Huadian joins stampede on Hong Kong market to take units private as market slump uncovers dozens of undervalued stocks

Eric Ng

China Huadian Corporation, one of the country’s five state-owned electricity generators, will privatise its Hong Kong-traded unit, becoming the latest to take advantage of a slumping market to buy back undervalued assets.

Huadian will offer HK$8.3 billion (US$1.06 billion) to buy 2.57 billion shares of the Hong Kong-listed shares of Huadian Fuxin Energy Corporation Limited from minority shareholders, along with 750 million unlisted stock in China, according to a statement.

Huadian decided to take its 62.8-per cent unit private as Fuxin’s low transaction volume and depressed valuation since its Hong Kong listing in 2012 had constrained its ability to raise funds in the capital markets.

“Without external equity financing capability, the company has lost the main advantage of a listing platform,” Fuxin said in a filing to Hong Kong’s bourse late on Monday. “The privatisation will help enhance the flexibility and efficiency of the company’s future business development.”

Huadian’s offer for Fuxin is not the only privatisation in play, with 16 “take-private” transactions valued at US$9.5 billion under way on the Hong Kong exchange since the beginning of February, according to Refinitiv’s data.

The biggest deal in the works is the HK$48.1 billion offer by Hong Kong’s Woo family to take Wheelock & Company private. Li & Fung, the global supply chain manager, last week exited the Hong Kong stock exchange after 28 years of listing, following a plan by its controlling shareholders and a partner to take it private.

High-efficiency coal power plant, Huadian Fuxin Energy. Photo: Huadian Fuxin Energy

Last October, Fuxin’s peer Huaneng Renewables – a Hong Kong-listed unit of the nation’s largest power generator China Huaneng Corporation – was taken private after a transaction worth HK$2 billion. The controlling shareholder offered minority investors a premium of 46 per cent to take the unit private.

A take-private offer for power generation equipment maker Harbin Electric at an 82 per cent premium to the previous closing price – representing 0.45 times net asset value per share – was voted down by shareholders marginally last July, said Daiwa Capital Markets’ analysts in a note.

View of HKEX at Exchange Square, Central on 15 April 2020. Photo: Nora Tam

The main driver of the spate of privatisations is the Hong Kong’s depressed market sentiments, caught in a trade war between the world’s two largest economies for almost two years, followed by anti-government protests and a coronavirus outbreak that has sent the local economy to its worst recession on record.

The benchmark Hang Seng Index in Hong Kong, Asia’s third-largest capital market, is trading recently at 10.4 times historical earnings while the China Enterprises Index averages 8 times. That makes Hong Kong one of the region’s cheapest markets, surpassed only by the Straits Times index in Singapore and the Colombo exchange in Sri Lanka.

“The longer the weak market sentiment drags on, the higher the chances of success for privatisation deals,” said Kenny Tang Sing-hing, chief executive officer of China Hong Kong Capital Asset, adding that companies which trade at sharp discounts to their net asset values – notably Chinese power utilities and Hong Kong rental income-reliant real estate investment firms – and those with low trading liquidity are prime targets.

People seen in the reflection, as an electronic board shows the closing Hang Seng Index number in Central on 1 June 2020. Photo: Felix Wong

Fuxin’s shares averaged at HK$1.42 each in Hong Kong before Huadian announced its take-private plan, with 7.3 million shares changing hands on average everyday in the past year, or a mere 0.33 per cent of its issuance over 180 trading days. The stock soared by as much as 60.3 per cent to a record HK$2.42 in recent trading.

“Huadian is of the view that the [offer] is an excellent opportunity to realise [shareholders’] investments in the company with relatively low liquidity at a cash consideration which represents an attractive premium,” Fuxin said.

The offer price for each H share of HK$2.5 represents a 65.6 per cent premium over the last trading price of HK$1.51 and 82.2 per cent above the average closing prices of the last five trading days.

The offer price represents 0.84 times its last year-end’s net asset value per share, compared to 0.5 times of the last trading price.

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