Chalco announced debt（cash） equity swap of RMB12.6b
Chalco yesterday announced that eight investors including insurance andassets management companies are agreed to make capital contribution （eithercash or debt） of RMB12.6b to four of Chalco's 100% subsidiaries. Post thistransaction, those external investors will hold 30.8% of Chalco Shandong, 36.9%of Zhongzhou Aluminium, 25.7% of Baotou Aluminium and 81.1% of ChalcoMining, respectively. Meanwhile, Chalco will be able to reduce its asset to liabilityratio to 66% from previous 72%. Earnings perspective, it is about c.RMB600mfinancing cost saving if we assume 5% interest rate.
Upcoming private placement likely to be earnings accretion
Post aforementioned deal, Chalco will issue new shares （A share） to thosenvestors to acquire above holdings back. Based on Chalco A's share price andassume a similar capital raise of RMB12.6b, it will be c.10% shares dilution. 10%dilution means RMB400-500m earnings impact as we expect Chalco's bottom lineto be around RMB4-5b in upcoming years, which is earnings accretion comparedto RMB600m+ financing cost savings.
Structure positive; maintain Buy
We like Chalco's move on this debt equity swap, which leads to lower gearingand also earnings accretion thanks to higher valuation in A share. We use 2.2x2017E PB - Chalco's +1 standard deviation from average since its listing in 2001,with c.10%+ ROE in 2018 and 2019. Historically, Chalco trades at 1.4x with 5%ROE in average. Weaker than expected heating season cut in Shandong and highngots inventory are the major downside risks.