Last Week in Event SPACE: ZOZO, New World Dev, Osram, Holcim/San Miguel, Bharat ETF, Doosan

Last Week in Event SPACE ...

• The combination of profitability and pro-ration grids, and your access to more granular trading strategies, will determine where you see the bounds of the opportunity in ZOZO Inc (3092 JP)'s partial tender. Unless you are quite bullish or quite bearish the back end, the bounds are not as wide as you think.
• New World Development (17 HK)'s land "donation" doesn't quite live up to media hype.
• OSRAM Licht AG (OSR GR)'s Supervisory Board, Managing Board, and worker representatives on the Supervisory Board and Worker Council would welcome Bain & Advent coming over the top of ams AG (AMS SW)'s Offer. But then ams did something very sneaky.
• Contrary to the reading of a media report and the headline of an article of an event-driven competitor, the Philippine Competition Commission has not approved the San Miguel (SMC PM) / Holcim Philippines (HLCM PM) merger.
• The Government of India is likely to sell stakes in ITC Ltd (ITC IN) and Axis Bank Ltd (AXSB IN) after floating the next tranche of BHARAT 22 ETF (ICICIB22 IN) in the first week of October.
• Doosan Corp (000150 KS) rolled over mid-week ahead of its suspension this past Thursday and subsequent demerger. Post-merger, the newly-listed fuel cell company will be a key investor focus.
• Plus, other events, CCASS movements (including IPO lockups) and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)

ZOZO Inc (3092 JP) (Mkt Cap: $7.1bn; Liquidity: $184mn)

Based on Travis Lundy's observation of intra-day trading and his understanding of where the borrow market is, it appeared to him the market is pricing a mid-60% pro-ration. That is OK but it is not a lot of room for error. That tells Travis there is some back end bullishness. If you are not bullish the back-end vs where it was trading before, Thursday's price from the week before was trading a bit rich for arb.

• Understanding your estimated pro-ration and where you think your risk of pro-ration mis-estimation is bounded will tell you where you can "afford" to trade. At current levels, one has to have a quite good confidence in one's pro-ration estimate and/or solidity and costing of borrow.
• Below ¥2,450 is a pretty good place to buy if you can get Guaranteed Non-Tender Borrow at a reasonable price. Above ¥2,500 post- ex-date starts to get expensive (though the time til settlement starts to drop which means you need less gross return) and another percent higher and you need to be bullish the back end.
• Beware the dividend - the stock has now gone ex (as at the close of Thursday), which means you have to re-set your levels.

link to Travis' insights:
Yahoo Japan Partial Tender for ZOZO 2: Trade Profitability/Return/Residual Risk
ZOZO Partial Tender: Ex-Div Arb Grids

New World Development (17 HK) (Mkt Cap: $13.3bn; Liquidity: $30mn)

It was reported that NWD will donate 3mn sqft of land - ~16% of its farmland - to society. There was no mention of this donation in NWD's annual results the day before the announcement. With a value of $3.37bn under the Lands Department compensation rate - assuming that is what might transpire - there is no obligation under Chapter 14 of the Listing Rules to make such a HKEx announcement.

• Reading between the lines, three plots totaling 28,000 sqft near Tin Shui Wan MTR would be given to Light Be, a local social housing and tenant development, to build Light Village, a social housing project. This would encompass 100 units @300 sqft, to be completed by 2022. The location of the three million sqft to be given away for social housing, was not disclosed, although the majority of NWD's farmland is in Yuen Long.
• The decision to donate was apparently not influenced by calls for the government to use the Land Resumption Ordinance, nor increasing Mainland media rhetoric that Hong Kong developers are to be blamed for creating a housing shortage and runaway property prices, fueling the city's ongoing unrest.
• Arguably, there is no shortage of land for housing in Hong Kong - property developers are sitting on 130mn sqft of farmland - simply a failure of government policy. Still, 100 units is symbolic. Expect further "donations" or concessions from other major developers.

(link to my insight: New Worlds' Land "Donation")

BHARAT 22 ETF (ICICIB22 IN) (Mkt Cap: $1bn; Liquidity: $12mn)

Reportedly the Government of India is likely to sell the SUUTI (Specified Undertaking of the Unit Trust of India) 7.96% stake in ITC Ltd (ITC IN) (worth ~US$3.4bn) and 5.36% Axis Bank Ltd (AXSB IN) (US$1.4bn) in two tranches to meet its disinvestment targets for the year. The Government had projected a divestment target for the fiscal year of ~US$14.78 bn) but will need to increase that with the corporate tax cuts (estimated lost tax revenue of around US$20.5 bn) and the shortfall of GST collection (around US$5.6 bn).

• The next tranche of Bharat ETF is expected to be floated in the first week of October. Brian Freitas expects the issue to take in ~US$1.4 bn and offer a discount of around 4-5%. The government will sell stakes in all companies except Engineers India (ENGR IN), Rural Electrification (RECL IN), National Aluminium (NACL IN), Indian Oil Corp (IOCL IN), Gail India Ltd (GAIL IN) and Larsen & Toubro (LT IN). This will reduce the announced discount by around 1.57%. There could be partial stake sales in some of these names depending on the size of the tranche and whether the Government of India is comfortable with taking their stake down to 52% or 51.5% affecting the announced discount.
• After the sale of the ETF tranche, the Government will most likely launch the stake sale in ITC and Axis Bank. The first tranche could go through before the end of the year and the second tranche before the end of the fiscal year in March, depending on market sentiment and appetite for the issues.

• ITC and Axis Bank were lower on the news of the stake sale. With such large blocks being sold, it will increase the liquidity in the stock but there will be an overhang for a while. However, the weight of both stocks should increase in the global MSCI and FTSE indices since this will result in an increased free float. In the case of ITC, there is also concern around British American Tobacco's holding of 29.53% in the company and whether this could lead to a hostile takeover.

(link to Brian Freitas's insight: Bharat 22 ETF - Update on Government Disinvestment & Impact)

Leyou Technologies (1089 HK) (Mkt Cap: $1bn; Liquidity: $1mn)

Recently Sohu.com Inc (SOHU US) tabled an Offer (as discussed in Cashed-Up Sohu To Freeze Out Changyou's Minorities) to buy out the minority shareholders in Changyou.Com Ltd (Ads) (CYOU US), an online game operator in China's leading developer and operator of online games in China remains preliminary and non-binding. In the same space, Leyou has announced it is in preliminary discussions with various independent potential investors in connection with either a possible share disposal from its major shareholder holding 52.37% or a possible acquisition of a substantial part of the business. The share disposal, should it materialise, may lead to a takeover transaction under the Takeovers Code. The asset disposal may constitute a very substantial disposal for Leyou.

• Earlier this year Leyou attempted to sell 31% of its key online gaming subsidiary, Digital Extreme, to Meitu Inc (1357 HK), which backed out a fair of $2.73/share for Leyou, excluding its remaining businesses. The indicative PER multiple of 14.9x trailing for Digital Extreme did not look demanding. Meitu shareholders thought otherwise.
• The most recent share placement was done at $2.25/share in May. There appears clear, or renewed interest, in this industry. Shi Yuzhu, one of China's richest people, currently holds 17% in Leyou.
• Shares are up ~15% to $2.60/share since late last week, on decent volume, as news appeared to have leaked ahead of the announcement. I believe the downside is limited here, so would look to enter if there is any decent pull-back. This is a pre-event. There is no guarantee a firm Offer will emerge, and even if one does, there is no guarantee it will be pitched at a material premium. It may be the Offeror's intention to maintain Leyou's listing.

(link to my insight: Leyou The Latest "You" To Be Targeted)

Holcim Philippines (HLCM PM) (Mkt Cap: $1.8bn; Liquidity: $0.5mn)

San Miguel (SMC PM) has published a notice to the minority shareholders of its intention to conduct a tender offer, subject to the approval by the Philippine Competition Commission (PCC) of the proposed acquisition. The biggest hurdle for the transaction pivots off competition concerns. The PCC launched a Phase II review earlier this month, which could potentially run for a 60-calendar day period - compared to 30 days under Phase I - to inquire whether there will be any substantial lessening of competition from the merger.

• The 24th September was the deadline for "stakeholders such as cement manufacturers, importers, exporters, distributors, contractors, dealers, hardware owners, retailers, truckers, terminal and warehouse owners, consumers, and other interested individuals" to submit their thoughts and comments to the PCC on SMC's proposed acquisition.
• Despite some misleading reporting on this SMC notice, SMC is simply putting in place the necessary paperwork, in accordance with the Code, to initiate a mandatory tender offer should the PCC approve the merger.

• As discussed before, if this transaction was not taking place in the Philippines and not involving the Ang family, then anti-trust approval would (in my opinion) be unlikely. For investors who disagree with my opinion this is likely a done deal, and view PCC approval as a major risk, the share price has already had a great run since January. It would not be a bad sell here.

(link to my insight: Is San Miguel Signalling Approval?)

Glow Energy Pcl (GLOW TB) (Mkt Cap: $4.3bn; Liquidity: $1.4mn)

The Circular for the Tender Offer for GLOW's Securities (Form 247-4) from Global Power Synergy Company Ltd (GPSC TB) has now been dispatched. The 45-business day Offer Period is from the 25th September to the 28th November. The consideration under the Offer will be paid on the 3rd December. A fair-value opinion by the IFA was previously given ahead of the EGM vote in August.

• This is now a straightforward tender offer situation. The Delisting Offer will be at THB 90.8136, with a net cashout of THB 90.57067362/share. This is a "final" Offer Price. The Offer period will also not be extended. Only with the occurrence of a MAC or the advent of a competing Offer can the terms be changed.
• The Offer is unconditional. As per 5 of the PDF (of Form 247-4): "the conditions precedent for the making of the Tender Offer are fully satisfied in all respects."
• Trading at a gross/annualised spread of 0.6%/3.3%. I recommend selling at this level unless you want to hold as a cash substitute as it isn't a great risk-free-rate adjusted return given hedging costs.

(link to my insight: GPSC Submits Tender Offer for Glow Energy)

Briefly ...

Reportedly SK Networks (001740 KS) will pay ₩500bn (US$417mn) to SK Telecom (017670 KS) for its stake in Aj Rent A Car (068400 KS). SK Networks then would then use the proceeds to help the company to acquire Wongjin Coway. By extension, this means that the SK Group would be focusing its efforts on acquiring Woongjin Coway rather than Asiana Airlines (020560 KS). (link to Douglas Kim's insight: Korea M&A Spotlight: HDC Holdings Sale of 17% Stake of Samyang Foods for 95 Billion Won)

The Nikkei is reporting that Toyota Motor (7203 JP) will take its stake in Subaru Corp (7270 JP) to over 20% from its current 16.8%, making the company an equity affiliate. The companies had already announced a tie-up in June which LightStream Research discussed in Subaru: Joint BEV Development with Toyota Matters; Toyota's CASE Strategy Becoming Clearer. (link to LightStream's insight: Subaru: Toyota's Increased Stake, US Volume and Profit Growth Support Positive Momentum)

HDC Holdings (012630 KS) will sell its 17% stake of Samyang Foods (003230 KS) for ₩94.7bn in a block deal, involving 1.28mn shares of Samyang Foods, representing ₩74,000/share. This represented a 4.9% discount to the closing price of ₩77,800 as of September 23rd. This block deal is likely to have a near term positive impact on HDC and a negative impact on Samyang. (link to Douglas's insight: Korea M&A Spotlight: HDC Holdings Sale of 17% Stake of Samyang Foods for 95 Billion Won)

The Japanese Market (lots of liquidity)

A large portion of Japan's TOPIX Index traded ex-dividend for mid-term dividends on the 27th of September. There is something like ¥125tn of AUM in strictly-passive AUM tracking TOPIX, MSCI Japan, FTSE Japan, JPX Nikkei 400, and Nikkei 225. Those funds will not want to take significant tracking risk by not holding a 100% invested position.

• TOPIX dividends are about 0.95% going ex- on 27 September. That means that roughly 0.95% of AUM will need to be reinvested at the close of 26 September so that as of the open, such funds are 100% invested. If they are 99% invested and the market goes up 5% before they can reinvest, they will have lost 5bp. That would be unacceptable. They were likely to buy.
• Historically, there has been excess value-traded in the days up to the Sep mid-term ex-date, but excess volume drops off after the end of the month (there is traditionally month-end rebalancing and a Nikkei 225 reshuffle at end-Sep to keep volumes high). That excess vs recent history is smaller than one might expect, indicating some of the buying may be done multiple days ahead.
• Historically, since the BOJ started buying ETFs and the GPIF increased its equity weightings within its portfolio in the early teens, the last day of trading with dividend has seen good outright performance - about 1.1% on TOPIX. The index is up 9 times out of the last ten on that day. Historical patterns suggest TOPIX will underperform on the 25th Sep and outperform on the 26 Sep. To trade that, one would buy on the 25th and sell into the close on the 26th.
  • It turns out that it was OK to buy on the 25th and sell on the 26th, but if you bought in the morning and sold the morning it would have been an OK trade. If you bought the close and sold the close, less interesting. It appears that investors had front-run this.

(link to Travis' insight: Sep Div Date in Japan - Still Interesting, Still Significant)

China Treasury (CHINA GOVT)

Three weeks ago, JP Morgan's Government Bond Index - Emerging Markets (GBI-EM) (which had kept China's renminbi bond market as "Index Watch" for inclusion since March 2016) announced that it would include China in its GBI-EM suite of indices starting Feb 2020, adding 1% a month for 10 months and capping index weight at 10%. FTSE Russell, which operates the World Government Bond Index (WGBI) series of indices (which were operated for decades by Citi), has had China in its WGBI-Extended Index at a mid 5% weighting since July 2017 after being under review for years before. Earlier Friday Asia time, FTSE Russell announced that China would not see its Market Accessibility Rating raised to 2.

• With JPM EM-GBI coming, this will mean more inflows. But without WGBI for now, it will mean less than some (myself included) might have expected in the near-term.
• The result of WGBI not being included immediately lowers the amount of inflow into China through what might be considered unsterilised "hot money inflows." That means perhaps a little more pressure on yuan weakening than I thought. I also see a lower likelihood of a near-term trade deal of any kind between China and the US so I expect that flows in will be even lower than one might have expected.
• Passive flows to help China get through its near-term problems will have to wait a bit longer because sentiment clearly shows that net inflows are smaller than would be predicted so far this year and it is possible they will stay low for the foreseeable future.

(link to Travis' insight: FTSE Russell Dings China (For Now).... )

Briefly ...

Hyundai Mobis (012330 KS) began its buyback program this week. The target is 1.3mn shares, 1.36% of shares out, at a cost of ~₩340bn. Of this target, about 20% will be cancelled. The remaining will be locked up for 6 months. The buyback runs until Dec 23. The daily limit is set at 130,000. or ~70% of the 1M DTV. If Mobis was buying equal quantity each day or 20K, this represents 11% of the daily turnover. Sanghyun considered another fresh round of long Hyundai Glovis (086280 KS) /short Mobis trade at the time of his insight.(link to Sanghyun Park's insight: Hyundai Mobis Share Buyback: Execution Detail & Trade Idea)

OSRAM Licht AG (OSR GR) (Mkt Cap: $4bn; Liquidity: $37mn)

As discussed in Ams Deal for Osram On the Table: Trading Wide back in August, the deal whereby ams AG (AMS SW) outbid the existing Bain and Carlyle bid at €35.00/share for Osram, agreeing to pay €38.50/share, started trading wide until AMS actually got its feet under the table with a launch document - something which happened on 3 September. AMS lowered the minimum acceptance threshold from 70% to 62.5%. The Acceptance Period still expires on 1 October. As of the 24th, a relatively teensy 1.75% of shares had been validly tendered into the Offer.

• Bloomberg reported, followed by an FT article, that private equity firm Advent might join Bain and Carlyle to match or improve on the ams bid for Osram. On cue, Osram announced that it had received an indicative offer from a consortium comprising Bain and Advent, and that it will offer a “meaningful” premium over the current ams' €38.50/share Offer.
• The worker representatives on the Osram Supervisory Board, and the Worker Council currently object to the ams bid, recommended shareholders not take it. The Supervisory Board and Managing Board recommend it because of the top-line number.
• The promise of a “meaningful” premium is nice, but it is not clear whether that means 2% or it means 10%. At 1% through terms (at the time of the insight), it probably needed to be several percent to be worth it. Travis would make that bet by buying in the €38.60-38.90 area, expecting a Bain/Advent bid of at least €40/share. If ams wants to match, they would have to bid over a new Bain bid.
• UPDATE: ams raised their takeover consideration to €41/share. But they did so without amending the offer documentation, which would have necessitated a two-week extension. Investors have to make a choice of whether to sell in the market or wait and tender at €41.00. Travis expects everyone will. This is about as good as an outcome as one could have expected.
• UPDATE 2: ams announced after the close that it owned 14.69% of Osram unconditionally. This makes it much more difficult for any other party to reach domination.

links to Travis' insights:
A Better Bain Bid for Osram?
ams AG Finds a Loophole: Ups the Osram Bid to €41 but Does Not Extend

Doosan Corp (000150 KS) / Doosan Heavy Industries (034020 KS) / Doosan Infracore (042670 KS)

I estimate Doosan closed the week at a 59% discount to NAV, having recently touched its narrowest level (57%) inside a year. The share price was down 7% mid-week vs. 2% for Heavy. Doosan Corp's demerger kicks off with the suspension of its shares this past Thursday, before being relisted on October 18. On a spin-off ratio of 90.6%, 3.3% and 6.1%, shareholders of Doosan Corp will receive new shares in Doosan Solus and Doosan Fuel Cells. Doosan Corp will own 18.1% in each of the new companies via existing treasury shares.

• Doosan Fuel Cells is the key biz segment within Doosan Corp after the Moon administration's push for hydrogen-fuelled cars. Hyundai Motor (HM) and Doosan Fuelcell are the local leaders, with HM targeting vehicles and Doosan energy. The separate listing of Fuelcell paves the way for a re-rating, together with an additional avenue for Doosan Corp to raise funds.
• Sanghyun believes there will be a tender offer for Fuelcell to enable the major shareholder to move its 51.1% stake in Fuelcell (& Solus) to Doosan Corp. Usually, tender offers take place about a month after re-listing. This major shareholder would want a high Fuelcell price before selling, suggesting Doosan's tender offer for Fuelcell could be pricey, putting pressure on Doosan Corp. Doosan Corp will likely liquidate some of these acquired shares to raise cash at a later date.
• Doosan Corp, with respect to Doosan Heavy, has outperformed since the demerger was announced back in March. The key segment within Doosan Corp is the Fuelcell business. Sanghyun indicated the market may assign a fair value up of ₩300~400bn compared to its capital value of ₩100bn. Post demerger, the outperformance of Doosan Corp can be expected to reverse. But if Fuelcell is the jewel, buying Doosan Corp on weakness this week ahead of the suspension was probably the right trade - it popped 4% on its last day.

links to:
Sanghyun's insight Doosan Corp Demerger: Current Status Checking
my insight: StubWorld: A Demerged Doosan Read-Thru

LG Chem Ltd (051910 KS)took a hit mid-week mainly on 3Q earnings concern. The common/1st pref is now at -1.6σ on a 20D MA as the common is being undervalued relative to 1P. Liquidity on 1P shouldn't be much of a concern. Sanghyun suggested a long C/short 1P trade. (link to Sanghyun's insight LG Chem C/1P Trade Entry Point)

Typically Samsung Electronics (005930 KS)'s common & pref shares trade in a very narrow band and arbitrageurs move in when the ratio of the two securities reaches either end of the band. At that time of Brian's insight, the ordinary shares were trading at the cheaper end of the band. He expects the ordinary shares to outperform the preferred shares in the near term by around 3% absolute. (link to Brian's insight: Samsung Electronics - Ords V Prefs)

• Stanmore Coal (SMR AU) and Golden Investments are back to being best buds after Golden withdrew its requisition notice under section 249D of the Corporations Act. Jimmy Lin has now been appointed as a NED and Stanmore will work with Golden as to an INED.
• Shareholders of TMB Bank PCL (TMB TB) overwhelmingly approved the purchase of Thanachart Capital (TCAP TB).
• John Singleton - 32.3% stakeholder - has now accepted Nine Entertainment Co Holdings (NEC AU)'s Offer for Macquarie Radio Network (MRN AU).
• Due to the hurricane which passed through Bermuda recently, the court hearing to convene a Court Meeting for TPV Technology (903 HK)'s Scheme was postponed. The result is the Scheme Document has similarly been delayed until no later than 31 October.
• Pongsak Lothongkam, SVI Pcl (SVI TB)'s CEO and largest shareholder with 45.71% of shares out, has submitted a Conditional Voluntary Tender Offer (Form 247-4), two days ahead of my estimate. The Offer period is from 26 September to 1 November (25 biz days). Payment is the 5 November. The Offer Price is THB0.41 or THB0.408903 after netting off the brokerage fee/VAT. The Offer is conditional on 19.29% of shares out tendering.
• The Australian Takeovers Panel has declined to make a declaration of unacceptable circumstances in response to an application from QIC in regards to OPTrust/ICG's Offer for Pacific Energy (PEA AU).
• As the Equity Transfer Agreement - concerning Dalian Port (Pda) Co Ltd H (2880 HK) - became effective on 30 August and all of the completion conditions had been satisfied on 25 September, China Merchants Liaoning and Liaoning SASAC shall procure Liaoning Port Group to make a filing for the change of business registration within 10 business. This is the last condition. The SFC has granted its consent to extend the deadline for the despatch of the composite document to a date falling within seven days of Completion or 7 October 2019.
• Nexon (3659 JP) shareholders approved all the measures for the issuance of stock options related to the purchase of Embark.
• Elliott has raised its stake in Unizo Holdings (3258 JP) to 13.14% from 11.98%. And after the close Friday UNIZO dropped a bomb on investors. Travis commented to me that UNIZO had received another offer at JPY 5,000/share, and had established a new Basic Policy dealing with Tender Offers by Third Parties. Because the other Tender Offer did not meet the company's Basic Policy guidelines with regard to employees, it rejected the tender offer. The new Basic Policy obliged UNIZO to a) request that Fortress raise its offer to JPY 5,000, and b) obliged it to withdraw support for the previous Tender Offer. UNIZO is obviously trying to have its cake and eat it too. Travis comments this could change the nature of the trade dramatically.
• The Ascott Residence Trust (ART SP) / Ascendas Hospitality Trust (ASCHT SP) Composite Document is out.
• Travellers International (RWM PM)'s tender offer closed with 1.321mn (~8.4%) shares tendering. There is now less than 2% of shares out in public hands. The settlement is the 30 September. Under Philippine rules, Bidders must obtain 95% of shares out to pursue delisting. This deal is done.
• Of note: Artgo Holdings (3313 HK) is down 69% since I wrote about it in Artgo And Other Short Sell Ideas last week.
• Aveo Group (AOG AU)'s Scheme Booklet has been registered with ASIC. The Scheme Meeting is to be held on the 6 November.
• Huaneng Renewables Corp H (958 HK) is suspended pending an announcement pursuant to the Hong Kong Code on Takeovers and Mergers. A privatisation Offer is likely. (see: Huaneng Renewables Targeted Amidst Clean Energy Privatisations)

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.