Tuesday, 16 October 2018

东岳集团 Dongyue Group (HKEX: 189) Spin off of Organic Silicone Segment




Dongyue Group announced spin off details of its Organic Silicone Segment(Dongyue Organosilicone) on 12 October 2018.

While there has been more specific details this time round, the announcement should not come as a surprise as there has been announcement with regards to a possible spin off since 29 March 2018.

Pre-Spin Off Details(Can be found in Link above)

Current Net Asset Value of Dongyue Organosilicone (As of 31/8/18): 1.98 Rmb per share
Shares Outstanding: 900 000 000
Dongyue Group Share of Dongyue Organosilicone = 77%

Number of maximum new shares to be issured on A-share market: 300 000 000
Maximum issue price per share = 4.5 billion Rmb or 15 Rmb per share
Minimum issue price per share = Nav Price (1.98 Rmb per share)

Dongyue Group estimated share of Dongyue Organosilicone if maximum issue occurs = 57.75%

Implied market capitalization of Dongyue Organosilicone at maximum issue = 18 billion Rmb
Dongyue Group's share = 0.5775*18 = 10.395 billion Rmb = Roughly 11.79 billion Hkd

Dongyue Group's current market capitalization(As of 16/10/18) =2.1 billion shares * 4.80(share price as of 16/10/18) = 10.08 billion Hkd
Dongyue Group current Net Asset Value (As of 31/6/18) = 4.02 Rmb
Implied Fair Value of Dongyue Group post spin off = 4.02-1.98+(10.395/2.1)
                                                                                   = 6.99 Rmb or 7.92 Hkd

Dongyue Organosilicone Profit

2017 Full Year: 285,348,000
2018 1H: 449,002,000

For the 1st 2 months of  2H 2018, the profit can be estimated as Net asset value is provided for as of 31 August 2018 and 31 June 2018

Net Asset value at 31 August 18 = 1.98 Rmb per share = 1,782,000,000
Net Asset value at 31 June 18 = 1,607,322,000
Estimated Profit = 174 678 000

The profit in the first 2 months is roughly 38.9% of 2018 1H, representing a decent mathematical chance that the profit will be stable in both halves of the year.
It also means that the profit will likely be higher than 2017 Full Year Profit

However, 107 胶  which accounted for 38.2% of Dongyue Organosilicone's revenue and 9.15% of Dongyue's revenue might be faced with price pressures having seen its price in October fall lower than its price last year. On the bright side, the first 9 months have had a higher price than it was in 2017 and it was around the same period last year that prices started a crazy rally.

Conclusion

The exact amount raised in the spin offs will likely determine the value of Dongyue Group as a whole. While the ideal scenario would result in a higher fair value, spin offs listings are still subjected to demands for IPO as a whole and in a pretty bearish year, there could be a few key risks and waiting for exact details of proceeds raised and IPO Price might not seem to be a bad move after all.

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