20140417-杰富瑞-New_CITIC_Is_Born__A_Good_China_Proxy_14页_1mb

Summary of CITIC Pacific Ltd (267 HK) Acquisition

Core Content

CITIC Pacific Ltd has announced an all-equity acquisition of CITIC Limited, the operating arm of CITIC Group. This landmark deal, valued at RMB227 billion (HKD287 billion), is considered a significant move in China's state-owned enterprise (SOE) reform, showcasing the country's commitment to strengthening its financial and industrial conglomerates.

The acquisition is structured with a mix of cash and share consideration, with RMB50 billion (22% of the total) in cash and RMB177 billion (78% of the total) in shares. The cash portion will be raised through public equity issuance at HK$13.48 per share. The deal is expected to complete by the end of August 2014, pending minority shareholder approval.

Post-acquisition, CITIC Pacific will rebrand as "CITIC Limited," becoming a diversified conglomerate with operations spanning financial services, real estate & infrastructure, engineering contracting, resources & energy, and manufacturing. This will significantly enhance its financial position, with revenues and EBIT expected to increase by approximately 366% and 818%, respectively. The ROE is projected to rise by 4 percentage points to 13%, and the company's credit rating will improve, enabling it to capitalize on future growth opportunities in China.

The combined entity is expected to become the largest multi-industry conglomerate in the Hong Kong market and a strong proxy for the Chinese economy. Its revenue composition aligns closely with that of MSCI China, making it a compelling investment for those bullish on China's economic performance.

Key Takeaways

• Deal Structure:

  • An all-equity deal with RMB227 billion total consideration.
  • 22% cash (RMB50bn) and 78% shares (RMB177bn) as payment.
  • The cash will be sourced from public equity issuance at HK$13.48/share.
  • The deal is expected to complete by end of August 2014.

• Valuation and Upside:

  • The deal price is set at 1x book value (HK$101,763 million) and is considered fairly priced.
  • The long-term fair value is estimated at 1.3x PB, offering upside potential for minority shareholders.
  • The target price is HK$17.1, implying a 2014 PE of 8x, with a 20% holding company discount applied to the NAV estimate of HK$21.3/share.

• Post-Acquisition Impact:

  • Revenues and EBIT are expected to rise by ~366% and ~818%, respectively.
  • ROE is projected to increase by 4 points to 13%.
  • The company will expand into new business segments, including financial services, real estate, and manufacturing.

• Market and Financial Position:

  • The New CITIC is expected to be a must-own holding for investors with a long-term view on China.
  • It will offer a proxy investment in the Chinese economy, with a revenue composition similar to MSCI China.
  • The company's credit rating will improve, allowing it to fund capital-intensive projects.

Main Points

• Strategic Importance: The deal is seen as a significant step in China's SOE reform, demonstrating the country's intent to consolidate and strengthen its financial and industrial sectors.
• Shareholder Approval: The deal is contingent on minority shareholder approval and is expected to complete by the end of August 2014.
• Financial Strength: The combined entity will have a stronger capital base, higher profitability, and better earnings profile.
• Diversification: The acquisition will diversify CITIC Pacific's business portfolio and solidify its ability to deliver sustained profits.
• Investment Outlook: The analysts maintain a BUY rating on the stock, with a target price of HK$17.1, suggesting long-term value and growth potential.

Key Information

• Deal Size: RMB227 billion (HKD287 billion).
• Payment Structure:
  • Cash: RMB50 billion (22% of total).
  • Shares: RMB177 billion (78% of total).
• Issue Price: HK$13.48/share.
• Post-Acquisition Name: CITIC Limited.
• Target Price: HK$17.1.
• 2014E NAV: HK$21.3/share.
• 2013 Book Value: HK$101,763 million.
• Free Float Requirement: 15%–25% after the transaction, with a regulatory waiver for a public float of less than 25%.
• ROE: Expected to increase from 8.1% (CITIC Pacific) to 13% (New CITIC).
• EPS Growth: Post-acquisition, EPS is expected to grow significantly, from HK$1.06 to HK$2.07.

Risks

• Shareholder Approval: Uncertainty around the approval from minority shareholders.
• Market Volatility: Potential fluctuations in the stock price due to market conditions.
• Execution Risk: Challenges in the integration of the acquired assets and operations.

Financial Highlights

• CITIC Pacific Financials (2014E):
  • Revenue: HK$99,066 million.
  • Core Earnings: HK$3,867 million.
  • Net Profit: HK$4,429 million.
  • EPS: HK$1.21.
• CITIC Limited Financials (2013):
  • Revenue: RMB108,328 billion.
  • Profit: RMB57,805 billion.
  • Net Assets: RMB262,110 billion.
• Combined Entity:
  • Net assets will increase by over fourfold.
  • The company will be the largest and potentially most profitable conglomerate in the Hong Kong market.

Analysts

• Christie Ju, CFA: Equity Analyst at Jefferies Hong Kong Limited.
• Leon Liao: Equity Analyst at Jefferies Hong Kong Limited.

Conclusion

The acquisition of CITIC Limited by CITIC Pacific is a major strategic move, enhancing the company's financial and operational profile. It is viewed as a strong proxy for the Chinese economy and is expected to deliver long-term value for both the acquirer and the minority shareholders. The analysts maintain a BUY rating with a target price of HK$17.1, highlighting the deal's potential for growth and profitability.