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Be prepared for the train to Busan

Chew Sutat
Chew Sutat9/22/2022 03:44 PM GMT+08  • 8 min read
Be prepared for the train to Busan
Typhoons and disasters, just like market horrors, come and go. Both surfers and investors should be well prepared / Movie still from Train to Busan / Wallpaper Cave
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The unexpected summer rally fizzled out in the West, just as this column has rightly predicted. No thanks to uncertain policies, China’s markets have taken another step back even as President Xi Jinping’s expected “coronation” is poised to take place in October. Perhaps, a Great Leap “Left” is being priced in?

Singapore’s own Straits Times Index, meanwhile, has continued to bask in the light of being the best-performing developed market in the world as the steady stream of solid dividend payouts generate real returns for investors with the patience to stay put and stay home. That includes myself, keeping a home bias for the most part of my equity portfolio.

That aside, I have gradually learnt to do less and am now trying out intermittent digital-fasting that includes the constant monitoring of the markets which has occupied my consciousness (with varying degrees of sobriety) for the past three decades as a market professional.

So, rather than risking heart pain or heart attacks checking prices round-the-clock — a compulsion that afflicts forex and crypto traders — I am now on holiday in South Korea, paid for by the interim dividends given out by the listcos that I hold. Of course, in between stuffing ourselves with giant Russian crabs and gimbap, I have not forgotten to keep an eye out for possible opportunities for the rest of the year.

From Seoul, I took the train to Busan. Fortunately, we did not run into any zombies, although the Korean Exchange, like many other stock markets, does have its fair share of zombie stocks littered in the long tail of small and speculative enigmatic stocks.

As luck would have it, however, Typhoon Nanmadol, the 14th typhoon this season and the largest since 2019, made landfall in Japan’s Kyushu. Some four million people have been told to evacuate and get out of the way as it moves north. According to the meteorologists, the tail of Nanmadol will spill into Korea including Busan.

See also: Picking winners in a market under the Hand of God

’Tis indeed is the season — for not just investors screaming in pain but also the howling winds. Just two weeks before we arrived in Korea, Typhoon Hinnamnor, the first super typhoon of 2022, had landed in Geoje, where we were scheduled for a short cruise to an island less well known than Jeju. The impact knocked out power and flooded basements in scenes akin to those in Parasite, the Oscar-winning Korean black comedy film.

Be prepared

Indeed, for the two good days we had (it got warmer and more humid before the storm arrived), we saw parts of the coast around Busan that were battered by Hinnamnor still being repaired. Coming from Singapore, where events such as “ponding” and “slope failure” made headlines for days on end, and where the closest we’ve come to experiencing a serious natural disaster was from watching movies, we were somewhat anxious about Nanmadol even if it was an indirect hit.

See also: Thanksgiving this November, as markets savour the rain

Our itinerary was completely redone, with outdoor activities brought forward and sheltered markets pushed back to when the storm would break overnight.

The cruise further down south was cancelled altogether. We caught a spectacular cable car ride. Unfortunately, as a precaution from the high winds, what was supposed to be a round trip became one-way. The wind struck home almost literally when on a coastal rail ride, my phone was almost blown off my hand as I attempted a picturesque “wefie” near a closed ocean observatory deck. Strong winds inverted my umbrella while on my way to catch some squiggly octopus and squids for dinner. Meanwhile, with the D-day clock ticking, the emergency alert system pushed out a constant stream of updates to my phone, from every half day initially, down to every 15 minutes as the rains came in.

Sitting dry in my hotel room, I counted my blessings that this was not a direct hit, and that we were able to plan, anticipate and manage the situation with the constant flow and changing stream of information and data, while enjoying ourselves come what may. Even as the typhoon warnings were flashing, I saw hundreds of surfers, mainly locals, out in the water catching the waves, looking calm and collected, and getting about their day.

Yet, at the appropriate time, the beaches and roads were emptied of traffic and people.

As it turns out, what I have observed was less a stoic attitude shown by the Koreans, but more of the Boy Scouts’ famous motto: Be prepared. Just as Lord Baden Powell, the Scouting movement’s founder, believes that scouts should be “always in a state of readiness in mind and body to do your duty”, the same applies for investors and companies alike.

A tale of two corporate actions

Back in November 2017, homegrown gaming peripherals maker Razer listed on the Hong Kong Exchange with great fanfare, at an auspicious sounding offer price of HK$3.88 to boot. Yet, the stock price of the then-loss-making company sank, trading as low as HK$1 at one point.

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In 2021, despite Razer finally generating a profit, investors were reluctant to value it appropriately. Soon, privatisation rumours surfaced, with talk that the takeout value would be as high as the IPO price.

Expectations built up. Yet, when Razer founder Tan Min Liang, with help of private equity firm CVC, announced their offer, it was just HK$2.82 — quite a wide berth from expectations, and a mere 5.6% premium over its last traded value — having itself fallen 7.87% on Dec 1, 2021, when the offer was announced by Credit Suisse.

To say there were very disappointed investors of all categories was an understatement. Going by the noise and chatter, both public and private, the privatisation offer had every reason to fail. Yet by the time the offer closed in April, 95% of “disinterested” shareholders had given their nod. CVC got its prize without so much of a whimper of noise. A brilliant result.

Two months later, on June 13, Frasers Property, with the help of the joint team of investment bankers from DBS Group Holdings, Oversea-Chinese Banking Corp and Bank of America, launched the privatisation offer of Frasers Hospitality Trust (FHT). At 70 cents per unit, the offer was a 6.1% premium to the then stock price, which itself had inexplicably run up prior from Covid lows of around 45 cents from March — investors anticipating the rebound in travel, perhaps?

This offer ticked several boxes in the reasonability test. It was at 1.07x book value, at close to a four-year high pre-covid levels; the offer was made amid a rising rate environment where the attractiveness of yields becomes more discerning; the Singdollar, which is its reporting currency, is holding its strength relative to the foreign currencies of the pound, the yen, the euro, for example, thereby adding to potential forex losses.

In addition, unlike other REITs, this privatisation did not see the same obvious activist investors publicly fighting for a higher price. Therefore, it was quite a shock that TCC, the Thai conglomerate that controls the various Frasers entities, failed by a whisker at 74.88%, inauspiciously shy of 75% required to clear.

Funds and punters who dabbled in “merger arbitrage” (buying stocks at slight discounts to offer value in hope of generating a return higher than their carrying cost of cash — otherwise known as betting pennies potentially to lose pounds) haemorrhaged out when 70 cents became 54 cents right after the offer fell through.

So, why did one succeed when others fail? There will be all sorts of speculations and recriminations after the fact. As it was not clear that Razer would succeed, significant efforts were spent managing every single shareholder constituency early on: institutional investors, associations to the retail public in Hong Kong and Singapore. Media and shareholder concerns were systematically and deliberately addressed via various platforms to explain the deal. Right up to the general meeting, there was nervousness and anticipation, adapting and advocating. Job done, it ended up.

In the case of FHT’s privatisation, both major proxy advisory firms Institutional Shareholder Services and Glass Lewis were engaged, and both recommended positively. Somehow, retail and accredited investors who represent a large constituency of the unitholders did not take the bait, as they believe that there is more value to be discovered.

As a result of the unit price collapsing back to 54 cents thereabouts, these very same unitholders are now “long-term investors”, with the stock now at a discount to book and 25% below the offer price. While it is unlikely to become a zombie stock, the question that it begs is: Were those on the deal too sanguine about the result? Could more have been done to be better prepared?

Regardless, I have no complaints. I bought FHT at a “Covid discount”. I sold “on news” when the offer was announced in June. When the offer fell through, I bought back in on the sell down. If another future offer does come up, I may have to choose to hold on to it and vote it through. Who says your vote does not count in Singapore?

Meanwhile, there is no need to hold the soju for me. I’m always prepared, and so should you.

Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore

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