Yanlord Land Group - OCBC Investment 2019-10-29: Mandatory General Offer For United Engineers Ltd


Yanlord Land Group - Mandatory General Offer For United Engineers Ltd

Investment thesis

  • We see YANLORD LAND GROUP (SGX:Z25) as a beneficiary of improved sentiment within the Chinese property market.
  • Yanlord has strong exposure to key economic regions in PRC such as the Yangtze River Delta, Bohai Rim and Greater Bay Area. It is targeting contracted sales of RMB40b in 2019, supported by its abundant saleable resources of ~RMB84b.
  • Key management’s interests are also aligned with minority shareholders, as Yanlord’s founder, Chairman and CEO Mr. Zhong Sheng Jian owns ~70% of Yanlord’s total shares outstanding.

Triggering mandatory GO for UEL after acquiring stakes from partners

  • Yanlord Land Group announced that it has entered into separate sales and purchase agreements with Perennial UW and Heng Yue Holdings Ltd to acquire their respective 45% and 6% stakes in the entity which holds 35.27% of United Engineers’s (UEL) ordinary shares. See Yanlord Announcements; Yanlord Latest News.
  • Yanlord holds the balance 49% stake in the entity. As such, Yanlord now has a 35.27% interest in United Engineers. The total cash amount paid by Yanlord to Perennial UW and Heng Yue amounted to S$229.7m, and was funded by a combination of internal resources and debt. It also translates into a value of S$2.60 per United Engineers share.
  • It is therefore required to make a mandatory general offer for all of United Engineers ordinary shares it does not hold and also a comparable offer for United Engineers preference shares to be compliant with the Singapore Code on Take-Overs and Mergers.

Unlikely to receive many acceptances, in our view

  • It appears that both Perennial UW and Heng Yue had expressed their intentions to dispose their stakes in United Engineers. Yanlord said that this acquisition was in-line with its objective of strengthening its position in UEL and WBL (69.14% held by United Engineers and 29.9% held by Yanlord) to enhance portfolio alignment and leverage on synergies, given that United Engineers and WBL have a presence in Singapore and China.
  • Singapore and China contributed 51.2% and 18.2% of United Engineers’s revenue in FY18, respectively. Recall that Yanlord is seeking to increase its exposure to the Singapore property market after making its maiden entry in Apr 2018 with the successful tender of the collective sale of Tulip Garden (JV with Hongkong Land).
  • The mandatory conditional cash offer price of S$2.60 per United Engineers ordinary share is slightly below United Engineers’s closing price of S$2.62 on 25 Oct, and is also at a 16.7% discount to United Engineers’s NAV/share (as at 30 Jun 2019), implying a takeover offer at 0.83x PB. As such, we believe the acceptance rate for this general offer would be low. See United Engineer Share Price.
  • This cash offer is conditional upon Yanlord garnering valid acceptances that will result in it holding more than 50% of the total voting rights attributable to the UEL ordinary shares. In any case, Yanlord said that it has no intention to delist or privatise United Engineers.
  • We maintain our fair value of S$1.56 on Yanlord.
  • (See Yanlord Share Price; Yanlord Target Price)

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-10-29
SGX Stock Analyst Report BUY MAINTAIN BUY 1.560 SAME 1.560