Market thumbs down for Sino Biopharmaceutical move into Cinda

Shares in Sino Biopharmaceutical dropped nearly 15% in a Jan. 8 trade after the company said it would buy almost 5% of financial conglomerate Cinda for HK$5.8 billion ($747 million), mostly by borrowing the cash. The transaction, at HK$3.05 a share, represented a 16% premium on the closing price of Cinda on Jan. 7.

In a statement to the Hong Kong Stock Exchange, Sino Biopharmaceutical said the transaction was a "strategic cooperation agreement, under which the parties agreed to utilize their respective expertise and resources to explore business opportunities in a wide variety of areas, with a focus on healthcare and life insurance."

In May, in the company's first-quarter release, Sino Biopharmaceutical noted its entry into the hospital business through the acquisition of Chia Tai Shaoyang Orthopedic Hospital in Hunan Province.

UBS analysts Shaojing Tong and Rachel Yang said the transaction might also be a play for yield.

"Cinda's estimated dividend yield was 4% calculated at the subscription price, which is higher than the yield of 2% SBP could obtain on the market," the analysts said in a Jan. 8 note to clients. "The 16% premium of subscription price is because Cinda as an SOE (state-owned enterprise), the new issued shares could not be lower than 1.0x PB (price-to-book ratio) (Cinda is trading at 0.75x PB currently)."

Though shares fell on the news, UBS said that the transaction price was reasonable.

"We believe the premium is justifiable given SBP's higher R&D investment and potentially more sustainable long-term growth prospect," the analysts said.

Sino Biopharmaceutical focuses on R&D in traditional Chinese medicines as well as hepatitis and cardiocerebral diseases. Cinda has a wide range of financial interests from distressed asset management to fund management.

In a separate announcement on Jan. 7 that apparently did not help the share price, Johnson & Johnson ($JNJ) said it has licensed the rights to various liver treatments from a unit of Sino Biopharmaceutical that it hopes will help lead to a cure for chronic hepatitis B. The agreement gives J&J exclusive rights to develop, manufacture and sell the drugs outside China.

The Hong Kong Stock Exchange has seen no slowdown in healthcare-related wheeling and dealing so far this year with expectations that pharmaceutical companies are on track so far to raise more than $5 billion this year through initial public offerings (IPOs).

At the same time, volatility on the Shanghai Stock Exchange has seen the bourse shut twice this week after sharp falls of more than 7% triggered circuit breakers.

Still, investors remain hopeful that a move to lift restrictions on IPOs in China made in November last year will allow a resumption of healthcare dealmaking in that market as well.

- here's the release (PDF)

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