What's driving Tencent's privatization bid for Bitauto?

September 17, 2019 15:11
A buyout of Bitauto will allow Tencent to boost its holding in the online automobile retail platform Yixin Group indirectly. Photo: Reuters

Crisis brings opportunity.

Many years ago, investors learnt a painful lesson after betting heavily on the so-called new economy stocks that subsequently proved toxic amid a sharp slide in the post-IPO performance.

Now, the game seems to have changed to a new dimension – seizing potential value in beaten-down stocks that once launched red-hot IPOs.

A case in point is Yixin Group, a Tencent-backed online automobile retail platform that created a huge buzz in late 2017 with what was then touted as the 10th hottest Hong Kong IPO ever.

Last Friday, we had news that Tencent, in partnership with private-equity firm Hammer Capital, has launched a bid to buy out Bitauto Holdings, a US-listed Chinese auto information and services provider that holds a controlling 43.74 percent stake in Yixin.

Tencent, which currently owns 7.81 percent of Bitauto and 20.59 percent of Yixin, will prepare a general offer price of no more than HK$2 per share.

Yixin surged 24 percent yesterday and closed at HK$2.12, but the level still marked a 73 percent discount to its IPO price in November 2017.

Yixin's IPO attracted some HK$382 billion of investor capital, with the retail portion garnering about 560 times oversubscription.

The stock hit more than HK$10 in early deals on its first trading day before closing at HK$8.15, up nearly 6 percent from the offer price of HK$7.7.

However, since then it has mostly been a downhill ride for the firm, sliding 80 percent from the peak.

Still, that doesn't mean the firm is a no-go for investors.

Leaving the stock performance aside, a company could be worth at least its net cash – raised in the IPO – even if all the staff went on holiday and closed all business after the IPO.

Already holding a substantial chunk of Yixin, it would make sense for Tencent to gain more control through a privatization deal for key shareholder Bitauto. 

That explains why the savvy startup investor would act like Warren Buffett and take a second bite of the cherry.

Expect more privatization bids, especially in relation the small to mid-cap companies that were in red on the books of internet giants Tencent and Alibaba Group.

A quick glance suggests China Literature and Zhong An Insurance – both hot IPOs under the wing of Tencent but whose shares have taken a big knock post the listings – would fit well on the watch list.

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EJ Insight writer