Last Week in Event SPACE – Toshiba, JA Solar, Hyundai Merchant, Hochtief, ASE

Last week, the announced capital raising resurrects Toshiba Corp (6502 JP); minorities should exercise a "Shanda" on the JA Solar Holdings Co (JASO US) offer; as Hyundai Merchant Marine (011200 KS)'s rights issue falters, an arb opportunity emerges; and Hochtief AG (HOT GR)'s in the merging lane for Abertis Infraestructuras SA (ABE SM).

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

Events

Toshiba Corp (6502 JP) (Mkt Cap: $11.3bn; Liquidity: $92mn)

In the most read & appreciated piece in the Event SPACE this past week, Travis Lundy examined Toshiba's ¥600bn equity offering, which tilted Travis more positive from his prior bearish stance.

• The offering was no big surprise as Travis previously flagged such an outcome in his July insight The “Einhorn Bet” And What Might Toshiba Be Worth? Theoretically, the raising allows Toshiba room for the Toshiba Memory Corporation sale to fall through.
• Toshiba needs positive equity as at March 2018 to avoid delisting. That ¥750bn equity shortfall can be overcome from this ¥600bn equity raising; and using the cash raised to "fully pay off its Westinghouse claims, which would allow Toshiba to sell the WH claims (rather than realize recovery through the bankruptcy process), and when sold, to enable a ¥240+bn yen tax write-back".
• Retailers may not be wild about the dilution impact; however, placees (including Effissimo [now 11.34%, up from 10%], Farallon, Elliott and King Street), which got a 10% discount, are viewed as long-term backers.
  • Effissimo's stake reveals it obtained an exemption to the Foreign Exchange and Foreign Trade Act which restricts foreign ownership to less than 10% on "sensitive" companies, of which Toshiba is one.

Mio Kato, CFA agreed with Travis Lundy regarding the shift in risk to the upside following Toshiba capital raise. Mio had also tilted negative on Toshiba for some time and continues to believe that the quality of management and governance at the company leaves much to be desired. Nevertheless, the "current profitability of the memory business is excellent and with activist investors getting involved, the potential for the realisation of value in some of Toshiba's other businesses is also tangible".

links to insights:
Travis' - Toshiba Capital Raised!
Mio's - Toshiba: Capital Brightens Outlook Significantly, Opens Possibility of Repairing WDC Relationship

Hyundai Merchant Marine (011200 KS) (Mkt Cap: $956mn; Liquidity: $8mn)

Hyundai Merchant Marine (011200 KS)'s rights offering is problematic with a high likelihood the final offering price will be set at its share face value of ₩5,000, or a total offering amount of ₩600bn, down from the initially targeted ₩693.6bn. Moreover, if HMM's share price fails to rebound to a level substantially or meaningfully higher than ₩5,000 by the subscription day (Dec 6-7 for existing shareholders and Dec 8 for forfeited shares), there will likely be a lot of forfeited shares. And that ₩600bn is before the underwriter’s 15% hit on forfeited shares.

• KDB, which owns (directly/indirectly) a 20.3% stake, is supposed to take ₩126.0 worth of new shares from this rights offering. It can oversubscribe by 20%. But KDB isn't just a mere investment firm. It is a government agency that is inherently sensitive to public and political scrutiny.
• Trading of the subscription rights actually began on Nov 21, and will end on Nov 28. If you agree HMM’s share price will be supported by KDB, at a mid-₩5,000 (say ₩5,500 to ₩6,000), then Sanghyun Park recommends to buy these subscription rights at the current price of ₩17 and take new shares at ₩5,000. This is assuming KDB will do the right thing…

(link to Sanghyun's insight: Rights Offering - Current Status Check & Arbitrage Opportunity Assessment)

Lotte Holdings (004990 KS) (Mkt Cap: $4.3bn; Liquidity: $30mn)

Shin Dong-bin owned a 13.5% stake in Shopping, but he is better off focusing on his controlling stake in Lotte Holdings (004990 KS). This led to Shin Dong-bin selling ₩214.6bil (3.56% stake) worth of Shopping at ₩214,000, a 4.88% discount to the closing price (₩225,000), reducing his stake to 9.89%.

• Shin will use the proceeds to buy Holdings shares (~4.7%) from Lotte affiliates, which currently have Holdings stakes and are subject to the circular shareholding regulations.
• Potential sellers are Lotte I&C, Fuji Film Korea, and Daehong Communications. Sanghyun’s bet is Shin Dong-bin will buy Holdings shares from Fuji Film Korea and Daehong Communications.
• While it seems that several foreign institutions took Shin's stake in Shopping, longer term, Sanghyun prefers to be aligned with Holdings.

(link to Sanghyun's insight: Lotte Group Restructuring Part 12 - Shin Dong-Bin’s Shopping Stake Block Deals)

Briefly, elsewhere, in Events...

Noble Group Ltd (NOBL SP) (Mkt Cap: $166mn; Liquidity: $1.1mn)

The previous Friday, just prior to the close of trade, Fitch cut the company's rating from CCC to CC saying "default of some kind appears probable." Noble was down 12.95% last week; 9.19% on Friday.

• On Thursday, Noble said it was transferring 14.7mn treasury shares to staff. And this week the company is understood to have held talks with creditors as to restructuring its $3.5bn in bonds.

M&A

Abertis Infraestructuras SA (ABE SM) (Mkt Cap: $21.9bn; Liquidity: $132mn)

Roderick Manalo discussed last month’s competing offer from Hochtief of €18.76 per share (cash or scrip), a 14% premium to Atlantia’s.

• Hochtief and ACS weren't able to secure any financial support from external co-investors. So Hochtief is going it alone, issuing relatively overvalued shares to fund the stock portion (19.5% of total consideration) and partially funding the deal by taking on a chunk of debt at low-interest rates (€12.4bn at 2%). The fact that JPMorgan is providing bridge financing would indicate that not only is the bid sound but also can be stretched if Atlantia returns with a counterbid.
• ACS is waiving its pre-emptive subscription rights to 18.4m of these Hochtief shares, reducing its stake below 50.0% from 71.7% - depending on the acceptance level. ACS will then equity account its Hochtief’s stake, protecting its credit rating and opting out of any equity raising itself in the process.
• It may be premature to back Hochtielf in this competitive offer – although ACS' chairman said he has the backing of the Spanish government; the same government which previously had an issue with Atlantia's 2006 tilt for Abertis, specifically the motorway concessions in Spain falling into foreign hands.
• And Roderick calculates that the accretion to Hochtief is over 100%, realised immediately. This should lead to significant upside in Hochtief shares if it is successful in its bid for Abertis.

(link to Roderick's insight: Abertis / Atlantia: Strategies Behind the Hochtief & ACS Counterbid)

JA Solar Holdings Co., Ltd. (ADS) (JASO US; "JASO") (Mkt Cap: $350mn; Liquidity: $5mn)

Last week JA Solar Holdings Co., Ltd. (ADS) (JASO US; "JASO") entered into a definitive agreement with its major shareholder, with a view to delist the company at US$7.55/ADS.

• The offer price is underwhelming and compares to the original non-binding proposal in 2015 of US$9.69/ADS. An offer around US$9/ADS appears more reasonable.
• Pranav Rao argues minorities should take a leaf out of the Shanda buyout book wherein Maso disputed the 2015 offer, leading to the Cayman Islands court awarding Maso 2.35x the price paid.

(link to Pranav's insight: JA Solar: Get Up, Stand Up, Stand Up for Your Rights)

Sun Art Retail Group Ltd (6808 HK; "Sun Art") (Mkt Cap: $10bn; Liquidity: $12mn)

Pranav addressed the potential acquisition by way of an SPA of a ~36% stake in Sun Art Retail Group Ltd (6808 HK; "Sun Art") by Taobao China Holding ("Taobao"), an indirect subsidiary of Alibaba Group Holding Ltd (BABA US). The sellers are Sun Art’s substantial shareholders Concord Greater China Ltd and Chung Yao Yin. A successful SPA would require an unconditional MGO at HK$6.50 (~6.2x EBITDA), a takeunder vs. the then share price of $8.60 against the closing price on Friday of $8.24.

• The mechanics of the SPA are thorny, but Pranav’s digging into SPA suggests Auchan (the ultimate controlling share) has better terms than Alibaba.
• Morningstar believes this deal further strengthens Alibaba founder Jack Ma’s vision of a new retail concept, integrating online and offline retailers, as offline retailers struggle traversing into the online world. Morningstar expects Sun Art's e-commerce segment's losses to narrow in 2018, which speaks to the power of Alibaba’s network effect, where the value of its e-commerce platform to consumers increases with more sellers, and vice versa. "This has led to a virtuous cycle that is difficult for other e-commerce players to replicate".
• Alibaba Group Holding Ltd (BABA US) or Auchan are expected to privatize Sun Art in the medium-term, which the former did with Intime Retail Group Co Ltd (1833 HK). An indicative offer price, premised on precedents, suggest an offer price of 8.6-8.8x EBITDA or ~$9/share.
• Morningstar maintains a fair value estimate of HK$7.80 per share for Sun Art, given limited details on the future cooperation.

link to insights:
Pranav's - Sun Art: Alibaba Joins The Register
Morningstar's - Alibaba Strengthening Its New Retail Strategy With Sun Art Through a 36% Stake in the Latter

Lotte Confectionery Co., Ltd. (280360 KS(Mkt Cap: $593mn; Liquidity: $6.1mn)

Lotte Confectionery Co., Ltd. (280360 KS) announced on Thursday it will acquire a 100% stake in Havmor, a leading Indian ice cream maker, for ₩164.5bn (US$150 million). The Havmor acquisition is based on about 1.6x sales, which optically looks okay. The profitability and balance sheet number for Havmor were not made public – however, there will be synergies between Havmor and Lotte Confectionery's core business.

• Overall, Douglas Kim believes the market will view the acquisition positively since it is acquiring a well-known ice cream maker in India with excellent brands at a relatively reasonable valuation.

(link to Douglas' insight: Lotte Confectionery Acquires Havmor Ice Cream in India)

Advanced Semiconductor Engr (2311 TT) (Mkt Cap: $11.2bn; Liquidity: $20.8mn)

Just over a week after ASEand Siliconware Precision Inds (2325 TT) received antitrust clearances from the Taiwan Fair Trade Commission, China's MOFCOM conditionally approved the ASE/SPIL merger case on 24 Nov 2017. ASE will now convene an extraordinary general meeting in Feb 2018 and will set up the ASE Industrial Holding Co (ASEC) by the end of May 2018 if no further delay from the review progress of relevant authorities.

• Despite the four conditions attached to the conditional approval, Andrew Lu is positive on the merger approval from MOFCOM.
• As ASE and SPIL are required to run independently in management, financial, personnel, pricing, sales, capacity expansion, and procurement, Andrew sees no synergy effect for two years. But on the positive side, ASEC is "allowed to coordinate research related projects and consolidate research capacity for both ASE and SPIL, implying no duplicated R&D effort on advanced packaging technologies".

(link to Andrew's insight: China MOFCOM Says Yes to ASE and SPIL Merger; Four Takeaways)

Briefly, elsewhere in M&A....

Hitachi Kokusai Electric Inc (6756 JP) (Mkt Cap: $3.1bn; Liquidity: $14.4mn)

• KKR has raised the tender price for Hitachi Kokusai to ¥3,132 and extended the offer to Dec. 8th. Travis commented in the discussion section of the last insight that KKR should have walked and is not sure ¥3,132 gets them what they want unless the US names (and therefore Japan comps) tank into year-end.

Stubs

Sina Corp (Class A) (SINA US) / Weibo Corp (ADR) (WB US)

Despite its seeming contempt to the idea of defending even a modicum of corporate governance, SINA is cheap, either outright or as an inexpensive “in” to Weibo.

• The earnings for the portal stub ops have increased due to improving cost control. Excluding these ops, SINA has US$1.3bn at the parent level as at 30 Sept 2017, with an additional US$1.2bn in long-term investments.
• The in-specie distribution of Weibo share earlier this year unlocks value in SINA, (should) narrows the discount, and elevates the public float. Expect more distributions.
• Would Alibaba step up? It is Weibo’s biggest customer and the 15.6% position (of total voting power) is neither here nor there.

(link to my insight: StubWorld - Set-Up & Unwind Extremes: Sina Corp, JCNC)

Jardine Cycle & Carriage Ltd (JCNC SP)/ Astra International Tbk Pt (ASII IJ)

Raghav Kapoor addressed JCNC's discount to NAV of ~23%, at extreme levels, more so after Asta's strong performance mid-week.

• JCNC recently bumped its stake in Vietnam Dairy Products Jsc (VNM VN) to 10%, from 5.5% previously. There is a 49% max for foreigners on many Vietnamese companies/sectors, but VNM is not one of them. This neither-here-nor-there stake is an outlier for JCNC and increasing its position in the dairy company is likely. This investment represents yet another good example of the Jardine Group buying into a leading ASEAN franchise, as well as broadens out the medium-to-long-term growth and opportunity set for the company.
• Raj believes buying into JCNC at current levels represents an attractive entry into a diversified cross-ASEAN play, with a stable of strong brands and growth leaders.

(link to Raj's insight: JCNC: Truth Serum. Misplaced Thesis, or Rare Opportunity)

Very briefly on Stubs...

Wheelock & Co Ltd (20 HK) / Wharf Holdings Ltd (4 HK) / Wharf Real Estate Investment (1997 HK)

WREIC commenced trading, with an opening print of $54.50, bang in line with my estimate…then promptly declined 8% and stayed there. That’s 0.75x P/B. Slightly outside my 0.8x expectation - although the Lex column (pay-walled) suggests its better to own the tenants as opposed to the landlords. Wheelock’s NAV now looks like the following:

• This would indicate Wheelock's NAV discount is trading around its average, but this is not entirely representative as I've normalised WREIC's share price historically. The in-specie of WREIC is likely the first salvo in the restructuring of the Wheelock group. Wharf is massively cash-rich (net debt of $15bn as at 30 June [page 9&10], including $63bn of cash) - a special dividend? Followed by a stake reduction or outright sale? All benefiting Wheelock. A 26% discount does not look overly demanding here. And the look through P/B of 0.50x is inexpensive.

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

PCCW's 3.9% gain for the week vs. 1.36% for HKT, continued its outperformance since a low in September. I have the NAV at 28.7%, slightly above the 12-month average of 31.4%, with a one-year range of 26%-34%. I don't see any specific news driving this turnaround.