Asset restructuring: Plan A vs. Plan B
After the injection of China Merchants Logistics, the recent halting of tradingSinoair （600270.SS）， an A-share listed subsidiary in which Sinotrans holds60.95%, has caught investors' attention. As Sinotrans has announced it willbe involved in the current restructuring, we think Sinotrans likely will tacklethe long-lasting inefficient corporate structure （i.e. as Sinotrans consolidatesSinoair, resources at Sinoair cannot be effectively utilized by Sinotrans, the peercompetition problem）。 We think there could be potentially two plans. Plan A:China Merchants Group, the parent company of Sinotrans, buys back the 60.95%Sinoair's stakes held by Sinotrans. Plan B: Sinotrans issues A-shares to acquirethe remaining 39.05% stakes of Sinoair. As Plan A seems against the overallSOE asset consolidation, we think the likelihood of Plan B is greater. Given thesubstantial P/E difference （i.e. Sinotrans at 9x, Sinoair at 13x, and A-share logisticssector at 32x） and previous CHALCO case, we view Plan B, if it happens, as apositive catalyst for Sinotrans' stock price.
Plan B - it happended before…
In April 2007, CHALCO （China Aluminum Corporation）， a dual-listed companyin HK and US, was listed on the Shanghai Stock Exchange through acquiringtwo subsidiaries, Shandong Aluminum （71.4% stakes held by CHALCO） andLanzhou Aluminium （28% stakes held by CHALCO）。 CHALCO issued A-sharesand swapped shares at 3.15:1 and 1.8:1 of Shandong and Lanzhou Aluminum'sshares. After this deal, both subsidiaries delisted from A-share market andCHALCO completed its A-share listing and consolidated all major assets from thethree different companies. Despite 9% EPS dilution, CHALCO's H-shares reactedvery positively, rising as much as 50% from the acquisition announcement on27 November 2006 to the acquisition completed on 30 April 2007 （vs. HSCIrose 10% during this period）。 CHALCO's A-shares also increased 32% over threemonths post acquisition vs. Shanghai Composite index, which rose 12% duringthis period.
Plan B - impact on Sinotrans
Obviously, under Plan B, Sinotrans' A-share issuing price would be critical. Apartfrom that, how much premium Sinotrans would offer to Sinoair's minority isanother important consideration. However, given the huge P/E gap betweenSinotrans, Sinoair and China's A-share logistics peers, we think Sinotrans hasdecent room to come up with a plan, without leading to EPS dilution （though in CHALCO's case, despite dilution, stock still reacted positively because investorswere positive on long-term gains in synergies efficiency, etc.） Based on ourquick calculations, assuming Sinotrans issues A-shares at 17x 2017 P/E （or 80%premium over H-shares） and offers 25% premium to Sinoair's minority （basedon Chalco's 25% premium on Shandong and Lanzhou Aluminum）， there will bevirtually no dilution 。 We thinkthis scenario does not look excessive as average A/H gap at 94% while logisticscompanies, on average, trade at 32x P/E in A-shares. Taking into account potentialsynergies and efficiency gains and large valuation gap （i.e. the huge discount ofSinotrans' A share to peers will drive its A share price, which in turn would liftSinotrans' H share）， we think Sinotrans' H-shares would react positively.
Reiterate Buy on Sinotrans; risks
Along with robust organic growth across all segments and looming synergiesfrom CML injections, we expect Sinotrans' ROE to reach 13% in 2018E. Inaddition, we believe the stock will highly likely re-rate ahead if Plan B comestrue. We reiterate Buy on Sinotrans with target price of HK$6.60. Our SOTP-basedprice implies 13x 2018E P/E. We believe it looks conservative as global peers, onaverage, are trading at 20x forward P/E.
The key macro risk is weaker-than-expected trade flows. On the companyfront, we see poor execution of the expansion strategy and lower-than-expectedsynergies with CML as major risks.