ChinaDaily Briefs

China: Soho China Ltd, Semiconductor Manufacturing International Corp (SMIC) and more

In today’s briefing:

  • SOHO China (410 HK): The Tap On The Shoulder
  • SMIC (SEHK: 00981; SSE Star Market: 688981): Concerns in the Price, Buy for Long-Term Growth
  • SOHO China: Blackstone Walks Away

SOHO China (410 HK): The Tap On The Shoulder

By David Blennerhassett

Perhaps my last insight should have been titled: SOHO China (410 HK): At Least There WAS Dialogue

On the 6 September, Soho China Ltd (410 HK) announced its SAMR application was still ongoing, and that the “Offeror has received further requests to provide additional information for the regulators’ review. It is uncertain when the review process will be completed.”

Four days later, and in “light of the lack of sufficient progress in satisfying the Pre-Conditions” – the Offer was conditional on approval from China’s competition authorities –  Blackstone and Pan Shiyi pulled the transaction.

With over three and half months left on the clock to the expiry of the long-stop date… what happened?

Evidently, Beijing tapped Pan Shiyi on the shoulder that this deal is not going to happen, and all parties saved face by simply pulling the transaction.

But was the decision predicated on the ensuing backlash from Pan Shiyi son’s comments last year?

Or has Pan Shiyi fallen victim to China’s common-prosperity strategy, which calls for China’s citizens to share in the opportunity to be wealthy?

From the onset, this property deal faced domestic online criticism that Pan Shiyi and his wife Zhang Xin were cashing out of the business they set up over two decades ago, and taking the proceeds offshore. Perhaps not the poster children for this shared prosperity drive.

So what now – how do the Pans move forward?

The right trade would appear to one of selling their assets piecemeal, then paying out dividends. But that scenario would see cash returned to the vendor anyway, which only serves to circumvent this failed offer. 

The big question now is where this will trade on Monday, and who – apart from those who are short – will be buying from arb investors now that the company is certifiably toxic.

More below the fold. 

SMIC (SEHK: 00981; SSE Star Market: 688981): Concerns in the Price, Buy for Long-Term Growth

By Scott Foster

SMIC’s share price jumped 6% to HK$23.60 on Friday, Sept. 10,  signaling that concerns over the cost of the new factory announced a week ago and other risks had been discounted. Over the previous month, the shares had declined by 19%.

On Sept. 3, the company announced plans to build a new factory in Shanghai to produce semiconductors at the 28-nanometer node. This technology is suitable for automotive ICs, which are currently in short supply.

Given common concerns over the semiconductor shortage and President Biden’s reportedly conciliatory call to President Xi, the risk of U.S. sanctions seems minimal.

Buy in anticipation of a near doubling of production capacity by 2024.

SOHO China: Blackstone Walks Away

By Arun George

Soho China Ltd (410 HK) is a real estate company controlled by power couple Pan Shiyi and Zhang Xin. On Friday after market close, SOHO China announced that Blackstone Group (BX US) has withdrawn its pre-conditional voluntary conditional cash offer of HK$5.00 per share. 

The key pre-condition was SAMR anti-trust approval. On 2 August, the SOHO China/Blackstone case was accepted for SAMR review by normal procedure rather than a simplified procedure which can take 180 days. On 6 September, SOHO China noted that Blackstone has provided further documents in response to the SAMR’s requests for additional information. Blackstone had received further requests to provide additional information by SAMR and the statement noted that it remains uncertain when the review process will be completed. 

We previously argued in SOHO China’s Spread Risk/Reward Update that SAMR approval should be forthcoming due to Blackstone’s prior experience in securing SAMR approval for real estate deals, SOHO China will continue to be listed and the deal will not lead to a material increase in market concentration. 

Four days later 10 September, Blackstone and Pan Shiyi mutually agreed to terminate the offer as they concluded that the pre-condition (SAMR antitrust approval) will be unlikely to be satisfied on or before the Long Stop date (31 December 2021). Revealingly, the parties also agreed that there will be no extension to the Long Stop date suggesting that recent interactions with SAMR had headed downhill.  

We think that Blackstone decided to walk away as it was unwilling to expend all its political goodwill to complete a single transaction. The transaction had caused disquiet in China with several Chinese press and social media posts urging SAMR to block the transaction due to the premise that the deal is unpatriotic for reasons highlighted in SOHO China’s Spread Risk/Reward Update. While we previously argued that the rationale presented in these articles for blocking the deal is poor, a SAMR antitrust approval would also not sit well with President Xi Jinping’s recent calls for wealth redistribution.

On the other hand, Pan Shiyi is stuck between a rock and a hard place. The publicity from the pulled transaction means that potential buyers will stay away in the short term. When the dust settles, Pan Shiyi can pursue selling individual assets or sell his stake to a domestic private equity bidder or real estate firm. Long-term, we see a limited rationale for SOHO China to remain publicly listed.   

With the offer terminated, the immediate focus turns to the extent of the share price drop on Monday. Our analysis suggests that the share price could fall between HK$2.45-3.25 per share range. At the last close price of HK$3.50 per share, our share price range represents a decline of -30% to -7%. 

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