China Animal Healthcare

Kim Eng on 1 Oct 2012

Company background. CAH is principally engaged in the manufacturing, sales, and distribution of animal drugs. It is one of the leading players in China’s animal drug industry with 13 proprietary brand names for powdered form drugs, injection form drugs, and biological drugs.

A Subscription Agreement with two new investors. China Animal Healthcare announced last Wednesday that it had entered into a conditional Subscription Agreement with two investors. Subject to the satisfaction of the conditions in the Subscription Agreement, the two investors will subscribe for an aggregate amount of 53m subscription shares at the issue price of SGD0.30 per share and 106m warrants with an exercise price of SGD0.30. The total amount of SGD47.7m raised will be primarily used to partially fund the possible delisting offer.

Possible delisting from SGX and transferring to HK. CAH announced on 22 May 2012 that the company intends to delist its shares from SGX, while maintaining its listing on the Hong Kong Stock Exchange. CAH will give a cash exit offer of SGD0.30 per share to current shareholders. Shareholders who do not accept the cash exit offer will have their shares transferred to the HK Stock Exchange. 

The question is more about “how” rather than “if”. The delisting is subject to many conditions such as the finalisation of financing and approval from shareholders and all relevant authorities. Investors have been sceptical about the prospect of the delisting going through. In our view, CAH shareholders will vote to approve the delisting. The key questions that remain to be answered are: 1) How many shareholders will accept the cash exit offer and how many shareholders will choose to transfer their shares to HK? 2) How will the company fund its cash exit offer?

 Possible earnings concentration post delisting. Roughly 39% of CAH’s existing 1591.4m shares are now listed on the SGX, while the remaining 61% are listed on the SEHK. The possible new issuing of 46.6m subscription shares and 93.1m warrants will account for only about 22.5% of the current SGX-listed shares. In the future, there will only be limited room for CAH to raise funds through equity due to the restriction in the Subscription Agreement. Thus, CAH will have to use bank borrowing or its current cash balance of RMB821m to fund the delisting, if too many shareholders choose to accept the cash exit offer, thus resulting in earnings concentration.

Main opportunities and risks. The main risk involved in this stock is the possible failure of the delisting, although this is not our base case. But if the delisting from SGX eventually happens, current shareholders will be able to enjoy higher valuation in HK. The company’s cash exit offer of SGD0.30 will yield a return of 15% based on the current share price of SGD0.26.