Low profile businessman behind gutsy Fullshare deal to swallow wind turbine gearbox leader

PUBLISHED : Friday, 25 November, 2016, 9:37pm
UPDATED : Monday, 28 November, 2016, 1:09pm

Ji Changqun, a Nanjing businessman little known to Hong Kong capital markets until this year, surprised investors this week by pulling off a share swap deal that will see his listed vehicle Fullshare gobble up China High Speed Transmission Equipment, a much more profitable and asset-heavy company, without using any cash.

Fullshare shot to fame not because of achievements or brand recognition in its core property development business, but because its share price soared 30-fold without matching profit growth since Ji took over three years ago, making it a risky proposition for would-be investors. Ji gained control over Fullshare by injecting property assets into the company.

It is also not an easy company to decipher, since it has also been rapidly diversifying into health and personal care products, elderly care resort development, and investment banking – all achieved through a long string of acquisitions and investments – although property remains its main earnings driver.

They deals include HK$1.82 billion worth of investments in two property developers, a personal care products firm and a skincare products firm – all listed in Hong Kong. The biggest deal, HK$1 billion for Hong Kong listed property developer Zall Development, was paid for by issuing shares instead of cash.

Its “green buildings” construction business bought from Ji’s privately-owned Fullshare Group in2014 and last year was sold to independent third parties in September this year.

Management cited as the reason for selling the “long operating cycle and large initial investment cost” and the fact that the business volume and revenue did not match the resources deployed.

“[Fullshare] has no analyst [research report[ coverage and appears not to be familiar to most institutional investors,” Pierre Lau, head of Asia-Pacific utilities research at Citigroup Global Markets Asia, said in a note after meeting Fullshare management late October.

In September Lau was sceptical that the share swap deal would work. “We believe its share exchange offer of every two shares of China High Speed into five new shares of Fullshare is unlikely to be able to get at least 50 per cent shareholder approval ... We therefore view this offer to be a non-event [that would not] affect China High Speed,” he wrote at the time.

Fullshare has a market capitalisation of HK$67.2 billion, almost nine times its net assets of 6.85 billion yuan at the end of June, much higher than the 1.15 multiple commanded by blue chip property developer China Overseas Land and Investment.

China High Speed, also a Nanjing -based firm and the nation’s largest wind power turbine gearbox maker, fetches a multiple of 1.3 times on its net asset of 10.2 billion yuan (HK$11.4 billion).

Fullshare made a pre-tax profit of 242.7 million yuan in the first half after excluding non-recurring accounting gains, up from 58.6 million yuan in the year-earlier period.

China High Speed posted a first-half pre-tax profit of 729.9 million yuan this year, up 8.4 per cent year-on-year.

To the surprise of Lau and other analysts, Fullshare’s lofty market valuation hasn’t prevented it from managing to convince China High Speed chairman Hu Yueming and his fellow founding shareholders to swap their combined 28 per cent controlling stake into a 5.7 per cent minority stake in Fullshare.

Since Ji already owned 9 per cent of Fullshare before the share swap offer, Fullshare only needed independent shareholders owning 13 per cent of China High Speed to agree to the swap to meet the minimum 50 per cent consent ratio for the deal to go through.

By Monday, 77 per cent of the offerees had accepted the deal, leaving the remaining 23 per cent of shareholders to either sell their shares, take the offer by December 5, or remain a shareholder of China High Speed with a new majority shareholder and a much reduced public shareholding.

Analysts have recommended that shareholders take profit by selling China High Speed shares in the open market given that they are trading 35.5 per cent higher than September 19 when the shares swap offer was announced.

“If I were shareholders of either Fullshare or China High Speed, I would sell shares in both and wait for better entry points,” VC Brokerage director Louis Tse Ming-kwong told the Post. “On China High Speed, it is an established manufacturer with a good brand reputation, but its share price rally has exceeded the profit growth potential in the short term,” he said.

“On Fullshare, it is one thing to have a grand vision to become a diversified conglomerate, but it is early days and this remains an illusion until proven successful.”

JP Morgan analysts also recommended China High Speed shareholders take profit, citing uncertainty over its future business direction under a new majority shareholder, uncertainty in the market’s perception of Fullshare’s value as a conglomerate, and the prospects of owning a firm with a much smaller public float.

Value Partners, one the largest institutional shareholders of China High Speed, heeded the call and sold its 4.7 per cent stake a few weeks ago, a spokesman said.

China High Speed chairman Hu, who spent decades building up the 47-year-old formerly state-owned firm that privatised in 2001, did not respond to emailed queries on how long he and fellow management shareholders would stay at the helm, whether new directors will be appointed by Fullshare, and his reason for agreeing to give up direct control over China High Speed.

“Under chairman Hu [Yueming] and other senior management, China High Speed has made great success in developing into the world’s largest wind gearbox maker, from a small industrial gearbox factory in Nanjing,” Michael Tong, Deutsche Bank head of regional utilities, renewable energy and environmental research, wrote in a note.

“Fullshare is primarily focusing on property development and provision of green buildings, investment and healthcare services, with little business overlap with China High Speed, thus, we do not see any obvious synergy from the proposed offer.”

The 48-year-old Ji, who maintains a low public profile, declined to be interviewed. Two people close to him said he rarely speaks to the media.

One of them described him as a “workaholic” but a health-conscious person who habitually takes long-walks in the mornings and mostly eats organic food grown on his properties.

A Fullshare spokesman declined to comment on potential sectors that Ji could tap to sell his assets to the company, but said it is targeting to expand in six markets; medical equipment, child health and well-being, anti-aging, online-to-offline business, travel and leisure, and new energy.

According to its annual report, in 1992 Ji obtained a higher education diploma on highway construction from Nanjing Associated Workers’ College and in 2006 received a masters in business administration (MBA) from Macau University of Science and Technology.

In the early 1990s he worked as a project manager and later as branch manager for Nanjing Jiasheng Infrastructure Engineering, rising in 2011 to the rank of general manager of the company known today as Jiasheng Construction Group.

Thanks to the skyrocketing value of Fullshare’s share price, Ji was ranked by Forbes as China’s 25th richest person in 2016, with a fortune of US$5.5 billion.

But according to a recent bond issuance circular from Fullshare’s unlisted sister firm Fullshare Group, his assets – besides his stake in listed Fullshare – are not sizeable relative to listed Fullshare in terms of net asset value.

China High Speed has made great success in developing into the world’s largest wind gearbox maker, from a small industrial gearbox factory in Nanjing
Michael Tong, Deutsche Bank

The sister company was set up in 2002 by Ji who has a 74.7 per cent stake, of which 66.3 per cent is currently mortgaged to financial institutions for loans.

It had 9.57 billion yuan of net assets at the end of June, compared to 6.85 billion yuan for the listed Fullshare, with a debt-to-asset ratio of 69 per cent that the circular said is “relatively high”.

The sister firm posted net profits of 152.4 million yuan in the first half, 367.5 million yuan for the full year 2015, 411.7 million yuan in 2014 and 406.5 million in 2013.

Around a third of its total liabilities of 9.53 billion yuan at the end of June came from the issuance of trust products that carry a relatively high average capital cost of 9.9 per cent and average maturity of two years.

It had to repay loans worth 5 billion yuan this year and 3.4 billion yuan of loans duenext year, and by the end of June had used up all of its 5.55 billion yuan of credit facilities from various financial institutions, which “could pose liquidity risk for the issuer”, the circular said.

Roads, bridges, buildings and other municipal infrastructure construction accounted for 73 per cent of the parent’s gross profit last year, while trading contributed 19.7 per cent and property just 2 per cent.

It injected most of its property projects into listed Fullshare in late 2013.

The sister firm’s biggest 10 subsidiaries are engaged in affordable housing development, solar power and environmental protection projects, health products, elderly care, building energy consumption management, hotel and tourism, municipal infrastructure construction, commodities and consumer goods trading, the circular said.

This article was corrected to show that Fullshare Group is Fullshare’s sister firm, not parent, as previously stated