A state-owned enterprise in Henan acquired a 29.01% stake in the company. Recently, Jianye Real Estate announced a framework agreement. According to the agreement, Henan Railway Construction Investment Group, a Henan state-owned enterprise, will acquire 860000000 shares in the company, or 29.01% of the company. The consideration for the deal is HK $688 million, equivalent to an average purchase price cost of HK $0.80 per share, or 0.2 times the company's 2021 market-to-book ratio. At the same time, Henan Railway Construction Investment Group will subscribe for convertible bonds with a maturity coupon of 5 per cent and a maturity yield of 9 per cent for no more than HK $708 million. The conversion price is HK $1.20 per share and the number of convertible shares is 590000000. Assuming that all convertible bonds are converted into shares, Henan Railway Construction Investment Group will become the largest shareholder of the company, holding a 40.8% stake in the company, while Mr. Hu Baosen's stake will be further reduced to 34.3% (41.1% after share transfer).
The credit level has been enhanced. After the share transfer and subscription of convertible bonds, Jianye Real Estate will receive a total of about HK $1.396 billion in cash replenishment, which will greatly enhance its credit level. We believe that the investment of Henan provincial government will solve the recent debt repayment problem of Jianye Real Estate, and will also enhance the company's long-term credit rating and operating performance.
Target price of HK $0.90 to maintain "collection". We believe that support from the local government will enhance investor confidence in the company, especially given that the company's valuation has been depressed by the financial crisis. We maintain a cautiously optimistic view of the company and suggest a "collection" with a target price of HK $0.90. The main downside risks are: 1) slow sales in Henan market; 2) further decline in gross profit margin; and 3) refinancing difficulties.
A state-owned enterprise in Henan acquired a 29.01% stake in the company. On the evening of June 1, 2022, Jianye Real Estate ("Jianye" or "the Company") announced that the company's controlling shareholders would sell 860000000 shares, or 29.01% of the company's shares, to Henan Tongsheng Real Estate Co., Ltd. The investor is a wholly owned subsidiary of Henan Railway Construction Investment Group (Henan Railway Construction Investment), while Henan Railway Construction Investment is a state-owned enterprise owned by Henan provincial government. The consideration for the deal is HK $688 million, equivalent to an average purchase price cost of HK $0.80 per share, or 0.2 times the company's 2021 market-to-book ratio. The price of HK $0.8 per share represents a 23.1% premium to the closing price on June 1, 2022. After the acquisition, Henan Railway Construction Investment will become the company's second-largest shareholder, with a 29.01% stake, while Mr. Hu Baosen's stake has been reduced to 41.1%.
Upon completion of the transaction, existing shareholders will provide shareholder loans to Jianye Real Estate.
Investors will also subscribe for convertible bonds with a principal of no more than HK $708 million. At the same time, Henan Railway Construction Investment will subscribe for convertible bonds of no more than HK $708 million, with a maturity coupon of 5 per cent and a maturity yield of 9 per cent. The fixed term of the convertible bond is two years, which can be extended by one year with the agreement of both parties. The conversion price is HK $1.20 per share and the number of convertible shares is 590000000. Assuming that all convertible bonds are converted into shares, Henan Railway Construction Investment Co., Ltd. will become the company's largest shareholder, holding a 40.8% stake in the company, while Mr. Hu Baosen's stake will be further reduced to 34.3%. We believe that the direct capital injection into the company by Henan Railway Construction Investment shows its confidence in the company and is supported by the local government.
The level of credit has been enhanced. After the share transfer and subscription of convertible bonds, Jianye Real Estate will receive a total of about HK $1.396 billion in cash replenishment, which will greatly enhance its credit level. According to our calculation of its financial balance sheet at the end of 2021, the cash on hand of Jianye Real Estate will increase from RMB 9.848 billion to RMB 11.034 billion.
As a result, the cash-to-short-debt ratio of Jianye Real Estate will increase from 1.5 times to 1.6 times; the net asset-liability ratio (net debt / total equity) will increase from 94.9% to 90.3%; and the asset-liability ratio (excluding contractual liabilities) will also fall from 86.4% to 85.9%. In fact, considering the company's focus and long-term development strategy in Henan Province, we believe that the company has been communicating with Henan state-owned enterprises for some time. We believe that the capital investment of Henan provincial government will solve the debt repayment problem of Jianye Real Estate in the near future. In addition, Jianye Real Estate recently signed strategic cooperation agreements with China Overseas Land & Investment Group and China Power Construction Henan Engineering Group, which we believe will be conducive to the company's development in project cooperation and capital acquisition.
Increase confidence in the delivery of its property and sale of assets. In addition, the investment of state-owned enterprises may make the long-term fundamental trend of Jianye Real Estate clearer. First of all, we believe that the background of state-owned enterprises reduces buyers' concern about Jianye's ability to deliver properties, thus enhancing the resilience of Jianye's sales in Henan market. At the same time, it will also help Jianye Real Estate to better control construction costs and marketing management expenses in the future. Finally, with the involvement of the state-owned enterprise background, we think this may help Jianye property to raise cash by selling other assets, such as investment real estate.
The company's contract sales were mediocre in May. According to the data disclosed by the company on June 6, 2022, we see no sign of a recovery in sales of Jianye property. From January to May 2022, Jianye Real Estate recorded total contract sales of 11.067 billion yuan, down 48.6 percent from the same period last year. According to Carey's sales data to 47 leading Chinese developers, contract sales fell 53.8% from January to May in 2022 compared with the same period last year. Although the decline in the company's sales is slightly narrower than the overall national trend, its sales figures are hardly satisfactory, especially given that most of the low-line cities in Henan have relaxed their controls earlier. We believe that the company may eventually fail to achieve its sales target of 53 billion yuan (year-on-year-12.1%) in 2022, taking into account: 1) the company's contract sales fell 48.6% from January to May 2022 compared with the same period last year; and 2) the recent policy easing in many high-line cities in China has had little positive impact on Jianye Real Estate. Entering the second half of 2022, we believe that contract sales of Jianye Real Estate will pick up somewhat, but the upward space may come from proactive price cuts and destocking.
Performance Review in 2021. The total revenue of Jianye real estate in 2021 was 42 billion yuan (down 3.1% from the same period last year). Gross profit margin fell 3.7 percentage points year-on-year to 16.2%. EBITDA profit margins also fell 4.9 percentage points year-on-year to 11.7 per cent. In 2021, the company's net profit fell 40.4% to 1.253 billion yuan, mainly due to reduced profit margins. In 2021, the net profit attributable to shareholders further fell to 605 million yuan, a decrease of 66.4%, mainly due to the large minority shareholders' rights and interests. From the balance sheet, compared with the end of 2020, the total cash of Jianye real estate decreased by 66.4% to 9.8 billion yuan, and the total debt decreased by 29.9% to 21.9 billion yuan. Short-term debt fell 55.7 per cent to 6.7 billion yuan, while the coverage ratio of cash short-term debt fell to 1.5 times from 1.9 times a year ago. The net asset-liability ratio rose sharply to 94.9% from 13.6% at the end of 2020, but still meets the requirement of < 100% under the "three red lines".
Valuation and risk
Target price of HK $0.90 and maintain "collection". We believe that this transaction, by encouraging direct capital injection by state-owned enterprises, shows the support of the Henan provincial government to Jianye Real Estate. In addition to direct cash replenishment, long-term support and improvement of credit level in the future are also important for Jianye's operation in Henan. Our new core profit forecasts for Jianye Real Estate from 2022 to 2024 are RMB 322 million, RMB 331 million and RMB 333 million respectively. Our current target price is HK $0.90, based on a larger discount of 75% per share in 2022 valuation, corresponding to 7.0 times 2022 core price-to-earnings ratio and 0.24 times 2022 price-to-book ratio. Main downside risks: 1) further slowdown in Henan market sales; 2) further decline in gross profit margin; and 3) refinancing difficulties.