The revaluation of the company's assets has a high margin of safety.
The company currently has a total market capitalization of 4 billion yuan. As of the third quarter of 2014, the company reported cash on its account of 843 million yuan; Shennan Electric's 16.72% equity market value was about 890 million yuan, and Mawan Power Plant's 6.42% equity market value was about 500 million yuan. The rest of the long-term equity investments totaled about 327 million yuan based on book value; among the participating subsidiaries, the 10 gas stations of Nanshan Petroleum had stable profits, with a valuation of 500 million yuan, and the value of 13,500 million square meters of the Beihuan Yuanding Stone Project. Not taking into account, the value of a hundred million litres reached 3.4 billion yuan.
The company's wholly-owned subsidiary Guang Ju Yisheng owns 710,000 square meters of land in Qianhai, two deep-water terminals, and a 300-meter coastline. In the context of overall land appreciation in the Qianhai block, there is huge room for revaluation; the company's overall balance ratio is only 6.85%, the market value is lower than the possible revaluation value of current assets, and the stock price has a high margin of safety.
The triple catalyst highlights the value of the company's investment.
The Guangdong Free Trade Zone, Shenzhen's state-owned enterprise reform, and oil and gas reform are the triple catalysts that drive the company's growth.
The Guangdong Free Trade Zone may be officially listed on February 26 or 28. Part of the company's business is located in the Shekou district of Qianhai, while its wholly-owned subsidiary has hundreds of millions of litres of land, terminals, and storage equipment assets located in the Qianhai block. The company will fully benefit from the real estate premiums and institutional dividends brought about by listing in the free trade zone; Shenzhen is a pioneer in the reform of the national state-owned assets system. In November 2014, the “Shenzhen Investment Holding Co., Ltd. Comprehensive and Deepening Reform Implementation Plan” formulated by Shenzhen Investment Holding Company, an important investment platform under Shenzhen State-owned assets in Shenzhen, was approved by the Shenzhen State-owned Assets Administration Commission. Guangju Energy is the only listed company under the District-level State-owned Assets Administration Commission. There have been no major changes in its equity structure, corporate governance, or business structure since listing. In the new wave of state-owned enterprise reform in Shenzhen, it is not ruled out that the company has become an important reform sample for Shenzhen's state-owned assets; the company's traditional wholesale and retail business of refined oil products is expected to benefit from oil and gas reform. Market-based oil and gas sales reforms, such as the liberalization of import rights for refined oil products, are expected to make the company have more choices in the wholesale process. At the same time, the promotion of market-based mechanisms may bring more opportunities for the company to grow.
Earnings Forecasts and Ratings.
The company sold 4.96% of Shennan Electric's shares at the beginning of '15, which will include non-recurring profit and loss in '15; Gardener Stone Real Estate is expected to be monetized in '16, and after tax deduction, about 240 million will be included in non-recurring profit and loss. EPS is expected to be 0.32 and 0.55 yuan respectively in 2015 and 2016. The current stock price corresponds to 23.7 and 13.8 times. It is covered for the first time, giving a highly recommended rating.
Risk warning: Shennan Electric continues to lose money; progress in the free trade zone falls short of expectations; low demand is dragging down the growth of the main business
