Last Week in Event SPACE: Vedanta, Cardinal Res., Japan Retail Fund, HSBC, Opticomm, Tiffany/LVMH

Last Week in Event SPACE ...

• This Vedanta Ltd (VEDL IN) event is big and interesting and should still hold more value for investors, but it is not without risk.
• The knockouts continue as Shandong Gold Mining Co., Ltd. (1787 HK) and Nordgold tussle for Cardinal Resources (CDV AU)'s Ghanaian gold mine.
• Bigger is almost always better in REIT-land as Japan Retail Fund Investment (8953 JP) and Mcubs Midcity Investment Cor (3227 JP) enter into an absorption-type Merger.
• Shareholders are the big loser as the US, UK, and China turn HSBC Holdings (5 HK) into a political football.
• First State Super's last-minute, unprecedented non-binding, unsolicited Offer for OptiComm Ltd (OPC AU) looks a done deal.
• Tiffany & Co (TIF US) files a lawsuit to enforce a merger agreement. Lvmh Moet Hennessy Louis Vuitton (MC FP) said it would counter with its own lawsuit over Tiffany's mismanagement. Now the lawyers will duke it out - but Tiffany holds a stronger hand.
• Plus, other events, CCASS movements, and Mood Spins.

Vedanta Ltd (VEDL IN) (Mkt Cap: $6.6bn; Liquidity: $31mn)

VEDR theoretically has until the third week of September to file with the Exchange in order to complete but that is playing it as unsafe as possible. Travis would not be surprised to see an Approval In-Principle this week or next. Then the timeline is fixed, and VERY short. There is US$3.15bn of funding taken down. US$1.75bn of that is very short-term. Another US$0.6-1.1bn should probably be taken down near-term in terms of a letter of credit against the syndicated loan VEDL has taken down this past week. If VEDR wants, it could relatively easily pay INR 200/share.

• There is a non-negligible possibility that Vedanta does not attract 90% of the shares (i.e. 80% of the minorities). There are a very large number of very small shareholders who together hold about 6.95% of shares out. They may abstain. There was 4.37% of shares out held in the American Depositary Receipts. They cannot participate. The rest is institutional shareholders who likely will participate. If retail participates to half, this just gets to 90%, but the price may be "too high".
• If VEDL proposes too low a price, this won't get done. Investors can see the value. The Value Per VEDL share of the Hindustan Zinc holding is - as of Friday 4 Sep - INR 164 per Vedanta share. That gets you the rest of Vedanta for free. The rest of Vedanta produces more EBITDA than Hindustan Zinc does and has a book value of roughly INR 89/share (wholly coincidental to the "Book Value" proposed last week).
• VEDL is worth more than people think it is. If VEDR buys Hindustan Zinc from VEDL minorities at a 20% discount to market price despite zinc trading near 52-week highs and HZL cash costs trading lower than ever, and silver at 6-8yr highs, that means the rest of VEDL is currently trading for ZERO. The trade is still to be long. If you want to play it super safe, buy the ADS and convert to onshore shares. As we trade higher, it makes more sense to have something of a sector hedge on, but it doesn't make tremendous sense. This is quite binary. The deal gets done and you get taken out - most likely at a higher price. OR... It doesn't get done, the price probably falls, and VEDL will still be cheap to peers. If the deal fails, THEN you put on your sector hedge.

(link to Travis Lundy's insight: Vedanta: Reaching The End Game)

Hinokiya Holdings (1413 JP)(Mkt Cap: $0.2bn; Liquidity: $1mn)

Yamada Denki (9831 JP), Japan's largest electronics retailer, well-known for running large and shiny stores with more aisle space than the more aggressive electronics retailers like Bic and Yodobashi in urban areas, has agreed to buy 45.6-50.1% of Tokyo-based custom homebuilder Hinokiya from the founder and his relatives in a Partial Tender Offer at ¥2,000/share which is ~12% premium to last. The price comes out to 4.5x EBITDA, 10x PER, and 1.3x book. It isn't very impressive as a price

• This deal appears odd, but it is less odd than you'd think. When houses get built, they get furnished with new TVs, kitchen equipment, furniture, etc. Yamada Denki sells a lot of that. And if you wanted to build your new house with all the modcons and wired to the rafters with ethernet, wifi, etc., you might want to have a house built in collaboration with someone who knew how to execute on a wired home. It isn't necessary for a home builder to tie up with an electronics retailer, but I've seen worse ideas.
• For long onlies, if you like the stock, it will suddenly get a LOT more liquid (relatively speaking) around the Tender Offer price. That would be a time to buy more shares if you liked the company and were looking for liquidity. For arbs, a priori Travis expects the trade is to buy shares at a few percent discount and tender them. If you can borrow shares, you can play the ex-date fall as well, but now that it is only two days, there isn't much room to play that. There is every possibility that this trades illiquidly.

(link to Travis Lundy's insights: Yamada Denki Partial TOB For Hinokiya (1413 JP) & Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation)

(link to my insight: StubWorld: Walking The Fine Line With HSBC)

Intouch Holdings PCL (INTUCH-R TB) / Advanced Info Service PCL (ADVANC TB)

Athaporn Arayasantiparb looks into Intouch Holdings (INTUCH TB), ex-Advanced Info Service (ADVANC TB). After all, Intouch owns Invent, the largest venture capital firm in Thailand. Reality Check XXVI: How Much Are the Other Intuch VC Investments Worth?

Medpeer Inc (6095 JP)(Mkt Cap: $0.9bn; Liquidity: $36mn)

• On both LTM and NTM bases, Medpeer's EV/Revenue, EV/EBITDA, and PER multiples are much higher than the estimated means and medians for a selected group of peers which included other companies operating similar knowledge-sharing platforms. More importantly, in its full-year presentation in December 2019, the company set a target to reach a market capitalization of over JPY50bn in FY09/20. At present, the company's market cap is ¥96bn - almost double. This seems like a good reason to be cautious.
• Pure "TOPIX-Inclusion" Trade - AVOID: This seems like very low-impact event and although this event might have not been highly anticipated (due to long listed history and a lack of pre-event signals such as equity offerings) Janaghan feels the stock has overheated in recent months.
• Long-term Fundamental Angle - Bullish on prospects: Although Janaghan is not particularly excited by the TOPIX Inclusion event, he feels the business model is quite interesting. In the long term, stocks with comparatively larger market cap and better liquidity (than typical TSE1 promotion candidates) like MedPeer are also more likely to attract more analyst coverage and/or investor attention. At Forward EV/EBITDA of 50+x, this is "cheap" compared to its largest competitor M3 Inc (2413 JP) which trades at 80x. This is a covid-19 residual effect and it is not clear that is anywhere near the right price, HOWEVER, stocks like these can go from super-expensive to even more expensive on sentiment.

(link to Janaghan's insight: TOPIX Inclusion (6095 JP): MedPeer Inc)

• Travis expects the public comment to come up with little new or of note.
• He expects the only major change would be to clarify that Continuing Listing Requirements might be different from Initial Listing Requirements. It would not make much sense to exempt large companies from getting demoted immediately if they have negative equity in one year. That usually requires a "special loss" of some magnitude. Getting back that loss so that one meets the two-year requirement of JPY 2.5bn in profit over two years seems like a tall order, unless there is a grace period. Even with a grace period, it seems odd to allow grace periods which are then broken, then another grace period is applied, then met, then broken again...
• Unaddressed in this is the TSE's ability to create derivatives on the TSE STANDARD section which will be important. Access to the style bias itself would be highly valuable, and the ability to create borrow baskets would be quite important.
• Longer-term the really big change will be the availability of borrow in what are currently the bottom 1000 or so names in TOPIX.

(link to Travis' insight: The TSE's Listing Criteria Revisions - Part I)

In Japanese Household Goods Pair Trade: Let The Lion Pounce As The Pigeon Lands, Oshadhi Kumarasiri concludes that all things considered, with a target Pigeon Corp (7956 JP)/ Lion Corp (4912 JP) price ratio of 1.7x, a Long Short pair trade between Lion and Pigeon could yield about 30% in market-neutral returns.

• 58.Com Inc Adr (WUBA US)'s shareholders approved the Merger - done deal.
• Lakeville Capital Management Ltd. has given a letter of intent to support the Huadian Fuxin Energy Corp (816 HK) Merger. Lakeville holds 96.089mn shares or 3.74% of the total issued H shares. The H-Share Class meeting will be held on the 16 Sept.

• The SFC has granted consent to an extension of the time limit for despatching the Scheme Document for Leyou Technologies (1089 HK) from 17 September 2020 to 9 November 2020. A delay was anticipated - but this is about two weeks past my expected despatch date. The delay is expected to push the despatch of cheques to mid-late December.

• In its monthly update, Baoye Group Co Ltd H (2355 HK) said the "controlling shareholder of the Company is still considering the Potential Transaction and no definitive agreement or letter of intent has been entered into".

• The result of the Colowide Co Ltd (7616 JP) Tender Offer for OOTOYA Holdings (2705 JP) is that Colowide purchased all 2,000,371 shares which were tendered, and now owns 46.77% of shares out. Pro-Ration was 100%.

• The AFR reported that UAC Energy had sold their 19.9% stake in Infigen Energy (IFN AU) into Iberdrola SA (IBE SM)'s revised bid. Iberdrola now have 97%. This is completely done.
• Inner Mongolia Energy Engineering (1649 HK) in talks concerning possible privatization.

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.