Parent company priced at 1.01x 2013 book
Following the framework agreement to acquire the parent company on 26Mar, CITIC Pacific (CP) announced that total consideration for the parent company (excluding the 57.51% stake in CP) is set at RMB226.9bn (cUS$36.9bn). This implies a P/B multiple of 1.01x 2013 book. The total consideration is envisaged to be satisfied by 1) consideration shares priced at HK$13.48/sh amounting to RMB177.0bn (US$28.8bn), and 2) cash consideration of RMB49.9bn (US$8.1bn) which CP expects to raise through an equity placement to institutional investors, with the placing shares to be priced at the higher of HK$13.48/sh and 80% of closing price prior to the placement.
NAV for the combined group at HK$14.1; current share price at 3% premium
With reference to the market value of the listed entities in the parent company's portfolio, assumed P/B multiples (avg 1.5x) relative to ROE of the unlisted assets, and our current estimate of CITIC Pacific's existing assets, we estimate an NAV of RMB277.9bn (US$45.2bn) for the combined group. The number of shares of CITIC Pacific will increase from 3,649m to 24,903m as per the proposed deal structure. Accordingly, we estimate a NAV of HK$14.1/sh for the combined group.
Mind the NAV discount; Equity FV of combined group estimated at HK$10.6
We estimate that 62% of total NAV of the combined group is separately listed with stakes in CITIC Bank and CITIC Securities accounting for 51% and 9.6% of total NAV respectively. This compares with c30% for Hutch and c80% for Swire Pacific. With these large cap conglomerates trading at a 25-30% discount, we believe this range would be reasonable for CITIC. With an assumed 25% discount, the fair value of the equity for the combined group would be HK$10.60, reflecting downside risk to the current share price of HK$14.54.
Valuation: Sell, PT HK$10.60 (from HK$6.10)
The circular of the transaction is expected to be dispatched by 14 May and independent shareholders are due to vote on the transaction and issuance of shares at the EGM on 3 June. Our PT is based on a 25% discount to our SOTP-derived NAV estimate.