Dalian Wanda Commercial Properties Co.,Ltd:Our thoughts on privatization offer

　　Fate of privatization could lie in the hands of IPO cornerstone investors.

　　Yesterday, Dalian Wanda announced specifics of its proposed privatizationscheme, with the general offer at HKD52.80/ H share, which is a 10% premiumto its IPO price of HKD48.0 (back in Dec, 2014) and 1x 2016 Bloombergconsensus book value. The H share offer is subject to the below conditions: 1)approval is given by at least 75% of the votes attaching to the H-shares held byindependent H shareholders that are cast either in person or by proxy and 2)the number of votes cast (by way of poll) against the privatization is not morethan 10% of the votes attaching to all the H shares held by independent Hshareholders. We believe there is good probability this deal could go eitherway, given the relatively high holdings of various IPO cornerstone investorswho could veto the deal. For instance, per Bloomberg, China Life still holds7.4% stake, Kuwait Investment Authority 7.4%, APG 4.95%, and Och-Ziff 4.9%.

　　Given overall China property sector stocks’ average performance has beenlackluster YTD, the offer price does not look high to us but we see it asreasonable. There were few cases of failed privatization, e.g. Glorious’ schemewhich was not approved by requisite no. of scheme shareholders in Jan 2014.

　　If the privatization goes through, our credit thoughts on potential scenarios.

　　In our view, if the privatization succeeds, the risk will be for Wanda to lever upmore from current levels (recall at end-2015, its total debt/EBITDA was 5.0xand EBITDA/interest was 3x). While the proposed privatization has positivesignaling effect on Wanda (implying Chairman Wang has good funding andhas support in the financial world), from a fundamental perspective, we see itas slightly negative given potential reduced corporate transparency (though itis still required to file regular financials due to its existing bonds) as well aspotentially higher leverage. How can the Chairman and consortium investors(including Ningbo Nanjia, Shanghai Chirui, Dalian Wanda Group itself etc) ofWanda extract value out of the firm once privatized? We can think of a fewpotential scenarios, e.g., by using internally generated cash or levering up topay higher dividends, disposing of non-core assets, improving the earningsstream of the company. An A-share IPO is at least 2 years away, we estimate.

　　Previously China press also reported Evergrande as a potential candidate forprivatization, but we do not think it is likely given its red chip status, therewould be hurdles and complicated tax issues for Evergrande.

　　Bond valuations: Maintain Hold on Wanda’s 2018 and 2024 bonds but we noteDALWAN has a steep yield curve. We see more value in DALWAN'24 (midprice: 105.1, YTM: 6.4%, Z-sprd: 486bp) than GRNLGR'24 (mid price: 97.9,YTM: 6.2%, Z-sprd 464bp) given Wanda’s stronger credit profile and recurringincome despite Greenland Group’s SOE background. DALWAN'24 trades~80bp wider in Z-sprd than BB-rated SHIMAO'22C19, which looks fair to us.

　　Upside risks include: stronger sales and recurring income, and faster A-sharelisting. Downside risks include weak sales execution, aggressive debt-fundedexpansion, and weakened funding channels.