Events:

The company announced the reorganization plan: 1) to purchase assets, it is expected to issue about 316 million shares to all four shareholders of Changyuan Water, with an estimated valuation of 2.792 billion yuan for the underlying assets; 2) supporting financing, it is expected to issue 92.79 million shares to 8 investors, including China Water, to raise 883 million yuan.

Comments:

The actual controller is listed through backdoor listing, and the fragrant pear shares are transformed into a water company. According to the announcement, on July 25, 2011, Changyuan Water was transferred to Xinjiang Xinye's 100% stake in Rongsheng Investment, while China Water holds a 51% stake in Changyuan Water, which is the controlling shareholder of Changyuan Water, that is, the actual controller of Xiangli shares. Two years later (this transaction), China Water Affairs plans to inject Xinjiang Changyuan Water into listed companies to achieve backdoor listing. Xiangli shares used to be mainly engaged in the processing and sales of agriculture, forestry and fruit products, with poor profitability, with a net profit of 5.08 million yuan and a loss of 6.27 million yuan in 2011 and 2012, respectively. Changyuan, the underlying asset injected, has excellent water assets, with a net profit of 205 million yuan in 2011 and 236 million yuan in 2012, which will significantly improve the company's profitability.

The matching financing of 883 million yuan will be used for the development of projects under construction, which will thicken the performance in the long term. Xiangli shares plan to invest in the Laojunmiao secondary water supply project of Xinjiang Zhendong Economic and technological Development Zone, with a total investment of 938 million yuan. With the development of Zhendong coalfield, JI Ji Lake Industrial Park and Laojunmiao Industrial Park have become an important part of Urumqi economic circle. This investment project will effectively solve the problem of insufficient water supply in the above industrial parks.

Overweight rating is given for the first time. We assume that the restructuring will be completed during the year, and the diluted earnings per share from 2013 to 2015 are expected to be 0.5,0.55 and 0.60 yuan, corresponding to 17.6,16.0 and 15 times PE. Compared with the historical performance of Xiangli shares traced back in 2012, the static PE of Xiangli shares in 2012 is 19 times, which is slightly lower than the median value of water companies in the market, and considering that Xiangli shares have both epitaxial and endogenous growth potential in water affairs in the future, the overweight rating is given for the first time.

Risk hint: the acquisition progress is lower than expected.