In recent weeks, there have been news of several management buyout of companies, including the latest by toll operator, Chinese Merchants Holdings (Pacific) Limited or CM Pacific which was reportedly being offered by its parent listed company in Hong Kong, China Merchants Group Limited (3699 HK Equity) for a takeout price of about S$1.02 per share, or S$1.8 billion. This latest takeout news along with others prompted us to take a closer look at some of the potential SGX-listed S-Chip property counters that might be seen as takeout candidates in the near term.
The current Chinese property market
According to a March 2016 CNBC.com news report, housing prices in Beijing kept climbing where a two-bedroom apartment in Beijing’s Shuangjing neighbourhood would fetch for around 1.8 million yuan (S$380,000), and a buyer reportedly paid around 4.05 million yuan (S$855,000) for a two-bedroom unit in cash last year. This trend, along with housing prices in other Chinese cities have similarly shot up over the past year. According to China’s official Xinhua News Agency, Shanghai home prices rose 21.4% while Beijing home prices experienced a 11.3% jump over last year.
How do these current housing trends in China impact S-Chip property counters
The housing euphoria in China reflected in many Chinese property counters’ latest March quarter results, with Yanlord Land posting a multiple-fold increase in its 1Q2016 net profits to 260.14 million yuan (S$54.86 million) from 15.46 million yuan a year ago. According to Yanlord’s Chairman and CEO, Mr. Zhong Sheng Jian, the various support and incentives by the Chinese government were key catalysts of growth within the China’s property sector, and the company hopes to further its advances through additional project launches in the first and second-tier cities in China.
We also think that the investor and customer bases for these SGX-listed Chinese property companies mainly come from the Mainland as their housing projects are being built there. For Singapore retail investors who do not travel to the Mainland often, and the various rules governing foreign property ownership in China, there are not many valid reasons to invest in the shares of these Chinese property counters unless it makes a significant contribution to their investment portfolios, or there are some exciting new housing projects coming up.
Moreover, many Chinese property counters do not have significant trading volume, judging by the three-month average trading turnover of around less than 6 million to none. From the standpoint of the management, the lack of significant trading volume, along with the expenses needed to maintain a SGX Mainboard or Catalist listing, and other issues, these factors might prompt them to consider taking their listed entities private.
How do we pick the S-Chip property counters as potential takeout candidates
The exercise we are about to illustrate is by no means an accurate predictor of what is to come for takeout opportunities among potential Chinese property counters, but we attempt to use some of the fundamental data to determine the possibilities.
We decided to focus on the key fundamental indicators for potential takeout attempts including the percentage float, total cash to total debt, price-to-book (P/B) value, price-to-earnings (P/E), enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) and Debt to EBITDA ratios.
We are also focusing on candidates’ total cash to total debt levels, and the Debt to EBITDA ratios to determine if management can launch a takeover attempt using cash or perhaps take on some debt leverage without necessarily compromising their debt coverage ratios.
Our potential S-Chip property stock picks for potential takeout
In the two tables shown above, we identified the three Chinese property counters shaded in yellow colour as some of the potential takeout candidates, and we picked these companies based on the total cash to total debt that are at least 90%, the P/B values for these three property counters are less than 1 times, and P/E values range from 2 times to around 20 times.
Some of our counters do not show as having significant debt incurred include China New Town Development, and Starland Holdings Limited.
As for the percentage float or the volume of shares available in the secondary markets, we think that these three companies might have to put in additional efforts in convincing minority shareholders into accepting their takeout offers as this measure for all the three Chinese property counters stand at less than 90% as of May 11, 2016.
Our forecast for potential takeout price premiums
There are no historical track records of former SGX-listed Chinese property companies being taken private. However in a March 30, 2016 Bloomberg News article, Chinese billionaire, Wang Jianlin was reportedly considering privatising its Hong Kong listed Dalian Wanda Commercial Properties Co. for a yet-to-be finalised offer price of HK$48 (S$8.51) per share or more for each H-share unit. This was about 24% premium to the closing price in Hong Kong on that day.
With this latest news of a Chinese property counter being taken out in Hong Kong, we think that small to mid-size Chinese developers like the management of the three counters being identified (Yanlord Land Group Limited, China New Town Development Company Limited, and Starland Holdings Limited) might come up with an offer price of about 10% to 20% premium to their six-month volume weighted average price (VWAP) as of May 11, 2016. For takeover premium comparisons, the one-day takeover premium by CMH on CM Pacific is at around 20%, 15-day takeover premium is around 20.1%, and 30-day takeover premium is around 21.6%.
We think that the potential 10% to 20% takeout price premium represents quite a generous offer to minority shareholders by management. For example, when Yanlord Land made its first debut on the SGX in June 2006, the closing price averaged around $1.00 per share. At around the mid-point of the potential takeover premium of 15% to the six-month VWAP price of S$1.127 on May 11, 2016, this translates to around S$1.296 per share. At the price of S$1.296, this is also a markup of around 29.6% to the average trading price of S$1.00 per share in June 2006.
A word of caution
We will like to stress that these estimates discussed in this article are purely hypothetical scenarios and investors should not rely solely on this article for their investment decisions. As there have not been any significant takeout attempts by SGX-listed Chinese property counters, we think that with the various management takeout news happening over the course of past few months of 2016, many undervalued or companies facing low trading volume and high listing expenses, including Chinese property counters might consider taking their entities private like the three companies we identified.
However, investors do need to be cautious about taking such taking on investments which they have no knowledge of, or going into these companies solely by the notion that these companies will be taken over soon. Like all investments, we believe that they should be doing their homework analysis diligently to minimise disappointments.
Disclaimer: This article is written by Tay Hock Meng. I do not have any SGX-listed or foreign listed Chinese property companies in my investment portfolio, and I have no intention of accumulating any equity interest in these Chinese property companies.