The latest events
Xia Gong completed the share issue on January 8 (the new shares began to be traded on the Shanghai Stock Exchange on the same day) and issued 160 million new shares at a price of RMB6.42 per share. As a result, the total share capital of the company increased from 799 million shares to 959 million shares (up 20 per cent).
According to the company's letter of intent to issue additional shares, the RMB 1 billion raised this time will be mainly used for capacity expansion: 1) to expand the excavator production capacity in Xiamen from 3000 to 15000 by the end of 2014; 2) to expand the production scale of loaders in Jiaozuo base from the current 10000 to 15000 by the end of 2014; 3) to build 10000 new forklift trucks in Jiaozuo by the end of 2014.
Potential impact
We lowered Xiamen Gong's annual earnings per share forecast for 2012-13-14 from RMB 0.49 per cent to RMB 0.44 per cent, which is 1% lower than the market forecast of Wande by 8%. The reasons for the adjustment are as follows: 1) 20% increase in equity after the IPO. 2) Investment income forecast adjustment: Xiamen Gong sold its 38.8 million Societe Generale securities shares in the first three quarters of 2012, which contributed most of the investment income (RMB 389 million) from the first to the third quarter of 2012. As a result, we have lowered our investment return forecast for 2013, due to the fact that Xiagong is expected to gradually reduce its stake in 2013-14.
Valuation
We reiterate our sell rating on Xiagong and adjust its 12-month target price based on Director's-Cut from Rmb4.37 to Rmb4.40, which is 36 per cent lower than the closing price on January 28th. Our new target price is based on our latest A-share Director's-Cut valuation framework, rather than the previous A-share / H-share valuation, so although earnings forecasts have been lowered, higher valuation ratios and Xiagong's historical premium have pushed up its target price by 1 per cent.
Main risk
Main risks: higher-than-expected growth in loader / excavator sales; better-than-expected cost control.
