There has been much talk this week about Alibaba Group’s forthcoming giant IPO, especially now that media sources have confirmed that the company is likely to list in the US rather than Hong Kong.
Of course, one of Alibaba’s units (Alibaba.com) did once have a listing in Hong Kong, going public in 2007 with a staggering price-to-earnings ratio of over 100 times. But in preparation for the larger Group-level IPO, it was taken private by Alibaba last year at HK$13.5 ($1.73) per share – i.e. a much lower PE multiple of 30 times.
Jack Ma’s internet colossus isn’t the only major Chinese firm shuffling its assets right now. Less high-profile but likewise of significant scale are the activities of Midea, a firm which started out making plastic medicine bottles in 1968.
Last week, the Midea Group floated all of its assets in a reverse takeover of its Shenzhen-listed unit GD Midea. Before the restructuring plan was announced in April, GD Midea focused on white goods such as air conditioners and carried a market capitalisation of less than Rmb30 billion ($4.9 billion). It is now worth Rmb81 billion, which puts its market value on a par with its nearest rival, Gree Electric (which was worth Rmb83 billion as of Wednesday).
The backdoor listing was one of the bolder moves the Chinese capital markets have witnessed in recent times – given a ban on IPOs has been in place for almost a year.
According to the 21CN Business Herald, the exercise also turned at least eight Midea executives into billionaires. The company’s founder He Xiangjian now sits on a net worth of Rmb27 billion (read WiC45 for his profile) although he and his colleagues have pledged not to reduce their stakes for the next three years.
The crux of last week’s transaction was He’s injection of a batch of unlisted assets into GD Midea. Global Business and Finance magazine said they generated a net profit of Rmb2.4 billion in 2010, estimating their value at Rmb12.3 billion (this figure does not include other Midea assets, like its logistics business, which were also part of the deal).
What Global Business and Finance finds fascinating is that this portfolio of businesses didn’t look very promising a few years ago. Midea’s unlisted operations essentially comprised units making small home appliances and electric motors. In an earlier 2005 restructuring, the assets were categorised as “loss-making” and were sold by GD Midea back to its parent group for just Rmb249 million.
“How did Midea turn some bad assets into quality ones in merely five years,” the magazine asks, noting that their value jumped nearly 50 times in the interim.
One explanation is offered rhetorically: “Were these assets sold on the cheap at the very beginning?”
China Business News has similar questions, believing that Midea’s successful reverse takeover was a result of “taking back some unwanted assets eight years ago”.
Still, CBN also noted that Midea’s home appliances business embarked on aggressive expansion after it brought in private equity investors in 2011. The growth of the home appliance market has been robust too. Li Feide, a Midea director, told the Securities Times that an American home typically owns more than 50 different types of home appliances. The figure for China is less than 10 but it has been picking up quickly and investor confidence in the sector has also rebounded strongly.
Gree’s stock has surged 90% since July. That of Suning, the biggest distributor of electric appliances, has more than doubled over the same period.
The bull run is partly explained by China’s ongoing urbanisation drive. Investors anticipate that it will fuel demand for more home appliances, the National Business Daily thinks.
But there is another angle to the recent spike in share prices too. There is speculation that the country’s first private bank licence is set to be awarded (see WiC208). Midea, Gree and most notably Suning have all confirmed their ambitions to apply for a licence when regulations permit. Some think this may be as soon as December.
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