20160701-高盛-EHIC_screens_as_potential_M_A_target__Introducing_Hong_Kong_property_M_A_framework_12页_313kb

Summary of Hong Kong Real Estate M&A Framework

Core Content

This document provides an analysis of potential M&A activity in the Hong Kong real estate sector, focusing on property companies and hotel/car rental firms. It introduces an M&A framework based on a "can, should, and would" test to identify likely targets for acquisition or privatization. The framework evaluates companies based on their size, regulatory risk, ownership structure, merger synergies, valuation, and management stance.

The M&A framework assigns a rank from 1 to 4, where rank 1 indicates a high probability of M&A (30%-50%), rank 2 a medium probability (15%-30%), rank 3 a low probability (10%-15%), and rank 4 a minimal to zero probability (0%-10%). For companies ranked 1 or 2, an M&A-based valuation is incorporated into the price target, with a 30% and 15% weighting respectively. Companies ranked 3 and 4 are not given any M&A premium in their price targets.

Main Points

• M&A likelihood: Most Hong Kong property companies have controlling shareholders, which may block M&A. However, the sector is trading close to trough multiples, making privatization a potential option.
• Sector focus: M&A is more likely to occur in the hotel and car rental sectors due to fragmentation and potential for economies of scale.
• Examples of past M&A:
  • 7 Days Hotel was taken private in 2013.
  • Homeinns Hotel Group was taken private in 2016.
• eHi Car Service:
  • Ranked 2 in the M&A framework, indicating a 15%-30% probability of being acquired.
  • No majority controlling shareholder, which reduces shareholder resistance.
  • Valuation is below historical levels and peers, making it an attractive target.
  • M&A-based valuation is included in the price target, with a 15% weighting.

Key Information

M&A Scorecard

M&A Framework Details

• Can: Evaluates the ease of acquisition based on size, regulatory risk, and presence of a blocking stake.
• Should: Determines the attractiveness of the asset or market and its valuation relative to historical levels.
• Would: Assesses management's willingness to accept a takeover and the presence of M&A activity in the sector.

M&A Valuation Methodology

• M&A values are derived from the average EV/EBITDA multiple from recent transactions.
• No M&A premium is applied to companies ranked 3 and 4.
• For rank 1, a 30% weighting is applied to M&A-based valuation.
• For rank 2, a 15% weighting is applied to M&A-based valuation.

Key Risks

• eHi: Faster-than-expected fleet expansion, weaker-than-expected rental rates.
• General: Uncertain macroeconomic conditions, regulatory challenges.

Conclusion

The M&A framework highlights the potential for consolidation in the hotel and car rental sectors, particularly for eHi Car Service, which is ranked 2 and has a 15%-30% chance of being acquired. While most companies have controlling shareholders that may block takeovers, the sector's current valuations near trough multiples suggest that privatization or M&A could still be viable. The framework is used to adjust price targets and reflects the analysts' view on the likelihood of M&A activity for each company.