Yichang HEC (1558 HK): Speculative Scrip Offer? No Thanks - Vote No

• A little over a year ago, I wrote about Yichang HEC Changjiang Pharma (1558 HK)'s overly complicated scrip Offer in Yichang HEC (1558 HK): Absorption Via Speculative Scrip. Avoid.

• In summary, Yichang HEC shareholders were being offered 0.263614 "Offeror H shares". These consideration shares are unlisted. The Offeror being Yichang HEC's controlling shareholder (51.41%).

• The Composite Doc and the Offeror's Listing by Way Of Introduction Doc are out. The independent H-shareholder vote is the 21st July. Shareholders should vote this down.

The Trade:

• Maybe these consideration shares are worth HK$19.36/share.

• Maybe Yichang HEC would be better equipped with R&D capability, and a larger suite of (future) drugs on Offer from the merger, after earnings came off the boil in FY24.

• Maybe.

• Unless you have a strong handle on the assessed value of the Offeror - I don't - I'd vote this transaction down.

• A cash alternative would have been welcome.

This insight is still labelled bullish, as I'm not bearish; and Yichang HEC's valuations are not too far removed from historical numbers.

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Conclusions First

• The appraised value of the "pipeline products" accounts for 100%+ of the Offeror's value.

  • That's a huge leap of faith when dealing with a raft of drugs covering diabetes, hepatitis, depression - amongst other - with success probabilities ranging from 52% to 93% (see page 154 of the PDF).

  • Shareholders are in effect, giving the green light to "relist" this portfolio of potential drugs, which recorded a net loss of RMB207mn on RMB295mn of revs in FY24.

  • Or merging the R&D entity with the profitably entity.

• No active role. I'm no fan of a major shareholders of a company having no board/management representation.

  • Guo and her husband (Zhang Zhongneng) were the major shareholders at the time of Yichang HEC's listing in December 2015, neither of whom have held a board seat or management role.

  • Guo's son Zhang Yushuai ultimately inherited Zhang Zhongneng's stake - and he holds no senior role.

• Shares are up 13% since the Offer was announced. Does that suggest shareholders are supportive of terms; or shareholders are supportive of Yichang HEC as is?