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02 October 2012 | Education | LZYE Group plc

LZYE Group makes first move into China in an unusual deal

LZYE Group has announced it has made its first expansion in mainland China. The Company has entered into a conditional agreement to acquire Nantong LZYE Education Advisory Limited ("LZYE NT") for a total consideration of HK$6.72m (£533k).

​HK$3.36m (£266k) is payable in cash and the balance is to be satisfied by the issue of 2,240,000 new ordinary shares in LZYE issued at 12p per share. As part of the acquisition agreement, the owners of LZYE NT will assign to the Company a debt of RMB2.80m (£273k) due to the vendor from LZYE NT.

LZYE NT has secured a 10 year lease over 2,964 square metres in Happy Valley, a new shopping centre situated in Nantong, Jiangsu Province. It will be the Company's first in mainland China and will operate as the flagship centre for the Group. Commenting on the expansion Dominic Yeung, Chairman, stated, “The Company hopes it will serve to attract potential investors from China and overseas as well as acting as a showcase to attract domestic partners”.

Happy Mall is located near to a residential area in Nantong, a "second tier" city, where growth is expected to be significantly higher, with less competition, than in "first tier" cities such as Shanghai and Beijing. The average annual rental for the centre is approximately RMB 2.64m p.a. (£257.5k). The Company estimates the setup cost for the centre to be around HK$6.02 million (£477k) and payback on the investment will be 3.5 years.

LZYE NT was only established in July 2012 in China as a wholly owned foreign enterprise. The shares to be issued to the vendors of LZYE do not appear to be subject to a lock in agreement.

Comment:

We can see no obvious commercial rationale for the acquisition which will see the vendors receive over £900k for a company established barely two months ago, with no apparent assets and a ten year lease obligation. The acquisition price and the assignment of the vendor’s debts represent 35% of the estimated rentals payable over the ten year lease. The RNS did not seek to justify the scale of the proposed payments.

Management estimate payback within 3.5 years but we doubt this takes into account the “£900k premium” to acquire the lease. This deal will inevitably raise investors’ concerns, following a series of damaging revelations at some Chinese and Hong Kong based companies listed on the UK, USA and Canadian Stock Exchanges.

A fuller explanation of the deal by the Company would have been helpful and may have allayed investors’ worries. It is early days for LZYE, but this unusual transaction and the Company’s racy valuation do little to make a compelling investment story at this stage.

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