ZG Group set to forge Hong Kong’s second De-SPAC listing

Shareholders of Acquila Acquisition Corp. will vote on a merger with the steel-trading platform on Feb. 27, paving the way for ZG Group to make its trading debut on March 10

Key Takeaways:

• Aquila Acquisition Corp. is expected to complete its merger with steel-trading platform ZG Group at the end of this month, just weeks before a regulatory deadline
• ZG Group’s revenue grew 42% year-on-year in the first nine months of last year, as it inches closer to its first-ever profits

By Doug Young

Hong Kong’s special purpose acquisition company (SPAC) program hasn’t exactly been a beehive of activity since its launch three years ago, with only five such listings as of last August. But that handful of listed SPACs are providing some drama nonetheless, as they race against the clock to complete their mergers with real-world companies within a three-year deadline that is fast approaching for many.

As the city’s first SPAC to list in March 2022, Aquila Acquisition Corp. (7836.HK) is in just such a race as its three-year deadline looms next month. Last week it announced a timetable for its previously disclosed merger that, if it happens on schedule, will see its publicly listed shell taken over by steel trader ZG Group (2572.HK) just days before the deadline.

Under terms of the final deal, eight investors have agreed to buy 53.6 million ZG Group shares once the deal closes for HK$10 per share, raising HK$536 million ($69 million), according to one ina series of filings by Aquila on Feb 5. Aquila also raised HK$1 billion at the time of its listing, meaning ZG should receive nearly $200 million in new money from the deal through the combination of new fundraising with money already in Aquila’s coffers.

The new cash infusion will nicely supplement the 436 million yuan ($60 million) in cash that ZG Group had at the end of last September, according to another Aquila filing on Feb. 5, giving the company some potent ammunition as it tries to expand its business beyond China.

Aquila appears to have most or all of the required regulatory approvals, or expects to get them very soon, and has scheduled a shareholder meeting to vote on the merger Feb. 27. Presuming shareholders approve the deal, which seems likely, Aquila would cease to trade as a public company on Feb. 28 and trading in the newly listed ZG Group would start March 10. That would be just a week shy of three years after Aquila shares made their Hong Kong trading debut with much fanfare on March 18, 2022, as Hong Kong’s first listed SPAC.

Just one other company has completed a SPAC merger so far, Singaporean e-commerce firm Synagistics (2562.HK), which made its trading debut last October after combining with Hong Kong Acquisition Corp. Another Hong Kong SPAC, Techstar Acquisition Corp. (7855.HK), announced a deal to merge with U.S. autonomous driving technology maker Seyond Holdings in December, as it also races against time to complete the deal before its deadline.

If the Synagistics deal is any indicator, ZG Group’s shares could do quite well if and when it finally completes its backdoor listing. Synagistics shares are up about 65% since its merger, though a big part of those gains are more likely related to investor sentiment towards the company rather than how it got listed.

Still, all the drama as Hong Kong’s handful of SPACs race to complete their mergers does reflect the high degree of scrutiny acquisition targets are receiving from the stock exchange and the city’s securities regulator. That means that any companies that finally complete such mergers are probably likely to be relatively high quality, as the stock exchange tries to boost investor confidence in the fledgling SPAC program.

Rocky road to listing

Aquila’s stock history nicely reflects the company’s development path, including the difficulties it faced in closing its merger deal, also known as its De-SPAC transaction, before the deadline. The shares largely traded in the HK$9 to HK$10 range, near their IPO price of HK$10, from the 2022 listing date through September 2023 when it first announced the plan to merge with ZG Group. At that time it said it was aiming to close the deal by the end of 2023.

But then the stock began to sag around November 2023 as it became clear the company wouldn’t meet its own December 2023 deadline, falling as low as HK$7.60. The shares ticked up again around August last year as the ZG deal moved ahead, and their Friday close of HK$9.86 – just below the IPO price – seems to show investors are relatively confident the deal will close before the deadline.

ZG looks interesting due to its position as a tech company operating a platform for traders mostly serving a Chinese steel industry that is the world’s largest. It earns most of its money from transaction fees, so it’s relatively immune to the big price swings in China’s massive steel sector that is currently quite oversupplied due to the country’s property downturn.

One of the latest documents filed on Feb. 5 shows that ZG Group’s revenue rose by a healthy 42% year-on-year to 1.14 billion yuan in the first nine months of last year from 805 million yuan in the year-ago period, accelerating from 29% year-on-year growth for all of 2023. At the current growth rate, revenue for the full year is likely to pass a peak of 1.35 billion yuan the company achieved for the full-year 2021, before its business took a hit during the pandemic.

The company has also been reducing its costs as a percentage of revenue as it rebounds post-pandemic and gains scale and experience. Its cost of revenue fell from about 75% of total revenue in 2021 and 2022 to 71.8% in the first nine months of last year, while its selling and distribution expenses fell from a high of 27% of revenue in 2022 to 19% in the first nine months of last year. As that happened, its gross margin rose from 25.5% in 2021 to 32.5% in 2023, though the figure fell back to 28.2% in the first nine months last year due to spending on global diversification.

That diversification looks like a smart move to reduce its reliance on China, which has dropped steadily from supplying 76% of ZG Group’s revenue in 2021 to 63% in the first nine months of last year. The company has always lost money, though it’s inching toward profitability. It reported a loss of 54 million yuan in the first nine months of last year, down sharply from a 341 million yuan loss a year earlier.

At the end of the day, ZG Group looks like a relatively solid company and should probably get a decent valuation when the deal is done. But all the drama on the path to the listing may not exactly embolden lots of others to launch new Hong Kong SPACs.

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