My first Seeking Alpha article published on Tuesday didn't reflect the FL divestment update news released right before the market open. This announcement is a milestone for FL divestment since a definitive agreement has been reached with Shenzheng Prince New Material Co., Ltd (Shenzheng Prince) and NQ will receive all cash for FL divestment upon the closure of transaction.
The total cash received will be RMB 4,780MM (roughly about $735MM). So, naturally, people will ask why NQ share price didn't go above $6/share or even more considering that NQ will have about $8/share after the FL divestment transaction is closed.
Based on my understanding, there are two main reasons: First, many investors are not confident that this time will be different from the three earlier FL divestment tries. Second, the risks and uncertainties for CSRC approval are not totally clear.
The first reason is invalid because this time, the definitive agreement has been signed. This document defines all the final terms related to FL divestment, and it has legal binding force. For the earlier three FL divestment tries, none could reach this stage of the process.
For the second reason, yes, I agree that there are always regulatory risks and uncertainty related to this kind of asset transaction. But the regulatory risks are given too much concern. According to the latest unofficial update from CSRC (link):
There will be more strict regulations for those reverse-merger transactions.
For non reverse-mergers but with new share offering transactions, CSRC approval is still required but the process will involve very minimal regulatory review.
For non reverse-merger without new share offering transactions, just a filing to CSRC is required, and it can proceed if no feedback from CSRC after 15 days.
FL divestment belongs to the second category. That is, CSRC approval is still required but will not be as strict as the reverse-merger category. In addition, FL is a real business that generates revenue and profit quarter after quarter and currently it's growing very fast.
The value of FL assets can also be further supported by the officially released document from Shenzheng Prince (link). In that document, it mentions that all new share offerings for funding the FL transaction have already been fully subscribed. Therefore, for a business like FL, it will have very minimal risk to get CSRC approval.
If have to quantify, I think the risk is less than 5% that FL divestment will not be approved by CSRC within three months.
In summary, the regulation risk overhang causes the NQ share price to be depressed at the moment. I think this will not last long after more and more investors realize that this risk is accorded far too much weight and is over-emphasized. For value investors, the current share price of $4.52/share is a golden opportunity with the FL divestment milestone achieved already.
By the way, to reflect the milestone of FL divestment, I'm also adjusting my 52-week price target for NQ: For a bear case, now increased from 5 to 7; for a neutral case and a bull case, they remains the same as before, that is, 12 and 18, respectively.
Disclosure: I am/we are long NQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.