GEO Investing

pwrd going privateGeoInvesting is looking into the possibility that an increase in the going private price for Perfect World (PWRD) could be looming. The company’s going private transaction has been on GeoInvesting’s radar since January 2, 2015 when PWRD’s founder and Chairman of the Board, Mr. Michael Yufeng Chi, sent out a non-binding proposal letter with the intent to acquire all of PWRD’s remaining outstanding American Depositary Shares (ADS) at a price of $20.00.

This price represented a premium of 26.9% to the previous day’s closing price. On January 2, 2015, the stock’s price increased by 22.1% from the previous trading day’s closing price of $15.76 to $19.25 per ADS.

Shareholders Likely to Request Increase Over the Tender Offer Price of $20.00 per ADS

However, we believe that the tender offer of $20.00 per ADS is not the end of story and shareholders will probably request an increased offer price from Mr. Chi in order to agree with the transaction. We think it’s likely that Mr. Chi will consider raising his offer. Here are three rationales behind our theory…

  1. Valuation Gap between Comparable Company’s Go Private Price and PWRD’s Current Offer Price

Giant Interactive (former symbol GA) is the only Chinese company in the same sector and listed on a U.S. market that has already completed a go-private transaction. Because both companies are from the same industry, it is reasonable for shareholders of PWRD to compare the valuation multiples of Giant Interactive based on its go-private price of $12.00 per ADS with those of PWRD, based on Mr. Chi’s non-binding offer price of $20.00 per ADS.

PWRD Giant Interactive
EV/S 0.7 5.8
P/E 7.4 11.9
P/TBV 1.5 4.1

Note: Giant Interactive’s valuation multiples are calculated based on the LTM financials of Q1 2014 before it went private; PWRD’s valuation multiples are calculated based on LTM financials of Q3 2014.

From the table above, it is clear that PWRD’s valuation is much lower than Giant Interactive’s valuation when it went private. The company’s enterprise value to sales, price to earnings, and price to tangible book value metrics are all lower than Giant Interactive’s were at the time it went private. We think shareholders of PWRD should carefully view the current non-binding tender offer as it represents a clear valuation gap between the two companies.

  1. Potential Benefit of Listing PWRD’s Business in China A Share Market for Mr. Chi

Aside from valuation, Mr. Chi’s personal interest in PWRD leads us to believe a higher offer could be on its way. Throughout our due diligence, we found that there is a China A share listed public company named Zhejiang Jinlei Refractories Co. (SHE 002624) that completed an asset restructuring on December 23, 2014. The company has already changed its controlling shareholder to Mr. Yufeng Chi, the founder and Chairman of the Board of PWRD. This leads us to speculate that Mr. Chi might use this company to incorporate PWRD in the China A share market after he takes the company private. The China A share market is known to give generous valuation multiples to the companies that are in the TMT/gaming industry in general, which would be an obvious benefit to moving the company to this market.

  1. Major Funds are Involved

On January 05, 2015, an investment management company named Greenwoods Asset Management Ltd filed an initial 13G which shows that it acquired 11.4% of the class B ordinary shares of PWRD. People might be curious as to who Greenwoods Asset Management Ltd. are. According to Bloomberg’s article on October 08, 2014:

“Golden China Fund, the best-performing hedge fund investing in the nation over 10 years, exceeded $1 billion in assets for the first time with bets on financial, real estate and technology stocks.

The fund, managed by Greenwoods Asset Management Ltd. founder George Jiang, had $1.1 billion in assets at the end of August, said Joseph Zeng, Hong Kong office head of the Shanghai-based company. The first time it crossed the $1 billion mark on a month-end basis was in July, he added.”

Greenwoods Asset Management is based in Shanghai, China and it has managed a hedge fund that is the best-performing hedge fund in China over the past 10 years, according to Bloomberg. This investment firm has approximately 11.4% of the total outstanding shares of PWRD, and is among the company’s biggest shareholders. In addition, Fosun International Ltd. also holds approximately 11.8% of the company, according to the 13G/A filed on February 11, 2015. We think it is highly possible that both of the investment firms will want an increased offer price for the same reasons we wrote in this note.

On March 23, 2014, the previously mentioned China listed company owned by Mr. Chi, Zhejiang Jinlei Refractories Co. (SHE 002624), was halted at 1:00PM (Beijing time) and according to the company’s filing, it is “planning significant matters”. In the meantime, PWRD is already a little late on its Q4 2014 earnings report, as the company reported its last Q4 earnings on March 10, 2014 last year. These combined incidents, along with our speculation of possible increase of the offer price, make us very interested in the forthcoming press release or earnings release from the company.

This piece is based on news released in China and represents arbitrage that that is available to GeoInveseting’s premium members first.  To see more on PWRD, sign up for a premium account.

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