IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

Arun has over 15 years’ experience covering the Technology sector. During this time, he has worked with technology start-ups and as an equity analyst in investment banks and independent research firms. He was formerly a Technology Analyst for Canaccord Genuity, Altium Securities, Espirito Santo Investment Bank, Noble Group and Clear Capital. He has a dual Master’s degree in Financial Engineering and Industrial and Operations Engineering from the University of Michigan. He obtained his Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology, Bombay. He is also a CFA charterholder.

IPOs and Catalysts/Events

Will the Chinese Government Rescue Soho China (Potential Write Down of Assets)?

SOHO China: After Many False Starts, Finally an Offer?

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<a href="https://www.smartkarma.com/entities/soho-china-ltd" target="_blank" data-smartkarma-citation="entities:4123:1" rel="noopener">Soho China Ltd (410 HK)</a> is a real estate company controlled by power couple Pan Shiyi and Zhang Xin. As a reminder on 16 June, SOHO China announced a pre-conditional voluntary conditional cash offer from <a href="https://www.smartkarma.com/entities/blackstone-group-inc" target="_blank" data-smartkarma-citation="entities:27166:1" rel="noopener">Blackstone Group (BX US)</a>. The offer of HK$5.00 in cash per share is a 31.6% premium over the closing price of HK$3.80 per share on the last trading day (11 June prior to the trading halt). The offer is conditional on the offeror holding more than 50% of the voting rights. The offer will meet the 50+% acceptance threshold as the offeror has secured irrevocables from Pan Shiyi and Zhang Xin representing 54.93% of the outstanding shares.However, since the announcement of the offer, the spread has widened from 9% on the first trading day after the deal announcement to touch a remarkable 74% on 30 July on the back of a dubious Chinese press article suggesting that deal would be blocked by SAMR under the PRC anti-monopoly law. The gross spread has subsequently declined to a still elevated 47% at the last close price. We previously argued that SAMR approval should be forthcoming due to Blackstone’s prior experience in securing SAMR approval for real estate deals, SOHO China will continue to be listed and the deal will not lead to a material increase in market concentration. On 2 August, the SOHO China/Blackstone case was accepted for SAMR review by normal procedure rather than a simplified procedure which can take 180 days. Due to the tightening anti-monopoly regulatory environment and Pan Shiyi's status as a pioneering real estate entrepreneur, the SAMR approval process can take some time.Several Chinese press and social media posts urge SAMR to block the transaction due to the premise that the deal is unpatriotic for various reasons. These negative articles and social media posts have led investors to take the sell first, ask questions later approach. We think that the rationale presented in these articles for blocking the deal is weak and largely speculation.<div class="content-highlight">Based on a break price of HK$2.45 per share and at the last close price of HK$3.39 per share, the deal probability remains at a low of 37%. A 60% deal probability would imply a price of HK$4.00 per share and an 18% gross spread to last close, which we view as reasonable. </div>

Soho China Ltd (410 HK) is a real estate company controlled by power couple Pan Shiyi and Zhang Xin. As a reminder on 16 June, SOHO China announced a pre-conditional voluntary conditional cash offer from Blackstone Group (BX US). The offer of HK$5.00 in cash per share is a 31.6% premium over the closing price of HK$3.80 per share on the last trading day (11 June prior to the trading halt). The offer is conditional on the offeror holding more than 50% of the voting rights. The offer will meet the 50+% acceptance threshold as the offeror has secured irrevocables from Pan Shiyi and Zhang Xin representing 54.93% of the outstanding shares.However, since the announcement of the offer, the spread has widened from 9% on the first trading day after the deal announcement to touch a remarkable 74% on 30 July on the back of a dubious Chinese press article suggesting that deal would be blocked by SAMR under the PRC anti-monopoly law. The gross spread has subsequently declined to a still elevated 47% at the last close price. We previously argued that SAMR approval should be forthcoming due to Blackstone’s prior experience in securing SAMR approval for real estate deals, SOHO China will continue to be listed and the deal will not lead to a material increase in market concentration. On 2 August, the SOHO China/Blackstone case was accepted for SAMR review by normal procedure rather than a simplified procedure which can take 180 days. Due to the tightening anti-monopoly regulatory environment and Pan Shiyi's status as a pioneering real estate entrepreneur, the SAMR approval process can take some time.Several Chinese press and social media posts urge SAMR to block the transaction due to the premise that the deal is unpatriotic for various reasons. These negative articles and social media posts have led investors to take the sell first, ask questions later approach. We think that the rationale presented in these articles for blocking the deal is weak and largely speculation.Based on a break price of HK$2.45 per share and at the last close price of HK$3.39 per share, the deal probability remains at a low of 37%. A 60% deal probability would imply a price of HK$4.00 per share and an 18% gross spread to last close, which we view as reasonable. 

Soho China

SOHO China's Spread Risk/Reward Update