Saturday, October 29, 2011

China Animal Healthcare Updates

China Animal Healthcare made an interesting announcement. In response to a Straits Times article that suggested the company was an attractive candidate for privatisation, China Animal Healthcare said that it was possible that a restructuring (not privatisation) exercise take place. This would involve only delisting those shares listed on SGX, while those on the Hong Kong Stock Exchange (SEHK) remain trading.

Just yesterday, the company announced its third quarter results for 2011 which were quite impressive. Revenue for the nine months increased 33.8 per cent while net profit rose 84.2 per cent. The strong results were attributed to strong sales of its powdered form drugs and biological drugs.

Putting the two pieces of news together, I would think that such a move is very likely to happen. This is because in general, S-Chips such as China Animal Healthcare have always felt that they are underpriced on the SGX compared to on the SEHK. This is something that the new SGX CEO Magnus Brocker has tried to refute.

However, it is uncertain whether such an exercise of moving wholly to the SEHK will have a positive impact on its price multiple. One, there is a smaller audience and demand is thus lower. In the current arrangement, China Animal Healthcare taps on two groups of investors namely those in Singapore and in Hong Kong.

But why announce the possibility of such an exercise? I might be wrong and am owning four lots of China Animal Healthcare, but I think it could be due to their outstanding zero coupon convertible bonds that were subscribed to Black Rock. A key term that I would bring attention to is (full announcement here):

"Minimum Conversion Price
Minimum conversion price for each conversion Share
("Conversion Share") is S$0.288, being 10% discount to
the last-traded price of the Shares on the Singapore
Exchange Securities Trading Limited ("SGX-ST") for 1
July 2010 ("Minimum Conversion Price").

Conversion Period
Any time commencing from 1 January 2012 up to 5
business days before the Maturity Date.

Early Redemption after 31 December 2012
The Bondholder shall further be entitled, within the period
of 4 weeks commencing on 31 December 2012, to require
the Company to redeem the Convertible Bonds at a
redemption price equal to the principal amount plus a
redemption premium of 15% per annum (on a simple, noncompounding
basis, based on a 365 day year and actual
days elapsed) on such principal amount.

If I am wrong, I will appreciate comments and will amend accordingly. The outstanding principal amount of bonds are worth USD 40 million (about RMB 100 million) while China Animal Healthcare has about RMB 500 million in cash. My understanding is, Blackstone has the right convert its bonds into China Animal Healthcare shares at 28.8 cents a piece or it could require China Animal Healthcare redeem the bonds based on the terms spelt out above. Therefore, if its share price continues to remain weak till the point of early redemption, China Animal Healthcare will have to cough up USD 46 million to redeem all the bonds. This should not be a problem as based on published information, the company has more than enough cash to meet this liability. This is a best case scenario for retail investors as it sends a strong signal that the company's cash hoard is really there, despite so many S-Chips proving otherwise through accounting manipulation in the past two years.

The worst case scenario would be that it goes the way of ChinaMilk Products. A quick search online will show that ChinaMilk Products could not meet bond repayment on its zero coupon convertible bonds and has since been suspended. Only time will tell which scenario will play out. That is why you should always do your own due diligence.

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