Last Week in Event SPACE – Sinoma, Toshiba, Mandarin Oriental, Lattice

This week, China National Building Material Co Ltd (3323 HK) and China National Materials Company Limited (1893 HK) finally reach a concrete proposal; Toshiba Corp (6502 JP) has a fortnight to get its chips together; Mandarin Oriental Intl Ltd (MAND SP) may be a step closer to selling its Excelsior Hotel; and Lattice Semiconductor Corp (LSCC US)’s Chinese cash injection gets dinged by the US’ watchdog.

(Market cap and liquidity noted below are in US$. Liquidity is assessed on a 3-month average)

Events

Toshiba Corp (6502 JP) (Mkt Cap: $12.1bn; Liquidity: $141mn)

There’s a slow burn. And then there’s Toshiba’s memory chip sale. But as Mio Kato, CFA discussed, citing a Nikkei article, the banks have drawn a red line at the end of September for Toshiba to make a final decision.

Travis Lundy discussed Hon Hai’s reported new ¥2.1trln offer whereby Hon Hai + Sharp would own 40%, Kingston and Apple 20% each, and Softbank and Toshiba 10% each. And Bain+SK Hynix's reported ¥2.4trln offer although the actual purchase price is ¥2tn with an additional 400bn yen of promised R&D and capex. Travis summarises the offers to date:

• Just some of the innumerable roadblocks/takeaways that have emerged for the suitors:
  • WDC did not want SK Hynix in a deal as it was a potential rival which Toshiba/WDC had successfully sued for industrial espionage related to NAND. Also, in the initial bid, SK Hynix was not supposed to have voting rights.
  • Hon Hai is allegedly (and unfathomably) supported by TMC’s management. Perhaps as it is not called WDC.
  • The INCJ and DBJ did not want to ink a deal while WDC still had a live suit against Toshiba in international arbitration.
• Both Travis and Mio believe Apple Inc (AAPL US)'s threat to cease purchasing (as discussed by Pelham Smithers ) is more bark than bite, to get WDC to concede terms and an eventual management stake.
• The government probably won’t say no to any deal. This probably favours WDC. The banks still need a deal done, and quickly, and (probably) don't care who it is. This also favours WDC. WDC has skin in the game and a case. This too favours WDC. Assuming WDC can do a ¥2tn deal, which is likely.
• As it stands, WDC still appears the most, if not only, viable partner of choice.

links to insights:
Travis' Toshiba Memory Deal Map - Deal on the 13th?
Mio's Toshiba: Banks Set Sep End Deadline, Trading Volumes Down, Do Any Upside Risks Remain?
Pelham Smithers' WDC Gets Apple in a Huff

Mandarin Oriental Intl Ltd (MAND SP) (Mkt Cap: $3.2bn; Liquidity: $1.6mn)

Back in early August, I discussed MAND's potential sale of Excelsior and backed out a fair value of US$2.50 – the stock was then US$2.08. MAND closed at US$2.56 on Friday, up 20.75%, slightly missing its all-time intra-high share price. The stock is now up 100% YTD.

• There are media reports of at least five bidders (allegedly including Sun Hung Kai Properties (16 HK) and Hysan Development Co (14 HK)) for MAND’s Excelsior Hotel, with speculated valuations upwards of $30bn, a figure previously mentioned in various media articles since earlier this year. MAND announced it has indeed received proposals and that this "will form the basis for further consideration of the Company’s strategic options".
• I estimated a sale value of HK$16.4bn – around HK$24/sq.ft. A HK$30bn price translates to around $44k/sq.ft of GFA.
• The record price for Grade A property in Hong Kong is held by Henderson Land Development (12 HK) when it paid HK$23.28bn or ~HK$50k/sq.ft for the Murray Road site in Central earlier this year.
• Assuming my numbers are way too conservative – the rumoured sale value exceeds MAND’s market cap by ~20%. MAND was net debt of US$320mn as at 1H17, therefore the stock is trading at a discount to net cash based on the media-reported sale value.
• MAND’s other 100%-owned assets include the MO here in HK and other MOs sprinkled around the world, with a book value of US$1bn (US$0.88/share) - before any asset revaluation. Hotels are held at depreciated cost less accumulated impairment losses.
• If Excelsior is sold for HK$30bn, my fair value jumps to ~US$4/share. The shares look to have more room to run here.

(link to insight: Mandarin Oriental - Making Room)

Japan Post Holdings Co Ltd (6178 JP) (Mkt Cap: $60bn; Liquidity: $37.9mn)

Travis discussed the government’s offer to sell 990.1mn shares in Japan Post Holdings Co Ltd (6178 JP), twice the size of its offer in Nov 2015. This is not an insignificant tranche - ¥1.2tn as a base size with an uplift of another 8% in the over-allotment options. The domestic portion of the offering is 80% (~95% of which is retail, 5% insto). The international offering is 20% of the total. There is a lockup of 180 days on the seller.

• Overall, at a first glance, Travis would take the deal at the discount provided. It's not expensive - the non-Treasury market cap of the stock is still below the market cap of its holdings in its two main subsidiaries; and it has a fat dividend – 3.75%.
• There is around 130-150mm shares of TOPIX-linked passive shares to buy on delivery date, i.e. the first day of trading of the shares purchased. If FTSE and MSCI add in very short order, there is something of a squeeze here too. I would not short JPH here.
• Mio also sought to gauge retail interest via social media indicators, reaching a preliminary conclusion the sustained media interest bodes well for the deal.
• And a final word - as Travis discussed in his insight subsequent to JPH’s 2015 IPO, Japan Post Holdings: The post-IPO details make for interesting possibilities, despite JPB's and JPI's excess capital and lack of EPS growth prospects, they are restricted from entering new businesses until JPH sells down below 50%.

link to insights:
Travis' Japanese Govt To Sell Japan Post Shares - Basic Details
Mio's Japan Post Holdings: Trying to Gauge Retail Interest Through Social Media Indicators

Lotte Shopping Co (023530 KS) (Mkt Cap: $6.6bn; Liquidity: $23mn)

Sanghyun Park discussed Lotte Group's Shin Dong-ju, the older brother of Shin Dong-bin and Group founder Shin Kyuk-ho's eldest son exercising his appraisal rights for 97% of his shares in the four Lotte affiliates, which were recently approved by their respective shareholders for the complex spin-off/merger plan.

• Shin Dong-ju’s exercising alone won’t scrap the spin-off/merger plans although there is “a little” concern for Shopping. By him exercising it may entice other shareholders to similarly do so, possibly canceling the merger.
• Even if the appraisal limit is exceeded, Shin Dong-bin and Lotte can source additional liquidity to push ahead, but not a great outcome for Shopping's share price. In any event, Shin Dong-ju remains a significant factor in this holdco conversion process.
• As an aside, Shin Dong-ju’s net gain after-tax from the exercising is ₩579.5bil. Sanghyun believes he will use the proceeds to continue his Lotte battle by pursuing full control of Lotte Japan Holdings. That is beset with its own issues including shares under litigation in Japan courts, and having to win support from Lotte Japan's employee stock ownership.

(link to insight: Lotte Group Restructuring Part 6 - Summary of Shin Dong-Ju’s Appraisal Rights Exercise)

Atlasbx Co Ltd (023890 KS) (Mkt Cap: $399mn; Liquidity: $0.1mn)

Korean Activist Value Partners Asset Management has singled out Atlasbx Co Ltd (023890 KS) – maker of auto storage batteries - to improve its share liquidity or face possible delisting.

• Atlasbx has outstanding shares of 9.145mn, 58% (or 5.3mn) of which are treasury. Hankook Tire Worldwide Co Ltd (000240 KS), the largest shareholder, has 31.1%. That leaves 10.4% of shares in minority hands. On 14^th June, a change in KOSDAQ regulations required at least 20% of a listco be held by minorities, or potentially face delisting.
• Douglas Kim discussed how Atlasbx tried and failed to delist the company in 2016, with minority shareholding rebuffing the low-ball ₩50,000 offer. Shares closed at ₩49,900 on Friday.
• Atlasbx has a consistent record of generating positive operating and net profit, and currently trades at 9x FY16 or 2.6x PE if netting off cash of ₩58bn. Atlasbx's market cap is ₩455bn. That cash is enough to take out the minorities at a decent premium.

(link to insight: Value Partners Goes “Activist” On AtlasBX)

Lattice Semiconductor Corp (LSCC US) (Mkt Cap: $671mn; Liquidity: $3.5mn)

The Trump administration - not surprisingly - upheld the U.S.’ tough stance and commitment to ensuring US national security protection, by blocking Chines-backed Canyon Bridge Capital buying Lattice Semiconductor Corp (LSCC US).

• Still, not a great outcome for Lattice (& its shareholders), currently the no.3 PGA/PLD semiconductor vendor behind Xilinx Inc (XLNX US), Intel Corp (INTC US)/Altera Corp (ALTR US), and Microsemi Corp (MSCC US) with only 3% of the global FPGA market share in 2015 and 2016.
• And peers are expected to benefit more from the US defense budget and rising A.I training/inferencing/scoring demand; whereas Lattice’s products are primarily used in consumer applications and mid-range family products.
• Without Canyon’s cash injection, Andrew Lu expects further deterioration in Lattice’s cash flow and its gearing ratio.
• No biggie for China as it continues to build its own technology and semiconductor know-how – supplemented via the hiring of senior executives and engineers from blue-chip players. It's a less costly route but will take a longer time.

(link to insight: US Trump Blocks Lattice Acquisition for Security Risk - China Will Have to Build Its Own Now)

Samsung Electronics Co Ltd (005930 KS) (Mkt Cap: $288.7bn; Liquidity: $475mn)

Sanghyun discussed Capital Group reducing its stake in Samsung Electronics Co Ltd (005930 to KS) to 4.65% from 5.24% - worth ~US$1.8bn.

• The selling kicked off on Aug 9 when news emerged that Samsung’s Prince Lee may spend a stint in the big house. It is fair to say Capital’s selling was a key tenant in SamE’s share price underperformance.
• The end of the selling refocuses back on SamE’s strong business fundamentals - its 3Q semiconductor OP is now estimated at ₩10tril - the highest ever.
• And Sanghyun tempers investor’s concerns on Lee’s trial. 5 years jail time is considered a 'win' of sorts for Samsung – and Lee will probably get a few years of probation on appeal.

(link to insight: Samsung Electronics - Capital Group’s Selling Came to an End, What Now?)

Arbs/M&A

China National Materials Company Limited (1893 HK) (Mkt Cap: $2.1bn; Liquidity: $4mn)

After nearly 21 months lapsed since talks of a reorganisation first surfaced back in Jan 2016, Sinoma shareholders have received a generous 1:0.85 China National Building Material Co Ltd (3323 HK) exchange offer, a 19% premium to the previous close, or a PBV (FY17E) multiple of 0.8x versus consensus PBV estimate for 2017 of 0.69x.

• The delay in cementing (sorry) a deal was due to the merger of the state-backed parents, which was completed on 8-Mar-2017.
• The motives behind the merger were driven by the fact the building materials industry (including cement) in some regions have been facing challenges in supply and demand as China’s economic development entered a new norm. Basically, bigger is better. And hopefully, more efficient.
• Deal terms look priced to complete. Deal risk centers on the not-more-than-10%-against clause on the Independent Sinoma H Share vote. That works out to be 116.4 mn shares or US$67mn using the current share price. No single shareholder holds such a stake, but potentially a few holders bandying together could pose an issue.
• At the time of writing, the Sinoma/CNBM spread is trading at 4.14%, which Pranav Rao considers fair.

(link to insight: China National Materials / China National Building Materials: Chinese Cement Consolidation)

In brief...

Bloomage Biotechnology (963 HK) (Mkt Cap: $726mn; Liquidity: $1.5mn)

The scheme doc for Bloomage has been dispatched, with the IFA assigning a fair & reasonable opinion – and specifically flagging such an opinion to “relatively sizeable shareholdings".

• Currently trading with a 4.61% net return.

(link to insight: Bloomage Biotechnology: Scheme Document Dispatched)

Ping An Securities Group (Holdings) Limited (231 HK) (Mkt Cap: $232mn; Liquidity: $0.4mn)

Ping An Securities is now unconditional in all respect. At the time of the initial announcement, the deal looked likely to complete, but I wasn't entirely comfortable with the company's past connected transactions, especially changes in asset ownership without any exchange of cash

• The offer closes on the 29 September. You’ll receive the offer price of $0.096/share within 7 business days once tendered. Currently trading at terms.
• Ping An will remain listed. I have no view on the back-end as management has provided zero clarity on its Shengming International Plaza and recent business developments.

(link to insight: Ping An Securities – Making the Connections)

Stubs

• That partial offer closes at noon on Monday (18th Septemeber). EDC popped 1.43% on Friday to close at Php7.00 vs. the Php7.25 gross offer price. Those shares acquired on Friday cannot be tendered.
• What's next? The intention is to delist EDC and the second tender offer may be put in place before year-end.
• In the meantime, EDC is expected to be kicked out of the PSE Index. Index inclusion requirements include free float (12% or higher); ranking among the top 25% in terms of median daily value in nine out of the twelve-month period in review; and market cap.
• FGen looks inexpensive here, with the market assigning little to no value for the stub ops (including various domestic power plants) after stripping out its stake in EDC. Just that FGEN only trades US$0.7mn/day.

(link to insights: StubWorld - Set-Up & Unwind Extremes (16 Aug 2017); EDC - The Squeeze Is On)

Iljin Holdings Co Ltd (015860 KS) / Iljin Diamond Co Ltd (081000 KS)

I flagged Iljin Holdings earlier in the week as 61.8%-held subsidiary Ijin Diamond, the main supplier of hydrogen car engine tanks to Hyundai cars, has been on a tear. Iljin Holdings still looks cheap, trading at a year low implied stub levels. Some follow-up commentary, courtesy of Sanghyun.

• Iljin Group has a total of 28 local firms and 15 overseas subsidiaries. Of these 28 local firms, 5 are public companies: Iljin Holdings Co Ltd (015860 KS), Iljin Electric Co Ltd (103590 KS), Iljin Display Co Ltd (020760 KS), Iljin Diamond Co Ltd (081000 KS) and Iljin Materials Co Ltd (020150 KS).
• Founder Huh Jin-kyu has two sons and two daughters. Founder Huh gave half of his business to his eldest son named Huh Jeong-seok and the other half to his younger son named Huh Jae-myeong.
• Huh Jeong-seok owns Iljin Holdings and Huh Jae-myeong owns Iljin Materials. So, Iljin Group is operated with two structurally separate business lines. The first one is the line led by Iljin Holdings and the other one led by Iljin Materials. At some point in future, these two lines will likely be fully separated.
• Iljin Composites (the one that is currently in the limelight) is Iljin Diamond's wholly owned subsidiary, so it belongs to Iljin Holdings' line.
• Iljin Holdings doesn't have any significant internal operating business.

(link to insight: StubWorld - Set-Up & Unwind Extremes: Japan Post, Mitsui Engineer, Iljin Holdings)