China Zenix Auto (ZXAIY) – Going Private – 20% Upside

Current Price: $0.9

Target Price: $1.08

Upside: 20%

Expiration Date: Q1 2022

Press Release


Steel wheel manufacturer China Zenix Auto has signed a definitive going-private agreement with its founder/chairman, valuing the company at $56m. Each ADS will be converted to $1.08 in cash. The transaction is conditioned on shareholders' approval and other customary conditions, including non-objection from regulatory bodies. The majority-of-the-minority voting requirement is not present. Overall approval seems like a formality as the buyer holds c. 70% of shares. Regulatory objections are unlikely. Closing is expected in Q1 2022. The company appears really cheap on balance sheet/replacement value with net cash position and full ownership of manufacturing facilities. Equity BV, mostly comprised of real assets, exceeds buyout valuation by 4x - this should increase motivation for the buyer to proceed with the transaction.

A large spread is probably explained by US-listed Chinese stock with low transparency, small deal size, pink sheets listing, low liquidity, and a substantial 77% downside to the pre-announcement price.

Reasons for the proposed offer as stated in the preliminary proxy

The Company’s stock price has been struggling since the ADS was involuntarily delisted from The New York Stock Exchange (“NYSE”) and started trading on OTC Pink in 2018. The Company has continued to incur costs and to expend resources associated with operating as a public company, despite its challenged stock price and thinly traded stock.

On the 9th of August, the company received a preliminary non-binding going-private offer at $0.9/ADS from the founder/chairman. The offer was later (27th of September) bumped by 20% to the current $1.08/ADS after pressure from the special committee. The transaction is now more attractive after becoming binding, as our findings show that this increases the chance of the deal going through (however, a recent similar albeit more complicated transaction with a definitive agreement has failed). A relatively short timeframe between binding and non-binding offers as well as an increase in the consideration also points to a more likely successful closing.

China Zenix Auto International designs, develops, manufactures, and sells both OEM and aftermarket commercial vehicle wheels mostly for the Chinese market (although exports to distributors in more than 24 countries as well). It is one of the largest wheel manufacturers in China in terms of sales volume with over 800 series of tubed, tubeless, and off-road steel wheels offered. Operations began in 2003 and the company currently has 6 fully owned manufacturing facilities across China with a designed annual production capacity of approximately 15.5 million units of steel and aluminum wheels as of March 31, 2021.

A quick glance at the financials since 2012 (2016 and later are displayed below) indicates that:

  • The company is cheap on the balance sheet/replacement value. It owns all of the 6 manufacturing facilities and headquarter building - depreciated BV of $71m for buildings (cost basis of $140m) and $75m for plant and machinery (cost basis of c. $200m). Net cash stands at $20m. Other working capital items sum up to an additional $30m. All of this compares to $56m buyout valuation and only $17m required to cash out for minority shareholders.
  • Revenues are quite stable, except for 2020 due to Covid.
  • Gross margins have been on the continuous decline with overall profitability decreasing as well.
  • The business was hit by COVID with gross margins turning negative.

Lastly, it appears that both ADS cancellation and annual depository service fees will be covered by the company. I understand this to mean that ADS owners will receive $1.08 net of fees and that the usual $0.05/ADS will not be deducted from the consideration.

each ADS issued and outstanding immediately prior to the Effective Time will represent only a right to receive US$1.08 in cash per ADS, without interest (the “Per ADS Merger Consideration”). The Surviving Company will pay any applicable fees, charges and expenses of The Bank of New York Mellon, in its capacity as ADS depositary (the “ADS Depositary”), share/stock transfer or other taxes and other government charges (other than withholding taxes, if any) due to or incurred by the ADS Depositary in connection with distribution of the Per ADS Merger Consideration to ADS holders (excluding any fees, including ADS cancelation fees (up to US$0.05 per ADS), any annual depositary services fee (up to US$0.05 per ADS) and any applicable taxes or governmental charges, payable by ADS holders pursuant to the terms of the deposit agreement (the “Deposit Agreement”), dated as of May 11, 2011, by and among the Company, the ADS Depositary, and the holders and beneficial owners of ADSs issued thereunder).

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