Tuesday 13 December 2022

AAG Energy Recent Updates

 AAG Energy Rallied 14.60% on 12 December before falling -1.27% on 13 December. Nevertheless, it is still a more than 10% rally from the friday closing price.

What brewed over the weekends?

This is in-line with the recent developments of its parent company 60339. 603393 approving an investment decision to invest up to 3 billion RMB into their Hong Kong Subsidiary (Not AAG Energy). The board also approved that out of this 3 billion, up to 2 billion can be from loan.

Considering that the net asset value of 603393 is only 12 billion RMB, this is a huge move from the company. The money moved into the subsidiary is also the same company that launched a 50.5% equity ownership offer in 2018 for AAG Energy. Therefore, this has triggered people to think that a take-over is close.

In 2018, when similar announcement is made, the initial amount as 2.2 billion and subsequently re-raised to 2.6 billion. The announcement was made in Feb and the acquiring announcement came in May. As such, we can estimate that this time around the timeframe is likely 3 months as well.

A simple count will mean that the offer price is likely to be cap at 2.30 HKD based on the 3 billion RMB converted to HKD.

At the closing price today of 1.55, there is still some upside to be considered.

(As seen in yellow shaded text, not more than 3 billion RMB increase in investment of subsidiary that is currently holding the AAG Energy Shares)

What are the things to know and beware about?

1. The timeframe for this investment is 1 year according to the announcement by 603393. Hence they have up to 1 year to wrap this deal up or commit to this deal.
2. They can claim that they want to invest but end up not doing anything as well. However, in 2018 when they first did this, they did acquire shares. In 2021, they made the same announcement and the amount was 0.65 billion rmb and ended acquiring 6.68% of AAG Energy.
3. Cash on Hand for AAG Energy. With 2 billion cash on hand, liabilities of 1.715 billion and 1.36 billion of receivables (mainly state owned oil and gas firms like CNOOC and Sinopec), its safe to say there is a good 700 million free cash on hand after the subtraction of 700 million of capex required for 2H 2022. These cash can either be declared as dividend if it is really required for the acquisition but I highly doubt this will happen.
4. Dividends and Previous Funds in the company. There should be a small amount of 100-300 million of cash in the HK Subsidiary Company as it has received dividends in 2022 and probably some left over funds from acquiring the shares. This portion is not disclosed as we do not know the balance sheet composition of the subsidiary company.
5. Not all funds are used. Perhaps end of the day after discussions, they might just end up acquiring a certain portion of shares. Nothing is confirmed as always.
6. Offering some 603393 Shares as part of the deal? A rarity with very little odds but cannot be ruled out.

Personal Thoughts
I think there are 2 ways to look at this, from a good and bad angle

Good Thing is that
There is a certain price support base and end point for this company. Coming at such timing of the year, it more or less certains that my performance in 2022 will be positive which among the HKEX Investors that started the year with at least 70% equities, this should be some decent or some would say miracle performance.

Bad Thing is that
I have quite high hopes for this company and its future, the price of 2 or even 2.3 HKD is pretty low ball in my pov.
2022 will be the company's best performance since listing and it is a company where it really has showed to be the dominant leader in terms of technology and profitability in the coalbed methane china industry which is known as an unprofitable industry.
Personally i feel that today's reaction is normal but i feel that interest might not be sustained for too long and it is likely to slowly trend downwards before an offer comes out again.
Although i might be wrong and we trade at this range and slowly trend upwards till the offer comes (if it does).
As for whether i will continue to purchase at these prices, well i have no comments/thoughts because i highly doubt any adding i do based on my current cash position can affect the portfolio much either.

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