ISS Special Situations Research Analysis August 1, Dalian Wanda Commercial Properties (HKG:3699): proposed acquisition by Dalian Wanda Group

Transcription

1 Analysis Dalian Wanda Commercial Properties (HKG:3699): proposed acquisition by Dalian Wanda Group Vote Recommendation: Vote FOR the delisting of H shares Executive Summary On May 30, 2016, less than 16 months a er the company s IPO, controlling shareholder Dalian Wanda launched an offer to buy the 14.4% of H shares outstanding in Dalian Wanda Commercial Proper es. While the transac on is structured as a tender offer, holders of H shares must first approve the delis ng of the company at an Aug. 15 shareholder mee ng for the tender offer to be declared uncondi onal.. One month a er the deal was announced, however, Dutch pension fund APG (5.0% of H shares) laid out its concerns about the offer, causing the spread to widen substan ally. Under Hong Kong rules, if more than 10% of H shares vote against the delis ng a necessary condi on to the tender it may not proceed, raising real risk of noncomple on. Process and Key Terms: The deal process is rela vely simple given the company s status as a controlled company. The company was approached by its controlling shareholder, and the board set up an independent commi ee to evaluate the offer. The commi ee retained its own financial advisor to evaluate the transac on. The offer of HK$ per share was officially announced on May 30, 2016 and later accepted by the DWCP s commi ee of independent directors. The tender offer is condi onal on approval of the delis ng. Strategic rationale The company does not provide a strategic ra onale to support the Dalian Wanda Group takeover offer, but the bidder encourages shareholders to accept the offer based on: Special Situa ons Research delivers comprehensive, independent research on high-profile economic proposals including M&A and proxy contests, and on the implica ons for shareholders of evolving trends in corporate governance and shareholder rights. The certain and immediate premium for the illiquid H shares of approximately 36.1% over the closing price on 30 March Record Date Aug. 15, 2016 Mee ng Date Aug. 15, 2016 Contents Execu ve Summary 1 Trading Comps & Historical Performance 5 Shareholder Base 7 Background 8 Strategic Ra onale 9 Valua on 11 Conclusion and Vote Recommenda on 14 Chart Focus Contacts Nelson Seraci Phone: Nelson.Seraci@issgovernance.com Source: Thomson One. In HK$ Chris Cernich Phone: Chris.Cernich@issgovernance.com All Rights Reserved. Ins tu onal Shareholder Services Inc.

2 2016, immediately prior to the deal s announcement, and approximately 10.0% over the IPO price; The ability to avoiding holding unlisted shares, as the H shares will be delisted should the tender offer be declared uncondi onal; and The fact that a third party is unlikely to pay a considerable premium for the H Shares, given the controlling stake of the Dalian Wanda Group. The poten al offer was announced barely 16 months a er the company s IPO, and it seems reasonable to ques on whether the offer somehow contradicts the ra onale for the IPO or market condi ons have changed so much as to jus fy a sale. In December 2014 the company had already warned over the sustainability of real estate market growth in China, sta ng that "the PRC property market is affected by the recent slowdown in China s economic growth. There have been increasing concerns over the sustainability of the real estate market growth in China" (IPO prospectus). In its 2015 Annual Report, the company stated that "China is s ll facing downward pressure with the rate of industry growth slowing down, local governments have implemented a series of policies rela ng to the real estate industry in 2015, covering a cut in interest rates and a reduc on of the reserves that certain banks must hold, a reduc on of down payment for housing accumula on fund loan (which is a special housing loan offering to those eligible persons who have made contribu on to the housing provident fund in the PRC), tax incen ve and li of home buying restric ons. These helped the real estate industry to gradually recover from depression. The wording from the company reports does not seem to reflect a heightened level of concern from management vs. the me of the IPO, though the situa on in China indeed deteriorated in the interim period between the two reports. The total investment in real estate development grew by 1.0% in 2015, as compared to a growth rate of approximately 19.8% in 2013 and 10.5% in On Jan. 10, 2016, the company announced it was expec ng contracted sales to decrease by 39% in During the first five months of 2016 the company s contracted sales declined by 12.0% or HK$ 4.9 bn, though this was par ally compensated by an increase in HK1.7 bn in rental and hotel income, which is more recurring in nature. China Resources Land, probably the closest listed peer, achieved a 49% increase in contracted sales over the same period. Credit ra ng agencies have put the company on nega ve watch (Moody's) or downgraded it (S&P): "However, the company's ra ng outlook remains nega ve, reflec ng our concerns that its credit metrics will weaken in the next months and will pressure its Baa2 ra ng," says Kaven Tsang, a Moody's Vice President and Senior Analyst...The nega ve outlook also reflects our concern that DWCP's liquidity posi on will weaken as its scales back contracted sales" (Moody's, Feb. 18, 2016). "The downgrade reflects our view that Wanda Commercial's aggressive expansion appe te to grow its investment property por olio could result in higher financial leverage over the next 24 months than we had previously ISS Special Situations Research an cipated," said Standard & Poor's credit analyst Ma hew Kong. The company's cash flows are also likely to weaken because the significant reduc on in contracted sales will offset the robust growth in rental income." (The Standard, Feb. 3, 2016). The decrease in contracted sales seems intended to some extent, as the company pushed through inventory during the booming years and has now decelerated sales in a weaker market (and cut acquisi ons of new land). The company started talking about a change to an asset light strategy shortly a er the IPO, heading in the direc on of making ownership and opera on of proper es (shopping centers and hotels) its main business, with property development (apartments and offices in shopping mall complexes) a secondary one. Analysts are divided on the risks of this strategy, though if there is a consensus that seems to be that it will be a bumpy road managing the transi on in business model with a slowdown in the market and financial leverage. Some analysts were concerned that the sharp cut of contracted sales target to the difficult physical property market in lower- er ci es where Wanda has majority presence, not a managed strategic transi on to an asset light model. Valuation We used the 11 peers selected by the independent director commi ee's financial advisor in our analysis. We note, however, that most peers are largely residen al property developers, as opposed to developers and operators of shopping malls. China Resources Land is probably the closest peer in terms of business model and exposure ISS Institutional Shareholder Services Inc. 2

3 Premium vs. market price: The offer represents a premium of approximately 40.6% over the unaffected closing price on March 30, 2016, as adjusted by the 2015 HK$1.25 dividend (exdividend date May 27, 2016). The short term premium might look substan al considering this is a minority squeeze-out for shareholders holding only 14% of the shares outstanding, though it is barely a premium to the price six months before the announcement given the downtrend in the stock. The offer is also a premium of 15.9% to the IPO price adjusted by dividends of HK$ From the IPO to date peers have increased by approximately 23%, and China Resources Land by 9%. Compared to the evolu on of the la er since IPO, the nominal 15.9% premium of the offer would actually represent a single digit premium. Valua on vs. Comparables: Since its lis ng in Dec. 2014, the company's stock traded in lockstep with the median of peers and China Resources Land un l late 2015, when a divergence became apparent. By the me of the announcement of a poten al offer on March 30, 2016, the company had underperformed China Resources Land by 8 percentage points since the IPO. This might to be related to the decline in contracted sales, which had grown by 10% during 1H15 but declined by 1.6% in 2H15 (the company discloses monthly figures, allowing the market to follow closely its performance). Moreover, any weakness in opera onal performance is magnified at the company because its financial leverage is much higher than that of China Resources Land. Valua on ra os echo this story, with the company trading at an average Price/Book ra o 8% lower than that of China Resources Land during the first year of trading, and the discount widening over me to 19% at the deal s announcement. If one values the company at the average discount of the first year of trading, its fair Price/Book mul ple would be 1.07x. The offer price implies a Price/Book ra o of 1.13x, or an approximately 6% premium to this normalized ra o. Analyst Target prices: The gap between share prices and analyst target prices also kept widening un l early At the me of the poten al offer announcement on March 30, 2016, the company was trading at a 40.6% discount to the unaffected target price, vs. 33.3% for China Resources Land. The offer price of HK$ is a 21.6% discount to the unaffected target price. Comparison to similar deals: The one-day premium of 40.6% compares well with the 32.4% median premium of similar successful deals reported in the fairness opinion. Over longer look-back periods that advantage dissipates: the 180-day premium to the average of daily prices of 16.0% looks low vs. the 52.2% median of similar successful deals. According to the fairness opinion, the transac on implies a 10.8% discount to the company's adjusted NAV (i.e. using the appraiser's valua on for the company's real estate), lower than all reported deals as well as the 32.4% average discount to Adjusted NAV. We note that the other deals involved developers of residen al property mostly, which tend to trade at higher discounts. ISS Special Situations Research Conclusion and Vote Recommendation: The company is going though its first cyclical downturn as a listed en ty, a period that of concern about opportunis c ming transac ons led by a controlling shareholder. The first ques on shareholders face is why they should accept such a premium in this part of the cycle. While analysts are divided on the risks, there is a consensus that it will be a bumpy road managing the transi on in business model with a slowdown in the market and financial leverage. The second ques on is whether shareholders are being properly compensated for the loss of poten al upside. There seem to be valid reasons behind the share price underperformance that preceded the announcement of the takeover: a decline in contracted sales coupled with higher leverage during a sluggish period for the Chinese economy. If these concerns were misplaced, and one would value the company based on the stock evolu on and historic discount to Price/Book ra o of China Resources Land, then the deal would imply a single digit premium, low even for minority squeeze-out standards. The other end of the spectrum is arguing that the 40% one-day premium is reflec ve of intrinsic value, which seems an exaggera on when the deal premium s ll implies a 10% discount to NAV. A mid-point, which seems a realis c assump on given the industry and strategic background, would imply a reasonable premium in a cash deal for minori es holding 14.4% of shares outstanding. Based on these factors, we recommend shareholders vote FOR the transac on ISS Institutional Shareholder Services Inc. 3

4 Transaction Summary 2016 ISS Institutional Shareholder Services Inc. 4

5 Trading Comparables Source: Thomson One. As of March 30, HK$ million ISS Institutional Shareholder Services Inc. 5

6 Historical Financial Performance Source: Thomson One. HK$ million ISS Institutional Shareholder Services Inc. 6

7 Shareholder Base Target (H Shares) Source: Thomson One; HK$ in mn. % ownership of H shares ISS Institutional Shareholder Services Inc. 7

8 Background Key Events Dalian Wanda Commercial Proper es Co. Ltd (DWCP) is one of China s largest commercial and residen al property developers. The company s ac vi es include development and sales of retail, office and residen al buildings; investment and opera on of large shopping centers; development and opera on of 5-star or super 5-star hotels; and property management. The company is controlled by Wang Jianlin (54%), through its Dalian Wanda group and other en es. The company had its IPO in December 2014, and in March 2016 its controlling shareholder announced it was planning an offer for holders of H shares (14.4% of total shares outstanding). The offer of HK$ per share was officially announced on May 30, 2016 and later accepted by the DWCP s commi ee of independent directors. While the transac on is structured as a tender offer, holders of H shares must vote on the delis ng of the company at an Aug. 15 shareholder mee ng in order for the tender offer to be declared uncondi onal. Dutch pension fund APG (5.0% of H shares) has stated the offer raises concerns, causing the spread to widen substan ally upon APG s announcement on June 29, Currently the shares trade at a 10% discount to the offer price. The deal requires approval by 75% of votes of H shareholders, and no more than 10% of the H shares outstanding vo ng against it. March 30, 2016 May 30, 2016 June 29, 2016 Aug. 15, 2016 Dalian Wanda Group considering offer for DWCP Dalian Wanda Group announces offer for DWCP News of shareholder opposi on EGM 2016 ISS Institutional Shareholder Services Inc. 8

9 Strategic Rationale The company does not provide a strategic ra onale to support the Dalian Wanda Group takeover offer, but the bidder encourages shareholders to accept the offer based on: Premium valua on, as the offer represents a premium of approximately 36.1% over the closing price of HK$38.80 per H Share on 30 March 2016, being the closing price on the date of announcement (which announcement was made a er trading hours that day), and a premium of approximately 10.0% over the IPO price; Certain and immediate premium for illiquid H Shares; Avoiding holding unlisted shares, as the H shares will be delisted should the tender offer be declared uncondi onal; and A third party is unlikely to be willing to pay a considerable premium for the H Shares, given the controlling shareholding of the Dalian Wanda Group. The poten al offer was announced barely 16 months a er the company s IPO, and it seems reasonable to ques on whether the offer somehow contradicts the ra onale for the IPO or market condi ons have changed so much as to jus fy a sale. In December 2014 the company had already warned over the sustainability of real estate market growth in China, sta ng that "the PRC property market is affected by the recent slowdown in China s economic growth. There have been increasing concerns over the sustainability of the real estate market growth in China" (IPO prospectus). In its 2015 Annual Report, the company stated that "China is s ll facing downward pressure with the rate of industry growth slowing down, local governments have implemented a series of policies rela ng to the real estate industry in 2015, covering a cut in interest rates and a reduc on of the reserves that certain banks must hold, a reduc on of down payment for housing accumula on fund loan (which is a special housing loan offering to those eligible persons who have made contribu on to the housing provident fund in the PRC), tax incen ve and li of home buying restric ons. These helped the real estate industry to gradually recover from depression" (2015 Annual report). The wording from the company reports does not seem to reflect a heightened level of concern from management vs. the me of the IPO, though the situa on in China indeed deteriorated in the interim period between the two reports. The total investment in real estate development grew by 1.0% in 2015, as compared to a growth rate of approximately 19.8% in 2013 and 10.5% in On Jan. 10, 2016, the company announced it was expec ng contracted sales to decrease by 39% in During the first five months of 2016 the company s contracted sales declined by 12.0% or HK$ 4.9 bn, though this was par ally compensated by an increase in HK1.7 bn in rental and hotel income, which is more recurring in nature. China Resources Land, probably the closest listed peer, achieved a 49% increase in contracted sales over the same period. Credit ra ng agencies have put the company on nega ve watch (Moody's) or downgraded it (S&P): "However, the company's ra ng outlook remains nega ve, reflec ng our concerns that its credit metrics will weaken in the next months and will pressure its Baa2 ra ng," says Kaven Tsang, a Moody's Vice President and Senior Analyst...The nega ve outlook also reflects our concern that DWCP's liquidity posi on will weaken as its scales back contracted sales" (Moody's, Feb. 18, 2016). "The downgrade reflects our view that Wanda Commercial's aggressive expansion appe te to grow its investment property por olio could result in higher financial leverage over the next 24 months than we had previously an cipated," said Standard & Poor's credit analyst Ma hew Kong. The company's cash flows are also likely to weaken because the significant reduc on in contracted sales will offset the robust growth in rental income." (The Standard, Feb. 3, 2016). The decrease in contracted sales seems intended to some extent, as the company pushed through inventory during the booming years and has now decelerated sales in a weaker market (and cut acquisi ons of new land). The company started talking about a change to an asset light strategy shortly a er the IPO, heading in the direc on of making ownership and opera on of proper es (shopping centers and hotels) its main business, with property 2016 ISS Institutional Shareholder Services Inc. 9

10 development (apartments and offices in shopping mall complexes) a secondary one. Analysts are divided on the risks of this strategy, though if there is a consensus that seems to be that it will be a bumpy road managing the transi on in business model with a slowdown in the market and financial leverage. Some analysts were concerned that the sharp cut of contracted sales target to the difficult physical property market in lower- er ci es where Wanda has majority presence, not a managed strategic transi on to an asset light model. Deal Process, Terms, and Governance Deal Process: The deal process is rela vely simple given the company s status as a controlled company. The company was approached by its controlling shareholder, and the board set up an independent commi ee to evaluate the offer. The commi ee in turn appointed its own financial advisor to evaluate the transac on. Terms The offer of HK$ per share was officially announced on May 30, 2016 and later accepted by the DWCP s commi ee of independent directors. While the transac on is structured as a tender offer, minori es should vote on the delis ng of the company assuming the tender offer is successful. The tender offer is condi onal on approval of the delis ng. The deal requires approval by 75% of votes of H shareholders, and no more than 10% of the H shares outstanding vo ng against it ISS Institutional Shareholder Services Inc. 10

11 Valuation Analysis TSR since IPO vs. Peers The following analysis is not intended to defini vely determine the per-share value. Valua on is as much art as science and is highly dependent on the underlying assump ons over which reasonable people can disagree. As such, our analysis is meant merely to indicate a poten al range of value that in our opinion, and based on public informa on, appears to be reasonable. We used 11 peers selected by the independent director commi ee's financial advisor (Halcyon) in our analysis, including China Resources Land, Longfor Proper es, China Vanke, Country Garden, Evergrande, China Overseas Land & Investment, Guangzhou R&F, Shimao Property, China Jinmao, Sino-Ocean, and Shenzhen Investment. We note, however, that most peers are largely residen al property developers, as opposed to developers and operators of shopping malls. China Resources Land is probably the closest peer in terms of business model and exposure. Premium vs. market price: The offer price of HK$52.80 represents a premium of approximately 40.6% over the unaffected closing price on March 30, 2016, as adjusted by the 2015 HK$1.25 dividend (ex-dividend date May 27, 2016). The short term premium might look substan al considering this is a minority squeeze-out for shareholders holding only 14% of the shares outstanding, though it is barely a premium to the price six months before the announcement given the downtrend in the stock. In this sense, the premium might reflect opportunis c ming, though we discuss below reasons for this downtrend. The offer price is also at a premium of 15.9% to the IPO price adjusted by dividends of HK$ From the IPO to date peers have increased by approximately 23%, and China Resources Land by 9%. Compared to the evolu on of the la er since IPO, the nominal 15.9% premium of the offer would actually represent a single digit premium. Source: Thomson One. Valua on vs. Comparables: Since its lis ng in Dec. 2014, the company's stock traded in lockstep with the median of peers and China Resources Land un l late 2015, when a divergence became apparent. By the me of the announcement of a poten al offer on March 30, 2016, the company had underperformed China Resources Land by 8 percentage points since the IPO. This might to be related to the decline in contracted sales, which had grown by 10% during 1H15 but declined by 1.6% in 2H15 (the company discloses monthly figures, allowing the market to follow closely its performance). Moreover, any weakness in opera onal performance is magnified at the company because its financial leverage is much higher than that of China Resources Land (Net debt/equity of 61% for DWCP vs. 23% for China Resources Land). Valua on ra os show a similar story, with the company trading at an average Price/Book ra o 8% lower than that of China Resources Land during the first year of trading, and the discount widening over me. It should be noted that for several months following the IPO the two companies were trading at very 2016 ISS Institutional Shareholder Services Inc. 11

12 similar valua ons, despite China Resources Land being controlled by the government, something for which analysts tend to assign a premium in China. When the poten al transac on was announced, that discount had widened to 19%. If one values the company at the average discount of the first year of trading, its fair Price/Book mul ple would be 1.07x. The offer price implies a Price/Book ra o of 1.13x, or an approximately 6% premium to this normalized ra o. Stock price vs. Consensus Target Price (CNY) Price to Book Ra o vs. Peers Source: Thomson One. Comparison to similar deals: Source: Thomson One. Analyst Target prices: The valua on divergence vs. peers since late 2015 is also evident when comparing the company's stock price with the consensus target price. The gap between target prices and stock price kept on widening un l early At the me of the poten al offer announcement on March 30, 2016, the company was trading at a 40.6% discount to the unaffected target price, vs. 33.3% for China Resources Land. The offer price of HK$ is a 21.6% discount to the unaffected target price. The one-day premium of 40.6% compares well with similar deals that were successful as reported in the fairness opinion (median of 32.4%). Over longer look-back periods that advantage dissipates: the 180-day premium to the average of daily prices of 16.0% looks low vs. the 52.2% for the median of similar successful deals. According to the fairness opinion, the transac on implies a 10.8% discount to the company's adjusted NAV (i.e. using the appraiser's valua on for the company's real estate), lower than the average discount to Adjusted NAV of 32.4% for similar deals, and actually the lowest of all deals in the sample. We note that the other deals involved developers of residen al property mostly, which tend to trade at higher discounts ISS Institutional Shareholder Services Inc. 12

13 Conclusion: At first glance, the offer appears opportunis c given the weakness in the company s share price since late But there seems to be credible reasons for at least part of that weakness: a decline in contracted sales coupled with higher leverage during a sluggish period for the Chinese economy. If these concerns were misplaced, and one would value the company based on the stock evolu on and historic discount to Price/Book ra o of China Resources Land, then the deal would imply a single digit premium, low even for minority squeeze-out standards. The other end of the spectrum is arguing that the 40% one-day premium is reflec ve of intrinsic value, given the decline in fundamentals ISS Institutional Shareholder Services Inc. 13

14 Conclusion and Vote Recommendation The company is going though its first cyclical downturn as a listed en ty, a period that is o en associated with the opportunis c ming label for deals. For Asian deals led by a controlling shareholder, in par cular, this triggers a heightened level of concern for many investors. The first ques on shareholders face is why they should accept such a premium in this part of the cycle. While analysts are divided on the risks, there is a consensus that it will be a bumpy road managing the transi on in business model with a slowdown in the market and financial leverage. The second ques on is whether shareholders are being properly compensated for giving up the poten al upside. There seems to be valid reasons behind the share price underperformance that preceded the announcement of the takeover: a decline in contracted sales coupled with higher leverage during a sluggish period for the Chinese economy. If these concerns were misplaced, and one would value the company based on the stock evolu on and historic discount to Price/Book ra o of China Resources Land, then the deal would imply a single digit premium, low even for minority squeeze-out standards. The other end of the spectrum is arguing that the 40% one-day premium is reflec ve of intrinsic value, which seems an exaggera on when the deal premium s ll implies a 10% discount to NAV. A mid-point, which seems a realis c assump on given the industry and strategic background, would imply a reasonable premium in a cash deal for minori es holding 14.4% of shares outstanding. Based on these factors, we recommend shareholders vote FOR the transac on ISS Institutional Shareholder Services Inc. 14

15 The issuer that is the subject of this analysis may have purchased self-assessment tools and publica ons from ISS Corporate Solu ons, Inc. (formerly known as ISS Corporate Services, Inc. and referred to as "ICS"), a wholly-owned subsidiary of ISS, or ICS may have provided advisory or analy cal services to the issuer in connec on with the proxies described in this report. These tools and services may have u lized preliminary peer groups generated by ISS ins tu onal research group. No employee of ICS played a role in the prepara on of this report. If you are an ISS ins tu onal client, you may inquire about any issuer's use of products and services from ICS by ing disclosure@issgovernance.com. This proxy analysis and vote recommenda on has not been submi ed to, nor received approval from, the United States Securi es and Exchange Commission or any other regulatory body. While ISS exercised due care in compiling this analysis, it makes no warranty, express or implied, regarding the accuracy, completeness or usefulness of this informa on and assumes no liability with respect to the consequences of relying on this informa on for investment or other purposes. In par cular, the research and vo ng recommenda ons provided are not intended to cons tute an offer, solicita on or advice to buy or sell securi es nor are they intended to solicit votes or proxies. ISS is an independent company owned by en es affiliated with Vestar Capital Partners ( Vestar ). ISS and Vestar have established policies and procedures to restrict the involvement of Vestar and any of Vestar s employees in the content of ISS' analyses. Neither Vestar nor their employees are informed of the contents of any of ISS' analyses or recommenda ons prior to their publica on or dissemina on. The issuer that is the subject of this proxy analysis may be a client of ISS or ICS, or the parent of, or affiliated with, a client of ISS or ICS. One or more of the proponents of a shareholder proposal at an upcoming mee ng may be a client of ISS or ICS, or the parent of, or affiliated with, a client of ISS or ICS. None of the sponsors of any shareholder proposal(s) played a role in preparing this report. ISS may in some circumstances afford issuers, whether or not they are clients of ICS, the right to review dra research analyses so that factual inaccuracies may be corrected before the report and recommenda ons are finalized. Control of research analyses and vo ng recommenda ons remains, at all mes, with ISS. ISS makes its proxy vo ng policy forma on process and summary proxy vo ng policies readily available to issuers, investors and others on its public website: h p:///policy Copyright 2016 Ins tu onal Shareholder Services Inc. All Rights Reserved. This proxy analysis and the informa on herein may not be reproduced or redisseminated in whole or in part without prior wri en permission from ISS. The Global Leader in Corporate Governance Ins tu onal Shareholder Services Inc. (ISS) is the leading provider of corporate governance solu ons for asset owners, investment managers, and asset service providers. ISS solu ons include objec ve governance research and recommenda ons, end-to-end proxy vo ng and distribu on solu ons, turnkey securi es class-ac on claims management, and reliable global governance data and modeling tools. More than 1,600 clients turn to ISS to apply their corporate governance views, iden fy governance risk, and manage their complete proxy vo ng needs on a global basis. ISS is a global company with more than 900 professionals located across 17 offices in 12 countries. For more informa on, please visit: