Wednesday, 3 June 2020

A Strategic Partnership That Leads To More Than 100% Upside And Buyout Target

On Wednesday, Secoo Holding Limited (SECO) announced a strategic partnership and $100 million investment from Qudian, Inc. (QD). The stock increased 53% to $3.28 on 27 million shares traded, though did sell off from its $4.24 open. We believe that the sell off represents a tremendous buying opportunity with a greater than 100% upside. SECO's entire market cap is barely over the strategic investment made by QD for 28.9% of the company and makes it an obvious buyout target if it continues to remain this cheap. We are up to 891 followers despite not giving out a lot of alerts, a fact that we think is indicative of a successful, diligent and prudent stock picking history. If you like our picks you can follow our blog by clicking the follow button on the top of the left hand panel as well as follow our Small Caps, Big Gains blog where we put up our Canadian picks. You can also follow us on Twitter @StockTradePicks which has over 4,300 followers.

The news release stated:

BEIJING, June 03, 2020 (GLOBE NEWSWIRE) -- Secoo Holding Limited (NASDAQ:  SECO) (together with its affiliates, “Secoo”), Asia’s largest online integrated upscale products and services platform, and Qudian, Inc. (NYSE:  QD) (together with its affiliates, “Qudian”), a leading technology platform empowering the enhancement of online consumer finance experience in China, announced today that Secoo and Qudian have entered into a definitive agreement, pursuant to which Qudian has agreed to purchase a total of up to 10,204,082 newly issued Class A ordinary shares of Secoo for an aggregate purchase price of up to US$100,000,003.60, reflecting a per share purchase price of US$9.80.
Following the completion of all transactions contemplated under the definitive agreement, Qudian will hold approximately 28.9% of Secoo’s issued and outstanding shares.
In addition, Secoo and Qudian will also enter into a business cooperation agreement, which will set forth the key areas for the two companies’ strategic cooperation in the online luxury e-commerce business space.
Mr. Rixue Li, Founder, Chairman and Chief Executive Officer of Secoo, said, “We believe this strategic partnership will enable us to accelerate growth by building upon both companies’ assets, core expertise and competitive advantages. We will utilize the investment proceeds to further strengthen the supply chain and enhance user satisfaction.”
“This strategic partnership  leverages both companies’ resources, capabilities, industry expertise and market presence, while fostering collaboration in supply chain management, user acquisition and retention, quality appraisals, post-sales services, and financing solutions,” said Mr. Min Luo, Founder, Chairman and Chief Executive Officer of Qudian. “Our partnership will bring value to both Secoo and our Wanlimu platform, launched earlier this year, and also establish a good foundation for a better user experience for our customers. We believe this strategic investment in Secoo will fuel opportunities for expansion and success on both platforms.”
The transaction is subject to customary closing conditions and is expected to be consummated in two separate closings in the near future. Qudian has agreed not to sell, transfer or dispose of any shares acquired in the transaction for twelve months after the first closing, subject to certain limited exceptions.

The share issuance is exempt from registration under the Securities Act of 1933, as amended, (the “Securities Act”) pursuant to Section 4(2) of the Securities Act regarding transactions not involving a public offering or is made in reliance on, and in compliance with, Regulation S under the Securities Act.
QD will be investing $100 million for 10.2 million SECO shares at a $9.80 price per share and a 28.9% stake in the company. Upon closure of this deal, SECO would have about 35 million shares outstanding. That means at a closing price of $3.28, its market cap is only around $115 million. This is barely over QD's entire strategic investment. QD has over $400 million US equivalent in cash so it has the money to invest in SECO. QD rose 5% on the day, so QD investors do not believe this purchase at triple SECO's closing price was a bad deal.

Prior to the strategic investment, SECO had $238 million US equivalent in total equity, meaning that it is trading at less than half of its book value. There are two very obvious events here that investors should be on the lookout for if the stock price remains low. First, QD has tremendous incentive to purchase more of SECO on the open market. It has plenty of cash and SECO is trading at a stock price that is one-third of what it just paid for the first 10.2 million shares. The second potential course of action would be SECO buying back its own shares. With $100 million being added to an already strong balance sheet, SECO can easily buy back shares. The company announced a $20 million stock repurchase program at the end of April. SECO has only an 18.5 million share float. A $20 million repurchase program would lead to 5 million shares being purchased at $4.00, or 27% of the float.

Given these favorable circumstances of an open share repurchase program, small float, strong balance sheet and $100 million strategic investment made at $9.80, we think that a share price of $5.00 is imminent and a double in the $6.00 to $7.00 range is inevitable.

Disclosure: We are long SECO

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