What's new
　　On February 1, Sinotrans announced that it may issue A-shares andmerge with Sinoair; however, the specific terms of any possiblereorganization are still under discussion.
　　Comments
　　Sinotrans could become a dual-listed company: according to theinformation the company has disclosed so far, we expect itstransaction framework to be similar to that of the merger betweenHuabei Expressway and China Merchants Expressway Network &Technology （CMET）： which was: by issuing A-shares and exchangingthem for the Huabei Expressway stock then held by shareholders at a31% premium on EPS （shareholders who did not want to participatein the share exchange could choose to take a cash compensation），CMET merged with Huabei Expressway to become an A-share marketlisted company.
　　EPS will not be substantially diluted: since Sinotrans owns a 61%equity share in Sinoair, if Sinoair’s shareholders are given a 10-25%premium on 2017e EPS for the remaining 39% of Sinoair stock theyhold, the conversion ratio is 1:5.5-6.5 （one Sinoair share for every5.5-6.5 Sinotrans-A shares）； thus, Sinotrans will need to issue1.9bn-2.3bn A-shares. Post-transaction, Sinotrans’ 2017e EPS will beRmb0.27-0.28 vs. its current Rmb0.29. We expect Sinotrans EPS toremain stable， but still open to change according to thespecific terms of the transaction. According to the latest financialreport, Sinoair has Rmb4.5bn cash. If the merger is successful,Sinotrans could benefit from the abundant cash flow and its 2018earnings are expected to reach Rmb2.3bn.
　　Valuation and recommendation
　　Sinotrans is trading at 10.6x/9.1x 2017/2018e P/E. We maintain ourBUY rating and target price of HK$5.26, and advise looking out fortrading opportunities.
　　Risks
　　Economic slowdown.