Current Price: $3.16
Offer Price: $3.65
Expected Closing: TBD
*Important. Some important developments happened since the initial posting of this write-up. For the overview of recent events, please refer to this comment.
This is going private transaction of US-listed Chinese company. For more background on these types of special situations, please refer to our Analysis of US-Listed Chinese Going-Private Transactions.
Manufacturer of water membranes Newater Technologies has signed a definitive agreement to get taken private by its chair/CEO and CFO at $3.65/share. Shareholder approval should not be an obstacle as buyers' own 44% of NEWA. Closing is expected in Q2 2021. Stock liquidity is limited.
The downside to pre-announcement price stands at 39%, however, the actual downside in case transaction fails might be significantly lower due to very positive H1'20 results.
- 12th May - non-binding proposal at $3.10/share received from the management.
- 3rd June - the special committee is formed.
- 29th Sept - definitive agreement signed. Consideration increased to $3.65/share.
Positive aspects of this case
- The definitive agreement is already signed, which signals a very high chance of the transaction going through. So far only 1 similar US-listed Chinese privatization with a definitive agreement was canceled.
- As discussed in CXDC idea comments, a recently signed legislation bill (that would kick Chinese firms off the American exchanged unless they adhered to American auditing standards) might provide the additional incentive for management to close the transaction.
- Price seems favorable to the buyer (cheap) and should incentivize the management to proceed with the privatization. The offer comes at 6.6x LTM P/E and 9x 2019 P/E. The company IPO'ed in 2017 raising $7m at $5/share. Since then NEWA gas significantly improved its performance - revenues grew over 3x and profitability increased 2x. Moreover, the company saw no impact from the pandemic and, in fact, its performance only improved as the company expanded into new markets - revenues went up by 17% YoY in H1'20.
- Financing matters for the transaction have already been settled.
- Some risk of cancellation still remains.