Luen Thai is engaged in the manufacturing and retail of apparels and accessories, the provision of freight forwarding and logistics services and real estate development.
There are 1,034,112,666 shares outstanding, of which the Tan family owns 726,625,000.
On 26 Oct 2016, the company announced that:
Click to access LTN20161026384.pdf
1) It will dispose its non core businesses of freight forwarding and logistics, real estate development, and retail sales of apparels and accessories at a consideration of US$110,344,883 to a company 55% owned by the CEO, Mr Tan. Upon completion, the remaining business of the group will be apparel manufacturing. As this is an interested party transaction, the approval of Independent Shareholders is required at an EGM.
2) Subject to Disposal Completion having taken place, the Company intends to declare and pay a special interim cash dividend of not less than HK$0.82 per Share.
3) Subject to certain antitrust pre-conditions in Japan, the Philippines, USA, and Germany being fulfilled, Shangtex (HK) Limited, a Chinese state owned company, will make an unconditional offer of HK$1.80 per share. The Tan family has irrevocably undertaken that they will accept the offer in respect of 520,849,598 shares, representing 50.37% of the total number of outstanding shares, and will not accept the offer in respect of the remaining 205,775,402 shares, representing 19.90% of the total number of outstanding shares. The Offeror intends to maintain the listing status of the company upon completion of the offer.
4) Subject to the Offer having become unconditional, the Company intends to declare and pay a special interim cash dividend of HK$0.749 per Share.
The Opportunity
Apparel manufacturing is an industry which is characterised by heavy competition due to its low barriers of entry, and firms in this industry generally earn low returns on capital. There is no single firm or group of firms which hold an outsized market share. Also, given the small implied value of the company (HK$1.80*1.03b shares=HK$1.85b) relative to the industry and that the Offerer intends to maintain the company’s listing status, it is extremely unlikely that the Offer will be blocked on antitrust grounds.
However, of late, there have been takeover offers by Chinese companies being blocked by sovereign powers. These may be politically motivated or due to national security concerns as the buyout targets operate in sensitive industries such as energy and semiconductor manufacturing. There is no such concern for an industry like apparel manufacturing.
The disposal of the non-core businesses is also highly likely to be approved by Independent Shareholders. The disposal group as a whole accounted for only 6% of revenues and recorded net losses in the past two years (p30 of the announcement on 26 Oct 2016), while the consideration of US$110m represented about half of the company’s market capitalisation just before the announcement was made. The proceeds will be used to fund the significant special dividend which is highly attractive for shareholders.
The Independent Financial Adviser (IFA) was appointed on 21 Nov 2016 and after two delays, the circular detailing the offer, disposal agreement and advice from the IFA will be published on 16 Dec 2016. What is left is the antitrust clearance, which should not take too long given the low complexity and size of the deal. Conservatively speaking, I estimate that the proceeds from the deal and special dividends will be paid out by June 2017.
Assuming that everything goes as planned, each shareholder who accepts the offer will get HK$0.82 + HK$0.749 + HK$1,80 = HK$3.369. At the current price of HK$3.10, this represents a profit of HK$0.26, for an expected return of 8.4%. Given the time to completion is 6 months, this represents an annualised return of 16.8%. This is a highly attractive risk-reward situation and I advocate a medium to high weighting in this opportunity.
After completion of the offer
The Offeror Parent has a leading textile manufacturing and trading business in China. The Offeror Parent is committed to building a leading global supply chain for textile and apparel products. Its strategy is to gain customers in developed markets in Europe and the U.S. and to acquire quality manufacturing capability.
The Offeror Parent seeks to implement such strategy through business collaboration and capital investments. The Offeror Parent intends to develop and manage its overseas businesses through Hong Kong, a leading trading centre for clothing with a worldwide reputation for quality and expertise. The Offeror Parent considers the Company to be one of the key platforms on which it will develop and manage its overseas businesses on a long term basis.
Company will continue to carry on its existing businesses. The Offeror expects that the Offeror Parent’s and the Company’s respective businesses will significantly complement each other. The Offeror Parent, being a leading textile manufacturer and trader, and the Company, being a leading OEM (as defined below) manufacturer, are expected to benefit from each other’s clientele and capabilities. Except for the changes in the board composition of the Company contemplated in the paragraph headed ‘‘Proposed changes to the board composition of the Company’’ below, the Offeror currently has no intention to change the management of the Company in any material respect.
Given the Offeror’s state backing and intentions with the company, it may be worthwhile to continue holding the company’s shares. This is something that we may revisit after the completion of the offer, when there is more information about what is left of the company and their long term plans.
C is for Compounding 