- Pujiang International, the 66% owner of specialty steel maker Ossen Innovation, listed on the Hong Kong Stock Exchange in May 2019
- Ossen Innovation provides 59% of Pujiang’s earnings and 56% of its net assets
- Pujiang has a market cap of US$362mm and is valued at 21 P/E and 1.7 P/B
- Ossen has a market cap of US$15mm and is valued at 1.5 P/E and 0.1 P/B
- The valuation gap shows that eligible small cap Chinese companies should be listed in Hong Kong rather than New York
Ossen Innovation (OSN) (奥盛创新) makes high performance pre-stressed steel used in large infrastructure projects, especially bridges. Ossen is 66% owned by Pujiang International (HK:2060) (浦江国际集团) which completed an IPO on the Hong Kong Stock Exchange in May 2019 (LINK). A large part of the valuation of Pujiang shares on the HKEX is attributable to the OSN business which has a very low valuation on Nasdaq.
Pujiang’s successfully listing means there is no benefit to Ossen’s continued existence as an independent publicly traded company. The simplest and most favorable outcome for Ossen shareholders would be a cash or stock acquisition of OSN by Pujiang. However there is a risk that Pujiang management may attempt to impose an unfavorable outcome on Ossen’s public shareholders.
The disparity between the market valuations of Ossen and Pujiang shows that the HKEX is a superior venue for small cap Chinese companies that meet its listing criteria. An HKEX listing provides better corporate visibility, better long-term access to financing, and reduces risk from changes to US tax and regulatory policies.
Topics:
- Pujiang/Ossen Group Structure
- Pujiang/Ossen Valuations
- Benefits to Ossen from the Pujiang IPO
- The Failed Ossen Buyout Offer
- Implications for Other US-listed Chinese Companies
- Investment Considerations
Additional information about Ossen is available in its SEC filings, website, and May 2018 Investor Presentation. Additional information about Pujiang is available in its HKEX filings and website.
PUJIANG/OSSEN GROUP STRUCTURE
There is no uncertainty about the relationship between Pujiang International and Ossen Innovation. Pujiang’s Global Offering document (LINK) shows the position of Ossen Innovation and its public shareholders within the group (colored notations added for clarity):
Pujiang’s Income Statement clearly identifies the portion of income attributable to the public shareholders of Ossen Innovation:
PUJIANG/OSSEN VALUATIONS
Data as of 7/16/19:
Applying Pujiang’s valuation multiples to OSN suggests a fair value over $30/ADS
BENEFITS TO OSSEN FROM THE PUJIANG IPO
Pujiang’s Offering Document includes extensive background information about the pre-stressed steel business conducted by OSN and the outlook for its future growth. Highlights include:
- Primary end-market is infrastructure development, especially bridge construction. China fixed asset investment in Tunnel and Bridge construction is projected to grow at a 10.4% CAGR from 2018-2022.
- Pre-stressed Materials market is projected to grow at a 13.2% CAGR from 2018-2022.
126mm RMB of Pujiang’s IPO proceeds are designated for expansion of OSN’s prestressed materials business, effectively doubling its capacity. This would fulfill a long-time goal which OSN management had not been able to pursue because the persistently low valuation of OSN shares made it impossible to raise new equity capital. Reasons for expansion:
- Participation in growing infrastructure investment
- Effective capacity utilization in OSN’s pre-stressed materials production was over 100% in 2018
- Potential to replace of some current outside suppliers of pre-stressed materials to Pujiang’s cable business
After completion of its IPO Pujiang provided a guarantee for 130mm RMB of bank loans to finance OSN’s capital expenditures (LINK). If the market outlook described by Pujiang proves accurate then the increased capacity would enable substantially higher OSN revenues and earnings from 2021.
Pujiang’s IPO was supported by 5 “cornerstone investors” who purchased 37% of the shares offered:
- Pacific Asset Management – a unit of China Pacific Insurance Group (HKEX:2601)
- SAIC Motor HK Investment – a unit of SAIC Motor, the largest auto company listed in China (SHA:600104)
- SIIC Trading Company – a conglomerate controlled by the Shanghai municipal government
- Shanghai Construction Group Investment – a unit of a leading Shanghai listed construction and engineering firm (SHA:600170)
- Shanghai Putao Science and Technology Investment – an investment company formed by the Chinese national government for the purpose of promoting technological development
Participation of these high quality investors is a positive signal about how Pujiang is perceived in China. Its IPO priced at HK$2.68/share on 5/27 amidst weak sentiment related to trade tension, but has risen 30% since listing (to HK$3.49 on 7/16).
THE FAILED OSSEN BUYOUT OFFER
It would have been smart for group Chairman Dr. Tang to buy out the public shareholders of OSN through a simple cash offer at a low price in 2017 prior to filing of Pujiang’s HKEX IPO application. Instead Dr. Tang proposed a buyout with a dumb complex transaction at no price as described in prior Koneko articles:
- Public Shareholders Invested $22.5mm in Ossen Innovation’s Steel Business, Now Ossen’s Chairman Offers To Buy It Back For $0
- Ossen Innovation Filed the Proxy Statement for its Chairman’s $0 Buyout Offer
- Ossen Innovation Acquisition Target Valued at $40.6mm in March, Equals $1.37/ADS
Essentially, Dr. Tang would have taken OSN’s business for free leaving OSN as an empty shell which would acquire a medical device company through a reverse merger. A shameful “fairness opinion” estimated the new company could have a value ranging from US$174mm to $376mm even though the acquisition target had recently lost the license to sell its primary product and its financial statements contained a “going concern” warning.
The buyout offer and reverse merger were not completed because the medical device company failed to fulfill the closing conditions. OSN’s public shareholders retained their interest in a business whose earnings subsequently grew 94% in 2018 and whose fair value has now been demonstrated by the Pujiang IPO.
It would be harder to execute a similarly unfair transaction now that OSN’s controlling shareholder is a company listed and regulated in Hong Kong compared to 2017 when the controlling stake was held by Dr. Tang, an individual citizen and resident of the PRC.
IMPLICATIONS FOR OTHER US-LISTED CHINESE COMPANIES
The huge valuation disparity between Ossen and Pujiang demonstrates the disadvantage of a US listing for small cap Chinese companies. These companies may be able to achieve an IPO with favorable market timing, but poor investor understanding of their businesses leads to persistently low valuation which is damaging to their corporate reputation and makes it difficult or impossible to raise additional capital for growth.
Investors look at a company like OSN with an irrational 1 P/E and assume the P is right so the E must be wrong. But Pujiang’s 21 P/E demonstrates that the same E can receive a completely different valuation in Hong Kong where the company is better understood. The following table shows US-listed Chinese companies selected for low market cap, low valuation, and poor share price performance since listing:
- 21Vianet (VNET) 世纪互联
- Bitauto (BITA) 易车
- Changyou (CYOU) 畅游
- Cheetah Mobile (CMCM) 猎豹移动
- China XD Plastics (CXDC) 鑫达集团
- CNFinance (CNF) 泛华金融
- Ever-Glory International (EVK) 华瑞
- Fuling (FORK) 富岭环球
- Gulf Resources (GURE) 海湾资源
- Highpower (HPJ) 豪鹏国际
- Ossen Innovation (OSN) 奥盛创新
- ReTo Eco-Solutions (RETO) 瑞图生态
- Sogou (SOGO) 搜狗
- Sohu (SOHU) 搜狐
- SORL Auto (SORL) 瑞立集团
- Xinyuan (XIN) 鑫苑置业
- Xunlei (XNET) 迅雷
Every US-listed small cap Chinese company should be looking at transferring its primary listing to Hong Kong if it can meet the exchange criteria:
Transferring listing would also reduce corporate risks related to unpredictable changes in US taxes and regulation such as the proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act.
INVESTMENT CONSIDERATIONS
There is no benefit to Ossen’s continued existence as an independent publicly traded company. Pujiang could easily acquire Ossen in an all stock transaction that would be immediately accretive to EPS and book value, capture the full benefit of Ossen’s capacity expansion, and simplify the group’s legal and regulatory compliance.
This example illustrates the immediate benefit from a merger with an exchange ratio of 40 shares of Pujiang for each publicly held OSN ADS. This would provide consideration of about US$18/ADS, about 1X book value per ADS.
While such a share exchange would produce a win-win outcome, it is possible that Dr. Tang and Pujiang could make a new unfair offer that severely undervalued Ossen or even provided no value at all.
On a standalone basis OSN is extremely undervalued at a 1.5P/E with earnings poised to grow from capacity expansion. However if there is no corporate action to consolidate Pujiang and Ossen then OSN is likely to continue to be poorly understood and persistently undervalued by investors. Shares could continue to trade in a range of US$2-3 as they have for the past 7 years.
Ossen’s business is dependent on Chinese infrastructure development. The long period required for planning and construction of major projects provides good visibility into future order flow and limits exposure to short-term economic cycles. However government controlled entities tend to pay slowly so Ossen and Pujiang have financial risk associated with a working capital mismatch between payables to steel suppliers settled in an average of 15 days and receivables from construction customers settled in an average of 158 days.
DISCLAIMERS & NOTES
At the time of publication the author was a shareholder of Ossen Innovation. The author hopes that publication of the facts in this article will increase the likelihood of fair treatment of Ossen Innovation shareholders and decrease the likelihood of a new unfair proposal from Ossen, Pujiang, and Dr. Tang. Investors are encouraged to check all of the key facts cited here from SEC filings and other external sources prior to making their own investment decisions.The author does not make any recommendation to any other person about investment in Ossen Innovation shares.
A link to this article was sent to Ossen CEO Wei Hua and to Ossen’s investor relations advisor. If they can provide public information as of 07/17/19 which shows there are errors in the text then corrections will be made as promptly as possible.
Koneko Research 