HKD377m to be raised for fin-tech platform development
On 17 December, Zhengtong Auto made an announcement regarding its newshare placement plan. To elaborate, Zhengtong Auto suspended trading on 15December and plans to issue a total of 50m new shares at HKD7.6/share tonot less than six investors, including funds run by one state-owned insurancecompany. The net proceeds, after deduction of placing expenses, should beabout HKD377m. The issue price is at 5.0% discount to Zhengtong shares' lastclosing price. The company’s share trading will be resumed on 18 December.According to the announcement, Zhengtong will use the share issuance proceedfor the development of its fin-tech platform. To recap, Zhengtong announced on29 September that the company and Xiamen International Financial Technologyproposed to form a JV （Shenzhen Zhengyuan Automobile Technology） witha registered capital of RMB500 million with 80% and 20% shareholdingsrespectively. The JV would focus on the internet auto financial business.
Deutsche Bank view – fundamental outlook intact; Maintain Buy
Assuming full placement completion, there will be 2.3% increase in number ofoutstanding shares. We think that the EPS dilution effect would be insignificantconsidering the small placement scale and some finance cost savings. Weraise our FY17-19 net profit forecast by 0.1-0.6% assuming successful shareplacement. Yet with increasing share counts, we lower FY17-19E EPS forecastby 1.9-2.3%.
We base our new target price of HKD9.7 （from HKD9.5） on DCF （unchangedWACC of 9.7% and terminal growth of 1%, based on our view of mature growthrates for Chinese auto dealers' income）。 Our target price was raised despite lowerEPS forecast due to DB's most recent expectation of slower RMB depreciation.Our target price also implies 12.6x FY18E P/E, which seems justified to us giventhe 21% FY17-19E two-year fully diluted EPS CAGR. On a forward P/BV basis, theimplied target FY18E P/BV of 1.7x does not appear to be stretched, in our view,with about 14-15% sustainable ROE.
Going forward, we still envision robust auto financing business growth while autodealers' new-car sales margin may be under some pressure on more competition.As such, we maintain our Buy on Zhengtong given its sizable auto financeearnings contribution. Key downside risks: a sharp weakening in new-car margin,slow auto financing loan growth and rising non-performing loan ratios.