Friday, May 13, 2011

Puda Coal's Chairman Sells Stake: Is He Raising $$ for Puda Buyout?

Yesterday, King Stone Energy Group (Hong Kong listed) released a statement that its Chairman, Mr. Wang Da Yong, had increased his holdings in the company through the purchase of 2.5 billion shares from the major shareholder Mr. Zhao Ming. Mr. Zhao Ming just happens to be the Chairman of Puda Coal (PUDA) that supposedly engaged in a illegal transfer of PUDA assets to himself and since has offered to buy the company at $12.

This deal raises about $55M and backs the believe all along that PUDA shareholders would make out ok considering Zhao Ming has a considerable amount of money to make shareholders whole or to complete a buyout at attractive prices.

It seems very unlikely that he would sell part of his stake in King Stone Energy unless PUDA is moving towards a deal.

Though we personally believe that PUDA is worth a lot more then even a sweetened bid to the $15 range, it might just be easier for all involved to take a decent offer and move on. The BOD is in a sticky situation considering that Zhao Ming has considerable assets to make PUDA whole including his existing PUDA shares. It could get messy relying on Chinese law, but they do have a fiduciary obligation to get a fair price. Would $15 be considered fair in order to avoid a legal battle and obtain a price higher then stock traded for all but a few days?

Our take is that $15-17 would make most US investors sleep well after a very trying period seeing the stock drop to $6 and be halted. The company expects to make $4/share in earnings in 2012 making such a price very attractive to Zhao Ming.

Ultimately our investment thesis suggests sticking in for the more fair value around $30+. Taking $15 next week and moving on towards other Chinese stocks that have been just as pummeled seems just as appealing then waiting for a long legal battle to work out.

2 comments:

NMP said...

Ming Zhou's actions show considerable mal-intent towards (mainly US) shareholders. The lack of information coming from PUDA in the past 3 weeks is dis-comforting. I am not thrilled about having to wait for a good-faith effort from this man to conclude this investment debacle.

Mark Holder said...

His alleged actions? 3 weeks isn't all that long to wait on an investigation. Assuming a deal gets done somewhere north of $12, then I don't see how it could be called an investment debacle.

PUDA isn't reliant on a good-faith effort. Its within their legal rights to have MZ make then whole. It will be interesting to see how it plays out, but deal in the $15-17 range probably leaves all parties happy.