What happened
On July 3, HC announced its intent to acquire a 80.38%equity interest in Zhejiang Zhongfu Internet Tech., whichprovides vertical websites to China’s garment industry; the dealvalues the stake in the target company at Rmb120.57mn.1
Comments
Another step in B2B2C to develop B2B1.0 business:Zhongfu’s websites are mainly internet portals providinginformation on the garment industry and includewww.efu.com.cn ( 中国服装网), www.yifu.net ( 壹服),www.51fashion.com.cn (时尚饰界), www.5143.cn (服装加盟网),www.nynet.com.cn (中国内衣网), www.kidsnet.cn (童装加盟网)and www.t100.cn (T100 服装趋势网).
Following ZOL deal, acquisition is another step inacquiring B2B2C verticals. The deal will enhance HC’s layoutin verticals; we expect to see more acquisitions as it continues tofulfill its promise to cover more verticals in the B2B2C area.
HC will also explore other B2B2.0 business models for theacquired verticals (currently still ad model), such as onlinetrading and financing by leveraging on HC’s existing platforms.
Target’s valuation is reasonable. Zhongfu’s managementwill aim to achieve after-tax profit of Rmb10mn/13mn/16.9mnfor each of the three years after the deal is completed (30%CAGR), thus valuing it at 15x/11.5x/8.9x 2016/17/18e P/E. Wesee the valuation as reasonable for a company with 30% YoYprofit growth.
Part of total consideration to be paid through new shareissue. The acquisition’s total consideration is expected to beRmb120.57mn, Rmb40mn of which shall be paid in cash with theremaining Rmb80.57mn paid by way of HC issuing 10,071,250new shares, calculated at HK$10/sh (exchange rate ofHK$1=Rmb0.8). HC is trading at HK$7, implying a 43% premiumon the issue price. Maintain BUY.