Brief TMT & Internet: Hanergy’s Hobson’s Choice and more

In this briefing:

1. Hanergy’s Hobson’s Choice
2. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex

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).