When it comes to investing, Cheng Kin-ming likes to bottom-fish. The Chinese financier (also known as Zheng Jianming when his name is rendered in pinyin) made his first major move in 2003 when he bought the entire 34th floor of the China Merchants Building in Hong Kong. He smartly picked the bottom of the property market in the city, with the SARS outbreak creating panic. When Cheng sold the bulk of his Hong Kong properties about five years later, he made a gain of HK$500 million ($64.48 million).
Now he is indulging in some of his riskiest bottom-fishing yet. Cheng – who once worked as a researcher with the State Council in pre-tycoon days – is the preferred bidder for bankrupt solar power giant Suntech.
Suntech defaulted on $541 million of convertible notes in March (see WiC200) and has been looking for a white knight to mount a rescue (Warren Buffett was a rumoured buyer but no bid materialised).
Last Tuesday, a Hong Kong-listed company controlled by Cheng said it had made an offer for Suntech’s key assets in China including the Suntech brand and its patents, plus two gigawatts of production capacity and a research and development unit. That same day the municipal government of Wuxi, where Suntech is headquartered, said Cheng had been selected as the “preferred bidder”.
The potential buyer is Shunfeng Photovoltaic, which was founded in 2007. When the sky fell in on much of China’s solar industry in late 2012 (see WiC169), Cheng spent HK$200 million buying a 30% stake in Shunfeng. Both Shunfeng and Cheng’s privately-held company then embarked on a shopping spree, including a 20% stake in LDK Solar, another debt-saddled solar wafer maker.
Still, the choice of Shunfeng as the preferred bidder has puzzled some creditors, especially as it was chosen over more established players including GCL-Poly (see WiC141).
It also looks like Cheng will require quite a bit of leverage to pull the transaction off. Shunfeng had just Rmb2.5 billion ($408 million) in total assets – against Rmb2.8 billion of liabilities – as of June. And before a recent share sale raising about HK$1 billion, Shunfeng only had Rmb460 million in cash. By comparison Suntech has Rmb10.7 billion of debt.
“It looks like a leveraged buyout with a snake swallowing an elephant,” the China Times wrote, wondering how Shunfeng would be able to restructure its much bigger rival.
News of the deal propelled Shunfeng’s share price upwards nonetheless. The company’s stock has already surged 50% since it placed a bid for Suntech’s assets. As of Tuesday, Cheng’s 30% stake was worth HK$2.3 billion. “Even Warren Buffett couldn’t match a return that is ten-fold in 10 months,” the Shanghai Securities News noted with some amazement.
Other analysts suspect that this is a far-from-done deal. The Economic Observer put it bluntly, claiming that Shunfeng’s might just be the “smokescreen” to give the Wuxi government (now the administrator) more bargaining power when negotiating terms with other bidders, as well as dealing with some of Suntech’s Chinese creditors.
But Shunfeng’s company secretary Xie Wenjie told the 21CN Business Herald that the firm won over the Wuxi government because it guaranteed to maintain Suntech’s brand, as well as promising no layoffs. But Xie didn’t rule out bringing in a strategic partner with more industry expertise, as well as access to further financing.
Resuscitating Suntech will be no easy task, particularly for a man like Cheng with little more than a year’s experience in the solar industry.
More experienced operators seem less interested. The Southern Weekend has reported that the Yingli Group – which has displaced Suntech as the world’s biggest solar panel maker – sent a 47-person team to Suntech’s headquarters in July to carry out due diligence but eventually decided to pull out. Perhaps Yingli is in negotiating mode. But if not – and it thinks Suntech can’t be salvaged – that seems pretty ominous.
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