What happened
Sinotrans announced last Thursday that two of its wholly-ownedsubsidiaries （China Merchants Shipping Enterprises and MerchantsLogistics） are to sell their combined 55% share of Merchants Lukai.
The buyers are CITIC Capital Maneuver and FV Pallet, both fundcompanies. The total cost is Rmb 2.475 bn （or 22.5x P/E and 1.5x P/Bof China Merchants Lukai's 55% stake）， of which Rmb 1.5bn is paid byCITIC Capital Maneuver, and Rmb 990 mn is paid by FV Pallet.
Comments
According to the announcement, we believe that the deal will havefollowing impacts on Sinotrans:
（1） Non-recurring gains: Sinotrans is expected to receiveRmb915.5mn （excluding effect of tax）。 The income will be recognizedwhen the delivery is completed.
（2） Increasing cash flow: Sinotrans will receive Rmb2.475bn. The cashwill be used as operating capital and CAPEX for core business, such aslogistics infrastructure construction.
（3） Improving Lukai’s operating efficiency: Introducing private capitalshould help Lukai improve the operating efficiency of MerchantsLukai and improve the company’s return rate.
（4） Probably reducing 5% of annual net profit. Merchants Lukaiachieved net profit of Rmb200mn in 2017. So 55% equity accountedfor 5% of Sinotrans' net profit.
We maintain Sinotrans H-share BUY rating and our TP of HK $4.22（9.6 × 2019e P/E, 54% upside） for following reasons.
Looking forward, the integration of Sinotrans’ logistics businessshould help it further enjoy the economies of scale associated witha modern logistics business. The acquisition of Merchants Logistics in2017 integrated the firm’s cold chain logistics; the acquisition ofSinoair （600270.SH） in process should address some of theshortcomings of the firm’s air transport logistics.
Historical attractive valuation. We estimate 2018/19e EPSRmb0.42（+9.6%）/ Rmb0.44（+5.4%）， not considering the impact of thedeal. The current price is only 5.1× 2019e P/E or 0.5× 2019e P/B,around -1×STDEV. Risks: Economy slows down; slower than expectedacquisition of Sinoair.