Escaping Hong Kong's value trap is far from cheap

China Traditional Chinese Medicine Holdings Co

12/03/2024 11:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Robyn Mak
       HONG KONG, March 12 (Reuters Breakingviews) - Saying
goodbye to Hong Kong will be hard. Luggage-maker Samsonite
International  1910.HK , skincare group L'Occitane International
 0973.HK  and Asian real estate fund manager ESR  1821.HK  have
emerged as potential buyout targets as stocks languish in the
financial hub. These businesses are broadly doing well and could
command a higher price tag on another bourse now or later. But
that also means shareholders can demand a generous premium from
any buyer.
    There have already been four privatisation offers announced
this year for Hong Kong-listed companies, worth a combined $4
billion. That's more than in the previous two years combined,
per Dealogic data. All involve mainland Chinese firms, whose
shares are among the world's worst performing equities over the
past year. China Traditional Chinese Medicine  0570.HK , for
instance, was trading at less than half its peak market value
reached in 2018 when a consortium led by its state-owned parent
Sinopharm Group  1099.HK  announced an offer last month worth
nearly $3 billion.
    The next crop of targets looks set to be larger and involve
global names. Buyout firms are eyeing Samsonite and L'Occitane
while Warburg Pincus and other top shareholders at ESR are
"studying options", Bloomberg reported. Each of those potential
transactions would probably roughly equal, if not surpass, the
$5.8 billion deal for Belle International in 2017, Hong Kong's
largest buyout. If central banks cut interest rates this year,
funding costs will drop, which would also help spur mega deals. 
    Unlike many China-focused companies, these businesses are
growing steadily. Shares of Samsonite, which owns Tumi and
American Tourister, have rebounded to their pre-pandemic levels
and the company is forecast to deliver a 17% jump in earnings
this year, LSEG data show. Yet the U.S.- and Luxembourg-based
enterprise trades on less than 9 times forecast EBITDA for the
next 12 months, below some New York-listed consumer brands like
VF Corporation  VFC.N , owner of Vans and EastPak, and Amer
Sports  AS.N , which makes Salomon skis and Arc’teryx parkas.
    Likewise, listed peers in Europe and Asia sport higher
valuation multiples than L'Occitane and ESR. The latter's stock
is down 40% from its 2019 initial public offering price.
    Hong Kong rules require at least 75% approval for a buyout
from disinterested shareholders. At Samsonite, institutional
investors like Janus Henderson Investors and Fidelity Management
& Research can push for higher premiums. L'Occitane Chair and
70%-owner Reinold Geiger, who abandoned his own plans to
privatise and relist the company in Europe last year, will
probably require a compelling offer from its suitor, reported by
Bloomberg to be Blackstone  BX.N . If the private-equity firm
teams up with Geiger, the two will have to please minority
shareholders like Butler Hall Capital, which has already
declared any offer below HK$45 a share - a 54% premium to
Monday's close -  would undervalue the company. Escaping Hong
Kong's value trap will be costly.
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    CONTEXT NEWS
    Carlyle Group and KKR have shown "preliminary interest" in
Hong Kong-listed luggage maker Samsonite International,
Bloomberg reported on March 7, citing unnamed people familiar
with the matter. Other private equity firms including Bain
Capital and CVC Capital Partners are making early assessments
about a potential bid, the report added, and may consider
teaming up.
    Separately, ESR's largest shareholders are "studying
options" including taking the Hong Kong-listed company private,
Bloomberg reported on Feb. 21, citing unnamed people familiar
with the matter. The real estate asset manager has also
attracted preliminary interest for the company or some of its
assets, the report added.
    U.S. private equity firm Blackstone is also considering a
bid for skincare company L'Occitane, Bloomberg reported on Feb.
6, citing unnamed people with the matter.

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Graphic: Stocks in Hong Kong have underperformed for years    https://reut.rs/49Gymjm
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 (Editing by Antony Currie and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  MAK/   
robyn.mak@thomsonreuters.com; Reuters Messaging:
robyn.mak.thomsonreuters.com@reuters.net))