What's new
CIMC announced that it plans to issue 286,096,100 new H-shares to COSCO Container, Broad Ride and Promotor Holdings at a price of HK$13.48/sh, a discount of 5.87% to CIMC-H's latest closing price. The newly issued shares represent 20% of existing issued H-shares and 10.75% of CIMC's total issued capital. The lock-up period is six months following the listing date of the newly placed shares.
Trends to watch
COSCO Container was the second-largest shareholder of CIMC before this deal, while Broad Ride, a wholly-owned subsidiary of Hony Capital Fund, held a 5.44% equity stake in CIMC-H (2.93% of CIMC's total issued share capital); Promotor Holdings is an investment holding company controlled by CIMC President Mai Boliang and other senior managers and employees of CIMC. The private placement (to a certain extent) acts as an equity incentive scheme.
While the company did not provide details on the use of proceeds, we believe they may be earmarked to fund the upgrading & innovation of manufacturing facilities for containers, road transport vehicles and offshore engineering business, as well as for building distribution channels and supplementing working capital. Although the proposed private placement may dilute EPS in the short term, we believe this deal has a slightly positive impact on CIMC as the proceeds raised may help improve its competitive strength and the issuance price is not significantly lower than the current CIMC-H price.
Segment outlook: We expect earnings contribution from the container manufacturing segment to decline more than 40% in 2013. At present, ASP for dry cargo containers stands at ~US$2,200/TEU. However, we expect both sales volume and ASP of dry cargo containers to recover starting from 2014. The energy, chemical and food equipment segments are expected to maintain 20~25% net profit growth for 2013~14. The offshore engineering business is expected to suffer a loss of Rmb300~400mn for 2013, but may turn profitable in 2014. The road transport vehicle segment is expected to post net profit of Rmb200~300mn for 2013 and see steady growth of 10~20% for 2014. In addition, we should also take into account the value of CIMC's land parcels in Qianhai Shenzhen.
Valuation and recommendation
We leave our earnings forecasts for CIMC unchanged with our 2013 EPS forecast staying at Rmb0.53; however, we reduce EPS forecasts by 9% to Rmb0.73 for 2014 and 10% to Rmb0.90 for 2015 to reflect the short-term dilution by the proposed private placement of CIMC-H.
Based on sum-of-the-parts valuation and the potential value of its land parcels in Qianhai, we derive a 12-month TP of Rmb16.27 for CIMC-A and raise our 12-month TP by 19.16% to HK$16.65 for CIMC-H. Maintain ACCUMULATE on CIMC-A/-H.
Risks
Fluctuations in global marine transportation and container markets; uncertainty on Qianhai development.