20140417-美银美林-Downgrade_to_U_P__share_price_capped_near_term_14页_679kb

CITIC Pacific Downgrade Summary

Core Content

CITIC Pacific (CP) is undergoing a significant acquisition by its parent company, CITIC Limited (CL), with the transaction terms and implications discussed in this report. The report outlines the financial structure, valuation assumptions, and the potential impact on CP's share price.

Main Points

• Downgrade to Underperform: The report downgrades CITIC Pacific to Underperform, citing that the acquisition price of CL is likely to cap CP's share price performance.
• Equity Placement Price: CP is expected to issue new equity at HK$13.48 per share, which will likely limit the share price in the short term.
• Valuation Dilution: The acquisition price of CL is at 1.0x P/B, which is higher than the current valuation of its listed assets (0.9x P/B), leading to a dilution of net asset value (NAV).
• Funding Mechanism: The HK$287bn acquisition price will be funded by a mix of HK$223bn in equity issuance and HK$63bn in cash, with the latter potentially sourced from borrowings.
• Free Float Requirement: To meet a 15% free float requirement, CP is expected to raise HK$23.5bn from public equity issuance. The free float will shrink from 42% to 15%.
• Share Price Capping: The share price is likely to be capped near HK$13.48 per share due to the equity placement, although a more substantial downside may be limited by investor interest in the SOE reforms.
• Pro Forma Valuation: The pro forma NAV is estimated at HK$13 per share, significantly lower than the current share price of HK$14.30, reflecting the dilution from the acquisition.
• Valuation Metrics: The pro forma P/E ratio is 7x, while the P/B ratio is 0.9x, indicating a potential discount on the company's assets.
• Investment Opinion: The investment opinion has been updated from C-2-8 to C-3-7, reflecting the new valuation assumptions and market expectations.
• Key Financials: The report includes detailed financial projections and valuations for CP, CL, and the combined entity for the years 2014 to 2016.

Key Information

• Acquisition Price: HK$287bn or Rmb227bn, representing approximately 1.0x P/B for CL.
• Equity Placement: CP is expected to raise HK$23.5bn from public equity issuance at HK$13.48 per share.
• Free Float: The free float will drop to 15%, with a potential for further equity issuance up to 25%.
• NAV Dilution: The pro forma NAV is HK$13 per share, which is below the current share price of HK$14.30.
• Share Price Performance: The share price is expected to be capped near HK$13.48 in the short term due to the equity placement.
• Investor Interest: Some investors may be interested in participating in the SOE reforms, which could limit further downside.
• Holding Company Discount: A holding company discount is a potential risk, as 75% of the pro forma NAV consists of listed assets.
• Investment Opinion: The investment opinion has been updated to reflect the new valuation and market conditions.
• Valuation Methodology: The report uses a variety of valuation methods, including P/B, DCF, and PER, to assess the pro forma financials of the combined entity.

Tables Summary

• Table 1: Summary of transaction terms, including the price paid for the acquisition, financing sources, and share issuance details.
• Table 2: Details of the standalone current NAV of CITIC Pacific, including valuation methodologies and per share values.
• Table 3: Standalone forward NAV of CITIC Pacific, with various valuation methodologies and per share values.
• Table 4: Pro-forma current NAV of CITIC Pacific post-acquisition, including valuation methodologies and per share values.
• Table 5: Pro-forma forward NAV of CITIC Pacific post-acquisition, with valuation methodologies and per share values.
• Table 6: Income statement of CITIC Pacific, including revenue, net profit, and EPS for the years 2012 to 2016.

Conclusion

The report concludes that while the acquisition of CITIC Limited by CITIC Pacific is a long-term positive, the share price is likely to be capped near HK$13.48 in the short term due to the equity placement and valuation dilution. The investment opinion has been updated to Underperform, reflecting the current market conditions and the potential for a holding company discount. Investors are advised to consider this report as a single factor in their investment decisions.