The announced acquisition price came lower than market expectation, which is even more positive for CGS. On a pro-forma basis, this deal would help boost CGS’s 2020/21 earnings by 13% if assuming 64.62% stakes acquisition. Due to the exchange rules, CGS would propose a general offer but a privatization may not be successful as 1) 30% price premium (or 7x Languang’s 2022E PE) may not be attractive enough to other shareholders such as Chairman Yao (6%) and Orient Fund (5%). 2) If Chairman Yao stays, he may decide to keep his stake as part of the incentive. 3) Languang’s future growth path may accelerate with CGS’s support therefore minority shareholders may not be willing to sell now.
- What’s new: CGS announced that it will purchase 64.62% stakes of Languang Jusbon from its parentco Sichuang Languang development (600466 CH) at a total consideration of RMB4.85bn (RMB42.1/share or HK$50.7/share). The acquisition price is equivalent to 30% premium over the last trading price of Languang.
- Privatization for Languang Jusbon?: After the deal, Languang’s parentco will cease completely and that would leave the remaining shareholders to be Chairman Yao Min (6%), Orient Fund (5%) and the rest public shareholders (24%). The deal itself would trigger a general offer but it is still a question mark on privatization given that the offer price came lower than market expectation. The key deciding power would be Chairman Yao and Orient Fund.
- Impact on CGS: We think this is very positive for CGS as 1) strategically, Languang’s strong presence in Southwest (60% of managed GFA) would fill the gap for CGS (only 3% in the region). 2) Financially, the acquisition would boost CGS 2021/22E earnings by 20% if assuming 100% stake acquisition after the general offer. Also, the two companies share similar profitability and thus there is less likely margin dilution. 3) Valuation wise, the purchase price is equivalent to Languang’s 7x 2022E PE, which would be value accretive. 4) Balance sheet wise, there’s enough cash to support up to 100% stake acquisition as CGS has already raised HK$7.7bn via placement in Dec 2020.
- Impact on Languang Jusbon: The deal would trigger a general offer that would benefit the minority shareholder. If Languang remains listed afterwards, we think it would be also positive as CGS would help Languang gain market share in Southwest region. As for the reason why Languang’s parentco is willing to sell at this valuation, we think it has to do with the debt structure improvement under the “three red line” policy.
