Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW

Soho China Ltd (410 HK) (Mkt Cap: $2.0bn; Liquidity: $7mn)

Following a media article, shares were down 31% at one stage, or 48% adrift of the $5.00/share offer price, and 13% below the undisturbed price, before recovering to close at $3.02/share. The article mentions the SOHO China/Blackstone deal has the attention of the Chinese government and is unlikely to face a smooth regulatory approval process in China. In addition, "the deal is expected to face obstacles in obtaining approval, but the issues relate more to the founders, than the deal itself." The source of the article is understood to be "familiar with the situation", not working on the deal. For context, I'm familiar with the situation.

• Apparently, according to the article, Zhang Xin and Pan Shiyi are in the US. We don't know for how long, or whether this is a recent development. Moreover, there is a question as to whether they need to be in China to be "interviewed" for the deal to complete. One interpretation of this article is the founders need to offer up “something” to get this deal over the line.
• The current environment is unquestionably one of general risk aversion given all that has happened with Chinese regulators and internet names. SOHO China is a crowded trade and short-term investors are being stopped out, further exacerbating a difficult situation. And being month-end, this is awful timing for many players.
• Short interest is my biggest concern on the deal. Aggregate short interest on the 9th July was 98.5m shares, with Bloomberg, implying at the time, an additional ~35m short sold since then, or an increase of 35% in the last 2 weeks. Short sell volume, as a % of total volume, appeared to be ~20-40%. You don't short something which could be 30% (before yesterday's move) in your face instantly unless you are certain. Or know something.
• This is adding up to one of those "circumstantial evidence" issues. The whole lot could be a circular reference - rumour begets rumour etc. But on balance, this deal should get up. There was clear adding/buying on the big fall day on the pretext this article was weak. The downside to a deal break is now less hairy. If this deal was blocked, for whatever reason, the downside is unlikely to be the undisturbed price, but probably closer to $2.30-ish or 24% down, compared to 66% up to the Offer price. That suggests a 2.75 upside:downside ratio, though where "downside" is can be tricky.

(link to my insight: SOHO China (410 HK): In For a Penny .... )

At the time of my insight, I had the discount to NAV at ~23%, compared to the 12-month average of 17%. The implied stub of (HK$1.20/share) compares to the (HK$1.05/share) average since PCCW reduced its take in HKT back in February 2017. The simple ratio (PCCW/HKT) of 0.4x compares to the 0.42x average since the February 2017 reduction.

• PCCW Solutions operates 9 data center locations in Hong Kong, China, and Malaysia. The portfolio comprises ~75+ megawatts of power capacity, across 1.3mn sqft of GFA. This portfolio of data centers made a net profit of US$2.6mn in FY20, up from US$0.02mn in FY19. Net assets are ~US$258.3mn, therefore DigitalBridge is paying 288x trailing earnings, and 2.9x book. PCCW appears to have paid 1.9x P/B for the Malaysian ops last year.
• I think one of two events will ultimately transpire from hereon - either HKT is taken over - not by PCCW - but by a PRC telecommunication company such as China United Network A (600050 CH), which already holds 18.5% - HK media assets have gradually been snapped up by PRC buyers; or Richard Li attempts another privatisation of PCCW.
• That's not to say Richard wants to continue in his dad's footsteps by holding or acquiring telco assets. I think he wants the cash from the sale of PCCW's stake in HKT. Following the sale of the data centers, PCCW would be net cash, or thereabouts, at the parent level. Richard has been in the news lately concerning Southeast Asian online realty company PropertyGuru agreeing to go public through a merger with a blank-check firm backed by Richard and Peter Thiel. But Richard's passion in recent years appears to evolve around insurance, especially the soon (expected)-to-be listed FWD.
• I would be inclined to be invested where Richard is - and therefore be Long PCCW, short HKT here. I expect the NAV discount to narrow towards its one-year average.

Passive holdings in Japan are approximately equal to 30-34% of the "float" as calculated by index providers such as MSCI, FTSE, and the TSE float calculations (which are generally smaller than MSCI and FTSE) PLUS 28-31,000 baskets worth of Nikkei 225 holdings. Longer-term, this fluctuates in the range of 26-30 million shares. This really matters with names with low share count. But among TOPIX 1000 names which are members, it is a weighted average of just over 4%.

• That puts Fanuc Corp (6954 JP) and Tokyo Electron Ltd (8035 JP) in the 38-45% range of float, if not a little higher. TDK Corp (6762 JP), Cyberagent Inc (4751 JP), Nissan Chemical Industries (4021 JP), and Kikkoman Corp (2801 JP) are in the 42-50+% range. Konami Holdings Corp (9766 JP) and Hitachi Construction Machinery (6305 JP) are close to or above 50%. Fast Retailing Co Ltd (9983 JP) is likely well above 70%.
• Last year Travis said "The BOJ may change its ETF allocations." It did. It stopped buying Nikkei 225 and JPX Nikkei 400 ETFs.
• As the world moves more and more to passive, expect float to decrease. As companies continue buying back stock, pay attention as to whether it is being repurchased from the market or from designated non-float sellers.
• Changes to the TSE Market Structure may introduce significant changes to index constituency impact on smallcap shares within the TSE First Section. It will likely not mean much at all for large cap shares. Many companies are looking at optimising their shareholding structure to make it possible for them to be TSE Prime members.
• In many cases, there are efforts to reduce cross-holdings because of increased emphasis on that factor exercised by the revised Corporate Governance Code and by new voting policies implemented this year by Glass Lewis and ISS which will recommend votes against directors where more than 10% or 20% of equity value is locked up in cross-holdings.

(link to Travis' insight: JAPAN PASSIVE: Who Owns What 2021?)

Full Circulation Of H-Shares: July 2021 Update was latest update in a series dating back to Legend's Conversion of Domestic Shares in June 2018.

• To date, 28 companies have sought approval to convert their domestic shares and/or unlisted foreign shares into H shares, which would then be eligible to be listed and traded on Hong Kong's stock exchange.
• 16 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Five of those have seen various degrees of movement in the converted shares.
• Sichuan Languang Justbon Service Group (2606 HK) received approval late last year but did not convert - and was subsequently subject to an Offer.
• To date, two companies have withdrawn their application to convert their domestic shares. Both of these companies - Beijing Capital Land Ltd H (2868 HK) and Zhejiang Cangnan Instrument (1743 HK) have now been subject to Offers.

Roland Corp (7944 JP) Has been shifting production away from China and Japan to concentrate most of the production activities to the Malaysian plant established in 2014 as a part of the business turnaround process that followed a vicious downward spiral in the post-global financial crisis environment. While demand for musical instruments soars across the world, COVID-19 lockdowns in Malaysia continues to affect Roland’s production capabilities. In Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages, Oshadhi Kumarasiri believes Roland may fail to meet demand amidst disruptions to the main production facility in Malaysia while Yamaha Corp (7951 JP) seems to be well placed to outperform the market through capturing Roland’s lost demand.