Core views:
1. Incidents
The company disclosed the restructuring plan on December 10, 2016. It plans to issue shares to all shareholders of Hikang Technology to purchase 100% of Hikang Technology's shares at a transaction price of 721 million yuan; at the same time, the company plans to increase the capital of Suzhou Xieyi to 26% by 117.46,800 yuan. The company will not resume trading for the time being.
2. Our analysis and judgment
(1) Optoelectronics business integration starts
Hikang Technology's main business is smart controllers, IoT products, smart devices, etc. Among them, the smart controller business accounts for the highest revenue share. The IoT business is Hikang Technology's key development direction. Hikang Technology is growing relatively well. From 2013 to 2015, it achieved revenue of 365 million, 421 million, and 508 million yuan respectively, and net profit of 23.33 million, 32.02 million, and 43.08 million yuan respectively. Revenue and profit have continued to grow rapidly over the past three years. Suzhou Xieyi specializes in optical lenses and automotive lenses. Currently, it is small in size, but its revenue is growing explosively.
Through the restructuring of Hikang Technology, the company will form an industrial structure with a more reasonable layout, richer product types and more diverse business fields. The company's existing optical component processing advantages will be organically combined with the target asset's high-quality electronic R&D and manufacturing capabilities, accelerate the transformation of the traditional optical processing business of listed companies to image modules, promote the transformation of the company into specialized market fields such as security, automotive, and wearable devices, provide customers with integrated optoelectronic solutions, enter the Internet of Things industry with better growth, and greatly improve business conditions. The Suzhou capital increase agreement is conducive to the company's further expansion into automotive optics and other fields. Through this restructuring and capital increase, the company's original optical business will expand into emerging fields with good growth, such as security and automotive, and the profit situation will improve significantly. We expect this restructuring to be completed within 2017.
(2) Further integration is not ruled out in the future
The business situation of China Telecom Group is relatively good, and the growth in operating income and total profit is at the forefront of military industry groups. The Group has many high-quality assets. In the past two years, capital operations have been active, and the role of its listed companies as a platform has been prominent. This restructuring has further strengthened the position of the company's optoelectronics platform. We believe that this is only the first step in integrating China Telecom's optoelectronics business. China Telecom still has significant high-quality assets in the fields of optics, mechanics, and electricity. We believe that further restructuring of the company will not be ruled out in the future under the right conditions.
3. Investment recommendations
We expect the restructuring to be completed in 2017, and the company's earnings per share for 2016-2018 are expected to be 0.05 yuan, 0.25, and 0.31 yuan. We believe that the possibility and flexibility of the company's further integration of China Telecom Group's optoelectronic assets in the future is still high. Against the backdrop of state-owned enterprise reform and the acceleration of the securitization process, there is still plenty of room for the company's medium- to long-term investment value to increase, maintaining the “recommended” investment rating.
Risk warning: the restructuring process fell short of expectations
