We usually stay away from Chinese companies but we came across an interesting idea recently. Earlier this year ex-Warburg Pincus China head launched his own fund, Centurium Capital, targeting to raise up to $1.5 billion. The fund was set up to invest Chinese consumer and healthcare companies. Hui Li, also known as David Li, was a director of China Biologic Products Inc. (NASDAQ:CBPO) since November 2013 and he is currently the Chairman of the same company.
Last month China Biologic Products Inc. (NASDAQ:CBPO) rejected an offer by a consortium to purchase the company for $118 a share. The consortium was formed by China Biologic Products’ former CEO David Gao, GL Capital Group, a Chinese bank, and CDH Investments. David Gao filed a lawsuit after being rebuffed by Hui Li. Here is an excerpt from a press release summarizing the situation:
“On August 24, China Biologic announced that it had rejected a non-binding proposal to acquire all of the outstanding common shares of the Company for US$118.00 per share in cash. The proposal represented an approximate 30% premium to China Biologic’s closing share price on August 16, 2018, the last trading day before its proposal was conveyed, and an approximate 40% premium to the Company’s closing price on June 8, 2018, the last trading day before CITIC Capital’s proposal to acquire the Company for US$110.00 per share was conveyed.
In its announcement rejecting the proposal, the Board also stated that it conducted a private placement of shares to the four investors at US$100.90 per share, a 14.5% discount to the offer price of US$118.00 per share. Two of the participants, Centurium Capital and PW Medtech, are also associated with selected Board members. Centurium Capital, which has taken over 50% of the new shares, is led by David Li, and PW Medtech’s Chairwoman Ms. Yue’e Zhang is a China Biologic Director.”
So, China Biologic rejected an offer to sell the entire company for $118 a share and then turned around and sold about 15% of the company for $100.90 per share to a fund managed by its Chairman, CITIC Capital which offered to buy the company for $110 a share in June, and Lei Zhang’s Hillhouse Capital (pictured below). This is exactly why we stay away from Chinese companies.
We don’t know how much exactly Centurium Capital currently manages but it is very intriguing to see that it agreed to pay a more than 20% premium to acquire more than 3 million shares of China Biologic Products Inc. (NASDAQ:CBPO). We understand that the stock has an average daily volume of only 350 thousand shares, so it might have taken them weeks to acquire 3 million shares in the open market without causing a large jump in the share price, but a 20% premium still doesn’t make sense. If I were an investor in Centurium Capital, I would be very angry right now.
Luckily our job is to identify the best stock picks of the best hedge funds and avoid paying them an arm and a leg for those stock picks. We have done a great job since we launched our flagship strategy in May 2014. Our best performing hedge funds strategy returned 121% through the end of August, vs. 66.7% return for the S&P 500 ETF (SPY) (see the details). How many hedge funds or index funds do you know that posted better returns than this?
We believe China Biologic Products Inc. (CBPO) might be a good stock to buy at its current price of $81. We are not only avoiding Centurium Capital’s annual management and performance fees, we will also buying one of its positions at a 20% discount. Now the only question we need to answer before we make an moves is whether this is a good stock to buy at all. We will take a detailed look at the fundamentals of this stock in the coming issue of our monthly newsletter.
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