or at a minimum, it should go on the watchlist as something to put on once the momentum stops/reverses.
(link to my insight: StubWorld: Jardine Cycle & Carriage - Back To MSCI Deletion Levels)
EVENTS
On 23 December, LG Electronics (066570 KS) announced that it will spin off its electric vehicles components business and form a major joint venture with Magna International (MG CN). The name of this JV newco is LG Magna e-Powertrain. LG Electronics has provided EV components such as motors and battery packs for GM's Bolt and Jaguar's I-Pace electric vehicles. Magna makes EV gear for Volkswagen and other carmakers. The JV will employ about 1,000 people in North America, Korea, and China. The initial value of the newly formed JV will be $925mn. In LG Electronics' New JV (LG Magna E-Powertrain): A Strategy to Become a Supplier to Apple's EVs? Douglas Kim touches on the speculation that this new JV could potentially become a leading supplier to Apple's new EVs.
Hong Kong IPOs: Lock-Up Expiries (December 2020 Edition)
This monthly insight looks at companies that have been listed for around six months, as a guide to when insiders/controlling shareholders are permitted to sell, potentially creating an overhang that could depress prices.
I've also constructed a chart highlighting the performance of 92 IPOs leading up to their lock-up, and compared this to the HSI index. The performance of the IPOs and the Index bifurcates around two weeks prior to the lock-up
(link to my insight: Hong Kong IPOs: Lock-Up Expiries (December 2020 Edition))
TOPIX INCLUSIONS!
Telecoms company IPS announced they had received approval to move from the MOTHERS Section to the First Section of the Tokyo Stock Exchange as of 25th December 2020. TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 28th January 2021. The Inclusion parameters are attractive. Janaghan Jeyakumar estimates the Inclusion quantity to be 556,600-668,000 shares. This translates to an Inclusion Size of ¥1.2 -1.5bn and an Impact of ~4 days of volume based on 3-month ADV. The company has not launched any substantial equity offerings in the run up to this TSE1 reassignment. All else equal, this is more bullish in the supply-demand balance than most of the TOPIX Inclusion cases in 2020.
- However, there are some concerns regarding overheating. The stock is up 72% YTD but the price rise is more likely to be related to the company's own business activities rather than TSE1-speculations. In May 2020, the company announced the acquisition of a city-to-city submarine communications cable to bolster their overseas business and in reaction to that the share price more-than-doubled in the following weeks. Since then it has mostly oscillated between ¥2,000-¥2,400.
- Going by FY19 numbers, the stock is trading at EV/EBIT and PER multiples of 28x and 46x. After accounting for the impact of the above-mentioned acquisition, Capital IQ consensus projections translate to EBIT and NP CAGRs of 19% and 21% from FY19A-FY23E. Even on a growth adjusted basis, it does not seem inexpensive.
- Janaghan would be Bullish between now and the Inclusion Date (28th January 2021). TOPIX Inclusion cases with above-median Inclusion sizes have historically outperformed TOPIX from reassignment announcement to Inclusion. Although there is some overheating, this event is likely to come as a positive surprise to the shareholders.
- The Inclusion Parameters are mixed. A big market cap means there is ¥4.5bn+ to buy at last price. If the stock were to go up 50%, that would be ¥7bn to buy, which is a lot. But it trades a lot of its float every day despite having quite a low float. The inclusion is only worth 2.4 days of ADV over the past three months, and there have been plenty of days in the past 6-9 months where one-day volume was larger than this inclusion will be.
- If the stock goes up a lot, I would wait for it to dip back a bit, but a priori, I would not expect it to fall all the way back to Friday's close, and I would be OK being long starting at a higher price than Friday's close.
M&A - EUROPE/UK
SHARE CLASS
In Hyundai Motor Div Play: 1P & 2PB at 3% Gain with Short Hedge on Ord Futures, Sanghyun Park notes Hyundai Motor Co (005380 KS)'s Ords have a 2.15% div yield, whereas 1P enjoys 4.62%. 2PB features a 4.49% yield.
INDEX REBALS
Changes to the FTSE China 50 and FTSE China A50 Due to the Executive Order. Semiconductor Manufacturing International Corp (SMIC) (981 HK) is being deleted from the FTSE China 50 index, while Hangzhou Hikvision (002415 CH) is being deleted from the FTSE China A50 Index (XIN9I INDEX) with the changes becoming effective after the close of trading on 6 January. At the current time, Great Wall Motor (2333 HK) is the highest ranked candidate in the FTSE China 50 Reserve List and the replacement for SMIC, while Shanxi Xinghuacun Fen Wine Factory Co (600809 CH) is the highest-ranked stock in the FTSE China A50 Index (XIN9I INDEX) Reserve List and the likely replacement for Hikvision. Link to Brian Freitas' insight: Changes to the FTSE China 50 and FTSE China A50 Due to the Executive Order.
HSI Market Consultation. The consultation will remain open for comments till 24 January and the conclusions should be announced in February. Meituan (3690 HK) will benefit from an increase in the cap on WVR securities from 5% to 8%. Stocks that could be added to the index are NetEase (9999 HK), Longfor Properties (960 HK), JD.com (HK) (9618 HK), amongst others. Stocks at risk of deletion are Petrochina Co Ltd H (857 HK), Bank Of Communications Co H (3328 HK), China Life Insurance Co H (2628 HK) and AAC Technologies Holdings (2018 HK). Link to Brian's insight: HSI Market Consultation - Wide Ranging Changes Proposed.
OTHER M&A & EVENT UPDATES
- SAMR approval has now been received for the China Zhongdi Dairy (1492 HK) transaction.
- Scheme Document has now been issued for Hengxing Gold Holding (2303 HK). The EGM is the 13 January. First day of dealing in the new SDGM H shares is the 5 February. IFA says fair & reasonable.
- I.T Ltd (999 HK) has delayed the despatch of the Scheme Document until the 22 March, on or before, two weeks past my earlier estimate.
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 |
| Indigo Star (8373 HK) | 34.20% | SHK | Outside CCASS |
| Ocumension Therapeutics (1477 HK) | 19.39% | MS | Outside CCASS |
| Cash Financial Services Group (510 HK) | 35.50% | BoC | Celestial |
| True partner (8657 HK) | 13.94% | HSBC | Outside CCASS |
The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.
Name | % chg | Into | Out of |
| Shinsun Holdings (2599 HK) | 68.91% | CCB | Outside CCASS |
| Kidztech (6918 HK) | 37.18% | Fulbright | HSBC |
| Everest Medicines (1952 HK) | 13.80% | CMB | Outside CCASS |
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