Equity, Bottom-up Analyst, Investics Research

Sameer Taneja

A buy-side analyst with over 15 years of experience investing in Asian markets and specializing in the mid-small cap space, emphasizing value investing in companies with good free cash flows/dividends and long-term holding horizons. 
Exempt Financial Adviser (EFA) under CrossASEAN Research Pte Ltd. It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity, Bottom-up Analyst

Investics Research

It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity Bottom-up Research

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/china-meidong-auto-holdings-limited" target="_blank" data-smartkarma-citation="entities:10795:1" rel="noopener">China Meidong Auto (1268 HK)</a> stock price performance and execution have been stellar over the last two years.  It has left its peers behind by a country mile. I've been bullish on this name since 2016 and written about it in a few insights.
<a href="https://www.smartkarma.com/insights/meidong-multiple-expansion-to-facilitate-m-a" target="_blank" data-smartkarma-citation="insights:34819" rel="noopener">Meidong - Multiple Expansion To Facilitate M&amp;A?</a> ( 28th November 2019 ) 
<a href="https://www.smartkarma.com/insights/meidong-a-deep-dive-looking-into-2019-and-beyond" target="_blank" data-smartkarma-citation="insights:36850" rel="noopener">Meidong: A Deep Dive: Looking into 2019 and Beyond</a> ( 26th Feb 2020 )
I also published insights on this name in the past when it was &lt;200 mn USD in market capitalization. 
<a href="https://www.smartkarma.com/insights/meidong-the-next-china-auto-dealer-to-be-acquired" target="_blank" data-smartkarma-citation="insights:3071" rel="noopener">Meidong: The Next China Auto Dealer to Be Acquired?</a> 
The company recently did a sizeable capital raise for the purpose of "opportunistic acquisitions". Analyst <a href="https://www.smartkarma.com/profiles/sumeet-singh" target="_blank" data-smartkarma-citation="accounts:4" rel="noopener">Sumeet Singh</a> in his insight <a href="https://www.smartkarma.com/insights/china-meidong-auto-placement-great-track-record-but-back-to-back-deals-don-t-make-the-cut" target="_blank" data-smartkarma-citation="insights:39994" rel="noopener">China MeiDong Auto Placement - Great Track Record but Back-To-Back Deals Don't Make the Cut</a> has covered the deal in great detail. With over 2.1 bn RMB of net cash, the company has built a war chest now for the purpose of M&amp;A. I do not rule out the possibility of good acquisitions, but with a valuation of 25x/18.8x PE FY20/21, a lot has been baked into the share price. Now that the story of a potential acquisition is well flagged, it's time to take money off the table. 
My reasons for doing so are : 
1) If Meidong did do an accretive acquisition today, utilizing all the 2+ bn RMB net cash they have, the absolute best-case scenario is a valuation of 8x PE for the target.  This would imply incremental earnings of 250 mn RMB ( on a 700 mn RMB forecast for FY20 ) placing the stock at 20x FY20 and 15x FY21, a valuation slightly above the next best name in this space <a href="https://www.smartkarma.com/entities/zhongsheng-group-holdings" target="_blank" data-smartkarma-citation="entities:10573:1" rel="noopener">Zhongsheng Group (881 HK)</a> trading at 16x FY20 and 14x FY21. 
2) I would argue that an 8x valuation may be hard to find in China ( except if you are Zhengtong and Baoxin, but will they sell ? ) given luxury auto dealers have had a decent run in this environment where an auto-recovery is being baked in. Most acquisitions that tend to happen at very cheap valuations in China are turn around stories where the targets are making losses. Would the market take such an acquisition by them positively?  With the valuation Meidong trades at, everything they do from hereon will have to be perfect. 
3) The founder recently sold down 4.45% of his stake. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/138/320/original/image_62585024621591407372349.png?1591407375" class="editor-image img-responsive" data-smartkarma-image-id="138320"></figure>
source: company filings 
Whilst the founder is still the majority owner of the business, a 4.45% stake sale in my opinion is negative.

China Meidong Auto (1268 HK) stock price performance and execution have been stellar over the last two years.  It has left its peers behind by a country mile. I've been bullish on this name since 2016 and written about it in a few insights.
Meidong - Multiple Expansion To Facilitate M&amp;A? ( 28th November 2019 ) 
Meidong: A Deep Dive: Looking into 2019 and Beyond ( 26th Feb 2020 )
I also published insights on this name in the past when it was &lt;200 mn USD in market capitalization. 
Meidong: The Next China Auto Dealer to Be Acquired? 
The company recently did a sizeable capital raise for the purpose of "opportunistic acquisitions". Analyst Sumeet Singh in his insight China MeiDong Auto Placement - Great Track Record but Back-To-Back Deals Don't Make the Cut has covered the deal in great detail. With over 2.1 bn RMB of net cash, the company has built a war chest now for the purpose of M&amp;A. I do not rule out the possibility of good acquisitions, but with a valuation of 25x/18.8x PE FY20/21, a lot has been baked into the share price. Now that the story of a potential acquisition is well flagged, it's time to take money off the table. 
My reasons for doing so are : 
1) If Meidong did do an accretive acquisition today, utilizing all the 2+ bn RMB net cash they have, the absolute best-case scenario is a valuation of 8x PE for the target.  This would imply incremental earnings of 250 mn RMB ( on a 700 mn RMB forecast for FY20 ) placing the stock at 20x FY20 and 15x FY21, a valuation slightly above the next best name in this space Zhongsheng Group (881 HK) trading at 16x FY20 and 14x FY21. 
2) I would argue that an 8x valuation may be hard to find in China ( except if you are Zhengtong and Baoxin, but will they sell ? ) given luxury auto dealers have had a decent run in this environment where an auto-recovery is being baked in. Most acquisitions that tend to happen at very cheap valuations in China are turn around stories where the targets are making losses. Would the market take such an acquisition by them positively?  With the valuation Meidong trades at, everything they do from hereon will have to be perfect. 
3) The founder recently sold down 4.45% of his stake. 

source: company filings 
Whilst the founder is still the majority owner of the business, a 4.45% stake sale in my opinion is negative. 