China XD Plastics (NASDAQ: CXDC) is a chinese manufacturer of plastic for auto parts found in cars such as Audi, Toyota, Volkswagen as well as in local chinese brands. As fiduciaries, management and the board have a duty to act in the best interest of all shareholders by seeking to maximize the share price of the stock.
Since the February 2017 $5.21 non-binding buyout offer by CEO Jie Han (51% ownership) and Morgan Stanley (25% ownership and two board seats), however, a perverse incentive exists to see the share price of CXDC drop to entice minority shareholders to accept the offer. What used to be an active investor relations department seems a shadow of its former self before and since the offer while a near two year silence has put a price cap on the stock draining liquidity further hurting the price.
The current non-binding buyout offer is unjustified by any appraisal and represents less than 4X normalized earnings, less than 1/3 of revenue and only 50% of book value. The offer values the company at only $345 mm despite more than $1 bb in revenues. The offer is also at a third less than the $525 mm valuation at which management first accepted investor money when it listed in Nasdaq in 2009. In contrast, since then, revenues have increased 9X while normalized earnings have increased 18X to $90 mm. Similar US companies in the Russell 2000 and S&P500 as well as Chinese companies in the Shanghai Exchange trade close to 5X ($25 per share) the offer made by Chairman Han and Morgan Stanley.
Morgan Stanley, according to Reuters, has made a practice of buying out minority shareholders out of overseas-listed china companies while boasting of “…the most attractive entry prices we have seen in the last 10 years”, taking the company private and then relisting it closer to home at multiples of their initial investment. Billion dollar CXDC would be the crown jewel.
Minority shareholders have formed www.proxygrove.com to present a unified front in negotiating a fair outcome to the buy-out. In the mean time management should restart investor relations and buy back shares. If intention is to buy out minority shareholders and take the company private, an independent reputable appraiser should be hired to value the company as promised two years ago. It is still time for CEO/Chairman Han and Morgan Stanley (two board seats) to live up to their fiduciary duties. Minority shareholders have taken notice.
Disclosure: I am/we are long CXDC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.