Click image for details "Today I came home, tore open the sugar coating, crying while eating candy, tears falling into Wahaha AD calcium milk, without turning on the lights." I've read many of Wang Sicong's Weibo posts, but this is the first time I've seen a post from Wahaha's heiress. The matter stems from an announcement by China Candy (8182.HK) last night that the acquisition offer had officially lapsed because the offeror, Zong Fuli, failed to successfully acquire 50% of the company's shares before July 13. The failure of the shell acquisition plan caused China Candy to plummet 56.8% today, closing at 0.229 yuan. I. Market Expectations: Wahaha's Backdoor Listing The acquisition offer began more than three months ago. China Candy was suspended on March 30 and the next day announced that Ever Maple Flavors and Fragrances Holdings Limited, held by Zong Fuli, intended to acquire no less than 50% of the company's voting rights. One of the preconditions was that the buyer acquire no less than 50% of the shares, with the acquisition price to be determined after due diligence. Zong Fuli is the daughter of Zong Qinghou, chairman of Wahaha Group, which was founded by Zong Qinghou in 1987. According to Wahaha's 2015 social responsibility report, the company has 30,000 employees, total assets of 34 billion yuan, and achieved operating revenue of 49.5 billion yuan in 2015, ranking among China's top 500 enterprises and top 500 private enterprises. Wahaha is currently a non-listed private enterprise, because Zong Qinghou has always maintained a cautious attitude, believing that the company has no need for listing or financing. However, Zong Fuli, having been educated abroad, is more receptive to capital markets than her father. So her proposal to acquire China Candy led to expectations that Wahaha would take new actions. Moreover, China Candy's market value was less than 400 million yuan at the time. If Wahaha really used it for a backdoor listing, that would be remarkable. The first acquisition announcement did not mention the acquisition price, but expectations are expectations, so who needs actual prices? The name Wahaha alone was enough to cause China Candy to surge 75.5% on the day it resumed trading, closing at 0.33 yuan. China Candy then suspended trading on May 11, and the day before the suspension, it surged another 31.7%, closing at 0.52 yuan. China Candy announced an acquisition price of 0.3565 yuan per share, and major shareholders holding a total of 26.01% (Jiaqing Development Limited held 9.33% and Noble Core Limited held 16.68%) had accepted the offer. This meant Zong Fuli only needed to acquire an additional 24% of the shares in the market to meet the precondition. Although the acquisition price was a 31.4% discount to the previous trading day, even the large discount did not disappoint the market. On the day trading resumed, the stock rose as much as 30.8%, eventually closing at 0.53, up 1.9%. Subsequently, amid media hype, China Candy's stock price reached a high of 0.94 yuan. The final outcome, as everyone saw, was that only 26.03% of shareholders agreed to the acquisition, with 26.01% of those votes coming from major shareholders. The 50% precondition was not met, the acquisition plan completely failed, and China Candy's stock price crashed 56.8%. I never participated in trading China Candy, but today, taking advantage of the sharp drop, I reviewed the company's data since its listing. Allow me to be a Monday morning quarterback: the script for China Candy actually began a year ago. II. Major Shareholder Reduced Stake by 40%, No One Knows Who the Buyer Was? China Candy was listed on the Hong Kong Stock Exchange via placement on November 11, 2015, with a placement price of 0.2 yuan. At that time, major shareholder Jiaqing Development (held by company chairman Xu Jinpei and his spouse Hong Yinzhi) held 51.99%, and Noble Core (held by Guo Chunyi and her spouse Ye Yayun) held 20.01%. On the surface, 28% of shares were in public circulation, but since it was a placement listing and the stock opened 25 times higher (not 25%) on the first day, it goes without saying that the 28% were actually held by related parties of the major shareholders. On June 15, 2016, major shareholder Jiaqing Development made its first reduction, selling 7.21% in the market at an average price of 0.115 yuan. On August 23, 2016, Jiaqing Development again reduced its stake by 150 million shares at 0.115 yuan per share, lowering its holding to 33.58%. On December 28, 2016, Jiaqing Development reduced its stake again by 300 million shares in the market at an average price of 0.158 yuan. The major shareholder's holding dropped to 11.19%. In the one year and eight months since listing, the major shareholder made three reductions, from 51.99% to 11.19%, involving approximately 76 million yuan. Where there are reductions, there are naturally increases. The reductions were by the major shareholder, involving as much as 40%. So who bought that 40% and became the new major shareholder? Looking at the above disclosures of interests and the three company announcements, none mentioned who the buyers were, meaning no buyer exceeded the 5% threshold in any of the three transactions. It is common for major shareholders to sell their shells after listing. Currently, the shell price for a GEM board company is around 300 million yuan, but that price includes controlling rights. Once a shell's equity is dispersed, the shell's value decreases. Therefore, it is absolutely unreasonable for the major shareholder to sell 40% of the shares in batches to different "retail investors." I can only think of two explanations: one is to avoid disclosure when planning to sell these shares in the future, and the other is to create a false impression of dispersed shareholding. III. Shareholding Is Actually Extremely Concentrated At the same time, regarding Jiaqing Development's last reduction, I checked the records of the Central Clearing and Settlement System (CCASS) and found that 15% of the shares were held by two securities firms. On the surface, the shares sold by the major shareholder went to investors holding less than 5% who do not need to disclose, but in reality, they were concentrated in a few securities firms. Who would believe they are not acting in concert? The two securities firms began holding in late December 2016 and coincidentally reduced their holdings in mid-May 2017, currently holding less than 0.2%. (See chart below) Jiaqing Development's third reduction was at 0.158 yuan, while the two securities firms reduced in the range of 0.5-0.9 yuan. Roughly estimated, the "retail investors" holding this 15% earned about 85 million yuan, and this is only part of the "retail investors." A few days ago, with two listed companies disclosing their sales of Jiaqing Development, the identities of two of the "retail investors" were finally revealed. One is Wiseway Group (1340.HK), which began selling 64.4 million shares of China Candy on April 3, accounting for about 4% of the shares, earning 35.95 million yuan. Calculating, the company's cost price was exactly 0.158 yuan. The other is Dickson Construction (8268.HK), which began selling 51 million shares of China Candy on May 25, 2017, accounting for about 3.17% of the shares, earning 26.423 million yuan. Again, the company's cost price was exactly 0.158 yuan. IV. Low-Price Placement to Maximize Profits On the surface, the major shareholder of China Candy rapidly reduced its stake half a year after listing, from 51.99% to 11.19% through three sales, but in reality, it only changed and hid the identity of the holders; the shareholding remained highly concentrated. Finally, on February 23, 2017, they launched the final move, announcing the use of the full 20% placement limit, placing shares at 0.148 yuan to no fewer than six placees. Numerically, the major shareholder's stake was further diluted, with Jiaqing Development holding 9.33%. But in fact, China Candy's shareholding became even more concentrated. The announcement content is as follows: Note that the announcement states that approximately 20 million yuan of net proceeds will be used to purchase a property for office use, and approximately 18.7 million yuan will be used as general working capital for the group. On March 17, the company announced the completion of the placement of 268 million shares, with net proceeds of 38.7 million yuan. Two weeks later, on March 30, the company was suspended, announcing a potential acquisition offer. Two weeks earlier, the company was still placing shares to consider buying a property for office use, and today it decided to sell the company. This is not buying vegetables at a market; before acquiring a company, there is normal due diligence. This makes one suspect that the real purpose of the placement was to obtain more chips at a low price before the acquisition news came out. V. Summary Therefore, if we view this incident from the perspective of stock speculation, everything becomes reasonable. The major shareholder's shares were first transferred to unknown friendly parties, creating a false impression of dispersed shareholding. One reason was for convenience in selling in the market later, and the other was to create a favorable storyline for Zong Fuli's acquisition for stock speculation. Imagine if the major shareholder still held more than 50%. First, Zong Fuli would have been able to complete the acquisition of control, and the selling price would have been at most the 0.3565 yuan she offered. On the contrary, by pre-reducing their stake, the major shareholder created a situation where their combined stake with the second shareholder was only 26%, forcing the interested buyer Zong Fuli to propose a precondition of acquiring 50% to continue. Subsequently, related parties cooperated with the media to hype the company's development potential after Zong Fuli's acquisition, and before the offer vote, they used retail investors' expectations to drive the stock price far above the 0.3565 yuan acquisition price. If unsuccessful, they would sell to Zong Fuli. If successfully hyped, all related parties would cash out at high prices. In the end, they left the unsuspecting, naive, and beautiful heiress Zong Fuli~~ Source: Wang Yayuan's Hong Kong Stock Circle (ID: Victoria-hk-stocks) -END-