Last Week in Event SPACE: Sing Air, Swire/Cathay, Evergrande, Crown Resorts, Capitaland REIT, Leyou

Management consultant Prored confirmed (J-only) on 21st April it had received approval to move from the MOTHERS section to the First section of the Tokyo Stock Exchange as of 28th April. TSE1 reassignment triggers inclusion into the TOPIX Index and we expect the inclusion event will be at the close of trading 28th May 2020.

• Janaghan Jeyakumar feels that the market had anticipated this event right from the beginning. In 2019, the stock price had almost doubled before the announcement in December that they were applying to move to the TSE1, and since then, the movement in price has been relatively insignificant. The announcement in December 2019 came as no surprise. The Company was listed on the Tokyo Stock Exchange Mothers Market in July 2018 and their intentions to move to TSE1 were made clear with their 1-into-2 stock split in May 2019.
• Janaghan's expects the inclusion size to be around 0.5mn-0.6mn shares which is only 6-8 days of ADV. Furthermore, the offerings in the last 12 months have collectively increased float by approximately 916,000 shares which is 60-80% larger than the expected inclusion size and we feel there will be enough float shareholders waiting to sell at or slightly above the current share price to satisfy the demand expected from index buyers. All told, Janaghan reckons this is largely an avoidable TOPIX Inclusion event.

Japanese online grocery delivery service provider Oisix confirmed on 30th March that it had received approval to move from the Mothers market to the First Section of the Tokyo Stock Exchange as of 9th April. TSE1 reassignment triggers inclusion into the TOPIX Index and we expect that the inclusion event will be at the close of trading 28th May 2020.

• Janaghan does not expect the TOPIX Inclusion to have a significant positive impact on stock price. He estimates the impact of the inclusion to be around 5-6 days of volume based on 3-month average daily volume and this is only 3-4 days going by 20-day ADV. This is very small. The equity offering announced in conjunction with the market reassignment alone has increased the float by around 4mn shares which is almost the same number of shares as the expected inclusion buying demand.
• Despite promising business prospects, the stock's relative valuation versus peers is at a cycle high. This is a steadily-growing business. The company has seen strong subscriber growth over the last five years, with some weakness in the smaller units in the past year (while Oisix subscriber growth continues apace). The company's revenue has grown at a CAGR of ~31% over the past five years. The current lock-down situation in Japan means they will see a spike in demand from consumers.
• While TOPIX inclusion is generally a positive factor, this time the inclusion is smaller than the recent Offering, meaning there may not be that much positive influence. It is not clear there is strong fundamental upside to peers as the EV/Revenue spread has expanded very recently. Only recommended as a momentum trade which means when relative momentum slows or stops, bail quickly.

Swire Pacific (A) (19 HK) / Swire Properties (1972 HK)

Swire Pac's discount to NAV of 40% is around its all-time low. The implied stub, stripping out its 82% holding in Swire Prop, is at its lowest level since Props was listed in Jan 2012. The last time the implied stub touched this level, HAECO (44 HK) was being privatized. The current issues largely rotate around Swire's 45% stake in Cathay Pacific Airways (293 HK).Singapore Airlines (SIA SP) has been the large Asian airline the most forthright of the large Asian airlines to address capital issues in its massive rights offering. Cathay is also in survival mode, and exploring all options.

• Should HK's government step in for Cathay? It is the default "national" carrier. But I think politics will get in the way. And just like the public pushback on Virgin asking for government help, when many believe Richard Branson should do some of the heavy lifting (he just sold half his stake in Virgin Galactic, so he may use those proceeds for Virgin), Hong Kong taxpayers may feel (rightly to me) the major shareholders of Cathay should similarly stump up the cash.
• With a net debt/equity of 2.3x, roughly in line with peers - and above SIA's 1.5x - Cathay may well go cap in hand to its shareholders. This would require a material outlay for Swire Pac if it intends to maintain its % holding - you would have to imagine Cathay tapping US$4bn+. I can't see Swire throwing in the towel. An alternative scenario, one that will inevitably be played out, if not now but at some later juncture, is that Air China/CNAC makes a takeover bid for Cathay.
• Leaning bearish on Swire Pac at 0.27x P/B on a look-through basis, appears disingenuous. It is cheap here. And the investment portfolio is prime real estate. Arguing a Long Pac, Short Prop trade, with mean reversion in mind, has merit.
• My concern is that Pac gets saddled with significantly more debt to maintain its % holdings in Cathay after a capital raising exercise. As it stands, the majority of the Swire Group news is largely negative, and primarily focused on the stub assets. A lot of that negative news surrounding Cathay is baked into Swire Pac's price. But if Cathay does announce a major capital raising - if anything like SIA's, then the long-term prognosis for the carrier is likely bearish (see earlier comments above in this insight on SIA) - and Swire Pac takes up its share, the implied stub will probably blow out further.

(link to my insight: Swire (19 HK) Trading Cheap. Heading Cheaper On Cathay Woes)

Kingsoft Corp (3888 HK) / Beijing Kingsoft Office So-A (688111 CH) / Kingsoft Cloud (KC US)

Both Ke Yan and I analysed Kingsoft with respect to the spin-off and listing of Kingsoft Cloud (KC US) this past Friday. The IPO price range provided an indicative market cap of US$3.4-3.8bn. Ke Yan estimated that Kingsoft Cloud could fetch a fair value of US$6.4bn-US$7.6bn based on peer valuation, believes there is at least a 30% upside from Kingsoft's current share price and would go long Kingsoft.

• I was less confident. Doubling in size, despite the offering metric, may be ambitious in this environment. Most of the benefits/monetisation from KC's listing will have been baked into Kingsoft's share price. If anything, if KC performs poorly on debut (that would not be my expectation, but possible), Kingsoft will be more negatively affected. For now, at the current discount to NAV levels, I would not chase a narrowing-in-the-discount trade, but would wait to see how KC trades.
• Ke Yan had a discount to NAV of 63% versus mine of 60%, so roughly the same. The IPO was price was set at $17/ADS, at the mid-point of the indicative range. Shares jumped 40% on their debut - good call Ke Yan. I see the discount to NAV now at 63%, with KC comprising 17%/18% of NAV/GAV.

links to:
Ke Yan's insight: Kingsoft Trade Idea Update: Cloud Listing to Crystalize the Value
my insight: StubWorld: Kingsoft's Imminent Spin-Off

Parjointco is offering Pargesa Holding Sa (PARG SW) minority shareholders to exchange each of their Pargesa shares for 0.93 shares of Groupe Bruxelles Lambert Sa (GBLB BB). That looks fair - Pargesa has 84.7mn shares out, GBL has 156.1mn, and Pargesa holds 50% in GBL. Pargesa is at discount to its holding int GBL, and GBL a discount to its holdings. In Pargesa (PARG SW) & Groupe Bruxelles Lambert (GBLB BB): A Tale of Two Discounts, Jesus Rodriguez Aguilar recommends a Long Pargesa / short GBL's main listed companies; and Long GBL / short GBL's main listed companies. Perhaps, but it's unwieldy. And short-selling is banned in both Belgium and France until 18 May.

Crown Resorts (CWN AU) (Mkt Cap: $4bn; Liquidity: $23mn)

Melco Resorts & Entertainment (MLCO US) announced it has sold its 9.99% stake in Crown to Blackstone. Blackstone paid $551.55mn for the 67.675mn shares in Crown, or A$8.15/share, a 2.37% discount to the average closing price of A$8.348 over the preceding five days. MLCO paid A$13/share back in June last year. What now? As it stands, 9.99% confers a passive stake, with no board seat. Media reports are that Blackstone's acquisition was opportunistic in nature, and that they have no plans to increase their stake. For now, maybe. Outside the Las Vegas and Macau Las Vegas and Macau casino clusters, expansion is thin on the ground. Which makes the Crown story, and its Australian footprint, an attractive opportunity.

• Packer is a seller. In April of last year, Crown confirmed that it was in confidential discussions with Wynn regarding a potential change of control transaction following approaches to Crown by Wynn Resorts (WYNN US), at A$14.75/share. Those discussions were promptly terminated the following day. A month later, the Melco deal was struck. Genting Bhd (GENT MK) was also seen to be in the mix.
• Melco selling is not the end of the matter. The casino inquiry is ongoing by the Aussie regulator, having been delayed due to COVID-19. Packers holds 36.8% in Crown. But it is highly unusual to hold such a large position, with no board seat (in either Crown or his private company CPH Group), having stepped back from the limelight in March 2018. His resignation occurred subsequent to the grant of the casino licence. The simple act of not notifying the regulator about the Melco/Crown deal in the first place, is troubling, and it is possible the inquiry will continue despite the exit of Melco. It is, however, doubtful the license will be yanked.
• Packer viewed Melco as his exit strategy. Melco was good for 19.99% and was seeking approval to go higher. That avenue has now been cut off. Once the casino inquiry completes, and taking the view Crown's remains on as the licensee, my guess is that Blackstone makes a move. Crown doesn't appear overly expensive, though not overly cheap at these levels. But there is a large player circling, with skin in the game. This looks worthwhile picking up on weakness, especially below $9, and closer to the $8.15 in-price.

(link to my insight: Crown: Blackstone's Passive Bet, For Now)

Keppel Corp Ltd (KEP SP) (Mkt Cap: $7.7bn; Liquidity: $21mn)

Travis' last insight Keppel Corp Partial Tender Update - Odds Less In Your Favor Now Than Before surprised some people because he put it out as a bearish insight. That required some further explanation. He said that he had turned "Bearish" on Keppel vs its Proxy Baskets because if we look at buying 100,000 shares of Keppel, assuming that tendering the 1,000,000 shares of Keppel will lead to a sale of 389,000 shares (i.e. 100% of minority investors participate), and hedge the resulting 611,000 shares with a basket of proxy baskets, the valuation buffer one had for doing was somewhat limited.

• If you are a long-only investor in Keppel, on a relative basis vs its proxy/peers, it is at the expensive end of things for the opportunity simply because one would want a greater margin of safety on any kind of event like this given the uncertainty surrounding the evolution of profits under the scenario of continued economic impact of COVID-19.
• If you are a hedge fund, able to borrow Keppel shares in order to buy and borrow and tender, then the current price is still eminently reasonable as a price to buy. And assuming the Tender Offer gets announced in the next short while, the risk vs proxies may not be significant. That, by itself, would allow me to be bullish Keppel, however, event-trading is not the act of Buying at A and Selling at Z, but instead, one buys at A, suffers the path risk of portfolio P&L indignity from B to Y, then sells at Z.
• The timing is still in question, and uncertainty is contagious, so for the moment I would wait for a further relative and/or absolute pullback in Keppel shares

(link to Travis' insight: Keppel Corp - Two Ways To Tender)

Leyou Technologies (1089 HK) (Mkt Cap: $0.9bn; Liquidity: $2mn)

(link to my insight: 58.com: Done Deal If Tencent Joins Consortium)

Alpha Networks (3380 TT) (Mkt Cap: $0.9bn; Liquidity: $2mn)

• The Tender Offer will be launched within a week, according to the filings. John Lee only holds about 0.8% of the shares outstanding so will not be leading the fight to defend with his own position. But he is fighting his ouster through an injunction filed with the Court to keep the newly "elected" chair from taking his post. If the Court decides that indeed his ouster was illegal, then that could allow Lee to slow the process down, but he cannot stop the Tender Offer, and presumably once it is done, he will be out anyway. His goal has to be to help get the "right" deal for minority shareholders through fair board procedures.
• Fundamentally, this stock has been a bit all over the place. Revenues in 2018-2019 had dropped significantly - to 14-15 year lows. It would be easy to see why large shareholders might be disappointed. It is also not clear that the shares are necessarily worth more than TWD 30/share on an earnings basis though Travis has not looked at what hidden assets may exist (though Alpha Networks appears to own a 31% stake in Hitron Technology (2419 TT) which is worth about TSD 2.0bn or 15% of Alpha Networks' market cap. Hitron itself is a small company and not a bad earner, but Travis does not see it being worth the bulk of Alpha Network's value.
• Alpha Networks shares were limit up this past Monday. Travis would suggest that they could go higher, but he is not sure that Alpha Networks is fundamentally worth a great deal more. At TWD 27 and assuming 85% of minority shareholders participate, the residual is "worth" TWD 25.00 a share, which is near the top of the range for the last few years. To be worth any more than that there needs to be a serious integration program or a LOT of customers. The other possibility is that Lee finds friends and they put in a counter-bid, but Travis thinks displacing an existing 43.8% of holdings might be a tall order for a rival bidder.

(link to Travis' insight: Alpha Networks (3380 TT): A Board Coup and Partial Offer To Control)

GlaxoSmithKline PLC (GSK LN) has sold its entire 5.7% holding in Hindustan Unilever (HUVR IN) that it had got from selling its Consumer Healthcare division Glaxosmithkline Consumer Healthcare (SKB IN) to HUVR back in 2018. The deal was well communicated and marked the biggest block deal ever done in India. In mid-April, index providers adjusted the number of shares issued on HUVR to account for the new shares issued to shareholders of SKB. The change was not very big since the shares issued to GSK were classified as non-free float. In Hindustan Unilever - Overhang Gone, Now Comes The Passive Flow, Brian Freitas reckons GSK selling its shares will now significantly increase the free float and there will be a fair amount of passive buying across the MSCI, FTSE, Nifty50 and Sensex trackers.

Telefonica SA (TEF SM) / Liberty Global Plc Lilac Class C (LILAK US)

Telefonica and Liberty are in talks to merge their UK operations. As with the street, Patryk Basiewicz assumes this will be a 50:50 JV, similar to the deal Liberty did with Vodafone (VOD LN) in the Netherlands. This transaction will fundamentally, perhaps, permanently, and, perhaps, conclusively reshape the UK telco market. Clearly other market players are currently considering their options with regards to both O2 UK and Liberty as a whole, or the Virgin Media (VMed) part. But there are no natural buyers for Virgin Media (VMed) and for O2 UK.

• Ultimately, both Telefonica and Liberty Global want to sell those assets too. In Patryk's view, this transaction is made with a view to IPO the JV in 2-3 years.

• Based on a 50% retention ratio of synergies, the more realistic (analytically conservative) impact on Telefonica TEF share is c. €0.22 per share from the deal. This implies that TEF share price is currently under-pricing the impact by about 2-3%. The deal’s impact on Liberty Global share is about $2 per share, which implies that the current share price move has overshot the value implications.

• Gatecrashers? Not Hutchison's Three - their influence over the market's towers remains a regulatory issue. Comcast Corp Class A (CMCSA US)will never get past the anti-trust regulatory. Vodafone should get involved, but is busy integrating the bulk of the ex-Liberty European assets. Overseeing two transformational deals at the same time is a stretch.

(link to Patryk's insight: O2 UK / Telefonica (TEF SM) / Liberty (LBTYA): Can You Create Value from Assets that Nobody Wants?)

Back on the 2 April, China's 58.com received a preliminary, nonbinding proposal from Ocean Link Partners, at $27.50 per Class A or Class B ordinary share, or $55/ADS, a 17.88% premium to last close. PE-outfit Ocean Link didn't appear to be the sort of company to make an US$8bn proposal on its own. So it came as no surprise when 58.com announced recently that it has received a preliminary & non-binding Offer from Ocean Link Partners and Warburg Pincus Asia LLC, General Atlantic Singapore Fund, and Jinbo Yao, 58.com's chairman and chief executive officer. The group has proposed to acquire all of WUBA's shares for $55/ADS, the same price as under Ocean Link's initial proposal.

(link to my insight: 58.com: Done Deal If Tencent Joins Consortium)

The next rebalance for the NIFTY Index (NIFTY INDEX) will be effective 25 September 2020 and the announcement of the changes will be done four weeks prior to the effective date. Halfway through the review period that runs from February to July, four stocks are eligible for inclusion HDFC Standard Life Insurance (HDFCLIFE IN), SBI Life Insurance (SBILIFE IN), Divi'S Laboratories (DIVI IN) and Dabur India Ltd (DABUR IN) while the four lowest-ranked stocks by average free float market cap and at risk of exclusion are Bharti Infratel (BHIN IN), Zee Entertainment Enterprises (Z IN), Gail India Ltd (GAIL IN) and Vedanta Ltd (VEDL IN). Avenue Supermarts (DMART IN) ranks very highly on market cap and is a constituent of the Nifty100 Index but it does not have listed Futures & Options, a prerequisite for inclusion. NIFTY50 Rebalance Preview - Early Trade Ideas.