Heng Ren Investments: Raise Buyout Offer of China Nepstar Chain Drug Store by 86%

The big-picture view is after the wave this year of go-private buyouts of US-listed Chinese companies, 26 by one count, the fairness tests are being applied. A growing number of shareholders of these US securities are giving many of the buyout offers a failing grade.

Without any challenges, the de-listings of these stocks just sail through bureaucracies at the companies (Special Committees and Boards of Directors), and also the NYSE and Nasdaq. Someone vested in the process needs to oversee and make sure shareholder protections are respected. This is a void Heng Ren is trying to fill by alerting the investment public with research and analysis since many of the stocks are uncovered, and even if covered, lazily by Wall Street.
You may recall in April when a buyer’s group including the former co-Chairwoman proposed to buy out shareholders of the Match.com of China, Jiayuan.com (Nasdaq: DATE) at a very low price of $5.37. Heng Ren challenged the bid with valuation analysis it sent in a “fight letter” to the Special Committee and published it for all shareholders and investors. In May the SC responded with the announcement of a revised bid of $7.20, a 34% increase that added $61 million in value for shareholders. The SC also announced at that time there were additional bids received, but oddly the SC to date has not disclosed the identities or the amounts (??).
When Heng Ren started in its activism, the universal opinion was Heng Ren would have no impact. Now other shareholders are following in theirfootsteps to do the same in seeking fair and full value of buyouts. This important story is being missed by the mainstream media. It involves cross-border investments between two superpowers, and highlights a need to avoid more stress on the relationship and negative perceptions of China in the US. This should be resolved fairly by US institutions, in particular the exchanges and regulators, in the interest of investors, current and future US-listed Chinese stocks, and also the reputations of both Nasdaq and NYSE.
This also is getting a lot of attention in China. On a popular investor web site in China called “Snowball,” Chinese investors have made more than 530,000 downloads of Heng Ren research and postings. Increasingly, investors in China are eager for professional analysis and to learn more about shareholder protections.
Press release below

Heng Ren Investments: Raise Buyout Offer of China Nepstar Chain Drug Store by 86%

Appeals to Nepstar’s Board of Directors and Special Committee; Advised by Olshan Frome Wolosky LLP

(SI Newswire)

BOSTON, Massachusetts (September 28, 2015) — Heng Ren Investments LP announced today the Chairman of China’s largest nationwide drug store chain should raise by 86% his bid to buy out U.S. shareholders of the New York Stock Exchange (NYSE)-listed stock at full and fair value.

The Boston-based fund stated in a September 11 letter to the Special Committee evaluating the proposed buyout of China Nepstar Chain Drug Store Ltd. (NYSE: NPD) that Chairman Simin Zhang’s current offer of $2.60 per American Depositary share (“ADS,” “share” or “stock”) is detrimental to Nepstar shareholders.

Heng Ren recommended the bid should be raised to $4.83 based on Nepstar’s current fundamental trends, and also the prospect of a new IPO in Chinese markets, which has proven lucrative for buyers.

The potential huge payoff from regaining full control of Nepstar and executing a new IPO is not fantasy,” stated Heng Ren Managing Partner, Peter Halesworth. “Look no further than 3SBio Inc. (Nasdaq: SSRX) as a cautionary tale.”

In 2013, 3SBio’s management successfully bought out shareholders in the U.S. for $370 million. Investor demand in China for established health-care related stocks, such as 3SBio and Nepstar, is strong.

Fast forward two years to June 2015. 3SBio executed an initial public offering (IPO) on the Hong Kong Stock Exchange (HKG:1530).

3SBio’s total value at IPO – $2.80 billion – or 7.6X the price management paid to shareholders in the U.S.

Our demand for a higher bid that includes a significant control premium is warranted with the potential of such an enormous reward for the buyer,” Halesworth stated.

Heng Ren Investments LP is being advised by Olshan Frome Wolosky LLP in connection with implementing shareholder activism strategies relating to Heng Ren\’s investments in U.S.-listed Chinese companies.

Heng Ren has a history with Nepstar. In a February 17 letter to its Board of Directors, Heng Ren urged for a change in strategy. At that time Nepstar was unprofitable and its stock had dropped 91% from its 2007 IPO price of $16.20 to $1.53. Heng Ren’s analysis demonstrated positive impact from more store closings, staff reductions, and an emphasis on energizing Nepstar’s online sales channel.

These changes were starting to be implemented. Nepstar’s stock responded with a +116% appreciation when it rose to a 52-week high of $3.30 on April 23.

In quarterly earnings calls in March and May, Nepstar’s management emphasized to shareholders their confidence in the “regained momentum,” the company’s “very promising future,” and pledged “a better result-driven approach will reward our shareholders in a very positive way in the coming quarters.”

Unfortunately, six weeks after this pledge to “reward our shareholders,” on July 6, Chairman Zhang proposed to buy out shareholders at $2.60 per share – 21% below the 52-week high of $3.30 in April.

From a buyer’s perspective, the proposal may appear to be a good deal – i.e. to buy the company at a discount just as a turnaround emerges,” Halesworth stated. “However, it’s a bad deal for shareholders to sell a stock at a discount after it collapsed from its IPO, and is just beginning to turn around – with a brightening outlook.”

Heng Ren’s letters to companies, including Nepstar, can be found here.

About Heng Ren Investments LP

Heng Ren is a friendly, active asset manager seeking to create long-term value for orphaned public companies, and their shareholders – including us.

Heng Ren (pronounced hung’runn), based in Boston, Massachusetts, seeks to engage companies and shareholders by sharing our research and analysis to assist them.

Heng Ren’s ultimate objective is to help company managements improve their reputation with investors by identifying very fixable problems and offering solutions.

We share this in a transparent fashion in the public forum so shareholders and investors can evaluate the problems and the solutions, monitor progress, and optimize value.

About Olshan

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