Up to HKD972m to be raised for business expansion and operation
On 7 June, Baoxin Auto made an announcement regarding its new shareplacement plan. To elaborate, Baoxin Auto suspended trading on 6 June andplans to issue a total of up to 280m new shares at RMB3.5/share. Themaximum net proceed, after deducting of placing expenses, should beHKD972.2m equity capital. The issue price is at 13.4% discount to Baoxinshares' last closing price. The company’s share trading will be resumed today.Assuming full placement of all new shares, stake of Baoxin's parent ChinaGrand Auto (600297.SS, CNY9.71, Not Rated) will be reduced to 67.6% from75.0%. According to the announcement, Baoxin will use the share issuanceproceed for future business development/expansion and working capital.
Deutsche Bank view – near-term positive outlook in the price
Assuming full placement of all new shares, there will be 10.9% increase innumber of outstanding shares. We think that the EPS dilution effect would beslightly less considering a small amount of finance cost savings. We raise ourFY17-19 net profit forecast by 3.1-4.7% assuming successful share placementand we also take the opportunity to incorporate the finance cost savings dueto Baoxin’s debt refinancing in late May. Yet with increasing share counts, welower FY17-19E EPS forecast by 3.1-6.1%.
We base our new target price of HKD4.2 (from HKD4.4) on DCF (WACC of9.2% and terminal growth of 1%, based on our view of mature growth rates forChinese auto dealers' income). Our target price, which implies 15.7 FY17/18EP/E, seems justified to us given the 25% FY16-19E three-year fully diluted EPSCAGR. On a forward P/BV basis, the implied target FY17/18E P/BV of 1.7 doesnot appear to be stretched, in our view, with about 11-12% sustainable ROE.To recap, Baoxin’s management guided in post FY16 results conference callfor 20% YoY and at least 10% YoY growth on new car sales and after-salesbusiness in FY17E, respectively, with margin improvement on robust luxury cardemand. We tend to agree with the company's optimism considering solidpremium car demand in China YTD and Baoxin's low earnings comparisonbase. That being said, we think that its current P/E valuation has alreadyfactored in the upbeat expectation. We therefore maintain Hold and expectsome near-term price weakness due to share placement discount. Downsiderisks: Slowing demand for premium car products and inability to lift margins.Upside risks: strong sales from Baoxin’s brands, and the consequent marginenhancement.