Key points to support ratings

Ketong Xincheng plans to place new shares. On May 20, Ketong Xincheng announced that it signed a memorandum of understanding with Dacheng International Asset Management Co., Ltd. (Dacheng). Dacheng (the contractor) conditionally agreed to subscribe for 124.8-1872 million new shares (9.3-14%) at a price of HK$12.5 per share (14% premium over the May 20 closing price). The issued shares are freely tradable shares. According to the company, the issuance proceeds will be used for potential international acquisitions and industrial consolidation.

The chairman agreed to buy back the shares after three years. The chairman of the company, Mr. Kang, also signed a memorandum of understanding with the contractor, agreeing that after three years, the contractor will be entitled to sell the placement shares to Mr. Kang at a price of HK$12.88, equivalent to a principal guarantee and an annualized interest rate of 1% for each of the three years.

Key Risks Affecting Ratings

The additional issue may or may not be completed; the final structure and terms of the additional issue are still to be negotiated by all parties.

valuations

We maintain our buy rating on this stock. The target price of HK$12.20 corresponds to 28 times the anticipated 2016 non-GAAP price-earnings ratio.