Opinion Index comes more than a year after last year's two large acquisitions of Dalian AirAsia and Qingdao Luohang. On the evening of November 21, first Services Holdings once again disclosed an acquisition announcement that it intends to acquire an 8 per cent stake in Century Jinyuan Services for a price of 163 million yuan. However, the price of the deal is in the form of a targeted rights issue to the shareholders of Century Jinyuan Services.

The result of this transaction is essentially equivalent to a stock exchange between the two parties, and the option contract attached to the transaction agreement can also promote the follow-up cooperation between the two sides.

As for the reasons for these transactions, apart from optimizing the investment and asset structure and strengthening the business co-operation between the two sides, there may also be more long-term considerations.

It is essentially a stock exchange, and the transaction price is relatively fair.

The form, purpose and mode of payment of this transaction are special.

The consideration of the transaction will be realized by issuing and allocating a total of 264 million shares to the seller at the issue price of HK $0.68 per share, of which 158 million will be allotted to Platinum wish and 106 million will be allotted to Jingzhi, and the allotment shares will enjoy the same status as the issued shares. Platinum Vision and Jingzhi are all shareholders of Century Golden Source Services. As of pre-transaction, Platinum Vision and Jingzhi had a stake of 49.69% and 33.12%, respectively.

After the completion of this acquisition, Century Jinyuan Services will not become a subsidiary of first Service Holdings, and its financial results will not be incorporated into the financial statements, but will only be counted as financial assets at fair value into profit and loss, it will not have a significant impact on its operation or financial aspects.

On the contrary, after the completion of the directional rights issue of the first service, Century Jinyuan's shareholding in the first service will directly rise from 0 to 20.88%. Platinum Vision and Jingzhi will also jointly nominate Su Peiwen as a representative as a non-executive director of first Services.

In terms of transaction consideration, the rights issue price of HK $0.68 per share of first Service is about 7.94% higher than the previous closing price and 3.98% more than the average closing price of the previous 10 consecutive trading days, while since Century Jinyuan Service has not yet been listed, it uses the independent valuation method of a third-party valuer, and the equity price of 8% is equivalent to HK $177 million, which is equivalent to 7.7 times price-to-earnings ratio based on 2021 profits. The discount is about 7.88% compared with the actual price, which can be considered fair to both parties.

To sum up, the nature of the transaction is similar to that of the stock exchange between the first service and the century gold source service. in the first service, the shares of the old shareholders have been diluted by nearly 20%, and the board of directors has been sent by the century fund source to send non-executive directors to settle in at the expense of 8% of the unlisted shares of the century fund source service.

There is no obvious interest bias in the option contract arrangement.

It is worth noting that in this stock exchange transaction, an option agreement has also been arranged for both parties. The acquisition agreement grants the seller (shareholder of Century Jinyuan Service) a subscription agreement and a buyer (first service) put option free of charge. The subject matter is the first service stock. Within a period of 3 years, the number of transactions is 300000 shares without power payment, and the agreed exercise price is HK $0.68 per share. The right price of the bank is consistent with the directional rights issue price of the first service to Century Jinyuan shareholders, which is a non-standardized over-the-counter contract.

Affected by various factors, the stock price of first Service on the Hong Kong Stock Exchange is not ideal, falling by more than 60% in the past year. If the share price of first Service continues to fall in the secondary market in the future, the first Service has the right to sell and benefit from the first Service shares to Century Golden Source Services at an exercise price higher than the market price.

Even if the share price of first Service hits bottom and begins to rebound, Century Capital still has the incentive to buy shares of first Service at a price lower than the market price to benefit, that is, no matter how the share price of first Service rises or falls in the future, there will always be a tendency on both sides to exercise power.

This arrangement for the award of options contracts between the two parties will lead to a continued increase in the proportion of Jinyuan Services' shareholding in the first Service in the future century, with the only difference being that of the exercising parties.

As the arrangement of this option contract is granted free of charge, there is no obvious interest bias for both sides of the transaction, and the exercise party can always benefit, which shows the sincerity of the deep cooperation between the two sides.

Conjecture of transaction purpose

There have also been stock swaps in the property management industry before, for example, Sunshine Zhibo Service and everything Cloud exchanged shares last year, but Sunshine City cashed out at a high level on the eve of the official IPO of everything Cloud, which is essentially just another form for Sunshine Zhibo shares in East Sunshine City to sell shares in the property management company to withdraw funds.

Contemporary Real Estate is currently undergoing debt restructuring and is not out of the crisis. At the beginning of this year, Contemporary Real Estate planned to sell the first service to Sunac Services, and both buyers and sellers made a number of announcements, but gave up because the prices of the two sides did not agree at the end of the transaction.

At present, contemporary real estate takes the form of diluting its 20% stake in the property management platform to acquire 8% of Century Capital Services, rather than directly selling shares in the property management company in exchange for desperately short-term cash flow to "put out the fire." the purpose of this deal is worth studying in itself. may be out of longer-term considerations.

Judging from the announcement alone, first Service said that the acquisition is mainly due to the fact that the board of directors may achieve synergy in view of the fact that first Service may establish a closer business relationship with the target group in the future, and is optimistic about the financial performance and prospects of the target group. The acquisition will be conducive to expanding the investment portfolio of high-quality assets.

In terms of actual business relevance, both Century Jinyuan Service and first Service Holdings are more traditional property management enterprises with the residential format as the main management body, of which the first Service has acquired some public and commercial projects through last year's acquisition. Century Jinyuan Service is characterized by its management of super-large buildings, that is, 12 Century City series projects developed by Century Jinyuan Group, with a total area of 44.4 million square meters. The average construction area of each project is about 3.7 million square meters.

The coincidence degree of the two in the regional layout is not high, the regional overlap is mainly in the Beijing area, and the rest are scattered in the national key urban agglomeration. After cooperation, the two sides can complement each other in their respective vulnerable areas to obtain new projects more easily.

It is worth mentioning that contemporary real estate and Century Jinyuan have had equity transactions before. On June 6 this year, Contemporary Real Estate sold all the shares of Beijing Contemporary Green Construction Project Management Group Co., Ltd. to Century Jinyuan at a price of 49.4738 million yuan, with a transaction consideration of about half of its net assets. the target company is a platform enterprise specializing in agent construction business under contemporary real estate, and the stock exchange transaction between the property companies of the two sides may be a sign of further cooperation between the contemporary department and the century gold source system.

From the point of view of the first service, apart from the consideration of business cooperation, Century Jinyuan Service has been to Hong Kong twice but failed to list in the past. if it plans to press ahead with its listing plan in the future, it is expected to still get a higher valuation level than the conversion price (7.7x PE). At that time, first Service Holdings will also have the opportunity to profit from the exchange transaction.