Current price: $4.37
Cash-out Price: $4.72
Expiration Date: expected in Q2 2020
This idea was hinted by Brian
This is a rather standard case of U.S. listed Chinese company getting taken private by controlling shareholder. The spread likely reflects limited trust by U.S. investors towards similar management buyouts of China based micro-cap names. However, there is high likelihood this transaction will close. SORL is really cheap if the numbers can be trusted and there are reasons to believe buyer’s intentions are real rather than only meant to manipulate the stock price. Also recent stats suggest majority of similar transactions with definitive agreements have successfully closed.
Insiders of SORL (via related party Ruili Group) have signed definitive agreement to cash-out minority shareholders at $4.72/share. Spread to the offer price stands at 8%. Insiders own 59% of the company and transaction is subject to approval by minority shareholders. Meeting date has not been announced yet. Downside to unaffected price is 23%. Management expects the transaction to close by Q2 2020.
The main risk is management cancelling the offer and I do not expect any pushback from minority shareholders.
SORL is manufacturer of automotive brake systems, mostly used in trucks and buses. The company supplies OEMs and aftermarket distributors. 82% of sales go to China and the rest are international. SORL operations are conducted through JV with Ruili Group, and majority of its assets have been acquired from Ruili Group as well. If my count is correct, insiders received a total of $109m by shifting assets from their private entity into the JV, but contributed only $5m in capital. This compares to current market cap of $85m for SORL and $35m required to cash out minority shareholders.
SORL is also tainted with heavy number (and amounts) of other related party transactions, raising questions if the reported numbers can be trusted. Having Malonebailey as auditors does not inspire much confidence either as Malonebailey has made its name by focusing on Chinese reverse mergers and auditor’s track record is not spotless (albeit most indicated cases seem to relate to 2011). However, similar things could probably be said about most of Chinese companies, so not saying that SORL is standing out from the crowd in terms of shaky governance or questionable financials.
If the financials are real, then SORL is very cheap trading at less than 4xPE and at 40% of TBV while growing revenues at 10%+. This would also explain why insiders might be willing to acquire the whole company for themselves.
Current buyout agreement follows non-binding offer made in Apr’19 at $4.26/share. Apparently, independent special committee managed to squeeze out additional $3.5m of cash for minority shareholders by increasing buy-out price to $4.72/share. This is rather unusual – if there was a real pushback by the special committee then this would be a rare case of U.S. listed Chinese company actually caring for the minority shareholders (i.e. SORL actually standing out from the crowd in a positive way).
Back in 2015 the same management also made a non-binding offer at $2.84/share – this one was simply withdrawn couple months later citing concerns over recent market conditions. China truck industry indeed experienced significant decline in 2015 but has picked up since (see page 22 and also here). Thus I do not believe that the cancellation of the 2015 offer is an indicator of how the current one will proceed. Improving commercial vehicle sales (and 2.5x higher SORL revenues vs 2015) also explain why insiders are being so generous and readily offering 65% higher cash-out price.
Majority of Chinese buyouts with definitive agreements close
Opposed to 2015 situation as well as the Apr’19 proposal, for the first time there is definitive agreement instead of a non-binding offer. Overview on the US listed Chinese companies’ privatization transactions (2019, 2018 summer and 2018 spring reports, compiled by Duff & Phelps) indicates that almost every case with a signed definitive agreement gets closed. SORL management’s timeline (Q2 2020) also fits within the range of recently closed transactions.