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Confused Algos Go Berserk After Chinese Megadeal Sparks Unexplained 150% Surge In Unrelated Company

Overnight, a major M&A deal was announced in China, where local property giant Dalian Wanda Group announced plans to sell various Chinese tourism projects and hotels to Sunac China for $9.3 billion, dialing back its theme-park ambitions and in hopes of reducing its massive debt pile. The sale, the second-biggest real estate deal ever in China according to Reuters data, is supposed to help strengthen Wanda's case for a mainland listing after its property unit delisted from Hong Kong last year. For Sunac, it would mean ownership of a wide portfolio of tourism developments at a time when it is spending billions on property and technology assets.

The details: Wanda said it would offload 91% of thirteen cultural tourism projects, which usually include theme parks and leisure complexes, and 76 hotels to the acquisitive Tianjin-based developer Sunac for 63.18 billion yuan, or just over $9 billion. After the sale, Wanda would, however, continue to play a role in operating and managing the projects. Wanda, which also has interests in films and sports, had plans to build at least 20 cultural projects around China. Its billionaire owner Wang Jianlin had last year said his "wolf pack" of parks would beat U.S. rival Walt Disney Co.

"This (deal) signifies a retreat from Wanda's previous strategy in cultural tourism, and marks a pivot to an asset-light strategy," said Qin Gang, senior researcher at State Information Center, a government-linked think tank.

The firm, which had earmarked a more than 300 billion yuan ($44 billion) investment for its cultural and tourism projects, did not give a reason for the sale to Sunac, but local business magazine Caixin quoted Wang as saying the deal would ease the debt burden on Wanda's property unit. "Through this asset transfer, Wanda Commercial's debt ratio will be greatly reduced, all the proceeds will be used to repay loans. Wanda Commercial plans to repay most of the bank loans this year," Wang told Caixin.

Wanda is among the best-known Chinese offshore acquirors and has been very active globally, with deals for U.S. cinema chain AMC Entertainment Holdings, Hollywood film studio Legendary Entertainment, Infront Sports & Media AG and Spanish soccer team Atletico Madrid.

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On the other side of the deal is Sunac, whose boss Sun Hongbin has also led the group on an acquisition spree, including paying $2.1 billion for the real-estate assets of Legend Holdings, parent of PC-maker Lenovo, and $2.2 billion for a stake in Leshi Internet, a unit of LeEco - a Chinese Netflix-to-Tesla-like conglomerate. The stake in Wanda cultural and tourism projects will cost Sunac 29.58 billion yuan. The price tag for the hotels is 33.6 billion yuan.

While Sunac's shares have more than doubled in value this year, analysts quoted by Reuters worry Sunac could have bitten off too much. It has a negative outlook rating from Moody's, which said in April Sunac's leverage had deteriorated significantly due to large amounts of debt it had raised to support acquisitions. Oh well, if it hits a tipping point, it will simply get a bailout from China.

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None of the above was particularly exciting; what was, however, is another small company caught in the crossfire, Wanda Hotel Development (0169.HK) - which is mostly responsible for development of property projects outside of China -and  which inexplicably surged more than 150% after news of the deal... even though none of the hotels being sold are included under this entity.  As shown in the chart below, shares of Wanda Hotel Development exploded higher, the most since April 2013, after the news that its parent was selling hotel assets to Sunac, yet assets which were completely unrelated to 0169.HK

Just to make it clear that investors should not be buying its stock on the news, a Wanda Hotel Development representative said the deal announced between its parent group and Sunac China Holdings Ltd. has no direct impact on Wanda Hotel, the Hong Kong-listed company.  But it was too late: the stock had already soared from 0.60 to nearly 1.50...

... before retracing only some of its losses.

In a filing with the HK stock exchange later, the company said it wasn’t aware of any reasons that caused the surge in its share price and trading volume, and added that it was unaware of any information which must be announced to avoid a false market or any inside information that needs to be disclosed under securities rules.

In short: for anyone who had read the press release of the deal, there was no reason at all to buy Wanda Hotel Development, and therein lies the rub, because what the algos did do, is buy first and ask (maybe) questions later. The result: a stock which nearly tripled - for no reason at all - just because an avalanche of clueless algos bid it up, prompting even more clueless algos to chase the momentum, until a full blown buying frenzy on massive volume emerged. That the stock was very cheap and liquid, certainly helped.

The take home message: with many instances of similar parent-OpCo patterns available in China, in which a massive publicly traded company has similarly named public spin offs in regional markets, traders should buy stocks not in potential tragets, but in those companies who have the same names and whose market cap is much lower, and wait for the next algo freak out to occur.