On 26 Feb, CITICS announced a A+H rights issue plan to raise max. RMB 28bn, aiming to enhance its capital base and expand principal-based business. Though the rights issue may increase CITICS’s share base by 13% and cause short-term EPS and ROE dilution if successfully completed, we believe the capital replenishment will support CITICS’s mid-term business expansion to meet more complex and diversified client demand, improve its profitability and solidify market leadership. Maintain BUY.
Details of rights issue plan: CITICS proposed to raise max. RMB 28bn through A+H rights issue, on a basis of 1.5 A/H rights shares for every 10 existing A/H shares. Total no. of rights shares will be up to 1.9bn (incl. 1.6bn A shares and 0.3bn H shares), accounting for 13% of enlarged equity base post rights issue. The subscription price of rights shares should be consistent for A and H shares after forex adjustment. The proposal is subject to shareholders’ and regulators’ approvals; A-share rights issue will be successful only if at least 70% of A rights share are subscribed.
An essential move to support the expansion of B/S-intensive business. CITICS planned to invest 68% of the proceeds to expand its principal-based business and 18% to inject into subsidiaries. We believe the rights issue plan is essential to enhance the Company’s capital position and support its mid- term growth. CITICS’s total assets increased rapidly during FY19-FY20E, driven by financial investment and margin balance as client demand grew. CITICS is also a market leader in innovative businesses, such as in securities lending and OTC derivatives thanks to its strength in institutionalization, while derivatives-related business requires more capital to meet regulatory requirement. As a result, CITICS’s risk mgmt. indicators were declining close to regulatory warning line by 3Q20, and it is in need of replenishing capital. Assuming an adj. leverage of 4.75x (by 3Q20), RMB 28bn proceeds could support RMB 133bn assets expansion ahead.
Est. FY22E EPS dilution at ~10%; short-term share price may under pressure. The announced plan implied a subscription price of RMB 14.44 per share, higher than FY20E BVPS (RMB 14.06 according to prelim results), and implied 47% discount/4% premium to A/H-share last price. We estimate that FY22E EPS dilution could be narrowed from 13% to 10% if 1/3 of the raised fund can be utilized and generate a ROE of 8% (Fig. 7) in FY22E. The rights issue plan and potential dilution impact may hit the sentiment on CITICS in short-term, while the H-share already trades at an undemanding valuation (0.9x 1-year forward P/B)。 Maintain BUY.