China Holdings Acquisition Corp. [[HOL]] today announced that it has entered into a definitive share purchase agreement to acquire Jinjiang Hengda Ceramics Co., Ltd.. Following the completion of the transaction, CHAC will redomesticate to the BVI and the new company will be called China Ceramics Co., Ltd. Hengda is a leading Chinese manufacturer of ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial buildings.
The transaction, which has been unanimously approved by the board of directors of CHAC, is expected to be completed by November 21, 2009. Under the terms of the definitive agreement, CHAC will issue 5,743,200 shares to Hengda, representing an initial equity value of approximately of $56.2 million or an enterprise value of approximately $101.2 based on an estimated redemption value of CHAC’s common stock of $9.79, the assumption of Hengda’s current debt and the estimated cost of the Gaoan facility.
In addition, 8,185,763 shares will be placed in escrow which will be released to Hengda when, on a consolidated basis, two types of targets are achieved or exceeded: incentive share for exceeding a financial target within a fiscal year, and share price targets.
Of the shares in escrow, up to 5,185,763 Incentive Shares will be released based on achieving growth in either Net Income Before Tax or Net Income After Tax, depending on the year, following the completion of an audit in accordance with International Financial Reporting Standards (IFRS). Additionally, 3,000,000 Price Target Shares will be released if CHAC shares close at or above certain share price targets for any twenty trading days within a thirty trading day period prior to April 30, 2012.
For example, Hengda will receive 0.3284 CHAC shares for every dollar of 2009 Net Income Before Tax above $28.0 million up to a maximum of 1,214,127 CHAC shares which occurs at a 2009 Net Income Before Tax of $31.7 million.
If Hengda receives all the Incentive Shares, the transaction will represent an equity value of approximately of $107.0 million or an enterprise value of approximately $152.0 based on an estimated redemption value of CHAC’s common stock of $9.79, the assumption of Hengda’s current debt and the estimated cost of the Gaoan facility (see below).
“Our proposed acquisition of Hengda Ceramics presents our shareholders with a compelling opportunity to participate in the continued urbanization of China as well as the country’s investment in residential and commercial infrastructure,” said Paul K. Kelly, Chairman and Chief Executive Officer of CHAC. “This opportunity reflects our stated objective to establish a platform in China by acquiring a company with a leadership position in its industry and a proven track record of growth. Their expansion through the construction of a new facility in Gaoan to meet growing market demand should help better position the company for the future.”
“Through its focus on quality control, research and development and manufacturing, Hengda has positioned itself as a leader in the ceramic tile industry and delivered year-over-year growth in revenues and profitability in the last three years,” continued Mr. Kelly. “We’re impressed with the many accomplishments of Hengda’s management team and we look forward to working with them, and Hengda’s employees, to build upon the strong foundation they’ve created and helping the company achieve even greater success in the future.”
“We believe that the timing and the valuation of this acquisition will prove to be an appealing way for China investors to participate in the country’s construction industry growth,” added Jim Dunning, President of CHAC.
The senior management of Hengda is expected to remain unchanged following the transaction. Mr. Huang Jia Dong, who founded Hengda, will remain as Chairman. Mr. Lee Shun Qing who has been at the company for over 15 years will remain as Manufacturing Vice-General Manager and Mr. Hen Man Edmund will remain as Chief Financial Officer. Mr. Paul Kelly and Ms. Cheng Davis from CHAC are expected to join the five member Board of China Ceramics.
“This transaction provides our company with a strong platform for continued success,” said Mr. Huang, Chairman of Hengda. “CHAC’s leadership understands our business, the markets we serve and the actions we need to take to grow, both in China and beyond. With CHAC’s assistance and our enhanced access to the US capital markets, we will be in an even better position to develop new innovative products for our customers, provide opportunities to our employees and continue to grow our business.”
In conjunction with the closing of the transaction, CHAC founders will reduce their ownership of China Ceramics from 3.2 million to 1.6 million shares. Except for 655,000 shares that will be locked up for only six months, all shares received by Hengda and CHAC founders shares will be locked up for twelve months.
Business Overview
Hengda Ceramics is a leading Chinese manufacturer of ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial buildings. The ceramic tiles, sold under the “HD” or “Hengda” brand are available in over two thousand styles, colors and size combinations and are distributed through a network of thirty three exclusive distributors and directly to large property developers. Hengda currently has one production facility with nine manufacturing lines in Jinjiang with an annual capacity of 28 million square meters of ceramic tile and is building, in phases, a twelve line production facility in Gaoan that will have an annual capacity of 42 million square meters of ceramic tiles by the end of 2011. Phase one, which consists of three production lines, is expected to be completed in September 2009. The estimated proceeds from the merger will be utilized to reduce debt associated with this facility. Hengda’s stringent quality management and marketing efforts have created a strong business reputation and high brand awareness as demonstrated by the company receiving recognition from the Central Chinese Government of the coveted “Chinese Well-Known Mark” award. Hengda’s commitment to R&D recently resulted in the development of a new ultra-thin line of products and the company has already been granted 33 design patents and 4 utility patents in China. Although approximately 95% of Hengda’s products are sold domestically, the company has exported products to Japan, Russia, Eastern Europe, South Korea, United Kingdom, Australia, Thailand, Spain, Turkey and Egypt.
Financial Highlights
Hengda’s 2008 Revenue was RMB776.6 million (approximately $113.4 million), 2008 Net Income was RMB165 million (approximately $24.1 million) and 2008 EBITDA (earnings before interest, taxes, depreciation and amortization) was RMB205.6 million (approximately $30.0 million). From 2005 through 2008, in RMB terms, Hengda achieved a Revenue compounded annual growth rate (CAGR) of 25.1%, a Net Income CAGR of 23.9% and an EBITDA CAGR of 27.2%. Assuming Hengda achieved all of its earn-out targets, the Net Income CAGR from 2009 to 2011 would be 36.8%.
CHAC’s acquisition of Hengda is expected to be completed by November 21, 2009, subject to approval by CHAC’s shareholders (and less than 33.3% of CHAC’s public shareholders exercising their right to redeem their shares for cash) and clearance by the US Securities and Exchange Commission (SEC).
Anticipated Investor Meetings
China Holdings intends to have investor meetings. The presentation slides that will be used in the investor meetings will be filed with the SEC and available on the Web site of the SEC at www.sec.gov as part of a Current Report on Form 8-K that CHAC will be filing today.