CIMC Vehicles heads for Hong Kong exit ramp via share buyback

The Chinese maker of transport trailers is making a U-turn out of the Hong Kong stock market four years after listing there

Key Takeaways:

• CIMC Vehicles said it would buy back its H-shares at HK$7 per share, a premium of only 8.7% over the pre-suspension price, while maintaining its A-share listing
• The departure decision came after the gap between the company’s Hong Kong and Shenzhen shares widened to 42%, amid shrinking Hong Kong turnover

By A. Au

A company that makes semi-trailers for the road haulage industry has joined the corporate convoy leaving the Hong Kong stock market behind. 

CIMC Vehicles (Group) Co. Ltd. (1839.HK; 301039.SZ), listed in Hong Kong and Shenzhen, suddenly suspended trading on Nov. 28 and announced plans to repurchase all its H-shares, except for those held by its parent and related parties.

The offer price was given as HK$7, just 8.7% above the price when trading was suspended, valuing the buyback at about HK$1.03 billion ($132 million). The company said it would revoke its Hong Kong listing afterwards, while retaining its presence on the Shenzhen Stock Exchange.

The maker of truck trailer units is aiming to leave a stock market that has been struggling to get traction for some time. It joins a list of nearly 20 firms including big names such as Dali Foods and Haitong International (0665.HK) that have turned their back on the international financial center this year, whether through privatization or the voluntary withdrawal of listing applications. The reason for the exodus is clear: shrinking valuations in a falling market. In its announcement CIMC Vehicles cited funding difficulties caused by low trading volume and the limited liquidity of its H-shares.

CIMC Vehiclessaid the exit from the Hong Kong Stock Exchange would save on costs of regulatory compliance and would benefit shareholders, freeing its A-shares from the relatively poor performance of the Hong Kong-listed stocks.

Shares in CIMC Vehicles have actually risen more than 43% in Hong Kong this year, but the price-to-earnings (P/E) ratio is languishing at just 11 times and the forward P/E ratio works out at 4.7 times. The closing H-share price of HK$6.88 last Friday marked a discount of more than 40% on the company’s A-shares at 10.71 yuan each. No wonder the company wants to pull out of Hong Kong.

Taking a closer look at this year’s earnings, CIMC Vehicles has been picking up speed since the pandemic, especially overseas. Economic policy stimulus and rapid transport growth in North America boosted business there, while profits were stable in China and other markets.

The company’s first-half revenue rose 20.3% to 13.47 billion yuan ($1.88 billion) from the year-earlier period, while net profit surged 419% to a record high. Net cash flow from operating activities soared five-fold to 1.25 billion yuan. The improving performance means this could be a good time for a buyback.

CIMC Vehicles went public on the Hong Kong Stock Exchange in July 2019. With shares priced at $6.38, the offer was oversubscribed 1.74 times and raised HK$1.58 billion. The company took advantage of the price peak to announce a dual listing in mainland China and Hong Kong in 2020. Since then, the A-shares have outperformed the H-shares by a widening margin.

Although the Hong Kong share price rose as high as HK$8.87 this year, the overall weakness in the market pushed the share down more than 20% below that level. The buyback offer of HK$7 per share is only 9.7% above the initial listing price, making the deal unattractive for some market watchers.

Maximizing profits

The company’s parent, CIMC Group (2039.HK; 000039.SZ), has shown itself to be adept at extracting profits over the past few years, as in the case of the airport facilities business CIMC TianDa. In 2013 CIMC acquired Deli International, a much undervalued airport baggage handler and logistics operator in Singapore. Two years later it became a major shareholder of Hong Kong-listed China Fire Safety Enterprise (CFE) through an equity swap. In 2018 the businesses were integrated and renamed CIMC TianDa, with a backdoor listing for the airport business.

However, less than two years later CIMC Group announced it would privatize CIMC TianDa at a premium of 20.36%. When the Hong Kong exit was finalized in 2021 an A-share listing was set in motion. Approval was gained in the middle of 2023 for a listing on the second board of the Shenzhen Stock Exchange, with plans to raise 1.42 billion yuan.

When a weak market is weighing on a valuation, taking a listed company private in order to transfer it to a more lucrative stock market has been a way for CIMC to maximize capital appreciation.

If the share buyback is successful, the only CIMC companies to remain listed in Hong Kong will be the CIMC Group itself and CIMC Enric (3899.HK), a company involved in natural gas, hydrogen and other clean energy that could be the next target for a switch of status.

CIMC Enric listed on the Hong Kong Stock Exchange in 2005 at HK$1.5 per share, rising at one point in 2013 to more than HK$13. The share price has bobbed up and down since then. Now the company’s forward price-to-earnings (P/E) ratio is only 10 times, with a market capitalization of about HK$13.5 billion. Its major shareholder, CIMC Group, owns a 67.63% stake.

The storyline sounds similar to the fate of CIMC Vehicles. CIMC Enric’s performance has been improving, with first-half revenue rising 20.2% to 10.76 billion yuan in 2023 and profits up nearly 30% at 568 million yuan.

The company could be considered undervalued compared with its A-share peers, as hydrogen and other clean energy initiatives rank highly on the national policy agenda. Baofeng Energy (600989.SH) has a price-to-earnings (P/E) ratio of 21 times while Weichai Power (000338.SZ) comes in at 15 times.

Futu Securities estimates the average price-to-earnings (P/E) ratio for stocks in the hydrogen energy sector at about 19 times. With that in mind, some market players are speculating that CIMC Group might apply its familiar tactics, privatizing CIMC Enric and then listing it on the mainland market to achieve a higher valuation and more efficient fundraising.

The retreat of the Hong Kong stock market has worn down the resolve of many investors. The Hang Seng Index has fallen nearly 15% this year, as of last Friday. For the past three years the drop stands at 37%, as Hong Kong underperformed all other major Asian stock markets. Even though prices of many stocks have fallen to low levels, shrinking turnover has curbed buying interest.

If there is no let-up, investors in listed companies are likely to grow impatient with the lowly values and look for ways to cash out of Hong Kong.

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