Sunday, 18 October 2009
SGX stops Li Heng’s ‘effective’ delisting in its tracks
It is status quo now for Li Heng Chemical Fibre Technologies, after it decided to drop its restructuring plan to float its assets in Hong Kong through a new company. This followed a decision by the Singapore Exchange to deem the transaction a delisting, which will require a cash exit offer to shareholders if the group wishes to proceed.
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SGX stops Li Heng’s ‘effective’ delisting in its tracks
Move seen as deterring privatisation under the guise of ‘exotic’ plans
By Lynette Khoo
11 October 2009
It is status quo now for Li Heng Chemical Fibre Technologies, after it decided to drop its restructuring plan to float its assets in Hong Kong through a new company. This followed a decision by the Singapore Exchange to deem the transaction a delisting, which will require a cash exit offer to shareholders if the group wishes to proceed.
At a time when Chinese listings, or S-chips, are increasingly weighing their options as they eye higher valuations in Hong Kong and China, SGX’s decision is seen as a carefully calibrated one to deter any delisting from taking place under the guise of some exotic plans.
Last week, Li Heng proposed to transfer its operating assets to a new company (Newco) that would apply for a Hong Kong mainboard listing, while Li Heng will remain listed on SGX as a listed shell and seek other viable business. Shareholders would be given shares in the Newco in proportion to the Li Heng shares they hold at no cost.
But Li Heng surprised the market again this week when it decided to scrap its restructuring plan. SGX informed the group that it views the proposal as effectively a delisting of its existing assets and, hence, it does not comply with the listing rules.
If Li Heng wants to proceed with its proposed plans, it has to offer a reasonable cash exit offer to shareholders and appoint an independent financial adviser to advise on the exit offer.
Li Heng’s spokeswoman told BT yesterday that it is evaluating its next step but currently has no plans for a delisting or dual listing. She also stressed that the group has exercised due and reasonable care in proposing the transaction.
‘We hope our shareholders recognise our efforts in building up value for them and enhancing their investment with us,’ the spokeswoman said yesterday.
Supporters of the plan are probably crushed by the about-turn when the proposal was said to be a win-win situation for the group and its shareholders.
For one thing, there is no extra cash outlay for shareholders. They would be given shares in the Newco in proportion to the number of Li Heng shares that they own. If they do not want to keep the Newco shares, they could sell it back to the Newco at 42 cents apiece.
By keeping the Newco shares, they would be ‘getting a free ride to Hong Kong’, said an institutional dealer. Based on his own estimates, Li Heng could be trading at least 12 times price-to-earnings ratio, which he arrived at through prescribing a 50 per cent discount to some Shanghai-listed comparables.
This is still higher than Li Heng’s current valuation of 9 times its historical earnings and 13 times forward earnings, a level that’s not befitting of the largest nylon player in China in terms of capacity, the dealer said.
The flipside also appears to be limited. Of course, there is the uncertainty of listing of the Newco in Hong Kong and risk of share dilution for minority shareholders if Newco undertakes any compliance issuance.
There is also no assurance that SGX will not suspend the trading and listing of Li Heng shares upon completion of the proposed transactions, or that Li Heng will be able to acquire a new business that would meet SGX’s listing requirements.
But if the listing in Hong Kong turns out to be unsuccessful, the Newco could still choose to ship its assets back again to Li Heng, the institutional dealer suggested. This could well be another ‘grey area’ that SGX wants to avoid, he said.
The impact of the deal on shareholders, however, is secondary in this case as the very move of transferring assets to list in Hong Kong is in effect a delisting, some market players assert. And should SGX allow this proposal to go through, it may risk a hallowing out of more Chinese listings here.
‘From the minority shareholders’ angle, they are given two bites of the cherry. They could go along with the business to Hong Kong and still hold on to Li Heng shares,’ said Robson Lee, partner at Shook Lin & Bok.
‘But from the SGX’s point of view, the business they approved for listing is no longer going to be listed here,’ he added. ‘I would call this a constructive delisting.’
Such a transaction would have set a precedence for companies to undergo effective delisting through various exotic means, at a time when S-chips are increasingly lured by options from overseas brokerages to migrate their shares.
If such ‘undue creativity’ is not curbed, it could be a matter of time before we see a cluster of listed shells here without a business, industry players said. It is also a question if these listed shells are driven to find new businesses to stay listed or allow themselves to conveniently slip off the market here eventually.
As it seems, SGX would rather act now rather than later.
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