Action
In a July 6 announcement, CPMC said it has applied for arbitrationwith Wong Lo Kat, Wisdom Kingdom and Qingyuan JDB Herbal PlantTechnology, claiming Wong Lo Kat has not met its commitment totransfer the JDB trademark to Qingyuan JDB under a 2017 agreementin which CPMC invested Rmb2bn into Qingyuan JDB. We lower our2018 and 2019 earnings forecasts and downgrade CPMC to HOLD.
What’s changed?
CPMC alleges non-compliance, likely to win. CPMC agreed inOctober 2017 to inject Rmb2bn （50% in cash and 50% in two-piecebeverage cans） into Qingyuan JDB for a 30.58% stake, and Wong LoKat agreed to transfer the JDB trademark （valued at Rmb3bn） toQingyuan JDB for a 45.87% stake. CPMC says Wong Lo Kat has yet totransfer the trademark and is highly likely to win the suit.
Relationship and business with JDB to suffer. Qingyuan JDBaccounted for about 10% of CPMC’s revenue in 2017, and arbitrationis likely to impact their relationship directly and indirectly. The 2017agreement called for CPMC to provide at least 70% of Qingyuan JDB’sneeds for two-piece beverage cans （vs. 40% currently） and to receive10–20% returns on its investment through dividends. Whether theseterms will be met is now in question. Indirectly, if arbitration slows arecovery in Qingyuan JDB’s operation, the stability of CPMC’sbusiness could be affected.
Scenario analysis. Under a neutral scenario （Wong Lo Kat transfersthe trademark, Qingyuan JDB business stays the same, but dividendsare not paid）， we estimate that CPMC’s 2018 net profit woulddecrease 27% relative to our previous forecast.
How do we differ from the market? See our scenario analysis ofCPMC’s business with Qingyuan JDB.
Potential catalysts: Lower material prices; cooperation with QingyuanJDB returns to normal.
Financials and valuation
We lower our 2018 and 2019 EPS forecasts for CPMC by 27.2% and35.8% to Rmb0.29 and Rmb0.34 （or HK$0.36 and HK$0.42） and revisedown our target price 47% to HK$4.5, equivalent 13x 2018e and 11x2019e （on par with current levels）。 Downgrade to HOLD. Risksinclude demand, raw material prices and arbitration.