Red Star Macalline (1528.HK) – Tender Offer – 16% Upside

Current Price – HK$10.44

Tender Consideration - H$11.78 + HK$0.39 in dividends

Upside – 16.5%

Expiration Date – 6th July, 2018

Tender Offer Announcement

This idea was shared by Neo.

 

Red Star Macalline (home decoration mall operator in China) intends to launch tender offer to buy c. 1/3 of its Honk Kong listed shares. Tender including dividend represents 16% premium to current market prices. Main reason for the tender is that Honk Kong listed shares are trading at sharp (50%) discount relative to China listing. Tender is subject to shareholder approval.

 

Background

Founded in 1986 Red Star Macalline is the largest home improvement and furnishings mall operator in China. In order to raise funds for further expansion, Red Star decided to go for an IPO in 2015. Due to its large presence in China, the company naturally preferred a listing in Shanghai. When Red Star found out there was a long line of over 500 companies looking to float on the mainland, the company decided to seek a listing in Hong Kong instead, while at the same time not giving up pursuing an A-share listing.

The company made its IPO debut on the HK Stock Exchange in Jun 2015. Despite being well known in China, Red Star has little to no presence in HK.

In Jan 2018, Red Star finally got its wish and got listed in China, and as of May 28, is trading for roughly RMB17 (HK$20.80), close to a whooping 100% premium over its H share counterpart trading at HK$10.50.

 

Tender Offer + Dividend

In Apr 2018, believing that the price of the H share doesn’t sufficiently reflect the company operating performance, Red Star announced its intention to repurchase and cancel up to 389m of H shares at the price of HK$11.78. This is roughly 36.6% of the H shares and 9.87% of the total issued share capital (H + A shares).

  • The offer represents a premium of roughly 25% over the average closing price of HK$9.40 over the last 30 consecutive trading days.
  • Offer is not conditional on any minimum shares tendered.
  • Sufficient financial resources are available to conduct the buyback.
  • Offer is recommended by the Board of Directors.
  • Offer is subject to proration.
  • Meeting held for the purpose of approving this offer: 8 Jun 2018
  • If approved, expiration date: 6 Jul 2018

On top of the tender offer owners of H shares prior to the ex-div date of Jun 14 are entitled to a dividend payout of HK$0.39, payable on Jun 22.  Making the total upside 16.5% if buyers enter before Jun 14.

 

Valuation

Valuation table in the tender offer document on pages 45-46 suggests that at HK$11.78 the company is valued at roughly 9x PE and 0.85x PB. This is at the high end of the range of comparables, however for the market leader of its industry, the offer doesn’t seem too out of line. Also the companies included for comparison operate in slightly different business lines.

 

Pending Shareholder Approvals

  • H-Shares – requires approval of two-third H-Share Shareholders. Warburg Pincus, a private equity firm owning 28% of the H shares outstanding, is the largest H shareholder. Warburg Pincus have 2 representatives on the Board of Directors and with the offer being recommended by the Board, I think it’s fair to say 28% of the votes will be in favour of this tender.
  • A-Shares – requires approval of two-thirds of A-Share shareholders. Founder CEO, Che Jianxing, owns 86%, thus approval is kind of given.
  • Approval of Holders of Domestic Debt Securities – the Company can waive this by repurchasing the bonds held by dissenting bondholders.

 

Other Considerations

  • Why is the management so generous with H share holders? Despite paying a 25% premium, when we look at how the company IPO back in 2015 for HK$13.28/share, got listed in China this year for RMB 10.23 (HK$12.51)/share and is now trading at RMB 17 (HK$20.80), the offer price of HK$11.78 doesn’t seem too hefty. Since becoming a listed company in 2015, Red Star has maintained a dividend payout ratio of over 50% in each of the 3 years. So company seems to be ok with sharing the spoils with its shareholders.
  • What happens if the tender is voted down? If we assume the price of the H share will revert back to its average closing price over the last 30 trading days of HK$9.40 if the tender is not approved, the downside is 10.6%. However, there is a chance that the price will not decline that much due to the signaling effect as it implies that existing shareholders deem the price undervalues the company.
  • What is the downside in case of proration? The offer is for roughly 36.6% of H shares. Assuming the worst case scenario that every H shareholder tenders and after the tender price will fall back to $9.40 still results in 2% upside from current prices.
  • Final point is that H-shares have market cap of c. USD1.5bn and daily liquidity of USD2m so it is not an obscure stock. With management’s intentions to close the valuation gap it is hard to justify current tender spread – so there might be something I am currently missing.

31 COMMENTS

  1. Alex15

    Thanks for sharing this interesting idea.

    Are there any other differences (Voting rights dividends etc) between A and H shares that might explain the large discount?
    If Warburg Pincus is a 28% shareholder of H shares, one could assume that owners of those shares won’t be in a disadvantage. Do you have any hints if Warburg is willing to tender? I would expect they need to announce their intentions as they might be considered insiders (given their two seats).

    1. Janeo

      “Are there any other differences (Voting rights dividends etc) between A and H shares that might explain the large discount?”

      Not that I’m aware of. But the discount between A and H shares is not uncommon and have been touched upon by various articles. The 50% gap however, is definitely not the norm and I will give an update if there’s anything noteworthy.

      “If Warburg Pincus is a 28% shareholder of H shares, one could assume that owners of those shares won’t be in a disadvantage. Do you have any hints if Warburg is willing to tender? I would expect they need to announce their intentions as they might be considered insiders (given their two seats).”

      Could not find anything on that either. But do note that in late Jan this year, Warburg Pincus trimmed down their stake in the company at an average price of HKD$10.75, selling 118m shares in the process, leaving themselves with 301m shares (roughly 28% s/o).

  2. FM W

    There was a case similar to this. Ping An Good Doctor (1833.hk) , a subsidiary of Ping An Insurance group (2318.hk) went IPO this year. The group was trying to allot parts of IPO shares to Ping An hongkong shareholders (and only for hk shareholders). But also subject to A share vote. It was made clear that even A-share holders vote down the allotment, they won’t be entitled to the allotment because they just can’t allot H shares into A share accounts. But in the end A-share holders still voted down the allotment and hk shareholders didn’t get the allotment.

    I’m not sure whether A-share holders are to vote this time. According to the write-up yes, but founder CEO owns as much as 86% of A-share so it seems to be a sure thing.

  3. FM W

    To how much extent the spread is due to the pending Approval of Holders of Domestic Debt Securities?

  4. FM W

    RED STAR MACALLINE GROUP C-H has offered to purchase up to a maximum of 388,917,038 outstanding shares of common stock at a price of HKD 11.78

    Pursuant to the company’s announcement dated 5 apr 18 and the offer document dated 24 apr 18, a voluntary conditional cash offer was proposed by the company to buy-back up to 388,917,038 h share from the qualifying shareholders at the offer price of hkd 11.78 per h share. The qualifying shareholders are assured of being able to sell to the company the assured entitlement of approximately 73 H shares for every board lot of 200 H shares they own and they may also tender their shares in excess of the assured entitlement.

    Options details are as following:

    Option 1: Take no action (default option)

    Option 2: Assured entitlement 

    Instruction quantity calculated on the basis of approximately 73 H shares for every 200 H shares held as at the latest acceptance time

    Option 3: Excess tenders

    Instruction quantity exceeding the assured entitlement 

    ==========

    DT, please advise. This seems different from the normal dutch auction tender options i.e 1)no action, 2)tender at no specific price and 3)tender not below a certain price.

    By Assured entitlement, does it mean that I will tender all my shares to a ratio of 73:200? If I tender 200 shares, 73 of them are assured to be tendered?

    And what does it mean by Option 3: Excess tenders?

    I’m not familiar with this kind of tender, please help clear my doubt, thank you so very much!

    1. dt

      My understanding is that by choosing option 2, you would be limiting yourself to having only 37% of your shares accepted in the tender. I think this is mostly for institutional investors who want to maintain their % ownership of the company unchanged after the tender. By choosing option 3 you might get more shares accepted in the tender if some of the shareholders do not participate.

      1. FM W

        DT, I thought shareholder vote is on 8th Jun? Why did I receive corporate action options before the tender is even passed by shareholders?

        Btw, it seems Holders of Domestic Debt Securities have already agreed on the tender, in exchange, the company will pay them higher interest on the debts.

        1. dt

          You should check with your broker regarding this – I am guessing it should be noted somewhere that the tender docs you received are conditional on shareholder approval.

          Timeline from the announcement document:

          Despatch of this Offer Document – Tuesday, 24 April 2018

          Latest time to lodge form(s) of proxy for the AGM and/or the Class Meetings – 1:00 p.m. on Thursday, 7 June 2018

          AGM and Class Meetings – 1:00 p.m. on Friday, 8 June 2018

          Announcement of the results of the AGM and the Class Meetings and whether the Offer has become unconditional or lapse – Friday, 8 June 2018

  5. Aidan Rich

    The announcement is out but I’m having trouble interpreting it (released in Chinese and I’ve used google translate)
    Announcement was after hours (6.22pm HK time) so I don’t know whether it will impact the stock price. Still a good arb left currently

    Original (in chinese) http://www.hkexnews.hk/listedco/listconews/SEHK/2018/0607/LTN20180607662_C.pdf

    “Hongxing Meikailong Furniture Group Co., Ltd.
    Announcement of Controlling Shareholders Conducting Stock Pledge Repurchase Transactions
    The board of directors and all directors of the company ensure that the content of this announcement does not contain any false records or misleading statements.
    Representations or major omissions, and assume individual and joint liability for the truthfulness, accuracy, and completeness of their content.

    Red Star Meikailong Furniture Group Co., Ltd. (hereinafter referred to as “the company”) in June 2018 7
    Received from the company’s controlling shareholder Hongxing Meikailong Holdings Group Co., Ltd. (hereinafter referred to as “Red Star Holdings”)
    The notice was informed that Red Star Holdings had conducted a stock pledged repurchase transaction on some of its holdings.
    The details are as follows:
    I. Details of the pledge of shares
    Red Star Holdings will hold 38,870,000 limited-sale conditional flows for its company on June 6, 2018
    A shares are pledged to Shenwan Hongyuan Securities Co., Ltd. for the purpose of handling the securities pledged repurchase transaction business.
    The transaction date was June 6, 2018, and the repurchase transaction date was June 3, 2021. The pledged shares
    Shares accounted for 1.57% of the shares held by Red Star Holdings and 0.99% of the company’s total share capital of 3,938,917,038 shares.
    The registration of the share pledge has been completed.
    As of the disclosure date of this announcement, Red Star Holdings holds a total of 2,480,315,772 shares of the company, all of which are limited.
    Conditions of sale Circulated A shares, which accounted for 62.97% of the company’s total share capital of 3,938,917,038 shares. As disclosed in this announcement
    On the same day, the cumulative number of shares in the company’s shares held directly by Red Star Holdings was 64,780,000 shares.
    It accounted for 2.61% of the total shares held by the company and accounted for 1.64% of the company’s total share capital.
    Second, the purpose of pledge
    The purpose of the pledge of the shares of Red Star Holdings is for financing.
    Third, fund repayment ability and related arrangements
     Hongxing Meikailong Furniture Group Co., Ltd.
    2
    Red Star Holdings is in good condition and has the ability to repay funds. The risk of pledge is controllable.
    Gold repayment sources mainly include dividends of listed companies, investment income, etc., there is no risk of liquidation or forced liquidation
    The situation will not result in a change in the actual control of the company. If the company’s stock price fluctuates to the warning line, Hongxing
    The stock will actively take countermeasures, including but not limited to supplementary pledge, additional margin, early repayment and so on. this
    The company will promptly disclose other major changes in the above transactions in accordance with relevant regulations.
     Special announcement.”

    1. Neo

      That link you provided isn’t about the class meeting.

      The Company is pleased to announce that the proposed resolutions set out in the respective notices of the AGM and the Class Meetings, including but not limited to the special resolutions to approve the Offer, were duly passed by the Shareholders by way of poll at the AGM and the Class Meetings held on 8 June 2018 and all the Conditions have been fulfilled.

      The Offer has become unconditional on 8 June 2018 and will remain open for acceptance until 4:00 p.m. on 6 July 2018. Shareholders are reminded that the Offer will not be extended or revised.

      http://www.hkexnews.hk/listedco/listconews/SEHK/2018/0608/LTN20180608905.pdf

    1. over2u

      My guess that it is linked to the expiration of the offer.

  6. dt

    Can anyone clarify how exactly tenders work with T+2 and no guaranteed delivery.

    Example – in order to participate in Red Star tender I had to buy shares before close on the 4th of July so that I would be record holder on the 6th of July. What happens then if I sell these shares on the 5th of July – does my tender submission simply get void?

    Also what happens if I short sell on the 5th of July? Can shares that were submitted for tender still be part of the borrow pool and will the borrower be liable for payout of tender consideration?

  7. greg lia

    My experience, shares are in a restricted mode at the broker and not available for trading if you have tendered. However, I have been able to call reorg and instantly take the shares out of tender status and sell immediately. (FYI this is at fidelity)

    As far as shorting I know we have had a number of discussions regarding various rules on holding a net short position while tendering.

  8. leoc00

    I bought some shares and tendered on Jul 3 and then shorted some shares on Jul 5 in another account. Everything is done through IB and will update what happens to the position.

    The shares available for borrow on IB has been ~500k shares the past 3 days which is less than 1% of outstanding. I would guess that tendered shares are not available for borrow.

    1. leoc00

      The shares shorted on Jul 5 were still intact until Jul 18 where I closed my short. Those shorted shares did not make me liable for the tender consideration.

  9. Neo

    http://www.hkexnews.hk/listedco/listconews/SEHK/2018/0706/LTN201807061140.pdf

    The Offer was closed at 4:00 p.m. (Hong Kong time) on Friday, 6 July 2018. As at
    4:00 p.m. (Hong Kong time) on Friday, 6 July 2018, being the Latest Acceptance
    Time, valid acceptances in respect of a total of 785,601,655 Accepted Shares had
    been received by the Company from the Accepting Shareholders under the Offer,
    the aggregate of which represents 19.94% of the total issued share capital of the
    Company and 73.92% of the total issued H Share capital of the Company as at the
    Latest Acceptance Time and approximately 202.00% of the Maximum Number of
    H Shares, being 388,917,038 H Shares, to be bought-back and cancelled by the
    Company.

    1. Fa

      Hi Neo,

      What does it mean exactly for someone who elected 100% of its H shares?
      73.92% got accepted ?

      Many thanks

      1. Neo

        I would estimate roughly 56% of the tendered shares got accepted.

    2. FM W

      Hi Neo, could you please explain what will be the pro-ration be? It looks so much different to the ordinary tender offer we’ve been through. What is the percentage of shares accepted if I tendered all my shares? I can’t really understand the formula (388,917,038 – A) x C/B in the announcement. Thank you very much.

      1. Neo

        Here’s my rough calculation. I think I gave the wrong number of 56% by 36.6% + 20%. But you get the idea.

        785.6m tendered – 287.5m (36.6% assured tendered) = 498.1m excess tender
        388.9m shares to be bought back – 287.5m = 101.4m
        101.4m/498.1m = 20% of the excess tendered will be bought back

  10. Fa

    thanks.
    This ratio could be anywhere between 49.5% and…… 100% (in the case of most of the traders elected only 36.6% of their inventory and not 100%).
    I agree with you that it will be closer to 49.5% than 100%

  11. Fa

    Actually 100% is impossible given the fact that 73.92% of the total H shares were elected

  12. Korak

    Hello All,
    Did you receive the dividend from the stocks? I trade with IB but still did not receive the same.
    Thanks.

  13. Neo

    According to IB, it seems like 46% of the shares tendered got accepted.

  14. Alex15

    Dt or NEO could you help me understand about the next steps in this tender? Also, I am a bit confused about current share tickers and share prices.

    Currently, I have three different classes of shares in my IB account (1528; 1528.TEN and 1528.TEN2) I am guessing 1528 is the normal ticker with shares trading at 9.33. What do I have to do with the tendered shares and why are they trading at 9.70?

  15. Korak

    Hi, by today you will see 1528.TEN and 1528.TEN2 vanished from our account and only 1528 remaining shares which are not accepted in tenders exist in account

  16. FM W

    now I have 108 shares stucked in my account, can’t sell because it’s not a multiple of 200. I can’t by 92 shares to make it 200 also. What to do? I’m using IB. Thank you.

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