From the Securities Lending Trading Desk – Week of April 1st

In the Americas, Lyft stock will be organized in a dual class structure with Class A & Class B shares. In Asia Pacific, ZTE Corp forecasted better than expected earnings for the first quarter of 2019. In Europe, short positions grow for struggling UK construction contractor Kier Group (KIE LN).

Americas

Enthusiasm, mixed with concern, abounds as ride-sharing service Lyft IPOs in the biggest offering since SNAP. Lyft stock will be organized in a dual class structure with Class A & Class B shares. Class A shares carry one vote per share while Class B shares carry 20 votes per share. Only Class A shares were sold in this IPO with the Class B shares being held by ownership. This means that 7% of the ownership will own 60% of the voting rights. Also notable is the lack of a sunset provision on the Class B shares, effectively giving ownership perpetual control over the future of the company. Lyft, like Uber (which will IPO later this year), intends to account for revenue on a Net Basis rather than a Gross basis. This is a significant consideration for investors as well because it removes driver compensation from the company’s stated financials. This can have the effect of clouding a company’s financial well-being by removing from view what many consider a major cost-of-doing-business. However, as a third-party facilitator in the ride-sharing process, Auditor PwC has supported Lyft’s right to do so. Nonetheless. pricing at $72 per share to open, LYFT surged immediately and neared the $81 range on its first day of trading.

Luxembourg-based investment company JAB Holdings moved forward with a tender offer for cosmetic manufacturer Coty Inc, becoming Coty’s majority stakeholder at 60%. The offer, originally announced in February, came on the heels of a sinking Coty share price which had dropped 65% over the course of the trailing 12 months. JAB’s board members offered $11.65 in cash per share of Coty and the announcement helped boost the Coty stock price back up by 60% leading up to the deal expiry. There was healthy broker demand for shares in the lending market which gradually waned as the Coty’s stock continued to climb.

Asia Pacific

Shares in the world’s fourth-largest telecommunications equipment maker soared in Hong Kong last week after forecasting better than expected earnings for the first quarter of 2019. ZTE Corp said it expected to earn a net profit of 800 million to 1.2 billion yuan ($178 million), a substantial increase from the profit it generated of 276 million yuan in the previous quarter. This marks a remarkable turnaround for the Chinese firm after it was forced to shut down most of its business for several months in 2018 due to sanctions imposed by the U.S, which were ultimately lifted after ZTE paid $1.4 billion in penalties. We have seen increased securities lending demand for ZTE since the earnings release, which has seen its shares rise by 60 per cent so far this year.

The Year of the Pig is proving to be a bad omen for one of China’s leading pig farming businesses. Last week, COFCO Meat Holdings announced a loss of US$90 million for 2018 after reporting a sharp decline in hog prices amid a rapid spread of African swine fever which hit its pig farming business in the country. The outbreak of the fever last year has resulted in restrictions on transportation of pigs across regions, resulting in an oversupply of the animals in some regions, thereby dragging down prices across the country. COFCO Meat plans to expand hog production while upgrading biosecurity measures to combat the outbreak of swine fever and some analysts are hopeful that a supply constraint as a result of significant culling of pigs will boost prices in the long-term. We have seen strong securities lending demand for COFCO Meat since it announced its results.

Europe

Wirecard (WDI GR) shares slid 9% on Friday after the Financial Times published their latest article investigating suspicions of corruption. The FT story alleges that half the company’s revenue comes from partners and raises questions about the robustness and sales attributed to them. Borrow demand has been muted since German regulator BaFin made an unprecedented move on February 18th banning short sales for 2 months while prosecutors expand their probe. In the meantime, bearish investors may gain synthetic short exposure through options markets. The Trading Desk anticipates activity to increase if the short ban is lifted in mid-April.

Short positions grow for struggling UK construction contractor Kier Group (KIE LN). The firm reported half year losses and a slashed to its dividend due to a slowdown in road and housing maintenance work this week. Marshall Wace, Blackrock Investment Management and Worldquant all increased their short positions in the stock this week, as reported by Bloomberg. The stock has fallen by as much as 66% in the past year after resembling similar structural issues as failed construction contractor provider Carillion.