In this briefing:
- Hanergy’s Hobson’s Choice
- AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex
- Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers
- Yungtay Noises Haven’t Produced a Result Yet
1. Hanergy’s Hobson’s Choice
On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.
Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn. Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.
Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.
The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share. To this:
it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.
The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.
Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.
(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)
2. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex
Aem Holdings (AEM SP) reported solid FY18 results and gave a decent outlook for FY19. Customer concentration remains high (85%+ of revenues linked to one of biggest IT companies globally) but new growth opportunities with Huawei and Novoflex could potentially add meaningfully to earnings and customer diversification as of FY20.
The balance sheet remains strong (58M SGD net cash) and should be further utilized for M&A to complement the current product offering.
Given the large change in the shareholder register over the past twelve months (after Novo Tellus distributed the shares to its LPs) free float is now 83% with Aberdeen and UBS among the largest shareholders. The high free float and low market cap make AEM a prime takeover candidate the coming 2-3 years.
Fair Value of 2.1 SGD remains unchanged (based on just 2x revenue or 10x FY2020 EV/EBITDA).
3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers
- The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
- De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
- Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
- Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut
- StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents’ market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation
4. Yungtay Noises Haven’t Produced a Result Yet
After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019.
The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.
Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.
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