Beijing Enterprises Water (BEW, the "Company", 00371 HK) announced that it will make a cash offer for Beijing Enterprises Urban Resources (BEUR, 03718 HK) at HK$0.78 per share, the same price as the previous last trading day. As at April 25, BEW (00371 HK) held 1,124,284,000 shares of BEUR (03718 HK), accounting for 31.2% of its total issued share capital of 3,600,000,000 shares. The offer involves 2,475,716,000 shares of BEUR (03718 HK), with a total consideration of HK$1,931,058,480 based on the offer price of HK$0.78 per share. After the closing of the offer, BEW (00371 HK) intends to maintain the listing status of BEUR (03718 HK).
Based on HK$0.78 per share and a total issued share capital of 3,600,000,000 shares, BEUR (03718 HK) is valued at HK$2.808 billion, or 5.6x 2021 P/E. We think this valuation is a bargain relative to BEUR's (03718 HK) 26.4% revenue growth and 17.6% growth in profit attributable to shareholders in 2021. In addition, the operating cash inflow of BEUR (03718 HK) in 2021 reached HK$542.6 million, even exceeding the profit attributable to shareholders, reflecting its very good profit quality. If the acquisition was completed in 2021, it would have increased the profit attributable to shareholders of BEW (00371 HK) by about 13%, which would be a very significant improvement compared to its current profit attributable to shareholders, which was only flat in 2021.
Moreover, BEUR (03718 HK) is mainly engaged in environmental hygiene services and hazardous waste treatment services, which basically does not compete with BEW (00371 HK) but strongly compliments BEW’s (00371 HK) business. We think that the acquisition of BEUR (03718 HK) will be a very good investment from both business and financial perspectives.
As at December 31, 2021, Beijing Enterprises Water (00371 HK) held more than HK$10.7 billion in cash, which is abundant compared to the total offer consideration of HK$1.93 billion. We think this acquisition is another manifestation of the Company’s asset-light strategy. We may slightly raise the Company’s earnings forecast in the next Company Report, and will review the target price and investment rating. The current target price is HK$3.70 and the investment rating is "Buy".