Billionaire Wang Jianlin is considering privatizing Dalian Wanda Commercial Properties Co. Ltd. (03699.HK) at an offer of HK$48 or more for each H-share. That would represent a 23.7 percent premium to the stock’s closing price of HK$38.8 on March 30.
The deal is expected to worth at least HK$31.3 billion.
The company would delist from the Hong Kong Stock Exchange, a move seen as paving the way for its listing in China’s A-share market.
It’s quite a sensible move. The A-share market has far more attractive valuation levels.
Currently, the Hong Kong market has a P/E ratio of around 11 times, and the China Enterprise Index only has a P/E ratio of 7.2 times.
By contrast, the Shanghai and Shenzhen markets have a P/E ratio of 16 and 26 respectively. The average P/E ratio for other sectors stays above 30 times, excluding financial stocks.
Wang currently holds 43.71 percent of the company’s issued shares. According to mainland netizens, the billionaire has decided to exit the Hong Kong market because he was annoyed by the city’s media and financial circles.
However, Wang said the decision will be made by the shareholders, and he is obviously the biggest shareholder.
It’s quite sensible for a savvy investor like him to seek higher valuation in China’s A-share market.
In fact, many companies are considering listing in the A-share market, or are already preparing to do so.
Management teams have been so disappointed with their share prices even after they tried their best to boost earnings or even increase dividends.
Their stocks may have jumped by 10 to 15 percent, but they remain far behind their peers on A-share market.
Also, it’s a great time to do M&A deals; many traditional companies are facing tough times amid China’s economic restructuring.
Mainland companies are lured into Hong Kong due to cheaper financing costs. However, things have changed. Many listed companies are allowed to issue bonds in onshore market after Beijing liberalized the bond market last year. They can obtain even lower rates onshore than offshore market without any foreign exchange risk.
Companies prefer to issue renminbi bonds given US dollar is expected to gain strength during the rate hike cycle.
It’s widely known that shell companies are priced at 3 billion yuan (US$463.7 million) in the A-share market but only HK$600 million in Hong Kong. Besides, A-share companies lag behind their H-share peers in corporate governance.
Nevertheless, it’s much easier to become sought-after shares among fund managers or retail investors on the mainland. And it’s easier to find the gray area in the A-share market given its less developed regulatory and legal system.
As such, returning to the A-share market is set to be the new trend, given its high valuation and more lax regulation.
The biggest winner would be the mainland stock market and companies listed in Hong Kong but have yet to issue A shares.
On the other hand, Hong Kong’s financial sector and the Hong Kong stock exchange are set to suffer.
There are many options for listing in the A-share market. If the HK-listed unit decides to spin off some business and incorporate a new unit to list in the A-share market, it would dilute the benefits of existing shareholders in Hong Kong.
Another option is that the HK-listed arm would be fully controlled by the subsidiary, which would list on the mainland. The second approach is fairer for existing shareholders.
This article appeared in the Hong Kong Economic Journal on April 1.
Translation by Julie Zhu
[Chinese version 中文版]
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