Fully support for PAG offer to acquire Spring REIT 01426 (3)

Chunquan Trust was listed in 2013 and has been in existence for about 5 years. It was very quiet in the early days. Only two large acquisitions were made in 2017 and this year, including the completion of the acquisition of British commercial properties in July 2017 and the announcement last month. The acquisition of Huizhou Property is not unique, and the two large acquisitions are related to the management.

Let me talk about the background information. The manager of Chunquan Trust is Chunquan Asset Management Co., Ltd. (Manager), whose shareholders are 90.2% of Mercuria Investment Co. (formerly known as AD Capital) and 9.8% of Huamao Property Holdings Ltd. The 9.8% stake in Huamao was transferred to Mercuria. At the same time, the majority shareholder of Chunquan Trust is RCA FUND, holding 27.2% of Chunquan, and Mercuria is also the administrator of RAC FUND, which means that Mercuria is the majority shareholder of Chunquan Manager and also the majority shareholder of Chunquan. The manager, that is, any decision made by the manager, will basically be supported by the major shareholder.

Let’s take a look at the acquisition of British commercial properties for £37.72 million completed in July last year. The Vendor is ITOCHU, and ITOCHU holds a 23% equity interest in Mercuria at the time of the transaction. As a result, Itochu is a connected person of Spring REIT and the RAC Fund managed by Mercuria is also a connected person. The acquisition is defined as a connected transaction. The RAC Fund cannot participate in the voting.

In order to allow the majority shareholder RAC FUND to participate in the voting, ITOCHU reduced the shareholding of Mercuria to 19.5% before the voting, so that it is no longer a connected person of Chunquan. Therefore, the RAC FUND managed by Mercuria and Mercuria can participate in the voting. The big ratio is approved and passed.

Before the completion of the above transaction, the manager issued a price of $3.25 per share, which was a 45% discount to the net asset value of the Spring capital of $5.95 per share, and issued 114.9 million shares to raise 373 million Hong Kong dollars to repay the loan. After the completion of the placement of new shares, Chunquan’s net asset value per share was diluted from $5.95 to $5.7.

The acquisition and issuance of new shares in this UK commercial property triggered the PAG to hold a special shareholders meeting, recommending the removal of the manager, but the proposal could not be passed without the support of shareholders.

This “connected” transaction is inseparable. Last month, the manager proposed to purchase Huizhou Huamao Tiandi for RMB 1.653 billion. The 87% interest in the property is owned by Huamao, while Huamao itself owns 9.8% of the Spring REIT management. Unfortunately, according to the regulations, Huamao is not defined as spring. The connected person of Quan, therefore Mercuria and its managed RAC FUND can participate in the vote whether to pass this acquisition.

The acquisition of Huizhou property is not too bad in terms of numbers. The price of 1.653 billion includes loans for the property, so the actual payment is 810 million, of which 110 million is paid in cash, and the remaining 700 million is paid by issuing 238.5 million new shares at a price of 3.372 HK dollars per share. There is a 55% discount to the net asset value of $6.05 per share. If the acquisition is completed, Chunquan’s net asset value per share will be diluted from 6.05 to 5.56, which is extremely unfavorable to minority shareholders.

In addition, it should be noted that if the Huizhou transaction is completed, the two major shareholders of the manager, Mercuria, will control 345 million shares through the RCA Fund, while Huamao will hold 279 million shares, a total of 624 million shares, equivalent to With 41% of the enlarged share capital, it will be even harder to shake their control in the future. It is difficult to guarantee that similar acquisitions will come one after another and have been diluting the interests of minority shareholders.

In view of this, Chunquan’s second largest shareholder, PAG, has offered a voluntary conditional cash offer at a price of $4.85 per share, which is a 20% discount to the net asset value of $6.05 per share, but the proposed valuation is on the market. The REITs, second only to The Link (00823), can be said to be very reasonable and sincere. The key is that PAG must obtain more than 50% of the shares and shareholders must veto Huizhou transactions.

Now PAG’s offer is to compete with time. The deadline for the offer and the voting date for the Huizhou transaction are October 29, but even if PAG obtains 50% of the equity on October 29, and the Huizhou transaction is also rejected, the offer can become unconditional or the appointment will fail. Even if the minority shareholder who accepted the offer is rejected, the share that has accepted the offer will be refunded due to the failure of the offer.

The special shareholder registration limit for Huizhou transactions is October 23, if the PAG can obtain more than 50% of the shares on or before October 23, the offer must be unconditional, which is what we hope to achieve!

The potential risk of the accept offer

The minority shareholder must be reminded that if the offer is accepted, the shareholding will be locked in the central clearing, and it will not be able to be released in the market until the results of the offer are announced on October 29. If the offer becomes unconditional, PAG will pay you at the price of $4.85 per share, but if the offer fails, PAG will return the shares to you within a few days after October 29, that is to say you It is impossible to take out the shares within the first two or three trading days after the announcement of the failure of the offer. It takes a few days for the shares to be returned to you. This is a potential risk of accepting the offer.

I don’t know if other minority shareholders are willing to take this risk, or if they are satisfied with the current price and choose to make a profit in the market; or if they want to pass the offer but they don’t intend to accept the offer, just want to do a free rider. Can you ride a ride?

I will accept the offer this week, and Chunquan holds about 2% of the portfolio. My own expectation is that if the offer fails, Chunquan’s share price will drop to $3.3, which is a potential decline of about 13% compared to the cost price I bought; if successful, the target price is $4.85 than I buy. The purchase price has a potential return of approximately 28%.

The last thing I want to say is that Hong Kong’s real estate trust regulations can really prevent unfair “Qianlian” transactions against minority shareholders. As in the case of Chunquan, both transactions are suspected connected transactions, but unfortunately the parties can participate. Vote on relevant motions.

Chunquan’s minority shareholders should be considered lucky because PAG is the second largest shareholder to oppose major shareholders and managers, and also allows minority shareholders to have a “just one time” opportunity to make choices and see if they continue to support the current The manager and major shareholder, or the high-priced transfer of shares to PAG, profit from the exit of this investment.

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