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Is Privatisation Still On The Cards For Delong Holdings?

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Last year in September, Delong Holdings’ Chief Executive Officer and Executive Chairman Mr. Ding Liguo launched a privatisation bid for the mainboard-listed Chinese steel maker in a voluntary conditional cash offer of $7.00 per share.

At that time, Ding and his wife, Zhao Jing, jointly owned a 75.6 percent deemed stake in Delong, and the offer was to be funded by bank facilities extended by Deustche Bank, according to filings on the Singapore Exchange released through PrimePartners Corporate Finance. In the privatisation announcement, the offeror (Ding Liguo) intends to delist the company and turn it into a wholly-owned subsidiary. The offeror has no plans to cease the company’s business.

However, in the following month on 11 October 2018, Ding Liguo withdrew his privatisation bid after the Chinese steel maker was forced to revise the offer price upwards to at least $7.42. This came after a ruling of “Rule 17” of Singapore’s Take-over Code whereby the offeror would be required to raise the offer price to the highest price that a concert party – in this case, the investment vehicle, Best Grace Holdings, controlled by Ding Liguo and his wife Zhao Jing – has paid in cash for shares carrying ten percent or more of the voting rights in the six months leading up to the offer.

Profitability And Margin Ratios For Delong?

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Source: StockFacts, Delong’s metrics

Based on the latest financial figures for FY18 ending 31 December 2018, Delong’s profitability and margin ratios have fallen year-on-year (YoY) as compared to FY17. The largest drop we noted was the falloff of the Return on Equity (ROE) of 58.1 percent in FY17 to 31.9 percent in FY18.

However, on a longer historical term, both FY18 profitability and margin percentages are at significantly higher levels compared to the flat-to-negative level in FY15.

Cash Level At The Highest

Delong’s overall cash and liquidity levels have risen from Rmb2.1 billion in FY17 to Rmb2.8 billion in FY18. Meanwhile, net cash from operating activities rose from Rmb3.2 billion to Rmb3.5 billion during the same period.

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Source: FY18 Annual Report

Debt Level Has Also Fallen

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Source: Company’s Financials

Based on the observations from the debt trends as shown in the chart above, we noted that total debt-to-total equity ratios have been marked down significantly from a peak of 169.2 percent in FY15 to 68.4 percent in FY18. On the other hand, the interest coverage ratio as measured by EBITDA/Interest Expense has fallen from a peak of 20.2 times in FY17 to 13 times in FY18. However, considering that Delong’s indebtedness has been pared down significantly, the lower interest coverage ratio does not pose any pressing concern for the company.

Undemanding Valuation

At the last traded price of $5.48 per share as of 12 April 2019, Delong’s total market capitalisation is worth approximately $604.9 million according to data provided by SGX StockFacts.

The Chinese steel maker also trades at a historical price-earnings (P/E) multiple of 1.8 times, and a price-to-book (P/B) value of 0.5 times. Its twelve-month dividend yield is 10 percent based on last cash dividend rate of $0.55, paid out on 26 September 2018.

Current Ownership Structure

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Source: StockFacts (12 April 2019)

Ding Liguo, the CEO and Executive Chairman continue to own a majority stake in the company with 89.8 million shares or 81.5 percent ownership stake. This is up from the deemed stake of 75.6 percent in September 2018 when Ding launched a privatisation bid on the company.

General Trend Of Steel Prices?

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Source: World Steel Prices

According to World Steel Prices, steel price indices – as measured by both the carbon steel and stainless steel prices – look relatively stable at around US$690 – US$790 per tonne for carbon steel, and US$2,500 – US$2,800 for stainless steel.

Is Delong Still A Potential Privatisation Play?

Based on the previous cash offer of $7.00 in September 2018, the offer would have given shareholders a premium of 27.7 percent, compared to 12 April’s closing price of $5.48. Had the offer been raised to $7.42 to meet the requirement of “Rule 17”, the premium would be even larger at 35.4 percent.

However, the majority shareholder Mr. Ding Liguo has already shown reluctance to up the ante by putting up a higher offer, a sign that he may be uncomfortable to put in another privatisation bid given the huge premium now.

That said, given that the company’s valuation multiples are still rather undemanding, there is still a possibility that Mr. Ding would return to the privatisation table. Along with Delong’s high net cash level, the impetus to privatise the company should remain. However, judging from Mr. Ding’s withdrawal of the offer, it may be likely that any subsequent bid would only come at less attractive price level for minority shareholders.

Potential investors or shareholders who might want to capitalise on any potential privatisation angle might have to take into account several risk factors of a privatisation possibility not becoming a reality given the peak economic growth seen in China.

In addition, various uncertainties arising from the current US-China trade relationships, escalation of trade tensions could see the US imposing punitive trade measures on imported steel from China. This would be detrimental for Delong, as the company may not be able to export their steel products out of China. As such, any escalation of trade tensions between the US and China, could impair any subsequent bids for Delong.

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