CICC Xinda Dongxing Discussion Thread

China International Capital Corporation (CICC) announced a merger and acquisition plan on December 9 last year. More than two months have passed, and the process is still in the early stages. The cash option for the merger is not strictly an arbitrage and carries certain risks, so this article is for reference only.

1. Overall stock market trend and securities sector performance

On the announcement date, the Shanghai Composite Index closed at 3,909.52. By March 4, it rose to 4,082.47, a 4.42% increase. The securities index (803203) closed at 1,882.73 on the announcement date and dropped to 1,759.06 by March 4, a 6.57% decline, clearly underperforming the broader market. Looking at the three stocks involved in the merger (see below), they performed better than the securities sector but still lagged behind the overall market due to the sector’s weakness.

2. Progress and rules

Generally, after the announcement, a second board meeting is held 4-5 months later. Regulations stipulate that the second board meeting for a plan should not exceed 6 months, so if there is no movement after 5 months, it can be suspected that the restructuring is blocked. For example, Haimen Information announced termination on the day the 6-month period after the announcement was reached.

Regarding voting, Cinda and Dongxing are relatively straightforward, as they are only A-shares with major shareholders holding over two-thirds, making approval easier. Even if the cash option is broken, voting can still pass. CICC has H-shares, requiring separate H-share voting (both AH separately and cumulatively must exceed two-thirds), and the major shareholders only hold 40%, so there is strong motivation to keep the stock price above the cash option before the shareholders’ meeting. (Note here that CICC is the surviving entity after the merger, so even if H-share dissent reaches 10%, it cannot veto the resolution.)

3. Operational strategies

Conservative approach: Only target CICC and Cinda, which fall below the cash option. Considering the share swap premium, Cinda’s proportion can be higher; that is, as long as the plan progresses to the shareholders’ meeting, both can return above the cash option. As the merger approaches success, the 2% share swap discount for Cinda relative to CICC will also narrow.

Aggressive approach: Choose Dongxing, which has a slightly higher share swap discount than the cash option. If the process advances toward the shareholders’ meeting, as CICC returns above the cash option, Dongxing will also rise, and with the merger’s success expectation, the discount will shrink. Dongxing could double in value. If the shareholders’ meeting passes, further progress will lead to even narrower discounts.

4. Risks

This arbitrage-like operation carries risks that vary over time. In the early stage, CICC and Cinda, bought near the cash option, may experience significant drops below the cash level during market crashes or major sector adjustments, as the shareholders’ meeting is still far away. For example, in April last year, Dajiang was announced with a cash option of 9.51 yuan, which once fell to 8 yuan. These extreme declines in the early stage are not necessarily substantial risks; as the merger progresses, these stocks tend to move independently, approaching the cash option or narrowing the discount.

In the later stage, especially if no second board meeting has been held after five months, a decline in these stocks independent of the broader market or sector may signal a potential failure of the plan.

In summary, the cash option in a merger is not strictly an arbitrage, and there is a risk of significant drops below the cash level. Participants should control their positions and manage risks carefully.