News
After market close on March 25, Sinotrans CSC Group, Sinotrans Limited and Sinotrans Shipping announced an asset restructuring proposal. For Sinotrans Shipping, the plan involves the acquisition of (1) a 49%-stake in dry-bulk operator Sinochart, (2) a 49%-stake in Sinotrans Container Lines and (3) a number of shipping owning and services companies under Sinotrans CSC and Sinotrans Limited (inc. 4X 1,100TEU owned container vessels and 2X 22,000t multi-purpose vessels), for a total consideration of Rmb549mn (i.e. US$89mn), while Sinotrans Shipping will also assume c.US$48mn of debt from the transaction. The target assets will become non-wholly owned subsidiaries of Sinotrans Shipping if completed.
Analysis
(1) Financial impact: Based on 2013 audited financials, a much larger Sinotrans Shipping group could have revenues of US$1.49bn in 2013, or 8 times its original revenue of US$195mn in 2013. However, due to one-off impairment costs at Sinochart in 4Q 2013 and continued losses at Sinotrans Container Lines in 2013, a larger Sinotrans Shipping group would have recorded a net loss of US$9.4mn in 2013 (vs. US$4.3mn net profit of the original Sinotrans Shipping in 2013).
(2) Purpose of the transaction: While the proposed acquisition values Sinochart at Rmb434mn (for a 49% stake, 2013 P/B of 1.2X vs. Sinotrans current multiple of 0.5X), at a premium to Sinotrans Shipping’s valuation, management highlighted Sinochart’s strong balance sheet with cash position of >Rmb450mn, strong cargo networks/relationships and synergies between the two companies as justifications for the consolidation. We expect higher dry bulk rates this year to support its profit turnaround. Meanwhile, a reason for acquiring Sinotrans Container Lines (for a 49% stake, at Rmb23mn), that had historically been generating losses, was not as clear. Minority shareholders will cast their votes on the proposal at an EGM in due course.
Implications
Our target price and earnings estimates remain unchanged. We await the minority shareholders vote on the proposed transaction.