Kangji Medical (9997 HK): TPG/QIA/Founder's Offer Is No Knockout

• Medical device play Kangji Medical (9997 HK) has announced an Offer, by way of a Scheme, from a consortium led by TPG and the Qatar Investment Authority, together with founders.

• The consortium is offering HK$9.25/share, a less-than-inspiring 9.9% premium to last close. The price has been declared final. It is 33.4% below the HK$13.88 2020 IPO price.

• Independent shareholders hold 25.25% of shares out. They could bare teeth; and they've been somewhat active at AGMs. But on balance, there's probably enough here for this to get up.

Conclusions First

• The premium to last close is less than ideal. A change of control premium (30%+) is arguably warranted. However the Offer Price is a four-year high.

• Kangji has consistently posted steady earnings since listing in mid-2020 - and is expected to do so again this year (interims are due out shortly, no dividend was declared in 1H24); yet the share price has largely drifted sideways for near-on four years.

• This is a foreign takeover of a PRC medical device play.

  • Not exactly a sensitive area, but still a test for China's regulator. In this case, SAMR.

  • My guess is that TPG would have preferred going this alone, but brought in Qatar to smooth over the regulatory process.

  • I expect SAMR to give the nod.

  • The last takeover of a medical device player in China, that I see, was US-headquartered Broncus (2216 HK)'s takeover of Hangzhou Jingliang in December 2023.

• Hong Kong Schemes, where there is a question mark on the Offer price, have not been a great space for investors of late - see Dickson Concept (113 HK): More Minority Teeth Bared As Another Scheme Fails

• This Scheme is less clear. Kangji is a consistently profitable company. Pricing is by no means a knock-out. But it's not blatantly low-balled.

• A blocking stake using the Offer price is ~US$36mn.

  • You could envisage some disgruntled IPO shareholders bandying together to block. Maybe.

• On balance, I think this gets up, but I'd be disinclined to chase a narrow spread.