China XD Plastics (CXDC) – Going Private – 13% Upside

Current Price: $1.06

Offer Price: $1.20

Upside: 13%

Expiration Date: 10th of May 2021

Proxy

 

*Important - the idea has been initially published on the 17th of Dec'20 and closed in Feb'21 with 13% gain after the spread was eliminated. As the spread has widened again, the idea is now returned among active ideas. The original thesis (detailed in the write up) is still intact, however the closing date has been delayed to the 10th of May. For more recent updates check the comment section below.

 

US-listed Chinese firm privatization by the management.

Modified plastics manufacturer China XD Plastics entered into a definitive agreement to be taken private by its founder/chair/CEO at $1.20/share. Shareholder approval has already been received (was guaranteed by the buyer's stake - 70% voting power and 50.1% economic interest) and the transaction is currently at the last stages. Market believed that this is a done deal and for a few months CXDC traded at a tight 1% spread. Recently, the termination date was adjourned (from 14th Dec to 7th Feb'21) without providing more details and the spread has widened to 10%+. There are arguments both in favour and against the successful closing of the transaction.

The downside to pre-announcement is 15% (May'20), but might be lower given the consistent improvement in Q2 and Q3 financial results as well as overall market recovery after covid sell-off.

 

Timeline

  • 8th May - received a nonbinding offer from Chairman/CEO at $1.10/share.
  • 15th June - entered into a definitive merger agreement with the consideration raised to $1.20/share. The merger was expected to be closed in Q3 subject to the approval by the shareholders holding the majority of the voting power.
  • 30th September - meeting date was set for the 5th of Nov.
  • 5th November - merger approved. Nothing was stated regarding the closing date except that it "remains subject to various customary closing conditions".
  • 13th December - termination date extended from 14th Dec to 7th Feb'21.

 

Points in favor of successful closing

  • This is a US-listed Chinese going private transaction with a signed definitive agreement and at the last stage of the process. Our analysis shows that similar (US-listed China firms) going-private transactions almost never fail when a definitive agreement has already been signed. Only 1 case with definitive agreements has failed so far. However, the spread now stands at the same size when the non-binding offer was just announced - 10%.
  • The timing is opportunistic and comes at a steep discount to the pre-COVID price ($2.10/share). CXDC share price was beaten down by the COVID-19 outbreak, which severely impacted Chinese automotive industry (CXDC clients) - industry sales decreased by 45% in Q1'20. As a result of the pandemic, CXDC business also took a hit, however, the performance saw a firm rebound since May. Total volume shipped is now almost back in line with 2019 numbers, while revenues are continuing to recover - Q3 revenues were down a modest 22% YoY compared to a 52% YoY fall in Q1'20.
  • Overall, management seemed eager to take the company private and, quite unusually for such transactions, announced a definitive agreement just one month after the non-binding offer was issued.
  • Privatization is being done by the founder/chair/CEO, who should know the company quite well.
  • No financing condition - the buyer expects to fund the merger with equity (through another of his firms) and available cash.
  • More details on termination date adjournment were not provided, however, it seems that the company has tried to indicate that the reason behind the delay is a minor issue: "The parties to the Merger Agreement are currently working on the logistics to complete the Merger". However, it's not exactly clear what they mean by "logistics".

 

Points against successful closing

  • Management has been quite silent regarding the process of this privatization. Closing time is already significantly delayed with almost no details provided. Initially, the transaction was expected to close in Q3 and even in the proxy released on the 9th of September, it was still written as Q3 (although not even the merger date was set yet). Now the closing has been delayed to Q1'21. These postponements and lack of visibility, especially for a Chinese firm, doesn't inspire confidence.
  • The same buyer (founder/CEO) has already tried to take the company private back in February 2017 at $5.21/share. However, at that time the proposal was made jointly with MSPEA Modified Plastics Holding, an affiliate of Morgan Stanley Private Equity Asia III. Minority investors were dissatisfied with the lowball offer saying that it undervalued the company. However, after the non-binding proposal all parties went silent for 2.5 years until Morgan Stanely made a filing stating that pursuant to the agreement, the merger was terminated 6 months after the initial non-binding proposal, however "the members of the Consortium treated the Proposal as remaining outstanding". CXDC management did not issue any response to the proposal barely noting in the annual report that "A special committee was previously established by the Board; however, the proposed transaction did not proceed". Although various delays and silence after the non-binding offer are not exactly rare in China, the way this 2017 offer was conducted, also does not add credibility to the management and its intentions.

 

China XD Plastics

The company manufactures and sells modified plastics primarily for automotive applications in China and Dubai.

CXDC products are primarily used in the production of exterior and interior trim and functional components of automobiles manufactured in China, including Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, and more.

13 COMMENTS

  1. nostradamus

    Could be a coincidence, but several Chinese M&A targets have seen their spreads widen considerably lately: also GSUM and SOGO for example.

        1. nostradamus

          I think it was very much anticipated he would sign it, so no surprise. It fits Trump’s agenda perfectly.

          Also, I’m not totally sure if this is the whole story. If anything, it seems to me this would increase the incentive to make sure taking these companies private succeeds.

        2. ijw

          Well if I was cynical I would say they could let the stock be delisted and take it out at a far cheaper price later on?

  2. paulum

    I have followed this company for a while during the 2017-deal aftermath. I would like to give a warning to anybody interested in participating:

    This company always had an aura of fraud around it, for several reasons:
    – It was trading below cash for a long time, even with the company generating an insane amount of money. Minority shareholders complained that the company should conduct a buyback and insiders buys, but nothing happened. The CEO said he could not get the money out of the country. In my experience, this is a very bad sign, esspecially if the cash balances are offset by loans.
    – The “Long-term prepayments to equipment and construction suppliers” item on the balance sheet has always been very dubious. In previous 10K filings (2019: page F-18) you can find that these prepayments were done to a company called Hailezi in Heilongjiang (North China). I tried to call this company several times but the phone wasn’t even answer. Given the amount of money involved (hunderds of millions US$), they should have a receptionist. It’s also interesting to note how this item keeps evolving; deals get cancelled, but then new, even larger, deals get prepaid. These deals are always signed right before a regulatory filing is due.
    – The prospectus of their US$150,000,000 11.75% Guaranteed Senior Notes due 2019 (redemeed early) is an interesting read. An anonymous source made the claim (among other things) that the suppliers and customers on page 102 were fake.
    – The business in the UAE supposedly has US$380 million in ‘assets’, yet only $60m in revenue.
    Please note I’m not saying that I think this is a fraud, I just think it’s all too shady for me.

    Caveat emptor. I’m skipping this one.

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  3. bigdaddy85

    No new filings/news on this one. Today is supposed to be the closing date. We should hopefully know more on Monday

  4. bigdaddy85

    Looks like the merger has again been delayed until may 10, 2021 to continue to “work on logistics”.

  5. Zulu Investor

    Again, just like OSN, CXDC has traded up to $1.39, despite new additional news and the fact the offer price is only 1.20..

  6. dt

    Definitely interesting CXDC share price volatility lately. The market has completely ignored another delay in closing of the going-private transaction.

    As the spread has been completely eliminated and CXDC trades at a premium to the offer price, the idea is closed with 13% gain in 2 months.

    It’s quite possible the situation will be worth revisiting if the spread widens again in time.

    1. Zulu Investor

      and it has. it has dropped to a mind boggling price of .99 – as low as its ever been. Again no news.

  7. Ilja

    We are bringing this idea back among the active ideas (at $1.06/share). The spread has widened to 13% again, while no new updates on the merger have been released yet. Closing date is on the 10th of May (unless it gets adjourned once again). Overall, the case is not risk-free (mainly due to the prolonged delays and lack of explanation), however, 13% return in less than a month seems attractive enough for a Chinese privatization with a definitive agreement signed.

  8. Jim Rivest

    There are a couple of CXDC lawsuits  (New York and Nevada) that may have been causing some of the delay.  In the NY case, the company requested a “Stay Motion” because it was already being adjudicated in Nevada and that court already denied the motion to enjoin the ‘Transaction”.  Both complaints were virtually identical and a proposed settlement had been reached in Nevada (subject to that court’s approval).  The company stated there would be a “substantial class-wide monetary settlement”, so there was no point in trying the case again in NY. 

    “Substantial” can mean different things to different people, but I prefer that word to something like a ‘token’ settlement.   I have no idea how this works in practice and if the shares had to be purchased and owned at a certain period of time.   I sold all my shares when they spiked in the $1.30’s, but I have since bought them all back. 

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