News Alert: Termination of a potential acquisition

  • Sunac Services announced to terminate the proposed acquisition of a property manager as they fail to reach consensus on the final deal consideration and transaction arrangements
  • We believe it is largely expected given the previous postponement on the deal’s Long Stop Date and the targetco’s sister developer defaulted its debt repayment obligations
  • Potential impact from the termination would be c.5% on FY22 earnings in the worst case scenario assuming the Rmb100m deposit has to be fully written off
  • The market may take this as another sign that Sunac Group is tight on liquidity, but we actually welcome the decision as the deal could be problematic for Sunac Services post-M&A given potential complications involved
  • More to follow after the company’s conference call to be held tomorrow morning

What’s new?

Sunac Services (1516 HK, BUY) announced after market close to terminate its proposed acquisition of a property management company as well as the share transfer agreement that they entered in Oct-21 as they failed to reach consensus in respect of the final deal consideration and transaction arrangements.

Our view

A largely expected termination. Sunac Services has previously postponed the Long Stop Date of this acquisition from end-Nov to end-Dec, and there has been increasing complications involved as the sister developer of the property manager has officially failed to fulfill certain of its bond repayment obligations and have entered into construction halts for numerous of its projects. It therefore came as no surprise to us that the deal was ultimately called off as a result of both parties failing to reach a consensus to close the deal.

c.5% earnings impact on FY22 earnings in the worst-case scenario. On one hand, our current earnings estimates did not factor in any potential contribution from this potential deal. On the other hand, Sunac Services has only paid Rmb100m so far as deposit for the share transfer agreement, and this payment was pledged with 200m of the target company’s shares. We believe the chance for Sunac Service to recover the amount would be low, but assuming that the Rmb100m deposit was not returned, Sunac Services should still have a chance to recover some of the Rmb100m if they had to exercise the pledge and sell the 200m shares on the market (target company’s historical low share price was at HK$0.77/sh). Even under the worst-case scenario where Sunac Services has to write the Rmb100m off completely in FY22F, we estimate this will translate into c.5% earnings downside to our FY22 earnings estimates.

A welcomed decision. There has been plenty of market news surrounding the target company’s sister developer since its default upon its project quality and its inability to deliver its projects. Given the sister developer’s jeopardized reputation and potential uncertainty on the property manager relating the collectability of receivables and business sustainability from the developer, we believe it could be problematic for Sunac Services post M&A. While the market could potentially take the termination as another sign that the Sunac Group is tight on liquidity, we actually welcome the decision and believe this is a good move in Sunac Services’ perspective. 

More to follow after the company’s conference call to be held tomorrow (4 Jan) at 9:30am