美的集团(000333)

We believe Midea’s chances of a successful privatisation of Little Swan have increased since it updated its offer terms on Nov 21. Midea will exchange 1.1158 and 0.9056 new shares for each Little Swan A and B share, respectively, after an RMB4.0 dividend by Little Swan. This implies that the offer price for Little Swan A is RMB48.25, a ~3% premium to yesterday’s close. While Little Swan’s privatisation may result in a small EPS dilution, this will be offset by the longterm benefits stemming from a more efficient corporate structure. We maintain our Buy recommendation on Midea and suggest investors monitor the arbitrage opportunity. Meanwhile, the new offer structure suggests that each Little Swan-B share is worth about HK$45, or a ~9% premium to yesterday’s close of HK$41.43.

Investment Highlights

Approval process continues: According to the Nov. 21 announcement, Little Swan and Midea have approval from their respective boards for the transaction. On Dec. 21, Little Swan and Midea will each hold a shareholders meeting to vote on the transaction. If successful, both companies will need further approval from the CSRC before the deal can be closed, though this last step is widely understood to be a formality. Ultimately, if the deal is successful, the transaction is expected to close after the Spring Festival.

Updated terms introduce a cash component: Midea originally proposed that it acquire the remaining 47% of Little Swan by offering 1.211 new shares for each Little Swan A share, and 1.0007 new shares for each Little Swan B share. This has effectively been revised to 1.1158 and 0.9056 shares for Little Swan A and B shares, respectively, with Little Swan issuing a special dividend of RMB 4.0 per share if the transaction is successful.

Midea to benefit in the long run: The deal itself may result in ~2% EPS dilution in 2019 (a ~5% increase in the number of shares offset by a ~3% increase in net profit). In the longer term, Midea will see efficiency gains as a result of fewer related-party transactions, reduced resource duplication, and less internal competition between the group’s Little Swan, Midea and COLMO washing machine brands. We believe a common sales channel and strong branding willmake Midea washing machines more competitive.

New offer sweetens the deal for Little Swan shareholders: This new offer structure implies that each Little Swan-A share is worth RMB48.25, or a ~3% premium to yesterday’s close of RMB46.83. We believe investors should monitor this pricing difference to capture arbitrage opportunities. Meanwhile, the new offer structure suggests that each Little Swan-B share is worth about HK$45, or a ~9% premium to yesterday’s close of HK$41.43.