What happened
On April 23rd, Legend announced that it has been selected as the firstcompany to participate in the HKEx’s “full circulation” pilot projectand received approval from the China Securities RegulatoryCommission （CSRC）。 All shareholders of Legend’s non-tradable“domestic shares” have made their decisions whether to participatein the conversion to tradable H-shares, and eight existing holdershave decided to convert up to an aggregate of 880mn domesticshares into H-shares which are eligible to be listed and traded on theHong Kong market.
Comments
H-share circulation may improve Legend’s share liquidity because itallows Legend to convert its “domestic shares” to H-shares. Domesticshare holders will convert 880mn shares, representing 37.4% of totaloutstanding shares （market cap of HK$22bn）， which will significantlyincrease on Legend’s circulation market value. After the conversion,domestic share holders still own 46.0% of the company in the form ofnon-tradable domestic shares. We believe Legend’s market liquiditywill increase through the project, making it more attractive tofinancial investors.
The project provides incentives for Legend to improve its corporategovernance. H-share conversion helps to reconcile the benefits ofholders of domestic shares （the current controlling interests） &H-shares （floating interests）， and Legend will have more tools toprovide market-oriented incentives for its management team andemployees, like establishing a share compensation scheme. We thinkit will actually enhance Legend’s competency and have a positiveinfluence on its long-term corporate value.
Still need to focus on Legend’s fundamentals rather than short-termfluctuation. Comparing to short-term trading opportunities related togood news, we suggest investors focus on Legend’s intrinsic value. Onthe one hand, Legend will continue suffering from weak performanceof Lenovo, dragging down its growth & profitability; on the otherhand, Legend is actively optimizing investing portfolios now, includingacquiring a leading preschool vendor （Better Education） and aEuropean bank （BIL Bank）， and restructuring its agricultural business,to facilitate a more comprehensive layout in modern service, financialservice and food & agriculture. Hence, we maintain HOLD on Legendand reiterate our TP of HK$24 based on 2018e NAV SOTP valuation.