China

Guangdong Hec Technology Holding Acquires 50% Stake in Yichang HEC ChangJiang Pharmaceutical for RMB 3.2 Bln

Summary:

  • Guangdong Hec Technology Holding (600673.SS) has announced it has acquired a 50% stake in Yichang HEC ChangJiang Pharmaceutical (1558.HK) for RMB 3.2 billion, according to Sina.

Why It Matters:

  • Guangdong Hec Technology Holding is engaged in the manufacture of aluminum and electronic components. The company expects its net profit in 2016 to increase 14% to RMB 113 million. On the other hand, Yichang Hec Changjiang Pharmaceutical expects to record much higher net profit growth and the company estimates a 40%+ growth rate for 2016.
  • Both Hec Technology and Yichang Hec Changjiang Pharmaceutical are controlled by Zhang Zhongneng. Although the companies have claimed that the deal enables Guangdong Hec Technology Holding to enter the high growth pharmaceutical business, this does not stand up to scrutiny because mainland investors can already access the Hong Kong market and they can invest in Hec Changjiang Pharmaceutical directly. The transaction is more analogous to arbitrage in that it takes advantage of the valuation gap between the mainland and Hong Kong.
  • In order to make the deal appealing, Yichang Hec Changjiang Pharmaceutical has promised to book a net profit of RMB 480 million in 2017 and RMB 575 million in 2018.