Although the share acquisitions in the A-share market can drive stock prices higher, some share acquisitions from small companies are facing floating losses with the fluctuation of the market.
Based on SSN’s statistics, the A-share market has witnessed over 80 shares acquisition with more than 5 percent stocks of listed companies since 2016. Currently, about 50 buyers are facing stock prices lower than the acquisition price and some even recorded floating losses of up to 30 percent. It is contrast to the high floating profit for share acquisitions in the second half of 2015. However, there are worries in the market that some share acquisitions are to seek high returns with leverages embedded in the design. Once the market sees significant fluctuations, it may see huge risks.
However, about 10 companies, including Winall Hi-tech Seed Co., Ltd. (300087.SZ), Hubei Yangfan Holding Co., Ltd. (600421.SH) and Shanghai Kaichuang Marine International Co., Ltd. (600097.SH), have been acquired through secondary market acquisition to the 5 percent limit since April. Connected companies of Zhongtian Group have acquired 30 percent equities of Yangfan Holding.
In the opinions of insiders, the A-share market prefers companies with small market value in shares acquisition. With IPOs becoming normal, the stock prices of companies with small market value but without performance will return reasonable. Investors should be alert to the risks on the acquisition of such shares.
Share acquisitions see more floating losses
Share acquisitions generally have certain effects in short term. But it will return normal in the long run.
A person from a Shanghai-based private fund indicated that the market does not always work. When a stock was acquired by capitals to the 5 percent limit, some will review the company. But certain capitals will follow the trend and drive the price of relevant stocks higher. As time goes time, it will be certified by the market and the stock price will return normal. If the market sees changes and the company has problems, the stock price may plunge. “It cannot stop losses immediately even if investors accept certain losses. It is the nature of share acquisitions.”
The acquisition of shares of Guangdong Boxin Investing & Holdings Co., Ltd. (600083.SH) by Tibet Kangsheng Investment Management Co., Ltd. is a typical case. As at the end of the first quarter, Kangsheng Investment totally holds 38,452,700 shares of Boxin Investing, accounting 16.72 percent share capitals of the company, through three shares acquisitions in the secondary market with more than 5 percent stocks. It has become the biggest shareholder of the company.
It takes quite a long period for Kangsheng Investment to conduct share acquisitions. It began to acquire shares of Boxin Investing on July 9, 2015. It acquired over 5 percent shares of Boxin Investing in September 2015, March and April 2016. The stock price of Boxin Investing has been hiking amid fluctuation during the period. The cost for share acquisition also surged from 10.85 yuan/share to 20 yuan/share. Based on the announcements and the analysis on the stock price, Kangsheng Investment has spent a total of approximately 714 million yuan in acquiring 38,452,700 shares of Boxin Investing with an average cost of approximately 18.58 yuan/share. The current stock price of Boxin Investing is 13.06 yuan and the floating loss is up to 29.71 percent.
The declining stock price is a result of the plunging performance. Boxin Investing only recorded a net profit of 3,013,000 yuan in 2016, representing a decrease of 73.4 percent year on year. It turned profits into losses in the first quarter of 2017 and recorded a loss of 548,300 yuan.
The companies acquired by Yichang Changjin were under special treatment (ST). Yichang Changjin and its parties acting in concert began to acquire shares of Hubei Wuchangyu Co., Ltd. (600275.SH) from June 2016. Based on the latest disclosure and as at March 21, it totally holds 101,658,300 shares of Wuchangyu, accounting for 19.98 percent of its total share capitals. Based on the information disclosed, Yichang Changjin and its parties acting in concert spent a total of 1,026 million yuan with an average of 10.09 yaun/share.
However, due to continuous losses, Wuchangyu has been under ST since May 2. As a result, the stock price of the company plunged and closed at 6.99 yuan on May 18. The current floating loss of Yichang Changjin and its parties acting in concert is 30.72 percent.
Li Qin, who bought shares of Chengdu Road & Bridge Engineering Co., Ltd. (002628.SZ), also faces the same situation. Li indicated that he spent 1,179 million yuan in buying 148 million shares of Road & Bridge Engineering with an average cost of approximately 7.97 yuan. The latest stock price of Road & Bridge Engineering is only 6.33 yuan and Li recorded a floating loss of about 20.58 percent.
It is noteworthy that buyers all indicated that they are optimistic about the future development of the company when acquiring their shares. They must be embarrassed with the current financial results.
Potential leverage risks
A floating loss of 30 percent is not rare for buyers if they really “followed the concept of value investment”. The value of such companies will be shown as times goes by. However, some buyers exaggerated leverage in acquisition and there are potential risks.
“There are huge amount of capitals in the market. An annualized interest rate of about 8 percent will attract tens to hundreds of million yuan of preferred capitals.” A market analyst indicated.
It is exciting that returned are expanded through leverages. However, if the stock price of relevant companies fluctuate significantly, relevant risks will also be expanded.
Take Shanghai New Huang Pu Real Estate Co., Ltd. (600638.SH) as an example, Shanghai Lingzi began to build position in the first quarter and acquired 15 percent equities of the company through three share acquisitions. Based on the median value of the stock prices, it totally spent approximately 1,703 million yuan. Based on a total of 84,174,700 shares held, the average cost is 20.24 yuan/share. The latest closing price of New Huang Pu Real Estate is 17.22 yuan on May 18. It means that Shanghai Lingzi currently records a floating loss of about 14.94 percent or about 254 million yuan.
Although the floating loss is not huge, buyers are facing difficulties. It is learnt that the actual controller of Shanghai Lingzi plans to raise 5 million yuan with 300 million yuan and the equities of the listed company with an annualized interest rate of 8 percent to introduce two trust plans and attract 3 billion yuan, which will be used in acquiring shares of listed companies. It is uncertain if the actual controller will continue the plan under the current circumstances.
Hexin Rongzhi also faces similar problems in acquiring shares of Guanhao Biotech Co., Ltd. (300238.SZ). Based on the announcement made in July 2016, Hexin Rongzhi bought 12,507,400 shares of Guanhao Biotech, accounting for 5.068 percent of the total share capital of the company, in one month with approximately 439 million yuan. The cost is about 39.41 yuan/share. However, the current stock price of Guanhao Biotech is 25.41 yuan, representing a floating loss of approximately 35.52 percent.
Hexin Rongzhi also leveraged assets management plans during the acquisition. Based on the announcement, Hexin Rongzhi built positions through several asset management plans as an investment consultant. Such details as the capital cost and investment period were not disclosed.
Li Qin also used various financing models in raising 1,179 million yuan in acquiring shares of Road & Bridge Engineering. Li borrowed 50 million yuan from an associate company with a period of three months. Li also transferred the equities of a company and obtained 600 million yuan. Four projects developed by a company reached about 1,234 million yuan were as at the end of 2016 and the returns reached about 836 million yuan. Li received 248 million yuan from the projects.
Shares acquisition shall follow original concept
“It is rare to buy 5 to 10 percent of shares in the secondary market and it shall not reduce the shareholding in six months. However, it has become an investment method with high returns since the second half of 2015.” A person from a Shanghai-based private fund indicated that as only an acquisition of 5 percent shares shall be disclosed, the transaction cost is not high when it is appropriate. The disclosure is also an advertisement for relevant stocks. It will catch attention from external capitals or original shareholders will increase the shareholding, which will boost the stock price and bring floating profits.
Sure enough, if investors buy shares of an individual stock to the five percent limit through secondary market acquisition, the stock price will climb accordingly; and if there’s fight for equity, the growth will be remarkable.
There’s one common characteristic of share acquisition to the five percent limit through secondary market over past two years that there are a great number of new investors who are quite interested in small firms. According to incomplete statistics, among about 80 cases of share acquisition since 2016, market value of about 60 listed companies whose shares were bought to the five percent limit is only several billion yuan and as many as 20-30 companies are regarded as shell resources.
The above-mentioned person from private fund thought that most of investors who bought shares to the five percent limit through secondary market in the second half of 2015 could gain benefits. There’s a typical case that China Science & Merchants Investment Management Group Co., Ltd. purchased shares of Maanshan Dingtai Rare Earth & New Materials Co., Ltd., while S.F. Holding Co., Ltd. carried out backdoor listing through the latter.
But this kind of model won’t last long. Many institutions told the journalist that share acquisition to the five percent limit betting on reorganization is after all speculation over shell resource. IPO becomes normalized and stocks prices of many shell resources and small companies without good performance declined since the beginning of this year, it is naturally hard for new share acquirers to gain benefits.
Interestingly, the previous lessons don’t prevent more capitals from investing in the stock market. Incomplete statistics showed that there have been about 10 listed companies whose shares were bought by industrial leaders as well as capital market participants since April.
The latest case is about Hubei Yangfan Holding Co., Ltd. It announced on the evening of May 17 that subsidiaries under Zhongtian Group which bought shares of the company to five percent limit for six times would increase its shareholdings by two percent in next six months. What will subsidiaries under Zhongtian Group do to such a shell company with market value less than 4 billion yuan and suffering losses in 2016?
The above-mentioned person from private fund said that under the tightening rules about listing through reorganization and review of financing, the probability of succeeding in betting on value of shell company through share acquisition is smaller and smaller. Share acquisition to the five percent limit should return to target long-term value investment in the long run.
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