This is an acceptable plan, in our opinion
Sinotrans announced its restructuring plan post market today. Sinotrans’ A-shareis priced at RMB5.32/share （or 51% premium over latest Sinotrans' H-share priceand 14x 2017E P/E）。 One share of Sinoair’s A share will be swapped to 3.88 sharesof Sinotrans' A-share, representing 19% premium on Sinoair’s latest closing price（Dec 29, 2017）。 Based on 2017E earnings, our calculations show that EPS dilutionis rather limited （< 2%）。
While we believe this is not a great plan for Sinotrans’ H shareholders, we think itis acceptable and practical. After all, management of Sinotrans need to balancethe interests between Sinotrans and Sinoair’s minority shareholders, both ofwhich will be voting for this deal.
Stronger fundamentals ahead
Post this deal, Sinotrans will become a dual-listing company （ie A+H）。 With Peercompetition between Sinotrans and Sinoair being resolved and resources fromboth companies being integrated, we see significant synergies ahead. Technically,given a valuation discount （ie 14x P/E for Sinotrans’ A share vs. average of 32x forA-share logistics companies）， Sinotrans' A-share price could trend up once listed.If this happens, it could in turn lift Sinotrans’ H-share.
Reiterate Buy on Sinotrans; risks
Along with robust organic growth across all segments and looming synergiesfrom China Merchants Logistics injections, we expect Sinotrans' ROE to reach13% in 2018E. We reiterate Buy on Sinotrans with target price of HK$6.60. OurSOTP-based price implies 13x 2018E P/E. We believe it looks conservative asglobal peers are trading on average of 20x forward P/E.
The key macro risk is weaker-than-expected trade flows. On the companyfront, we see poor executive of the expansion strategy and lower-than-expectedsynergies with CML as major risks.