On 28 November 2018, COFCO (Hong Kong) Limited (“COFCO HK”) and China Agri-Industries Holdings Limited (“China Agri”, stock code: 0606.HK) jointly announced a proposal to privatise by way of a scheme of arrangement, upon which the listing of the Shares of China Agri on the Hong Kong Stock Exchange will be withdrawn. COFCO HK will acquire the shares of China Agri not held by itself and COFCO Group at the cancellation price of HK$4.25 per share. The cancellation price represents a premium of approximately 34.07% over the closing price of HK$3.17 per share on the last trading day and a premium of approximately 72.49% over the average closing price of HK$2.46 per share for the 90 trading days up to and including the last trading day. On the day of China Agri published an announcement in relation to trading resumption, the share turnover reached over HK$1,230 million, with the closing price up 29.02% to HK$4.09. As of the close of stock market on 2 December 2019, the price of China Agri steadily remained at HK$4.10, indicating a positive market response.
The major reason for the privatisation of China Agri is probably related to the long-term share price weakness and its difficulty to raise funds on an ongoing basis. It is stated in the announcement that China Agri’s ability of raising funds from the capital markets has been restricted, making it more difficult to make use of equity financing to provide sources of available funds to finance its business development, and to support COFCO Group’s and its own development strategies.
Cancellation price in line with the level of premiums of privatisation projects in market
Since its listing in 2007, the share price of China Agri has experienced a fall after a surge, once hitting a historical high of over HK$10 in 2010. In this sense, the cost per share of some original shareholders, who have already held the shares for quite a long time, may be higher than the cancellation price, therefore adding uncertainty to the transaction. In view of its movement over recent years, the share price of China Agri has been sluggish, with the highest single-day closing price since 2016 amounting to HK$4.11, which can be covered by the cancellation price.
Regarding the privatisation cases in the Hong Kong market in the recent two years, the cancellation prices of ASMC and Hopewell Holdings could cover their 10-year share prices, while those of Asia Satellite, China Automation, China Hengshi Foundation, China Power Clean Energy and Sinotrans Shipping can generally cover their share prices for the past two to three years. For China Agri, that its cancellation price can cover its four-year share price is in line with the majority of cases in the market.
According to the publicly available statistics, the cancellation price of privatisation transactions in Hong Kong market since 2017 represented a premium of approximately 35%, 41%, 46%, 52%, 55% and 52% over their average closing price of 1 day, 10 days, 30 days, 60 days, 90 days and 120 days before their trading suspension, respectively. The cancellation price of China Agri, being HK$4.25, which represents a premium of 34.1%, 40.9%, 64.7%, 72.5% and 72.6% over its average closing price of 1 day, 10 days, 30 days, 60 days, 90 days and 120 days before its trading suspension, respectively, is in line with and slightly above the overall premium level of the privatisation cases in Hong Kong in the recent two years.
China Agri said in its announcement that its shares were not actively traded. The average daily trading volume for the 120 trading days up to and including the last trading day was approximately 4.97 million shares, representing only approximately 0.09% of the issued shares. The relatively low trading liquidity of the shares of the company makes it difficult for the shareholders to sell their shareholdings in large volume on the market without causing negative impact on the share price of the company. The proposal will provide a good opportunity for the shareholders to sell their shares, such that they will be able to realise their investment in the company without giving rise to any discount in liquidity.
In view of the above, even though the cancellation price of China Agri seems to be enough to cover shareholders’ costs, whether its privatisation proposal will materialise or not will lie in the attitude of its long-time shareholders since privatisation transactions in Hong Kong are subject to the approval of shareholders at general meetings.
Caution required amid complicated industrial environment
China Agri is the producer and supplier of processed agricultural products in the PRC, principally engaged in such businesses as oilseeds processing, rice processing and trading, wheat processing and brewing materials. The industrial environment where it operates is relatively complicated.
The market has a mixed view on the outlook of the oilseeds crushing sector. There are some views expressed optimism about Sino-U.S. trade tension and expected the overall environment will improve as the outbreak of swine fever has been eased. Recent research reports also indicated that the price of soybean meal will go up this year with the reduction in the inventory level of soybean meal and the relief of supply pressure. On the other hand, some investors considered that as Sino-U.S. trade tension will edge towards normalisation; swine fever has spread across many parts of China, seeing no obvious signs of improvement in the near term; and China’s oilseeds crushing sector is under fierce competition with overcapacity, it is impossible to accurately draw up a specific timetable for when the industry can actually improve. The above factors will bring greater uncertainties to the performance of the industry and China Agri in the coming two years. The volatile industrial environment will make it more difficult for the market to determine the industry performance and the company’s share price movement.