Bidder’s offer to go through as all pre-conditions are either satisfied or waived
On 26 May, China Grand (600297.SS, RMB10.78, not rated) and Baoxin jointlyannounced that China Grand decided not to invoke the pre-condition of SAFE(State Administration of Foreign Exchange) approval for foreign exchange inconnection with the partial offer. Since all other pre-conditions to the partialoffer set out in the announcement dated 11 December 2015 were satisfied asof today, China Grand will proceed with the formal offer to acquire 75% of theissued share capital of Baoxin. Offer documents will be dispatched to thequalifying shareholders and option holders within seven days after today’sannouncement.
In addition, as a supplement agreement to the irrevocable undertaking, ChinaGrand shall have the right to deduct HKD1.2bn from Baoxin’s Chairman YangAihua and related parties if Baoxin failed to collect at least 30% of thecompany’s outstanding receivables as shown on 30 September 2015.Alternatively, China Grand can also opt to withhold HKD1.5bn from ChairmanYang and related parties until Baoxin can provide proof of collection of thosereceivables.
Deutsche Bank view – share rebound likely, but don’t get over-excited
Baoxin’s share price once fell below HKD4.49 after the December 2015announcement, implying zero or even negative valuation for the 25%outstanding shares not to be purchased by China Grand. In our view, thatreflected market concerns on the probability of a failed deal. Now with theacquirer’s willingness to dispatch the offer details while still waiting for SAFE’sclearance, we think the market will react positively and drive the share priceup.
That being said, we do not think that there would be much share price upsiderisk, if any, from our HKD5.0 target price. This is in consideration of 1) stillpossibledeal delay with the pending SAFE approval, 2) weak FY15 net profit(at RMB220m vs. DBe’s RMB816m) and the implied FY16E earnings risk, aswell as 3) transaction costs related to the sale of shares and the potentialdiscount to the remaining odd lots. As such, we maintain our Hold rating sincewe think the stock provides limited upside considering both the partial offereffect and the outlook.