Current Price – HK$10.44
Tender Consideration - H$11.78 + HK$0.39 in dividends
Upside – 16.5%
Expiration Date – 6th July, 2018
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.
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 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.
- 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.