The parent, Harbin Electric Group, has offered to acquire all the issued Hshares of Harbin Electric at HK$ 4.56 per share. Harbin Electric Group andHarbin Electric jointly announced that the former intends to make a voluntaryconditional cash offer to acquire all the issued H shares of Harbin Electric atHK$ 4.56 per share. The offer price of HK$ 4.56 per share represents apremium of approximately 82.4% over the closing price of HK$ 2.50 per shareof Harbin Electric as quoted on 17th December 2018, the last day of tradingbefore trading suspension. The maximum value of H share offer isapproximately HK$ 3,080.6 mn and will be paid in cash.
Harbin Electric was hit hard by the thermal downtrend in China and theproposed merger with its parent is potentially its best exit. The share ofnewly installed power capacity from thermal power in China continues todecline year after year due to the change of energy development strategy inChina. Mainly engaged in the production of thermal power and hydro powerequipment in China, Harbin Electric has been hit badly and has facedincreasing pressure under the existing market environment. Net profit in1H2018 and 2017 went down YoY by 75.3% and 53.0%, respectively.
We maintain our "Accumulate" investment rating and raise the TP toHK$ 4.56. We expect the H share offer, the delisting and the merger withHarbin Electric Group to be successfully completed in 1H2019 due to thesignificant premium offered by Harbin Electric Group to the market. The TP ofHK$ 4.56 implies an upside of 14.3% over the closing price in December 31st2018 and corresponds to 0.5x / 0.4x / 0.4x 2018-2020 PBR, respectively.