CITIC Limited to go public through asset injection into CP
CITIC Pacific (CP) said it will acquire parent CITIC Limited (CL) (book value at Rmb225bn ) through both cash and n ew shares. The yet-to - be-decided price should dictate the ultimate investor reaction. IF CP can acquire CL at a reasonable price, we believe it should be a positive, as CP shareholders would own shares in a larger, flagship platform while concerns over cash flow pressure from Sino Iron project should ease. We maintain our Neutral rating but raise PO by 14% to HK$13 based on the potential elimination of the NAV discount as we expect covering of large short interest position, but new issue price to parent at HK$13.48/sh (6% above last closing price) could be a cap near term.
Acquisition scenario : HK$7- 25bn of public equity needed
Assuming CL will be priced between 0.6x (v CP at 0.5x, 0.76x P/B for listed CITIC Bank, 20% holdco discount) and 1.0 P/B, at the low end and with US$4bn debt, it would issue HK$131bn of equity to parent and HK$ 7bn in new equity to public to satisfy a 15% free float rule . At the high end , a 1x P/B price could mean HK$ 23bn of new public equity. Since most of CL’s assets are list ed and in currentl y out-of -favor sectors, we believe investors may demand an attractive valuation.
Transaction details and rationale
CL’s book value (ex CP stake) was Rmb225bn and profit was Rmb34bn in 2013. CL holds most of CITIC Group’s assets, including listed entities CITIC Bank (998 HK) , CITIC Securities (6030 HK) and CITI Resources (1205 HK) . While complicated, the transaction would likely enable CITIC Group to accomplish the twin results of going public but without creating yet another listed conglomerate platform apart from CP.
Regulatory hurdles ahead
We expect the transaction to take at least several months to unfold as it seems to be i n early stage. Independent shareholder approval will be needed, while the HKEx may deem CP a new listing applicant given the size of the injection.