A-shares placed out at US$4.55
- Tianjin Zhongxin announced that it has placed out 29.6m new A-shares to local investors in China at an issue price of Rmb28.28 (US$4.55) per share.
- As the issue price is higher than the previously-guided floor of Rmb12.83, Tianjin Zhongxin has been able to raise its targeted proceeds of Rmb836.1m with a lower dilution impact on its existing shareholders.
- This leads us to raise our FY15-17 core EPS estimates by 4.6%.
- We keep our Add call and increase our CY15 DCF-based target price to US$1.68 (WACC: 8.0%).
- Potential catalysts include
- organic earnings growth driven by increasing pharmaceutical demand in China, and
- boost in sales and margins for Su Xiao Jiu Xin Pills.
What Happened
- Tianjin Zhongxin has placed out 29.6m new shares in the A-share market at an issue price of Rmb28.28 (US$4.55) apiece, raising a total amount of Rmb814m.
- The placees include five China local funds and one local security firm, with the total placement size forming less than 4% of Tianjin Zhongxin’s enlarged share base.
- Tianjin Zhongxin had received proceeds of Rmb814.3m on 25 Jun 2015, net of placement expenses of Rmb21.7m.
What We Think
- Tianjin Zhongxin managed to get a good deal for its incumbent shareholders.
- The timing was perfect - the final issue price of Rmb28.28 was based on a 10% discount to the average A-share price over the 20 trading days prior to the pricing base date (23 Jun 2015, just before the A-share market started to crash).
- The issue price is 220% of the previously-guided issue price floor of Rmb12.83.
- As a result, the size of the placement was scaled down from the planned maximum of 65.2m new shares to just 29.6m, translating to a 4% dilution, lower than our projected 8.8%.
- We believe the short-term dilution will be more than compensated by the long-term benefits, as the placement proceeds are earmarked for business expansion and efficiency enhancement projects with estimated IRRs of 15-20%.
What You Should Do
- Tianjin Zhongxin’s S-shares (US$1.33) are trading at a huge 58% discount to the A-shares (US$3.19) and a monster 71% discount to the placement price (US$4.55).
- Its 14x CY16 P/E is more compelling than its peers that are averaging 22.5x.
- With a 3-year EPS CAGR of 13.2%, the group is geared to the increasing pharmaceutical demand from China’s ageing population. Its flagship product, the Su Xiao Jiu Xin pill (25-30% group earnings) is a household name in China for treating cardiovascular ailments.
(Roy CHEN, William TNG, CFA)
Source: http://research.itradecimb.com/
