Foreword:
In recent years, the advent of the digital age has accelerated the pace of digital transformation of China's three major industries, while all walks of life are also facing a crossroads of transformation and upgrading. Against this backdrop, capital-intensive traditional industries such as new energy, real estate, home appliances, food, and professional equipment, which have been undervalued in the Hong Kong stock market for a long time, have joined the privatization process.
In the wave of privatization of Hong Kong stocks, there is no shortage of leading companies in the industry, such as energy giant Huaneng New Energy, Hong Kong's established real estate industry association Tefeng, and Changshouhua Food (hereinafter referred to as “Changshouhua”) (01006-HK), the first domestic corn manufacturer. Meanwhile, Huaneng Renewable Energy and Huidefeng have been successfully privatized and delisted. Changshouhua, the former corn oil leader, is still advancing privatization-related work.
It is worth noting that the offer price premium per share of Shandong Samsung, the majority shareholder of Changshouhua, is quite inferior to previous privatization premiums for Hong Kong stocks. High and low privatization premiums reflect shareholders' sincerity towards minority shareholders, and are also the main catalyst for privatization delisting. So, under the big wave of privatization of Hong Kong stocks, why did Changshouhua choose to privatize and delist at a low premium? What does privatization and delisting tell us?
2020: The first year of Hong Kong stock privatization, Changshouhua chose to join at a low premium
Data compiled by Caihua News found that from the beginning of the year to now, there were 26 companies intending to privatize Hong Kong stocks and companies that were privatized and delisted during this period, up from the total number of 23 Hong Kong stock privatized companies from 2017 to 2019.
Announcements issued by privatized companies from the beginning of 2020 to the present found that the reason most companies chose to privatize was driven by factors such as parent groups or controlling shareholders making strategic choices, avoiding competition in the industry, saving the costs required to maintain listing, poor stock flow, and low valuations and stock prices.
In the wave of privatization of Hong Kong stocks, there is no shortage of leading companies in various industries. For example, Huaneng New Energy, which has been successfully delisted, was the main force in the construction of the domestic wind power industry, Defeng, an established Hong Kong real estate company that has been delisted, and Changshouhua, a leading domestic corn oil company. It is worth noting that unlike the privatization offer prices of over 40% per share of Huaneng New Energy and Huifeng, the majority shareholders of Changshouhua chose to privatize this time with a premium of only 16.4% per share. Furthermore, the privatization premium per share of Changshouhua is also lower than the average premium per share of privatization of Hong Kong stocks in the past and the premium per share of the previous privatization of China Grain and Oil Holdings in the same industry. According to Bloomberg data, from 2017 to March 31, 2020, 23 companies were privatized and delisted. The average purchase price premium compared to the closing price on the last trading day before the announcement was issued was 44.1%; the purchase price of delisted China Grain and Oil Holdings was 34.07% compared to the closing price of the last trading day before the announcement was issued.
Judging from past Hong Kong stock privatization cases, too low premiums may attract opposition from minority shareholders, and privatization plans often run aground. The majority shareholder of Changshouhua, Shandong Samsung Group, should be more aware of this. As to why the purchase price was lower than the closing price on the last trading day before the announcement was issued, Changshouhua did not indicate in the announcement. However, it is not ruled out that it is related to the debt restructuring of Shandong Samsung Group, the majority shareholder, and tight cash liquidity.
Behind the privatization of Changshouhua: Shandong Samsung Group's short-term debt rises
Changshouhua once stood out in the domestic cooking oil market with propaganda slogans such as “corn health oil” and “phytosterol corn oil”. It was the backbone of the corn oil market, and its popularity was lost for a while. As “Changshouhua” corn oil became popular, the parent group behind it, Shandong Samsung Group, began to be well known to the outside world. In 1998, I learned about the lack and market potential of domestic corn oil. When there were no domestic corn oil manufacturers at the time, Shandong Samsung Group dared to take the lead, actively participate in and develop the corn oil market, and invested in the establishment of China Corn Oil Co., Ltd. (the predecessor of Changshouhua), the first domestic corn oil manufacturer.
At the beginning of its establishment, Shandong Samsung Group began using the “Changshou Flower” brand as the largest IP for future development, and increased marketing and promotion related to health oil. The “Changshou Flower” brand products were successively rated by the National Center for Public Nutrition and Development as nutritional health promotion products, green food, nutritional health food, national quality assured and safe health food, and honorary titles recognized by the national edible oil market as the top ten safe brands, halal food, and famous brand products from Shandong. Shortly after Changshouhua went public in Hong Kong, Changshouhua phytosterol corn oil (Chinese food jianji G20100707) received national health food certification, and the scale of sales and business expansion rapidly increased.
With the steady rise in Changshouhua's performance, Shandong Samsung Group's business focus began to shift towards the two capital-intensive fields of R&D, production and sales of lightweight vehicles and aluminum alloys.
Currently, in the field of lightweight vehicles, Shandong Samsung Group's intelligent aluminum alloy tanker production line can produce 10,000 units per year; in the alloy field, Shandong Yuhang Special Alloy Equipment Co., Ltd., a subsidiary of Shandong Samsung Group, can process 150,000 tons of aluminum alloy industrial profiles per year, which has become a strategic emerging industry project in Shandong Province. With the Changshouhua corn oil and grease business and the lightweight vehicle and aluminum alloy business going hand in hand, the revenue scale of Shandong Samsung Group also broke the 10 billion mark.
There are unforeseen circumstances in the sky. The business performance of Shandong Samsung Group has been challenged and tested to varying degrees as trade sentiment between China and the US continues to increase, domestic leverage reduction continues to be pressured, and stock competition in various industries is becoming less heated. Take Changshouhua as an example. From 2016 to 2019, Changshouhua's revenue declined from 3.207 billion yuan to 3,030 million yuan, and net interest rate increased from 263 million yuan to 320 million yuan. Judging from the 2020 interim results, Changshouhua's revenue and net profit both experienced a double-digit decline in the first half of the year due to the pandemic. At a time when Changshouhua's revenue and net profit are on track, competitors Shandong Luhua, Shanghai Liangyou, COFCO and Yihai Kerry (Arowana brand owner) all performed well. Among them, Shandong Luhua's performance broke the 30 billion mark in 2018, and revenue increased to 33.9 billion yuan in 2019, achieving continuous growth for more than 30 years; leading Yihai Kerry's revenue directly climbed to $17.743 billion in 2019.
At a time when the performance of its core business, Changshouhua, was mediocre, Shandong Samsung Group had short-term cash flow problems, and its credit rating continued to be downgraded. According to the credit rating given by S&P in February 2020, the Samsung Group's unrestricted cash is relatively limited and relies more on external funding, but currently refinancing is progressing slowly, and the recent coronavirus outbreak will make the refinancing process more complicated. Long-term issuer credit ratings were downgraded from “B+” to “B”. The above ratings are all included in the credit watch list, and they all have a negative impact. From 2018 to the end of 2019, the revenue of Shandong Samsung Group was 11.85 billion yuan and 11.78 billion yuan respectively; net profit was 463 million yuan and 483 million yuan respectively. The revenue and net profit performance was also unsatisfactory to Changshouhua.
Behind its poor performance, short-term debt pressure is raging. As of 2017 to 2019, the total liabilities of Shandong Samsung Group were 9.15 billion yuan, 9.292 billion yuan and 7.856 billion yuan. The balance of current liabilities was 4.83 billion yuan, 4,536 billion yuan and 4,787 billion yuan respectively. Current liabilities accounted for 52.79%, 48.81% and 60.94% of total liabilities, respectively. It is easy to see from this that the Samsung Group's main debt is liquid debt, which accounts for a relatively high proportion. This means that a rise in the share of current debt will inevitably put greater pressure on the Shandong Samsung Group to repay its debts in the short term. As a result, excessive privatization offer prices will increase the group's privatization costs and put some pressure on cash flow. Therefore, the reason for the majority shareholders' low premium buyout does not rule out choices made due to high short-term debt pressure.
Epilogue:
At the same time as Samsung Group's own short-term debt repayment pressure surged, growth in its core business, Changshouhua's performance was blocked, secondary market stock prices have been declining since 2013, trading volume was sluggish, and financing channels were unable to meet its long-term capital needs. In this regard, judging from the long-term development of enterprises, taking advantage of the privatization wave, choosing low premium privatization and delisting, reviewing the parent group's embrace, integrating internal resources, and returning to the embrace of A-shares may be a good choice.