December 6, China Building Materials announced that Morgan Stanley would make a pre-conditional cash offer on behalf of the company to buy back and cancel up to the maximum number of shares (i.e. 841,749,304 H shares) at an offer price of HK $4.03 per H share. Representing approximately 9.98% of the Shares in issue and approximately 18.47% of the H Shares in issue as at the date of this announcement), the consideration of the Offer is HK $3,392 million, which will be paid in cash to the accepting Shareholders and will be financed by external borrowings and/or internal resources. As soon as the news came out, people in the industry and the financial market reacted strongly. Such a large-scale repurchase and cancellation of shares is not common in the field of building materials and even in the whole market. What kind of signal does China's building materials release to the market? The author will focus on the following points.
First, the long-term undervaluation of the stock price leads to the return of
value. Since the listing of CNBM on the Hong Kong Stock Exchange in 2006, the stock price as a whole has shown a state of fluctuation and decline, while its net assets per share have shown the opposite trend, basically rising steadily. In 2014, the stock price of China's building materials began to be lower than net assets per share, especially in 2021, the two trends continued to deviate from each other, and there is a growing trend. Generally speaking, for heavy assets enterprises, the stock price is lower than net assets per share, and its stock price is often considered to be undervalued, and the investment value has not been effectively excavated. Reasonable increase in valuation, guide the return of value, or one of the main reasons for the large-scale repurchase and cancellation of shares in China's building materials.
Figure 1: CNBM's share price is lower than net asset value
per share for a long time Data source: Cement Big Data (https://data.ccement.com/)
II. Stabilizing market confidence and enhancing shareholder returns
If CNBM's repurchase and cancellation offer is accepted smoothly, it will enhance shareholder returns and play an important role in stabilizing market confidence. On the one hand, because China Building Materials has not yet announced the specific details of repurchase and cancellation and the source of supporting funds, the author makes assumptions based on external borrowing and internal resources, without considering other costs, and simplifies the treatment. Based on the financial data of the third quarter of 2024, after the repurchase and cancellation, although the asset-liability ratio of China's building materials increased slightly to 62.37% -62.6%, it was lower than assessment requirement of SASASAC for the asset-liability ratio of central enterprises at about 65%, and the risk was controllable as a whole. Due to the decrease in the number of shares, net assets per share will reach more than 14.94 yuan, an increase from 13.82 yuan in the third quarter of 2024. On the other hand, CNBM repurchases at the offer price of HK $4.03 per H share, with a premium rate of about 15.1% over the closing price of HK $3.5 on December 6 and a premium rate of about 29.1% over the average closing price of HK $3.12 in the previous 60 trading days, which will increase the return on investment of shareholders intending to sell H shares.
Table 1: Partial financial information
of CNBM before and after repurchase and cancellation Data source: Cement Big Data (https://data.ccement.com/)
III.
As of September 30, 2024, the parent company of China Building Materials and its concerted actors mainly held 42.84% of domestic shares, less H shares, only 2.18%, and 51.86% of independent H shares. Exceeding the total number of shares held by the parent company of CNBM and its concerted actors. After the share cancellation and repurchase, the total shareholding of the concerted actors of the parent company of China Building Materials will reach 50.01%, and the holding advantage will be more obvious, which is of great significance to improve the voice of the parent company and the concerted actors, and to strengthen the control and governance of the company.
Table 2: Distribution of
equity interests in CNBM before and after repurchase and cancellation Source: Cement Big Data (https://data.ccement.com/)
IV. Accelerating transformation and upgrading and looking forward to long-term prospects
China Building Materials is currently accelerating transformation and upgrading, looking forward to future development prospects and investment value, or another important reason for its large-scale repurchase and cancellation of shares. Specifically, China's building materials are mainly engaged in basic building materials, new materials, engineering services and other businesses. Although the scale and proportion of basic building materials revenue are still large, there has been a significant decline in recent years. In the first half of this year, the revenue of basic building materials fell by 30.82% year-on-year, and the proportion dropped to 48.45%, less than 50% for the first time. The company's new materials and engineering services business has a certain market share and influence in the world, the overall revenue and proportion of the two showed a steady upward trend, the first half of this year's revenue is to achieve growth. In the future, with the acceleration of the transformation and upgrading of China's building materials and the further development of the international market, the new materials and engineering services business will continue to contribute to the growth point of the company, which will effectively hedge the pressure of the decline in domestic demand for basic building materials and help the company achieve high-quality development. (This article does not constitute investment advice)
Figure 2: Revenue of CNBM's main sectors (RMB 100 million) Figure 3: Proportion of revenue of CNBM's main sectors (%)
Source: Cement Big Data (https://data.ccement.com/)
