Last Week in Event SPACE: UNIZO, TPV, Sotsu, SK Group, Stars Group, Ayala, Amorepacific

Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

Ayala's 12% decline (at the time of the insight) since late August compared to ALI's 6% gain has resulted in the discount to NAV widening to ~16% against a one-year average of 9%, having bounced off its 12-month low at the beginning of the week. San Miguel (SMC PM) is a comparable conglomerate to Ayala and over the past seven years has exhibited a strong correlation, in terms of share price movement to Ayala. Ayala has recently bifurcated from SMC.

• Arguably there has been some weakness in Ayala's stub ops in the 1H19 - the key segments recorded reduced earnings (AC Energy segment) or losses (AC Industrial). However, this soft catalyst has pushed the NAV discount wider than the hard catalyst surrounding the Mitsubishi Corp (8058 JP) (possible sell-down, now resolved) overhang. The difference in the actual stub and the implied stub was ₱23bn more than what it was when I wrote about this holdco (StubWorld: Ai Ya! - Ayala Corp Tanking On Possible "Portfolio Rebalancing") back in April this year, around the time of Mitsubishi lock-up expiry.
• That Mitsubishi overhang was concurrent with Standard Life reducing its position by about 7.4mn shares (down to 3.4mn currently) in the 1H19. My inquiries indicate there is another seller in the market recently, in decent size, in terms of traded volume.
• I recommended getting involved at the time of the insight. Levels were extreme. If this has been exacerbated by a shareholder exiting, expect the discount to potentially reverse (narrow) once that selling pressure eases.

(link to my insight StubWorld: Ayala Re-Tests New Lows)

Amorepacific Group (002790 KS) / Amorepacific Corp (090430 KS)

A trifecta of insights addressing Group's ₩200 pref issuance and Corp buyback. Group announced it plans to purchase 1.33mn shares of Corp, worth ₩200bn, or about 2.3% of Corp's common shares outstanding. Group plans to conduct a rights offering to raise funds for this purchase. Group also plans to invest in the Osulloc tea brand business, which has been one of the Amorepacific affiliates. This share buyback is around 4 days of trading volume and should not impact the stock much - also, it's not going to happen for another couple of months, at the earliest.

• For this rights offering, Group will issue 7.09mn convertible preferred shares. The date of new shares allocation will be on November 11th (allocation ratio will be 0.0686641685 new shares for one existing share). There are no voting rights with these shares and the estimated dividend yields are 2.5% (2019) and 2.25% (2020). The subscription dates will be from December 5th to 6th. The new shares listing date will be on December 26th.
• The Group discount relative to Corp (price ratio) was currently at a 120D high. Sanghyun recommended a short Group and long Corp. Brian Freitas, at the time of his report, with the ordinary shares outperforming the preferred shares, recommended buying the preferred shares while selling (shorting) the ordinary shares. I see the discount to NAV back to ~22%, down from its 12-month high of 11% prior to this rights/buyback announcement.
• Douglas believes that one of the reasons why Group is issuing convertible preferred shares is because this could be one of the methods that Chairman Seo Kyung-Bae may use to increase the ownership of Group to his children. Chairman Seo has two daughters including Seo Min-Jung (age 26) and Seo Ho-Jung (age 22). Seo Min-Jung started working at Corp in 2017 and is being groomed to eventually take on key senior management positions.

links to:
Sanghyun's insight: Amorepacific Stub: Interesting Situation Amid Pref Issuance.
Douglas' insight: Amorepacific Group Plans to Buy 200 Billion Worth of Amorepacific Corp & The Long-Short Trade
Brian's insight: Amorepacific Corp - Buy the Prefs at a Big Discount to Ordinaries

Japan Market (lots of liquidity)

The TSE announced its Free Float Weight changes for companies listed on the TSE which have a fiscal year ending in the first calendar quarter. This leads to changes in sub-indices (i.e. moves from TPX500 to TPXSmall and vice versa). The changes, as announced, suggest $20bn of flows, with 32 different names to trade over US$100mn, and 40 names to trade over 10 days' worth of 3-month ADV. These changes take place at the close of 30 October.

• Travis' predicted Z Holdings (4689 JP) would be raised to 0.50 float weight coefficient. The number turns out to be 0.45. He cannot see how it got there, but the TSE calls the shots. Z Holdings is the second largest net buy behind NTT Docomo Inc (9437 JP). Nintendo Co Ltd (7974 JP), Hitachi Ltd (6501 JP), and Smc Corp (6273 JP) round out the top five.
• Among large selldowns, Keyence Corp (6861 JP) and Softbank Group (9984 JP) are the two largest followed by Sony Corp (6758 JP), Sony Corp (6758 JP), and KDDI Corp (9433 JP).
• The list of ADV impact is full of small companies on both the buy side and the sell side, with no names with more than $8mm to sell or buy within the top 25 impact trades on either side.
• The spreadsheet of all impacts (active weight changes and passive results (Toyota is a $200mm+ trade despite no change, simply because of what other changes are wrought).

(link to Travis' insight: 2019 TOPIX FFW Rebalance)

Hang Seng Indexes

The Hang Seng Indexes Company Limited will announce the results of the 2019 Q3 review of the Hang Seng Family of Indexes on 8 November. The constituent changes will be effective from 9 December and the rebalancing trades will need to be done at the closing auction on 6 December.

• Brian looked at the Hang Seng Index and Hang Seng China Enterprises Index methodologies, the historical performance of inclusions vs exclusions, and at potential candidates for inclusion/exclusion in this review and some of the details around the names.
• For the HSI, based on market value and turnover rank, he sees Meituan Dianping (3690 HK) and Sunac China Holdings (1918 HK) as having the best chance of inclusion, while Sino Land Co (83 HK) and Want Want China Holdings Ltd (151 HK) could be excluded.
• For the HSCEI, the shift from H-shares to Red-chips and P-chips continues. He expects China Resources Gas (1193 HK) to be included in the HSCEI, while we see China National Building Material (3323 HK) as a potential exclusion. He also sees China Railway Group Ltd H (390 HK) as a very close delete candidate, in which case we expect China Conch Venture Holdings (586 HK) to be a possible inclusion.

link to Brian's insights:
HSCEI Rebalance Preview - December 2019
Hang Seng Index Rebalance Preview - December 2019

Stars Group Inc (TSGI CN) (Mkt Cap: $5.7bn; Liquidity: $12mn)

Irish betting company, Flutter Entertainment (PPB LN) announced they had reached an agreement to merge with Canadian online gambling company, Stars Group, in an all-share deal to form one of the largest online betting groups in the world with a combined revenue of approximately £3.8bn. The acquirer is offering 0.2253 New Flutter Shares in exchange for each TSG Share which translates to a premium of 38.7% over the pre-announcement closing price. Following the completion of the deal, Flutter shareholders and TSG shareholders will own 54.64% and 45.36% of the combined entity respectively.

• The deal is conditional on receipt of Flutter and TSG shareholder approvals and relevant merger control and foreign investment approvals being obtained, including in the UK, Ireland, Australia, the US and Canada. This is a relatively long-dated deal. The transaction is expected to be completed between 2Q and 3Q of 2020.
• It looks like an OK deal for Stars Group shareholders in that they are getting to be part of a larger whole but Stars and Flutter are both large companies to start with, and Stars has been growing revenue more quickly over the past five years. Travis would not be surprised to see some pushback from Stars shareholders, though they are both relatively expensive, and between them, Stars is an extra one-turn-plus higher.

(link to Travis' insight: 2019 TOPIX FFW Rebalance)

Scottish Salmon Co Plc (SSC NO) (Mkt Cap: $600mn; Liquidity: $2mn)

On 25th September, Faroe-Islands based Salmon producer Bakkafrost P/F (BAKKA NO), announced they had signed a binding agreement for the acquisition of a 68.6% stake in Scottish Salmon from the previous owner, Northern Link. This transaction triggered a Mandatory Tender Offer for the remaining 31.4% at the same price, NOK 28.25/share, cash. While the premia of 3.7%, 8.0%, and 22.0% to the 1-month, 3-month, and 6-month VWAPs respectively do not seem highly attractive, it must be remembered that the stock price has increased by more than 5 times since the beginning of 2016 and considering the fading growth prospects, this might be a reasonable exit for long term shareholders of the target.

• Bakkafrost will need to achieve a shareholding of more than 90% to be able to squeeze out the minority shareholders and in order to achieve that level of shareholding they will need an acceptance rate of 68.1% or more of the remaining minorities in this mandatory offer.
• While the offer is not conditional on any minimum acceptance thresholds, the completion of the offer will require merger control clearance from the European Commission. The combination of Bakkafrost and The Scottish Salmon Company is expected to create the 4th largest player in Europe on a pro-forma basis and considering the scale and market shares of the top 3 players, obtaining EC approval for this deal should be fairly straightforward.
• The offer price translates to EV/EBITDA and PER multiples of 12.7x and 16.9x, respectively, both of which are above the estimated medians of 11.3x and 14.9x for a group of peers. Since the announcement of the Offer, the stock has closed between NOK 28.10 and NOK 28.25. Expect the deal to trade very close to terms until completion.

(link to Travis' insight: Bakkafrost Catches The Scottish Salmon Company)

LG Chem Ltd (051910 KS) / LG Chem Ltd (051915 KS)

LG Chem has two classes of stock: ordinary shares - 051910 KS - and the preferred shares - 051951 KS. Currently, the ordinary shares are trading at the cheaper end of the short-term band and are showing signs of bottoming out versus the preferred shares. Brian expects the ordinary shares to outperform the preferred shares in the near term by around 4% absolute.

(link to Brian's insight LG Chem - We Prefer the Ordinaries)

Grifols GFRS US / GFRSM

Grifols Class B shares listed on Nasdaq (GFRS US) are trading at a 33.4% discount to Grifols class A shares (GFR SM), listed in Spain. Jesus Rodriguez Aguilar regards this discount as excessive for and recommends a long GFRS/short GFR. I target a 25% discount. (link to Jesus' insight: Grifols' (GRF) Bleeding Prefs)

Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) / Taiwan Semiconductor Sp Adr (TSM US)

The premium on the TSMC ADR is nearing its highs over the last two years on higher than average volumes. The traded value on the ADR is higher than the local stock and the premium is causing the local stock to gap up at the open over the last few days as arbitrage traders hedge their positions and local investors look to the ADR for cues on direction. Brian was looking at entering a short the ADR position against a long TSMC position in the 6-7% premium range and wait for a reversion back to around 2%.

(link to Brian's insight: TSMC - Chip Away at the ADR Premium)

• The process deed between Winfield Energy and Stanmore Coal (SMR AU) has been extended to the 28 October from the 7 October.
• The HKEX (388 HK) has announced it is walking away from its Offer for the London Stock Exchange (LSE LN).

• Greene King PLC (GNK LN) shareholders overwhelmingly voted for CK Asset Holdings (1113 HK)'s Offer.

• Japan Post Holdings (6178 JP)announced they had completed the purchase of more than 5% of Aflac Inc (AFL US). This relationship is part of the plan, and Japan Post will be "Renting" it to Japan Post Insurance (7181 JP) going forward.

• Middle Island Resources (MDI AU) announced an extension of its offer to the shortfall shares from earlier this summer on AME (Alto Metals).

• Villa World Ltd (VLW AU) shareholders overwhelmingly approved the Scheme. The implementation date is the 30 October.
• Pw Medtech (1358 HK) has delayed the Circular for its privatisation of China Biologic Products (CBPO US) to the 31 October (on or before) from the 11 October.
• GBST Holdings (GBT AU) has declared a fully-franked dividend of A$0.35/share conditional on FNZ's Offer becoming effective. The ex-date is the 22 October.
• Nissan Motor (7201 JP) recently announced its new CEO and on Friday, only days after renewed speculation that Renault CEO Thierry Bolloré was a short-timer, Renault SA (RNO FP) replaced him with interim CEO Clotilde Delbos who had been CFO. Travis comments that given numerous reports of both Chairman Senard's and now-CEO Delbos' somewhat cavalier attitude towards RNO shareholder value given up in a RNO-FCA combination, Renault shareholders must be bullish trucks AND bullish the restructuring in the Italian auto market to want to give up so much intrinsic value to FCA because of "synergies."

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.

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.