Key points of investment:
Accelerate the cultivation of natural gas business and expand the market in the Rushan region of Weihai. Shengli Co., Ltd. signed an agreement with Huachang New Energy and its shareholders to invest in high-quality natural gas assets confirmed by all parties to establish a natural gas specialist company to operate natural gas business in the Rushan region of Weihai. The company plans to acquire 60% of the shares of the newly established natural gas specialist company for 47.4 million yuan. This cooperation is conducive to leveraging the advantages of all partners, achieving the goal of win-win development, and speeding up the company's layout in the natural gas market in the Jiaodong Peninsula region.
Performance promises and compensation methods. The original shareholders of natural gas specialty companies made performance promises: the audited average deducted non-net profit in 2016-2020 was no less than 8.1 million yuan, including 10,000 yuan in 2016, 8 million yuan in 2017, 9.5 million yuan in 2018, 11 million yuan in 2019, and 12 million yuan in 2020. The net profit achieved in any year during the profit compensation period (2016-2020) shall not be lower than the net profit promised for the same period; otherwise, Huachang New Energy shall provide the company with corresponding cash compensation.
Transfer shares in Shandong Lihuasheng Automobile to speed up the withdrawal from traditional industries. In order to develop the clean energy gas industry and speed up its exit from traditional industries, Shengli Co., Ltd. and its wholly-owned subsidiary Shandong Lihuasheng Energy plan to transfer 100% of their total shares to Yang Hongxing and Yang Zhifeng at a total price of 15.19 million yuan. The equity transfer is expected to contribute about 1.7 million yuan to the company's net profit, and the withdrawal capital will be used for clean energy and gas business development.
Expanding the natural gas market in the Tohoku region. In order to speed up the cultivation of natural gas business and expand the natural gas market in the Northeast region, the company signed agreements with Dalian Yimin Industrial, Pulandian Yimin, etc. on December 20, 2015 to jointly develop and operate natural gas businesses in Pulandian City, Puwan New Area in Dalian City, and Zhuanghe City in Dalian. As of September 12, 2016, Dalian Shengyi New Energy's commercial and commercial registration and bank account opening procedures funded by Dalian Yimin and Pulandian Yimin have been completed. The company has signed equity agreements with Dalian Yimin Industrial and Pulandian Yimin. After this share transfer is completed, the company will hold 51% of Dalian Shengyi New Energy's shares (the maximum price of 51% shares is 48.45 million yuan); Dalian Yimin New Energy registration and bank account opening procedures funded by Dalian Yimin Industrial and its shareholders have been completed. Shareholders signed an equity agreement to transfer Dalian for 22.95 million yuan Yimin Industrial holds 51% of Dalian Yimin New Energy. The deal helps the company accelerate the development of its natural gas business.
It is proposed to issue shares to buy natural gas and other urban operating assets and raise supporting capital. Shengli Co., Ltd. plans to purchase target assets such as 100% of the shares of Jingzhou Jinghu Real Estate Development Co., Ltd. and Jingzhou Natural Gas Development Co., Ltd. held by Chongqing Xianda Industrial Co., Ltd. and 49% of the shares of Bazhou Shengli Shunda Gas Co., Ltd. held by Bazhou Shunda Natural Gas Co., Ltd. by issuing shares, while raising supporting capital. The deal will help the company expand the natural gas market and gradually improve its industrial chain.
Profit forecasts and investment ratings. We expect the EPS of Shengli Co., Ltd. from 2016 to 2018 to be 0.17, 0.37, and 0.40 yuan respectively. Based on 2017 EPS and a price-earnings ratio of 20 times, we gave the company a target price of 7.40 yuan to maintain the “increase in holdings” investment rating.
Risk warning: transformation risks; natural gas business development progress falls short of expectations, etc.