The successful revision of the regulations has eliminated potential uncertainties in China's water service, which is of great significance for it to continue to maintain steady development.
On December 4, China Water (00855) issued an announcement on the “Revision of the Terms of Exchangeable Bonds”.
According to the announcement, after friendly negotiations between the two sides, China Water and BPEA (BPEA) both agreed to extend the execution period of the convertible bonds concluded on April 1, 2020 and first revised on July 12, 2021 for another year.
The specific rules are: the right to exchange bonds cannot be exercised until September 30, 2024, and the right of exchange can be exercised thereafter until December 31, 2024. At the same time, BPEA has the right to shorten the bond exchange period, but it must be sent to China Water by written notice before September 30, 2024, so that the exchange period ends at the end of business on October 31, 2024.
The successful revision of the regulations has eliminated potential uncertainties in China's water services, which is of great significance to the continued steady development of water services in China. And this still needs to start with the signing of an exchangeable bond agreement between China Water and BPEA in 2020.
On April 1, 2020, China Water issued an announcement stating that BPEA, the third largest shareholder of its associated company Kangda Environmental (06136), issued zero-coupon exchangeable bonds (EB) to China Water, giving China Water the right to exchange 340 million shares of Kangda Environmental Protection (accounting for 16.93% of the total share capital) held by BPEA. China Water will not be required to pay cash in this transaction, but will issue zero-coupon convertible bonds (“CB”) to BPEA at the same price at a convertible price of HK$8.05 per share. If BPEA exercises CB, it will exchange 44.89 million new shares of China Water, accounting for 2.72% of the expanded total share capital.
The significance of the signing of this exchangeable bond agreement is that while introducing institutional investors, China Water also provides a potential option for the company to fully acquire Kangda Environmental Protection. This is because when China Water exercises EB, its shares in Kangda Environmental Protection will rise from 29.52% to 46.45%, reaching a level of 30% or more. According to Hong Kong regulations, a comprehensive tender offer is proposed. This is expected to trigger China Water's full acquisition of Kangda Environmental Protection.
Zhitong Finance App learned that China Water has a long-term cooperative relationship with BPEA. As currently one of the top three private equity companies in Asia, BPEA's management scale as of the end of the third quarter of 2022 reached 22.1 billion euros (equivalent to about RMB 156.216 billion), and it has always been friendly and supportive of China's water business development.
Notably, in 2022, BPEA was acquired by Swedish private equity firm EQT for a total transaction value of 6.8 billion euros. EQT, founded in 1994, is backed by Sweden's Wallenberg family, which has strong financial resources. Over the past 30 years, EQT has managed assets of over 70 billion euros. After BPEA is acquired, China Water may also access EQT funding through BPEA, thus laying a solid foundation for the company's future expansion of financing channels.
According to Kangda Environmental's financial report, as of June 30, 2023, Kangda Environmental has entered into a total of 112 service franchise arrangements, including 106 sewage treatment plants, 1 water supply plant, 3 sludge treatment plants, and 2 reclaimed water treatment plants. In the future, it will achieve increased profitability and competitiveness by further expanding the urban water treatment industry chain.
Deferring the exercise of exchangeable bonds will allow China Water to eliminate uncertain factors about the company's development within the next year. The company's statements for the next two performance periods will not be affected by Kangda Environmental Protection's consolidated statements. At the same time, China Water will have a longer time to further improve Kangda Environmental's profit level and loan ratio, and continue to improve its asset quality level, thus meeting the conditions for integration into China Water.
In the future, if China Water Services exercises EB at the right time, it will increase the company's market share in the urban water services market and exert synergy and scale effects to a greater extent.