Brief China: Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower and more

In this briefing:

1. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower
2. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
3. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers
4. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.
5. Harbin Electric’s Offer: One For The Brave

1. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower

Biologics holdings is looking to raise upto US$517m by selling a 4.2% stake in Wuxi Biologics (Cayman) Inc (2269 HK). This will be fourth placement by the company since it listed less than two years ago. Below is a link to our coverage of the listing and the earlier placement:

• Jun 2017 – US$500m: WuXi Biologics IPO Review – An Opportunity to Get Exposure to Biologics in China
• Dec 2017- US$550m: Wuxi Biologics Placement – Selldown Right when Lockup Expires Suggests Eagerness to Offload
• Mar 2018 – US$600m: Wuxi Biologics Placement – In Time for the Next Lock-Up, Returns Will Probably Not Match Prior Ones
• Jun 2018 – US$500m: Wuxi Biologics Placement – Probably Not a Surprise to Sell Again when Lock-Up Expires

Each of the past placement has been of a similar size and has generally done well. The company recently reported results which were ahead of street estimates. The deal scores a marginal positive score on our framework but there is still a lot more selling left once the 90-day lock-up expires.

2. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

Ruhnn Holding Ltd (RUHN US) is looking to raise about US$200m in its upcoming IPO.

The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.

The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model. 

Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019.  The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.

3. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers

Frontage Holding, a contract research organization subsidiary of A-share listed Hangzhou Tigermed Consulting (300347 CH), re-filed to list on the Hong Kong Stock Exchange recently. We have covered the company’s fundamentals in our previous insight here. In this insight, we will provide an updated analysis based on new data available from the new prospectus, as well as our thoughts on valuation.

4. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.

New York based activist investor firm Starboard Value has been intricately involved in shaping the  fortunes and futures of two high profile technology companies in recent years, Marvell and Mellanox. The firm first to prominence some five years ago when they were the first among their peers to accomplish the extraordinary feat of replacing the CEO and entire board of Fortune 500 restaurant group Darden, while holding less than 10% of the company’s shares.

In the wake of their Darden coup, the firm has gone from strength to strength. To date the firm has taken positions in a total of 105 publicly listed companies, replacing or adding some 211 directors on over 60 corporate boards.

On March 7’th 2019, Starboard Value announced the acquisition of a 4% stake in US comms infrastructure firm Zayo. In the intervening period, Zayo’s share price has risen by 14% as canny investors scramble to partake in the goodness that will surely be extracted by the activist firm that simply doesn’t take no for an answer. 

5. Harbin Electric’s Offer: One For The Brave

Harbin Electric Co Ltd H (1133 HK)‘s (“HE”) composite doc for its merger by absorption has been dispatched. HE’s major shareholder Harbin Electric Corporation (HEC), an SOE, is seeking to delist the company by way of a merger by absorption at HK$4.56/share, an 82.4% premium to last close. The offer has been declared final. The IFA (Somerley) considers the offer fair & reasonable.

As HE is PRC-incorporated with unlisted domestic shares, the transaction is executed as a hybrid scheme/tender offer. The proposal requires ≥ 75% for, ≤10% against, in a scheme-like vote from independent H-shareholders. HEC holds no H shares. A 10% blocking stake is equal to 67.5mn shares. Should the resolution pass, the tendering acceptance condition in this two-step Offer is 90% of H shares out. Those who do not tender will be left holding unlisted scrip.

Indicative Timetable

A Word on Harbin’s Net Cash

In my prior insight, I discussed how the offer was below Harbin’s net cash, using CapIQ 1H18 numbers. That conclusion was not correct. While CapIQ’s net cash exceeds the consideration, its number excludes notes payable, a material number.

Using FY18 figures provided in the composite document, I estimate net cash/share of $3.18, ~70% of the consideration payment. Bloomberg’s number is higher again, while my understanding is Eikon’s $1.73/share (as at 30 June 2018) net cash figure includes (I have not verified, nor drawn a conclusion whether this would indeed be correct) deposits from customers and banks.

What to Do?

The significant offer premium to last close, the material drop in FY18 profit and the zero possibility of a competitive bidder emerging, suggests this Offer falls over the line.

The blocking stake at the H-share meeting is a risk. Although no single shareholder has the requisite stake to block the deal, collectively it is achievable.

The 90% tendering also, prima facie, appears a risk; yet such an acceptance threshold is not uncommon (Shanghai Forte (2337 HK) also required a 90% acceptance condition in 2011; while Hunan Nonferrous Metals H (2626 HK)‘s 2015 merger by absorption required 85%) and once the EGM resolution has been approved, there is little incentive to hold onto shares as Harbin will be delisted. Shares cannot be compulsory acquired.

However, I still consider “fair” to be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers.

Dissension rights are available, although I am not aware of any precedents, nor the calculation methodology of a “fair price” under such a dissension, nor the timing of payment. 

Trading at a wide gross/annualised spread of 9.6%/61.4%, implying a >80% chance of completion. The current downside should this break is 40%. I don’t see an attractive risk/reward here.