Tender Offer and Taking Private of Shinsung Tongsang

• On 21 June 2024, Canaan Co. announced a tender offer and taking private of Shinsung Tongsang. Tender offered shares are 31.664 million shares, representing 22.02% of outstanding shares.

• It could be difficult to complete this tender offer at 2,300 won, because there could be many investors that simply refuse to sell their shares at such low valuations.

• On the business side, the company has successfully captured higher market share and enjoyed higher profit margins especially for the Top Ten apparel brand, taking away market share from Uniqlo.

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On 21 June 2024, Canaan Co. announced a tender offer and taking private of Shinsung Tongsang (005390 KS). Canaan Co. currently has a 41.8% stake in Shinsung Tongsang which has a market cap of 328 billion won. Canaan Co. and related parties own a combined stake of 77.68% in Shinsung Tongsang. Tender offered shares are 31.664 million shares, representing 22.02% of outstanding shares.

If the tender offer is successful, Canaan Co. and related parties would own a combined 99.7% stake in Shinsung Tongsang. This voluntary delisting of Shinsung Trading is interpreted as a move to avoid the demands of financial authorities who are pursuing a corporate value-up program.

Regardless of the tender offer application rate, all shares that are tendered will be purchased and the tender offer price will be paid in cash. Shinsung Tongsang has chosen to voluntarily delist after 49 years of being listed on the Korean stock market. Shingsung Tonsang is a local apparel company with well-known fashion brands such as Top Ten competing against major apparel brands such as Japan's Uniqlo.

Tender offer price is 2,300 won. Prior to the announcement of the tender offer on 21 June, Shinsung Tongsang's share price was 2,030 won. After the tender offer announcement, its share price rose by 13.1% to 2,295 won on 21 June. However, it appears there was a leak a day before as its share price increased by 10.2% to 2,30 won on 20 June. Daily volume surged from 143k shares on 19 June to 2.3mn shares on 20 June and 8.9 million shares on 21 June. The tender offer period lasts from 21 June to 22 July. Tender offer payment date is on 24 July. NH Investment & Securities is the lead banker of this tender offer.

Balance Sheet Analysis - Shinsung Tongsang had total assets of 1.2 trillion won, total liabilities of 752 billion won, and equity of 451 billion won at the end of 1Q 2024. The company has a moderately leveraged balance sheet. It had cash and short term investments of 279 billion won and debt of 358 billion won at the end of 1Q 2024. Debt ratio was 167% at the end of 1Q 2024.

Low P/B valuation and stingy returns to shareholders - Shinsung Tongsang is currently trading at P/B of 0.7x. The company has a poor record of returning capital through dividends and share buybacks. The company paid out 50 won in DPS in 2023, representing 2.2% dividend yield. This was the first dividend paid out in nearly 10 years.

Strong Opposition to This Tender Offer by Minority Shareholders

There is a strong opposition to this tender offer by many minority shareholders mainly because they believe that the tender offer price is too low. Shinsung Tongsang's share price reached above 4,000 won in February 2022 and current price is nearly 44% below this level.

In addition, Canaan Co. is trying to complete this tender offer at a steep discount to its book value trading at only 0.7x P/B. To delist voluntarily, the largest shareholding ratio must exceed 95% for KOSPI listed companies and this may not be easily achieved.