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).

13 COMMENTS

  1. Ilja

    Proxy was released a few weeks ago and included a presentation with Duff & Phelps valuation – funny to see how they come up with a fair value range. Based on DCF its EV/revenues multiple of 0.08x – 0.15x. The offer is 0.13x, so it’s apparently fairly valued. Afterward, they show that most peers trade at 0.7x LTM revenues, while the recent M&A transaction multiples stand at 0.91x revenues. Liquidation value was put at $0.28-$0.99/share, of course, marking a 10%-22% recovery rate for RE assets and equipment as they’re “aged and specialized for the company’s operations and may not fulfill the demands of other businesses’ buildings” or “can’t be easily used by other manufacturers”.

    https://www.bamsec.com/filing/119312521321096/3?cik=1506756

    Well, at least the proxy was filed quite fast, so it seems that management really wants to buy this. 20% spread remains, which is wide for a definitive transaction.

    Q3 results are scheduled to come out on the 30th of November.

    3
  2. Terence

    3Q results, and reiterated merger, shareholder vote in 1Q22.
    https://finance.yahoo.com/news/china-zenix-auto-international-limited-110000257.html

    “Subsequent to the third quarter of 2021, the Company received a definitive offer by Newrace Limited to take the Company private. Under the terms of the offer, each shareholder of the American depository shares (“ADSs”) will be entitled to receive US$1.08 per ADS, representing approximately a 390.9% premium over the closing ADS price on August 9, 2021. A merger agreement has been signed, and the transaction is expected to be put forward for shareholder approval in the first quarter of 2022,” Mr. Gao concluded.

  3. ijw

    What is stopping these Chinese tycoons from simply delisting these companies all the way to the expert OTC market and then making some extreme lowball offer to desperate bag holders?

    1. bigdaddy85

      I think the true tender price is the $1.08 minus the $.05 fee that is being charged

      1
    2. Terence

      “… minus the $.05 fee” – anyone knows for sure? Trading around $1 now. So the 5c question will be relevant if price goes a little higher.

  4. dt

    As per bigdaddy85 comment above, the $0.05 fee will definitely be deducted from the payout to ADS holders. And there is also a question of the annual depository services fee. Both indicated as up to US$0.05, so the remaining spread is likely an indication of total expected fees for ADS shareholders.

    Another place in the proxy words it more clearly:

    “the consideration to be paid to the Unaffiliated Security Holders in the Merger is all cash, allowing the Unaffiliated Security Holders to immediately realize a certain and fair value for all of their Shares and/or ADSs, without incurring brokerage and other costs typically associated with market sales (other than, in the case of holders of ADSs, an ADS cancelation fee (up to US$0.05 per ADS) and any annual depositary services fee (up to US$0.05 per ADS) pursuant to the terms of the Deposit Agreement)”

    1
    1. Terence

      Wow, so cash consideration might be as low as $1.08 -5c -5c = 98c, (annual ADS fee hopefully less or prorated) vs $1.00 that one could have sold yesterday. No wonder why the spread seemed too high.

      You’re exactly right, DT. When I read the last part of the write-up above, I also took it to mean the company will absorb the ADS fees. You have to read closely, as obviously, the wordings are those of a typical lawyer, not meant to be understood quickly!

    2. Terence

      My guess is no ADS annual fee will be deducted, as I’ve never seen this happen in a merger (annual fees are charged at a certain date when you hold an ADS). So the net cash consideration will probably be $1.03.

  5. Terence

    $1.08 – .05 = 1.03, as expected. No trades beginning Feb 2. Even though the merger closed Jan 27, and the company asked FINRA to stop trading the next day Jan 28, FINRA did not stop trading till today. In the 3 trading days Jan 28, 31 and Feb 1, most trades were done at 1.02-1.03. So the market was efficient and correctly expected 1.03.

    https://otce.finra.org/otce/dailyList
    Daily List Events
    Summary Date/Time Event Type Eff/Ex Date/Time Symbol Issue Name Market
    02/01/2022 00:00:00 ADR/GDR Program Terminated 02/02/2022 00:00:00 ZXAIY CHINA ZENIX AUTO INTERNATIONAL LIMITED American Depositary Shares – Sponsored Other OTC
    Comments Mandatory Exchange for cash from merger in the local market. Gross rate $1.08, cancellation fee $0.05 Net Rate $1.03
    Details Current Value
    Daily List Date/Time 02/01/2022 00:00:00
    Event Type ADR/GDR Program Terminated
    Effective/Ex Date/Time 02/02/2022 00:00:00
    Symbol ZXAIY
    Issue Name CHINA ZENIX AUTO INTERNATIONAL LIMITED American Depositary Shares – Sponsored
    Class
    Market Category Other OTC
    Offering Type No Restrictions
    Daily List Comment Mandatory Exchange for cash from merger in the local market. Gross rate $1.08, cancellation fee $0.05 Net Rate $1.03

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