HKD1.7bn to be raised for auto-financing development
On 12 January, Zhengtong Auto made an announcement regarding its new shareplacement plan. To elaborate, Zhengtong Auto suspended trading on 11 January,and plans to issue a total of 226m new shares at HKD7.7/share to not less thansix investors. The net proceeds, after deduction of placing expenses, should beabout HKD1.7bn. The issue price is at 12% discount to Zhengtong shares' 10January closing price. The company’s share trading was resumed on 12 January.
According to the announcement, Zhengtong will use the share issuance proceedsfor the development of its auto-financing business.
Analyst call's key takeaways
Zhengtong hosted a conference call on 12 January. Management expects theshare placement proceeds to partly support the company's future financingbusiness capital needs at low cost, as Zhengtong continues to target its loan scaleto reach RMB30bn by yearend 2018, and RMB50bn by 2019. The growth will bedriven by still unsaturated company's current auto financing penetration rate of50-55%. With the beefing up of equity capital after this placement, Zhengtongdoes not expect further equity fund-raising in foreseeable future.
Deutsche Bank view – fundamental outlook intact; Maintain Buy
Assuming full placement completion, there will be 10.0% increase in numberof outstanding shares. We think that the EPS dilution effect would be less thanthat after considering some finance cost savings. We raise our FY18-19 revenueforecast by 0.2-0.4% on slightly higher finance business's interest income, andnet profit forecast by 0.4-1.4% assuming successful share placement. Yet withincreasing share counts, we lower FY18-19E EPS forecast by 7.8-8.7%.
We base our new target price of HKD9.3 （from HKD9.7） 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 implies 13.1x FY18E P/E, which seems justified to us given the 15% FY17-19E two-year fully diluted EPSCAGR. On a forward P/BV basis, the implied target FY18E P/BV of 1.6x does notappear to be stretched, in our view, with about 13-14% 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 finance