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BYD borrowing RMB 1Bn from BYDe. Smell test


MrB
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Does this pass the smell test?

http://www.hkexnews.hk/listedco/listconews/sehk/20110909/LTN20110909546.pdf

 

The jist

BYD (1211 HK) owns 65.76% of BYDe (Byd Electronics 285 HK).

BYD has been selling shares and debt to raise cash in order to fund growth; selling on forward PE of 11 and EV/NI of 14

BYDe on forward PE of 5.5 and EV/NI 2.2

On 9 Sep BYD announces borrowing RMB 1Bn from BYDe at 6.65% (3yr term loan rate for China)

Guaranteed by 25% BYDe shares (RMB 1Bn value/last 5 trading days)

 

Good: Independent shareholders have to vote (HKEX rule, not management initiative)

 

Bad: Credible logic to lend money out at 6.65% if earning less than 1% at the bank. However, that would imply it is excess cash and since ALL the shareholders of BYDe is/should be the priority why not dividend it up?

 

The 25% "reverse convertible" is a bit odd. A cynic would argue that you are sucking out the juice of the orange and giving the leftovers as collateral. a) Why not give BYD shares as collateral, making it a regular convertible bond or b) use fair market value? Using the current depressed market value of BYDe does not strike me as equitable.

 

Also, Hang Seng current depressed PE is 9 (historical multi decade average closer to 14) and current “sector” valuation is depressed. Even on that basis BYD trades way out of line. Using EV/Rev (not necessarily the best method, but gets around temporary lumpy earnings) BYD 0.10 v averages for Casings 2.87 (Catcher, HIP and Tongda 7.6, 0.33, 0.69), Keypads 0.61 (Ichai) and Handset ODM 0.30 (Flextronics, Jabil and Foxconn 0.16, 0.28 and 0.46)

 

I also note that in the press release BYD seems to indicate that the non-independent shareholders make up 65.76%, but Dragonfly owns another 7.47% and the beneficial owners are BYDe employees. However, I question the independence of these employees. Can they really choose to vote against their majority owner/employer?

 

Any thoughts?

 

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