Thread by @aceglobalvalue

1/ Shamelessly stealing this interesting special situation from @AsianCenturyS. Check their slide deck in the link. Haier Smart Home (hereafter 'HSH') is in the process of reorganizing its structure by merging with its 56% owned HK-listed subsidiary Haier Electronics (#1169.HK)

https://twitter.com/AsianCenturyStx/status/1305885633253056512

2/ HSH has about 96% of its shares listed in China as A-shares (#600690.SS) and about 4% in Germany as D-shares(#690D.F). The D-shares are currently trading at a discount of 72% to the A-shares, but have the same voting and dividend rights.

3/ A discount like this can persist for a long time because of the non-exchangeability and China's closed financial system in general. Regardless of the restructuring the D-shares seem interesting, though, because they are trading at a p/e close to 5 and a 6.1% dividend yield.

4/ The restructuring will simplify the structure. Haier Electronics shareholders will receive 1.6 newly listed HSH H-shares and a cash payment of HK$1.95 and will own 20.76% of HSH after the transaction (check @AsianCenturyS slide 23).

5/ The HSH H-shares will be covered by large investment banks and create a direct comparable to the D-shares. Although not exchangeable the D- and H-shares will have the same economic rights. For HK and international investors the D-shares will be an investable alternative.

6/ HSH appointed Platinum to value the HSH H-shares. It values the HSH-shares at a range of HK$18.23 to HK$18.72 which translate into €2.04 per share.

7/ Instead of using this valuation I simply use the share price of the A-shares and apply the A-share vs H-share premium for the largest and most liquid mainland China companies as measured by the HANG SENG CHINA AH PREMIUM INDEX. Additionally I add a 10% liquidity discount.

8/ This leaves me with 117.45% upside for the D-shares. How to play this? Option A) long D-shares; Option B) long D-shares and short #1169.HK; Option C) long D-shares and short HSH H-shares once listed.

9/ Option A) simply going long D-shares gives exposure to a cheap growing company. Value comes from multiple expansion (including closing discount between H- and D-shares) and growing dividend. HSH's shareholder plan includes a growing pay-out ratio to at least 40% in 2023.

10/ Option B) long D-shares and short #1169.HK. #1169.HK can be cheaply shorted. There are 7 million+ shares available for shorting at IB at a fee rate of 1.06%.

11/ Option C) long D-shares and short HSH H-shares once listed. I expect the HSH H-shares to be available for shorting at the same or even cheaper rate as #1169.HK. You will clip the D-share dividend yield and pay the H-share dividend yield+ short fee. At the current...

12/ discount between D-share price vs estimated H-share listing price this creates positive carry of 2.54% (6.1% -/- 2.5% -/- 1.06%) while waiting for the discount gap to close.

13/ I am simply long D-shares (option A). This is not investment advice, do you own DD. D-shares are illiquid. Credits to @AsianCenturyS for their work. Thoughts? I'm open for discussion.