CHINA MINZHONG trades at around 84 cents, offering about 40+% upside to a possible general offer at $1.20. Why the big discount that the stock is trading at?
One might say the broad market is in a slump but there are other more specific angles to look at. First, a recap of events:
31 Dec 2014: China Minzhong's chairman announces his intent to acquire 347 m China Minzhong shares, representing a 52.94% stake, from PT Indofood Sukses Makmur at S$1.20 per share. The chairman, Lin Guo Rong, is seeking to raise funding for the acquisition and for a mandatory general offer.
14 Oct 2015: CMZ BVI (the vehicle of China Minzhong's chairman) and PT Indofood enter into a binding MOU. CMZ BVI agrees to pay PT Indofood an earnest sum of S$40 m no later than 30 December 2015.
30 Dec 2015: CMZ BVI pays earnest sum of S$40 m to PT Indofood.
There is a broad range of views among investors as to why there is a big discount to the possible GO price despite Mr Lin's payment of the earnest sum:
1. Progress: Yes, the funding required is substantial and looks daunting -- but CMZ BVI said it "has made progress in its discussion with potential financiers on the funding arrangement."
2. Earnest sum: The most important indicator on the likelihood of Mr Lin being able to buy out PT Indofood and minorities is the payment of the earnest sum of S$40 m by his vehicle CMZ BVI.
Likely, the cash came from a financier (or financiers), who would not have handed it to CMZ BVI without being near certain that everything is in order.
If the S$40 m came instead directly out of Mr Lin's pocket, then it's an equally positive sign because he certainly would not risk losing S$$0 m unless his talks with financiers have convinced him that the necessary financing is his for the asking.
3. Non-refundable: The earnest sum, which works like a deposit for many types of transactions such as real estate purchases, is non-refundable.
To quote China Minzhong's announcement, "If the Parties fail to sign the SPA (sale and purchase agreement) by the Expiry Date, the MOU shall be terminated and PT Indofood shall be entitled to forfeit the earnest sums paid by CMZ BVI, and CMZ BVI shall have no right or claim against PT Indofood for costs, expenses, damages, losses, compensation or otherwise."
The MOU's expiry date is 14 Oct 2016, ie a year after the signing.
Now, if the SPA materialises, the share price of China Minzhong can be expected to rise to a whisker of the GO price, which will be a solid gain from the current share price level.
China Minzhong had cash of RMB4.4 billion as of end-Sept 2015 against bank borrrowings of RMB1.8 billion -- which works out to RMB2.6 billion in net cash (equivalent to S$570 million).
This huge cash pile is possibly a strong source of assurance for financiers being approached to lend S$534 m to CMZ BVI for it to buy a 70% stake in Minzhong.
In addition, at S$1.20 per share, CMZ BVI will be buying the shares at a discount to their Net Asset Value of RMB7.87, or S$1.71, per share.