UNIQUE INSIGHTS:

Xinhongtai announced that the company plans to issue shares to all shareholders of Tianyi Shangjia at a price of 4.32 billion yuan and pay cash to purchase 100% of Tianyi Shangjia's total shares, of which 4.07 billion yuan of the transaction price will be paid by issuing shares. The issue price of the shares purchased with the assets was 29 yuan/share, and the number of shares issued was 140,344,828 shares. At the same time, the listed company plans to raise 785 million yuan of supporting capital through the non-public offering of shares from no more than ten specific investors through an inquiry for quotations.

Key points of investment

1. The actual controller of the company maintained the controlling position, and Tianyi Shangjia's 17-19 performance promises were 228 million yuan/263 million yuan/303 million yuan respectively

After the issuance of shares and the payment of cash to purchase assets was completed, Xinhongtai's total share capital increased to 288,504,828 shares. According to the “Concerted Action Agreement” signed by Zhao Hanxin, Zhao Minhai, Shen Hua, and Yu Xu in September 2017, the company shares in Zhao Hanxin and Zhao Minhai actually controlled voting power accounted for 30.40% of the company's total share capital, maintaining the status of controlling shareholders. Zhao Hanxin and Zhao Minhai remained the actual controllers of the listed company. The number of public shares held by the public exceeds 25%, and Xinhongtai's shareholding distribution still meets the listing conditions.

The original Tianyi management team, Wu Peifang, Jiutai Fanghe, and Shi Jiacai allowed them to hold a total of 19.99% of Xinhongtai's shares after the transaction was completed. The target company made performance promises, and the audited net profit achieved in 2017, 2018 and 2019 was not less than RMB 228.147 million, RMB 262,814,500, and RMB 303,410,700, respectively.

2. There is huge potential for high-speed rail development, and demand for EMUs in the next three years is guaranteed

During the “12th Five-Year Plan” period, high-speed rail mileage increased from 6,601 kilometers in 2011 to 19,000 kilometers completed in 2015. In 2016, the operating mileage of high-speed rail exceeded 20,000 kilometers, reaching 22,000 kilometers, an increase of 10.90% over the previous year. In July 2016, China's National Development and Reform Commission issued the newly revised “Medium- and Long-Term Railway Network Plan”. The plan proposed that by 2020, the scale of the railway network would reach 150,000 kilometers, including 30,000 kilometers of high-speed railways. By 2025, the railway network will reach about 175,000 kilometers, including 38,000 kilometers of high-speed railways.

2017 was the low point of high-speed rail traffic in recent years. It is expected that only 1,700-1,800 kilometers will be opened to traffic. 2018-2020 will usher in a recovery in traffic mileage. It is estimated that traffic mileage from 18-19 will be around 2,400 kilometers, and traffic mileage will exceed 7,000 kilometers in 2020 (exceeding the peak in 2014). Also, it is worth noting that according to the plans of various local governments, 2019 was the peak of intercity rail traffic, with an estimated traffic mileage of over 6,000 kilometers. In the face of a sharp recovery in high-speed rail and intercity traffic mileage, demand for EMUs is guaranteed for the next 3 years.

At the end of 2015, the number of trains owned in China was in the 2206 standard range, and at the end of 2016 it was 2586 standard, an increase of 17% over the previous year. The current EMU density is 0.12 standard columns per kilometer. According to the progress of high-speed rail lines currently under construction, plus the encryption of train acceleration lines, although the growth rate is slowing down, the demand level of EMUs will remain about 350 trains per year until 2020.

3. The annual market space for EMU brake pads exceeds 6 billion dollars. Tianyi Shangjia is currently the only supplier of “Fuxing” brake pads

Brake pads, also known as brake pads, are consumable products for electric vehicles. Each train has 4 wheel pairs and 4 brakes for each wheel pair, so each train is equipped with 128 brakes, which are replaced 3-4 times a year. Using 3.5 estimates, the average annual demand for EMUs during the 13th Five-Year Plan period was over 6 billion yuan.

Currently, Tianyi Shangjia is the only supplier of powder metallurgy brakes for the “Fuxing” EMU.

Tianyi Shangjia holds a total of five EMU powder metallurgy brake CRCC certification certificates, covering 15 models. The supporting capital raised this time has provided sufficient financial support for the company's development in the field of EMU and rail transit vehicle components. The issue of shares raised 785 million dollars in supporting capital, of which 500 million was used for high-speed train basic braking material development and intelligent manufacturing demonstration production line projects.

Tianyi Shangjia sold a total of 414,500 powder metallurgy brakes for EMUs during the reporting period. Revenue from 2015, 2016, and January-April 2017 was 274,637,600 yuan, 47,14985 million yuan, and 213.189 million yuan, respectively, and net profit was 88.6662 million yuan, 19,696999 million yuan, and 99.052 million yuan respectively. At present, Knorr-Bremse's share of China's high-speed rail brake pad market is as high as 80%, and there is huge space for domestic alternatives, which is conducive to Tianyi Shangjia's future development.

4. Profit forecast and valuation:

Excluding Tianyi Shangjia's merger, the company's net profit for 17-19 is estimated to be 71 million yuan, 76 million yuan, and 81 million yuan. The corresponding EPS is 0.48, 0.51, and 0.55, and the corresponding PE is 66X, 61X, and 58X.

Considering Tianyi Shangjia's parallel table, it is estimated that the company's net profit for the 17-19 exam preparation is 299 million yuan, 339 million yuan, and 384 million yuan. The corresponding EPS is 1.04, 1.18, and 1.33, and the corresponding PE is 30X, 27X, and 24X. Give a “Recommended” rating.

5. Risk warning:

Risk after meeting