CCM - China Concord Medical

[writser]

Another Chinese reverse merger. This time a medical company. Their core business is providing radiotherapy / diagnostical imaging solutions to hospitals (or directly to patients through their own hospitals). First of all, a small reality check. Is this a real company or the next Sinoforest? My armchair research:

 

- They bought a hospital for $40m in Singapore. Visible on Google Street View: link.

- They acquired an indirect interest of 20% in the Texas MD Anderson Proton Therapy center (valued at opening at $125m). Presumably a big name in cancer treatment.

- They bought a large stake later and are now controlling shareholder of the general partner of the center and consolidating its results. According to their 2015 annual they invested ~$40m in total.

- They also paid out huge special dividends in 2014 and 2015, $1.61 and $0.99 per ADR respectively (~$117m in total).

- Carlyle was an early investor. Maybe they have done some due diligence ..

 

I have to admit I'm not particularly convinced by all other projects on their website. Most of it is work in progress, for example stuff like this. Growth company. I'm not particularly impressed by their balance sheet either. But anyway, their market cap is $200m and they spent $80m in cash in Singapore and the US the past few years and returned $120m to shareholders so it's presumably not a total fraud (but it might be an overleveraged crap company .. )

 

Now, onto the deal. Last november the company filed a receipt of a non-binding proposal to acquire the company. An form 13E3 was filed a few weeks ago. Key terms:

 

- No proxy, ADR holders will not get to vote. Gotta love the Cayman islands.

- Chairman and ex-COO own 45.4% of shares outstanding

- Carlyle and another ~10% owner signed a share purchase agreement (with a long-stop date of 11 Mar 2017) to sell their shares to the buyer group at $1.73 (or $5.19 per ADR).

- ADR holders will be cashed out at $5.19 too (minus a $0.05 ADR fee).

- An SPV is providing $56m to finance the share purchase agreements (deal can be cancelled if it doesn't close by March, 6). This loan is to be converted into equity later.

- The SPV can provide an additional $42m in financing (the way I read it insiders could use this to remortgage their pledged shares (see below) in order to get deal consent if the initial lender disagrees).

- According to the note agreement the notes can be cancelled if the deal doesn't take place before September, 30 (the "privatization deadline").

- The buyout group still need another ~$70m financing to be provided by a bank. According to the 13E3 they expect to enter in a bank commitment letter within the first quarter of 2017.

 

Now, there is some hair on this deal. Insiders bought their shares using borrowed money in 2013 (that's probably why they paid out the large special dividends in 2014 and 2015) and they still require consent from the lender to vote their shares. They still have to secure some financing. There's a bit too much leveraged involved for my taste. However, take a look at the big picture here. Insiders own 45% of shares, purchased ADR's for $6.10 in 2013 and have received $2.60 in dividends since. They only need $70m in financing which is a relatively small amount. All documents point to the deal being completed in a few months. Also, this is a small, boring deal. Nobody has written about it, nobody is looking at it. Average daily volume: $100k. In my experience the small Chinese deals tend to trade at an unjustified discount. In this case, since the 13E3 filing the ADR has drifted down to $4.68, or a ~10% discount. If the deal closes by July your IRR is 35%. If the deal closes 30 September (the privatization deadline) your IRR is still 18%. I expect some news to come out the next few weeks. Key question is: will it be good news!??!

 

I have a small position - certainly don't expect to go all-in on this one. Has anyone else taken a look at it?

[Paarslaars]

Slightly off topic but I have gotten curious, on all your Chinese companies you do a reality check but I assume you only post the ones you find legit.

How often do you come across one that isn't?

[writser]

I can't remember one where I thought it was definitely a fraud. But I mostly look at Chinese companies that are going private and I think that segment is relatively free of clowns. Filing hundreds of pages of documents for a fake going-private transaction to prop up your share price seems to me like a very convoluted way to defraud investors. A lot of these going-private deals are like the opposite of frauds: stock price goes nowhere for years, no volume in stock, lowball offer, no press releases at all, not a single mention on Twitter / SeekingAlpha and marginal operating results. If a stock like that turns out to be a scam it would be such a genius setup that I'd be happy to lose some money! (ok not really ..)

 

That said some companies look so hairy I'm not even going to bother to do additional research. AMCN comes to mind. I'm also slightly less enthousiastic about CCM than about other deals but I think the spread compensates for that. I mostly do the 'reality check' for two reasons:

 

1. Gives me some extra confidence when I own the stock.

2. A lot of (mostly American) investors instantly dismiss any obscure Chinese company as a fraud and I don't want to have that discussion in every thread.

 

Regarding the latter point: I think investors really got hurt in the Chinese RTO fraud spree a few years ago and now they are overcompensating, which is the reason these opportunities exist. Even though a lot of the deals I'm looking at aren't reverse mergers at all .. But still, no money manager wants to explain owning CCM to their clients if it implodes. And the value investors who bought Sino-forest and CCME when they were down 50% and lost all their money aren't touching this with a ten foot pole either. Also, I think a lot of Americans are biased against China in general.

 

btw: are you Dutch?

[Paarslaars]

Thanks for the info and the idea!

Have to see if I can free up some cash, been adding to my O&G positions but might be getting a bit too concentrated.

 

Close, I'm Flemish.  :)

[Jurgis]

OT: Yeah, there was serious hurt with Chinese frauds (some of them weren't reverse mergers either). And some of the frauds did "going private" announcements in the day. So I think it's reasonable to do some DD as writser does in these going private deals.

 

I also agree that there might be some anti-Chinese company bias. I think it's mostly justified though, since most (?) Chinese companies are not run for minority shareholders. (Not that a lot of other companies are...). Foreign locale, past frauds, complex structures (even the huge companies are structured through VIEs, contractual rights, etc, since China does not allow for foreign ownership of large swathe of companies), not understanding language, not understanding accounting/laws, grey financing/sales, etc.

 

Of course, writser picked a nice niche to work in. Going private spreads give known return and are time-bound, so you don't have to trust in things that are difficult to research and trust for long time.

[udravi]

Anyone knows what is happening with CCM? The discount went from 10 to some 50%.

[gfp]

I haven't followed this company so this could be incorrect, but the drop appears to be related to this amendment to their just-filed 13D -

https://www.sec.gov/Archives/edgar/data/1472072/000114420417028975/v467660_sc13da.htm

 

"ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION

 

Item 3 of the Prior Schedule 13Ds is hereby amended and supplemented by inserting the following at the end thereof.

 

Since the closing of the Share Purchases had not happened by the long-stop date as set forth in the Carlyle SPA and Solar SPA, a copy of each of which was attached as Exhibits 99.2 and 99.3, respectively, of Amendment No. 2 to Schedule 13D filed with the SEC on July 11, 2016 by the Reporting Persons, following the long-stop date, the Carlyle SPA was terminated and each party to the Solar SPA has a right to terminate the Solar SPA pursuant to the terms thereof.

 

ITEM 4. PURPOSE OF TRANSACTION

 

Item 4 of the Prior Schedule 13Ds is hereby amended and supplemented by inserting the following at the end thereof.

 

Since the closing of $56,650,000 principal amount of the Blue Ocean Notes failed to take place by March 6, 2017, the Blue Ocean Note Subscription Agreement, a copy of which was attached as Exhibit 99.2 of Amendment No. 4 to Schedule 13D filed with the SEC on February 9, 2017 by the Reporting Persons, was terminated pursuant to the terms thereof."

 

ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER

 

Item 6 of the Prior Schedule 13Ds is hereby amended and supplemented by inserting the following at the end thereof.

 

On May 23, 2017, Morgancreek and Haitong extended the maturity date of the Notes by six months from the Initial Maturity Date to November 22, 2017, and also amended the IRR used in calculating the Base Redemption Amount.

 

On May 23, 2017, the Reporting Persons entered into an agreement with respect to the joint filing of this Schedule 13D and any amendments thereto (the “Joint Filing Agreement”). A copy of the Joint Filing Agreement is attached as Exhibit 99.1 to this Schedule 13D and is incorporated by reference herein.

 

Except as described herein, there are no other contracts, arrangements, understandings or relationships (legal or otherwise) among the Reporting Persons and between any of the Reporting Persons and any other person with respect to any securities of the Company.

 

Which refers to these exhibits -

https://www.sec.gov/Archives/edgar/data/1472072/000114420416112332/v444012_ex99-2.htm

https://www.sec.gov/Archives/edgar/data/1472072/000114420416112332/v444012_ex99-3.htm

 

 

 

Anyone knows what is happening with CCM? The discount went from 10 to some 50%.

[writser]

Yep. Relevant quote:

Since the closing of the Share Purchases had not happened by the long-stop date as set forth in the Carlyle SPA and Solar SPA, a copy of each of which was attached as Exhibits 99.2 and 99.3, respectively, of Amendment No. 2 to Schedule 13D filed with the SEC on July 11, 2016 by the Reporting Persons, following the long-stop date, the Carlyle SPA was terminated and each party to the Solar SPA has a right to terminate the Solar SPA pursuant to the terms thereof.

 

So, looks like the deal is cancelled or at least postponed. Thesis didn't work out, I sold.