What happened
Sinotrans announced on December 18 that its wholly-ownedsubsidiary Sinotrans HK had signed an agreement with fivesubsidiaries of China Merchants Bureau Group on establishing a jointventure to be engaged in the business of land development,industrial parks and real estate development in Hainan Province.
Based on the agreement, Sinotrans will own 10% of the equity of thejoint venture via paying Rmb350mn registered capital.
Comments
Sinotrans’ participation in Hainan real estate company can probablybenefit itself in several ways: （1） to better grasp the developmentopportunities in Hainan Free Trade Area; （2） to further developpartnerships and accumulate experience in the field of logistics andreal estate; （3） to bring more profit source in the future.
A-share issuance is around the corner. Shanghai Stock Exchange isdealing with SinoAir’s delisting. Once it is done, Sinotrans will issueA-shares according to its announcement. Sinotrans’s A-share issuanceprice is 160% of its H-share price, implying a huge gap here.
Hidden value in Sinotrans’ land reserve. Sinotrans’ current land areais over 12mn sqm （most located in East China）。 It has disposed of asubsidiary with 58,550 sqm of warehouse space （less than 1% of itsowned land）， contributing Rmb480mn pre-tax gains in 2015. Webelieve the HK$20bn market cap signficantly underestimate the valueof its land.
We see limited downside in earnings based on Sinotrans’ historialperformance. Net profit kept growing since 2009. Looking ahead,synergies with China Merchant Logistics will have positive impactnext year, in our view. And we expect it to improve the profitability offreight forwarding by increasing direct clients’ proportion, and narrowthe gap with global comparable companies eventually.
With valuation at bottom, we reiterate BUY. Maintain our 2018/19EPS forecast of Rmb0.40 （+4.5% YoY） / 0.43 （+8.8% YoY）。 It is nowtrading at 7.0x 2019e P/E, 0.7x 2019e P/B, and 4.2% FY19 dividendyield. Maintain TP of HK$4.22 （9.0x 2019e P/E; 27% upside）。
Risks
Economy slows; US-China trade friction worsens; A-share issuanceslower than expected.