April 25, CECIC Chongqing Industry Co., Ltd. (‘CECIC Chongqing’) completed the previously announced acquisition of 29.0% interest in the Company. Nian’s Brother Trust has decreased its interest in the Company from 54.1% to 25.1% by selling shares to CECIC Chongqing. Nian’s Brother Trust was set up and is controlled by brothers Mr. Chim Wai Kong (粘為江) and Mr. Chim Wai Shing Jackson (粘偉誠), who are two of the eight original Company founders. CECIC Chongqing now holds 29.0% interest of the Company and is the single largest shareholder. The Company’s shares were bought by CECIC Chongqing for HK$3.620 / share; which is 54.0% less than the historical high share price of HK$7.870, but in line with the average closing price per share ( HK$3.630) for the 20 business days preceding the completion of the share acquisition.
New board composition: now 6 of 11 directors are nominated by CECIC Chongqing. Previously, Chim Wai Kong was the sole chairman of the board of directors. With the completion of the acquisition, the chairmanship has become a co-chairmanship, with Mr. Chim Wai Kong and Mr. Yu Heping as co-chairman. Mr. Yu Heping is a nominee of CECIC Chongqing. Additionally, previous board members Mr. Chim Fo Che, Mr. Hong Ming Qu and Ms. Wee Kok Keng, have been replaced by CECIC Chongqing nominees. With the change in control, the Company has not announced any changes in strategy, operations or development plans.
Company name to change to “CECEP COSTIN New Materials Group Limited”. The Directors proposed that the name of the Company should be changed as such in order to reflect the change in shareholding structure of the Company.
CECIC Chongqing is a non-wholly-owned subsidiary of China Energy Conservation and Environmental Protection Group (CECEP). CECEP is a state-owned enterprise, which is fully sponsored and owned by the central government. CECEP has 172 wholly owned and holding subsidiaries with over 30,000 employees and is the largest conglomerate in the field of energy conservation and environmental protection in China. In 2012, CECEP plans to reach RMB100 billion in total assets and RMB50 billion in total revenue.
Our comments and views: On the one hand, we find it potentially worrisome that the founders and controlling shareholder would willingly sell control of the Company, especially at a price 54.0% less than the historical high. The sale could possibly be an indication of lack of confidence in the Company’s prospects. On the other hand, the Company posted decent (although below our expectations) FY11 results, with net profit increasing 13.0% YoY. Further, we see no indication of problems with the Company that would warrant the share sale. The share sale might have been done as part of a strategy to advance the Company’s development. Focused on environmental protection and emissions reductions, CECEP could be a good strategic fit with the Company, and could help to promote the Company’s products, including pollution reducing products such as the Company’s new high temperature resistant non-woven filtration materials. The Company is currently trading at HK$3.97, equivalent to 7.1x FY12 PER and 1.9x FY12 PB. We maintain our current rating of ‘Buy’ and TP of HK$5.13, which is based on 9.2x FY12 PER