CIMC-TianDa Holdings (0445.HK) – Going Private – 8% Upside

Current Price: HK$0.246

Offer Price: HK$0.266

Upside: 8%

Expected Closing: December 2020

Offer document

This idea was shared by Andy.

 

This is a going-private transaction in China. The situation appears similar (yet riskier) to the Li & Fung transaction, which had a comparable rationale, main caveat, and closed successfully in May.

On the 4th of October, CIMC-TianDa announced a privatization offer by parent CIMC Group and Macao QiXin private equity fund. Consideration stands at HK$0.266/share in cash and offers a 9% spread.  Consortium owns 75.33% of the target. As usual in HK, conditions include approval by 75% of disinterested shareholders and less than 10% of disinterested shareholders objecting the transaction. The buy-out will be financed by cash on hand.

Almost 50% of the company’s business is related to airlines, so it has been hit hard by the recent COVID-19 outbreak and financial results do not yet reflect the full effect as the company was busy filling in orders received before the crisis. Management argues that this buyout makes sense as transformation efforts will show better results while being private and will release the company from short-term goal pressure. Minority shareholders are likely to agree to get cashed out at a 20% premium to pre-announcement price and a 15% premium to the pre-COVID price keeping in mind the state in which the airline and airport industry is currently. The offer values the company at 11x 2019 EBITDA. 0445.HK has been on an acquisition spree over the last few years, and at least some of the synergies might not yet be reflected in the financial performance – providing a motive for CIMC to cash-out minority owners at this time. Thus, I don’t expect the offer to be withdrawn.

The blocking stake is only 2.4%. However, the only larger owner (Wison Energy) which could singlehandedly oppose the transaction has already agreed to vote in favor of it.

The dispatch of the scheme document has been delayed until no later than the 30th of November. Closing is expected in December.

 

Valuation

From the perspective of 2019 EBITDA multiple, the offer looks fair:

The company recently sold automated parking systems business (also to CIMC parent, so there might be related-party concerns). When determining the consideration for this business, CIMC-Tianda took into account the net asset value of automated parking systems in 2019 and agreed to a 19% premium. It is not clear if the same methodology could be applied when valuing the rest of the company, however, NAV for the remaining business at end of 2019 was about $HK0.247/share. So the privatization offer of $HK0.266/share comes at an 8% premium to 2019 NAV, which given that a significant part of the business is connected to the aviation industry, looks reasonable.

 

CIMC-TianDa

CIMC-Tianda is a part of the CIMC group and specializes in design, development, and manufacturing of firetrucks, airport equipment, and automated logistics systems. The segments are:

• Firetruck business – the company is the largest producer of trucks in China and the 5th in the world. This segment generated 58% of total revenues in 2019.
• Airport facilities and automated parking systems – produces preconditioned air units, boarding bridges, and airport busses. Generates 26% of revenues.
• Material handling systems – produces airport baggage carousels, passenger checkpoint systems, and cargo handling systems. Generates 16% of revenues.

Over the last few years the company has made a number of acquisitions, which has been a significant driver behind its revenue growth:

However, the stock price has been on a negative trend mainly due to substantial dilution – number of shares outstanding increased five fold since the end of 2015):

Recent H1 results show 8% YoY decrease in total revenues:

• Fire truck segment revenue increased by 4% YoY.
• Airport facilities and automated parking segment revenues down by 16% YoY
• Material handling systems division declined by 33% YoY.

Although the results seem not that bad at a first glance,  a significant part of the negative covid related impact is masked by acquisitions made during 2019 and further supported by a significant amount of last-years orders:

Having experienced great pressure in procuring stable supply of raw materials and completion of new orders, the Company mainly relied on the orders from last year to maintain profitability

In 2019 0445.HK made 3 acquisitions: 60% stake in Shenyang Jieton in June’19, Shanghai Jindun in April’19, and 60% stake in Ziegler (Dec’19, however recently acquired the remaining stake as well). Shenyang Jieton and Shanhai Jindun accounted for 14% of the total group revenue for the 2019, so after the COVID-19 impact is is taken care of and full synergies are in play, the contribution of these acquisitions to the total performance of the group will be quite substantial.

Overall, the company states that its operations were hit hard by COVID and the airline related side of the business is not expected to make a quick turnaround. Company’s share price fell from $HK0.255 (January) to as low as $HK0.12/share in May. Management sees this volatility in share price as a hurdle to raise further financing:

Downturn in stock prices coupled with the lack of financing means also brought about difficulties for the Company to respond to the risks aforementioned, which may further affect the Company’s ability to distribute dividends.

So 0445.HK intends to restructure the business and implement certain long-term growth strategies. Some possibilities that were noted include low ROE segment divestitures, exploring the opportunity for a separate listings for divisions, re-adjusting the organization and management structure, changing the sales system, etc. Privatization will allow 0445.HK to stop pursuing short-term goals and relieve it from market expectations regarding the share price. It will also let free the firm from regulatory constraints and costs of being a public company.

Some reductions in non-core business assets have already begun. Last month, CIMC-Tianda announced a sale of the automated parking systems business (design, development, and manufacturing of various automatic parking systems and the provision of related technical and maintenance services). These assets were underperforming in the first 7 months of 2020 – compared to 2019 segment revenues declined by 83%. Total consideration is RMB182m or 4.47% of CIMC-Tianda market capitalization. Purchaser is an indirect non-wholly owned subsidiary of CIMC, which is the controlling shareholder of the Company. Shareholders will vote on the disposal is set for the 19th of November.