CICC Xinda Dongxing Discussion Thread

China International Capital Corporation (CICC) announced a merger and acquisition plan on December 9 last year. Over two months have passed, and the process is still in the early stages. The cash option in 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, and on March 4, it closed at 4,082.47, a 4.42% increase in the period. The Securities Index (803203) closed at 1,882.73 on the announcement date and 1,759.06 on March 4, a 6.57% decline, clearly weaker than the broader market. Looking at the three stocks involved in the merger (see below), they performed better than the securities sector but still underperformed the overall market due to the sector’s weakness.

2. Progress and rules

Generally, about 4-5 months after the announcement, a second board meeting is held. Regulations stipulate that the second board meeting should not exceed 6 months from the announcement. If there is no progress after 5 months, it can be suspected that the restructuring is blocked. For example, Haimen Information announced termination exactly 6 months after the announcement.

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 separate and AH cumulative votes must exceed two-thirds), and the major shareholders hold only 40%, so there is strong motivation to keep the stock price above the cash option before the shareholder meeting. (Note: CICC is the surviving entity after the merger, so even if H-share votes reach 10%, it cannot veto the proposal.)

3. Operational strategies

Conservative approach: Only trade CICC and Cinda when their stock prices 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 shareholder meeting, both stocks can return above the cash option. As the merger nears success, the 2% share swap discount for Cinda relative to CICC will narrow.

Aggressive approach: Choose stocks slightly above the cash option, especially Dongxing, which has the largest share swap discount. If the process advances toward the shareholder meeting, as CICC’s stock price returns above the cash option, Dongxing’s stock will also rise. Coupled with the expectation of successful merger, the discount will shrink further, providing a double benefit for Dongxing. If the shareholder meeting passes and the process continues, the discount will further narrow.

4. Risks

The risks of this arbitrage-like operation are analyzed based on time periods. In the early stage, CICC and Cinda bought near the cash option, and during market crashes or significant sector adjustments, their stock prices could sharply fall below the cash option, as the shareholder meeting is still far away. For example, in April last year, Great Wisdom announced a plan with a cash option of 9.51 yuan, which once dropped to 8 yuan. Such extreme declines in the early stage are not necessarily substantial risks; as the merger progresses, these stocks will still move independently, approaching the cash option or narrowing the discount.

In the later stage, especially if five months pass without a second board meeting, and these stocks decline independently of the market or sector, it could be a sign that the plan has failed.

In summary, the cash option in the merger is not strictly an arbitrage and may sharply fall below the cash value. Participants should control their positions and manage risks carefully.