Changshouhua Food Company Limited
This is a case of a live special situation – a ‘take private’ offer by the controlling shareholders to the minority shareholders - at $4.19/share.
Changshouhua (Company) is a Hong Kong listed company engaged in the
manufacture and distribution of edible oils. It operates via three segments: a) Own brand
edible oil (‘Longevity Flower’) – 78% of sales; b) Non-branded/bulk edible oil –
8%; and c) Corn meal – 15%.
It has an extensive distribution network of 1,437 wholesale distributors
and 150 retailers – totaling 390,000 sales locations – covering all provinces
of mainland China.
Management plans to expand its product offerings to include other
condiments to create a retail brand, and it intends to expand further in China.
Sales were $3.2b and net income was $333m for the last twelve months.
The company moved towards focusing on its own brand sales over recent years,
and profit margins picked up as a result. Covid-19 has disrupted business – but
the own-brand business held up well compared to the other segments.
The financial position is very strong with over $2b in net cash, $2.6b
in net current asset value, and $3.7b in tangible equity.
Free cash flow generation is strong, and returns on tangible assets (net
of cash) amount to 20% indicating the competitive strength of the business.
The controlling shareholder owns 52.14% of the equity and the offer
represents a valuation of $2.4b for the entire company.
Net of cash, this represents an earnings multiple 1.2x ttm earnings. It
is also at a 7% discount to net current asset value – a proxy for liquidation
value.
No sane shareholder would sell out at such a ridiculously low price.
It is perfectly logical to fear the delisting of the company – but Hong
Kong law allows minority shareholders to compel the buyout of their stakes up
to three months after the expiry of the offer – and after they’ve
rejected this offer, which they should.
The scheme requires 75% approval from the minority shareholders and not
more than 10% voting against the scheme. It appears that 23.9% held by one
shareholder has undertaken to accept the offer. The court hearing and voting
date will be announced no later than November 9th.
At the offer price, remaining shareholders have little ultimate downside
and the right to participate in significant earnings upside considering the substantial
cash resources, reasonably stable industry, fair competitive strength, and
management intention to execute on their core capabilities.
TTM: Trailing twelve months
$ represents Hong Kong $