The chairman of China XD Plastics Co. Ltd. and an affiliate of private equity firm Morgan Stanley are making a bid to take the large automotive plastics compounder private and delist it from the Nasdaq Stock Market.
The Feb. 17 joint announcement by XD Chairman Jie Han and Morgan Stanley Private Equity Asia III comes after several years of investor complaints that the company's stock price is significantly undervalued.
In filings with the Securities and Exchange Commission, Han and Morgan Stanley said they will spend $91 million to buy the 26 percent of the company they both do not already own.
Han and Morgan Stanley said their offer of $5.21 a share is a 29 percent premium over the company's stock price for the 30 days before Feb. 17. Morgan Staley had invested $100 million in XD in 2011 and currently owns 24 percent of the company.
XD, based in the northern Chinese city of Harbin, said it was the first plastic composite materials maker from China to list on Nasdaq. It has grown rapidly in recent years to become a large supplier of compounded plastics in China's auto market.
But the company faced repeated complaints in 2015 and 2016 from investors, including Morgan Stanley, that XD's stock market value was too low, especially compared to other plastics compounders listed in the Chinese stock markets.
Those complaints were raised again at a Nov. 9 conference call about the company's third quarter earnings, when several analysts pressed for stock or cash dividends and questioned whether the company was holding too much cash and being too conservative in maintaining “rainy day” funds.
XD Chief Financial Officer Taylor Zhang told analysts that the company understood concerns that its low valuation has been a “drag” on some aspects of its performance.
“That valuation is a drag, we can totally see that,” Zhang said. “In the marketplace, especially when we compete with our domestic competitors, who can afford very high multiple valuations, we do have some limitations in terms of competing with them.”
While Zhang said the low valuation did not hurt the company's operations, research or technology development, analysts said it was a detriment to bringing in new investors.
Speaking through a translator, Han told analysts in the November conference call that the company's global strategy, including significant new investments in factories in China's Sichuan Province and in Dubai, was taking shape.
He said that because those major capital investments were finishing up, the “optimal time to considering issues of dividends is about to come.”
The Sichuan plant is a huge investment for XD — it will nearly double the company's annual production capacity in China to 690,000 metric tons (1.5 billion pounds).
XD said in a news release that a special committee of its independent board directors would evaluate the offer, hiring their own financial advisors, and make a recommendation.
Han and Morgan Stanley said they “will not move forward with the transaction unless it is approved by such a special committee.”
While it has not yet released 2016 figures, in November it estimated full year revenues between $1.0 and $1.1 billion, with net income between $100 million and $110 million.
XD said its materials, including various nylons and other engineering plastic compounds, are used in exterior and interior trim in 28 automobile brands made in China, including Audi, Mercedes Benz, Buick, Volkswagen and Toyota.
