Brief Event-Driven: Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium and more

In this briefing:

1. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium
2. BGF Holdco/Sub Trade: Sub Overbuying Wouldn’t Last Another Day

1. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium

Xingfa Aluminium (98 HK) has announced its major shareholder, Guangxin Aluminium (a wholly-owned Guangdong SASAC vehicle), has acquired 5,000 shares, lifting its stake to 30.001%, triggering a mandatory general offer. The offer price is $5.60, a premium of just 2.94% to last close.

Guangxin, together with certain management of Xingfa, attempted to take Xingfa private at $3.70/share back in 1H17. That scheme failed comprehensively, which was a good outcome for minorities as FY17 net income increased 28%. 1H18 profit was also a 25% improvement over the corresponding period.

The offer price is in line to where Xingfa traded last October and 23% below the recent peak back in mid-June 2018. It is also 37% below where China Lesso Group Holdings (2128 HK) acquired its 26.3% stake in April last year.

At a guess, this low-ball offer provides an exit for large(r) investor with regards to Xingfa’s low liquidity. But no irrevocables have been given and the Offer remains conditional on Guangxin holding 50% of the voting votes.

As expected, Xingfa is currently trading 1.4% through terms. For those interested in small-cap, illiquid stocks, I would buy around these levels to play the back-end, or the (remote) possibility of a bump. The offer has not been declared final.

2. BGF Holdco/Sub Trade: Sub Overbuying Wouldn’t Last Another Day

• BGF Sub had a 5.39% gain on better-than-expected 4Q18 results. Holdco stayed flat. As a result, we had a 2+σ jump from 95% of σ to -133% of σ. This is the widest jump in 120D. Holdco discount is currently at 47% to NAV.
• On a 120D horizon, price ratio is still well below 120D mean. Despite recent gains, Holdco price relative to Sub is nearly 20+%p down since 120D ago. 4Q results seem to be encouraging. But local sentiments are still heavily divided on Sub’s fundamentals. 4Q results aren’t strong enough to turn the tide drastically.
• Sub has been one of the most heavily shorted stocks in Korea lately. Yesterday’s huge gain might have been a short covering. This shouldn’t be a structural price pushing up for Sub. Sub staying below -1σ wouldn’t last another day. I expect a quick mean reversion at this point.