On July 26th, the Hong Kong-listed company, Oriental Selection (1797.HK), experienced a significant gap down at the open, plummeting as much as 27.66% to HKD 8.97 per share, setting a new low since June 2022. Compared to its peak of HKD 75.55 in January 2023, Oriental Selection has seen an 88% decline. As of the closing on the 27th, the stock fell by 23.39% to HKD 9.5 per share. New Oriental-S (9901.HK) closed at HKD 54.95 per share, down by 4.43%.

The stock's sudden collapse stemmed from Oriental Selection's complete separation from its popular host, Dong Yuhui. After the market closed on the 26th, Oriental Selection announced that Dong Yuhui officially resigned on July 25th. Concurrently, Oriental Selection disclosed that Beijing New Oriental Xun Cheng Network Technology Co., Ltd. planned to sell 100% equity of Yu Hui Tong Xing (Beijing) Technology Co., Ltd. (hereinafter referred to as "Yu Hui Tong Xing") to Dong Yuhui for a price of RMB 76.5855 million.

Yu Hui Tong Xing, after operating for nearly half a year, has recorded a net profit of approximately RMB 141 million. Meanwhile, from June 1st to November 30th, 2023, Oriental Selection's profit for the period was RMB 249 million. Despite the differences in reporting periods, it is evident that Yu Hui Tong Xing played a significant role in Oriental Selection's revenue previously.

Regarding valuation and procedural issues, Yu Minhong, the founder of New Oriental, stated in a shareholder teleconference on the 26th that he had thoroughly communicated the company's specific situation with the appraisers and lawyers of the listed company to ensure the correctness of the process evaluation.

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As a Hong Kong-listed company, Oriental Selection is subject to many rules that differ from the well-known A-shares. How should it be valued, and what valuation pricing methods are available? What rules must be followed and what processes must be fulfilled for subsequent transactions, and how do these differ from A-shares? First Financial Daily will elaborate on these points.

The impact on Oriental Selection was significant on the 26th, with both Oriental Selection and New Oriental's stock prices plummeting. By the close, Oriental Selection's stock price had dropped 23.39% to HKD 9.5 per share. New Oriental-S (9901.HK) closed at HKD 54.95 per share, down by 4.43%.

According to the announcement, on July 25th, Dong Yuhui (the buyer), Beijing New Oriental Xun Cheng Network Technology Co., Ltd. (the seller), and Yu Hui Tong Xing entered into a sale agreement. Under this agreement, the seller agreed to sell, and the buyer agreed to purchase 100% of the target company's equity for a consideration of RMB 76.5855 million.The transaction in question, involving over 70 million yuan, may not require Dong Yuhui to pay out of his own pocket. Yu Minhong, founder of New Oriental, yesterday released an "Open Letter to Oriental Selection Shareholders," stating that to express gratitude to Dong Yuhui, in addition to the full payment of the promised remuneration, he has requested and obtained the consent of the board of directors and the compensation committee to award all net profits from "With Hui" to Dong Yuhui. At the same time, the equity purchase payment required for Dong Yuhui to hold shares in "With Hui" has also been arranged and paid in a manner consistent with the rules of listed companies and the company's articles of association.

The announcement shows that from December 22, 2023, to June 30, 2024, "With Hui" had a pre-tax profit of 188.554 million yuan, with a net profit of 141.414 million yuan.

If the aforementioned transaction and the content of the open letter are ultimately implemented, and there is no overlap between the equity purchase payment and the net profit reward received by Dong Yuhui, then this transaction will involve a net profit reward of approximately 141 million yuan and an equity purchase payment of 76.85 million yuan, totaling approximately 218 million yuan.

In response to the current market rumors that there is an overlap between the net profit reward and the equity purchase payment, Yu Minhong mentioned at the Oriental Selection shareholders' communication meeting that the remaining net profit of 140 million yuan is actually the net profit that should have been 100% owned by Oriental Selection after Dong Yuhui's income distribution. There is no connection between this part of the revenue and the equity purchase payment of over 70 million yuan.

Furthermore, Yu Minhong stated at the Oriental Selection shareholders' communication meeting that the equity transfer payment of over 70 million yuan will be paid by New Oriental through some form of cooperative relationship with Dong Yuhui, and it will comply with all the rules of New Oriental as a listed company in the United States, without infringing on any interests of Oriental Selection.

Regardless of the outcome, this "division" will have a significant impact on Oriental Selection's revenue. According to the latest financial report, as of November 30, 2023, Oriental Selection's net asset value was 3.305 billion yuan. The net asset value of the "With Hui" company sold this time is 76.58 million yuan, which is only 2.3% of the listed company.

"With Hui" holds an important position in Oriental Selection's revenue. From December 22, 2023, to June 30, 2024, "With Hui" had a net profit of 141 million yuan. According to Oriental Selection's latest financial report, from June 1 to November 30, 2023, Oriental Selection's profit for the period was 249 million yuan.

From a revenue perspective, according to data from a third-party statistical platform, in the May Douyin sales talent list, "With Hui" ranked second with a sales volume of 533 million yuan, while Oriental Selection ranked sixth.

Perhaps based on this background, several institutions have lowered their performance expectations for Oriental Selection. Bank of Communications International estimates that the downward adjustment for Oriental Selection's fiscal year 2025 in terms of Gross Merchandise Volume (GMV), revenue, and profit will reach 34%, 9%, and 20%, respectively. Shenwan Hongyuan has adjusted the company's adjusted net profit forecast for the fiscal years 2024 to 2026 to 853 million yuan, 1.003 billion yuan, and 1.074 billion yuan, respectively.

Shen Meng, a director of Chanson Capital, analyzed to the First Financial Journalist that, according to Oriental Selection's statement, "With Hui" has a very strong profitability, and selling it at its book value could easily damage the overall interests of the listed company, especially the interests of minority shareholders.To stabilize the stock price, Dongfang Selection is planning a substantial share repurchase. On July 25th, Dongfang Selection announced that the company's board of directors intends to repurchase up to RMB 500 million worth of company shares through the open market over the next year, based on the general authorization granted by shareholders at the annual general meeting on November 3, 2023, and possibly other authorizations.

How to Value Walking with Hui

The market's focus is on whether the price at which Dongfang Selection sold Walking with Hui is reasonable. According to Dongfang Selection's disclosure, the price of 76.58 million yuan was determined with reference to factors such as the original investment in the target company and its net asset value. The unaudited net asset value as of June 30, 2024, is approximately 76.5855 million yuan.

Due to the nature of Walking with Hui, the aforementioned net asset value primarily uses the cost method for valuation. The independent appraiser, Jones Lang LaSalle Corporate Appraisal and Consulting Limited (hereinafter referred to as "JLL"), believes that the market method usually relies on the value of comparable companies or transactions in the market to determine valuation. However, since Walking with Hui heavily relies on Dong Yuhui, his departure introduces uncertainty regarding the company's future operations and profitability. As of the valuation date, there are no market comparable companies or similar transactions with a similar degree of uncertainty as Walking with Hui. The income method requires detailed operational information and long-term financial forecasts from Walking with Hui, but due to the aforementioned uncertainty, such information and substantial objective supporting data cannot be obtained.

Therefore, JLL has adopted the cost method and, based on this, the summation method. The disclosure also specifically introduces the composition of assets, which mainly includes money market funds, financial assets, accounts receivable, fixed assets, right-to-use assets, and other non-current assets, all valued at book value.

The intellectual property and related contracts of Walking with Hui are considered to have no significant value.

JLL believes that, based on the provided information, most of the aforementioned intellectual property is closely related to Dong Yuhui's name and likeness, and according to the sale agreement, Dongfang Selection may also need Dong Yuhui's authorization to use the aforementioned intellectual property in the future. Therefore, these intellectual properties are not expected to bring economic benefits to Dongfang Selection thereafter.

In addition, Dongfang Selection has also signed several revenue contracts that generate commissions based on the sales volume of products promoted on platforms related to intellectual property. After the termination of the employment contract with Dong Yuhui, these revenue contracts are expected not to generate income for the company.

A reporter checked the data from Qichacha and found that Walking with Hui currently has 513 trademarks registered under its name, of which 134 trademarks have been registered, 230 trademarks are still in the application process, and 149 trademarks have been preliminarily announced. In addition, there are 7 copyright works involving several logos of Walking with Hui.

A small cross-border e-commerce manager in South China told the reporter that, on the surface, this does give the impression of an undervalued assessment. However, it is important to consider that Walking with Hui heavily relies on Dong Yuhui's personal influence and brand value, and Dong Yuhui's departure may introduce uncertainty regarding the company's future operations and profitability. This transaction may be more the result of friendly negotiations between the two parties rather than a pure market valuation.According to the rules of the Hong Kong stock market, what processes must be followed for a sale?

Another focus of market attention is whether a shareholder vote is required. In fact, there are certain differences between the disclosure rules of listed companies in Hong Kong stocks and A-shares.

Yu Minhong said on the 26th in a shareholder teleconference that he has fully communicated with the assessors and lawyers of the listed company about the specific situation the company is facing, to ensure the correctness of the process and evaluation.

According to the announcement of Dongfang Selection, since the applicable percentage rate calculated in accordance with Listing Rule 14.07 for one or more transactions under the sale agreement is higher than 5% but lower than 25%, the transactions to be carried out under it constitute a "disclosable transaction" of the company, and must comply with the reporting and announcement provisions of Chapter 14 of the Listing Rules.

The reporter noticed that according to Chapter 14 of the Hong Kong "Listing Rules", if the percentage rate calculated for a transaction or a series of transactions by a listed issuer is more than 5% but less than 25%, the type of transaction is a "disclosable transaction". These ratios include asset ratio, cost ratio, profit ratio, revenue ratio, and equity ratio.