Company background: China Aviation Industry International (AVIC International) is an investment holding company. China Aviation Industry International's main business includes real estate development and investment as well as trading business. As of the end of June 17, its ultimate parent company, AVIC, held a 34.34% stake through AVIC Hong Kong and AVIC International.
Bold transition to the parent company to buy the aircraft engine business: on September 20, AVIC International announced the acquisition of the aircraft engine business from the parent company, stimulating the share price to rise 80.8%. According to the announcement, AVIC agreed to buy a 100 per cent stake in Motto Investment from the parent company. MottoInvestment mainly produces and sells aircraft engines in the United States and Europe, and provides repair and maintenance services for aircraft engines and aircraft. The total consideration for the acquisition is HK $2.4 billion, of which HK $1 billion will be paid in cash and the remaining HK $1.4 billion will be paid through the allotment and issue of 3.8 billion consideration shares to AVIC Hong Kong and AVIC International at an issue price of HK $0.37 per share. Upon completion of the transaction, CNAC Hong Kong will issue a maximum of 2.484 billion shares, based on the proportion of 0.6855 shares per share held, at an issue price of HK $0.37 per share. Upon completion, the shareholding of AVIC International and its concerted Action Group will return to 34.35%. It is worth noting that CK Hutchison (0001.HK) also owns a stake in the company, which will remain unchanged at 8.15% after the acquisition and issuance.
Business restructuring to capture the growth brought about by the development of China's general aviation industry: the acquisition could be seen as part of a further asset restructuring of AVIC's international parent company. Its parent company was required by SASAC to sell all its real estate business. This is also in line with the direction the company said in September 2016 to carry out a series of business and asset restructuring activities, that is, the acquisition of certain assets and the sale of some real estate development businesses in the Chinese market. In 2016, the company sold its lossmaking knitting and textile businesses. Now, with the growth of China's general aviation industry, the company has chosen to enter the market by acquiring the aircraft engine business of its parent company. The development of China's general aviation industry is supported by a growing middle class and rising disposable income. Over the past three decades, China's GDP has grown at an average annual rate of more than 10%. The development of China's general aviation industry will be driven by the following factors: 1) increased demand for high-altitude operations; 2) more private individual participation; and 3) civil aviation development and growth. The continued development of China's general aviation industry is expected to bring growth opportunities for aircraft manufacturers, aircraft leasing, flight school operators, fixed base operators, and leasing, maintenance and maintenance service providers. According to data from the Civil Aviation Administration of China, the number and workload of aircraft in China's general aviation industry achieved an average annual compound growth rate of 17.2% and 14.8% respectively during the 12th five-year Plan period. The CAAC aims to achieve an average annual compound growth rate of 17.5% in the number of general aviation aircraft during the 13th five-year Plan period, and 20.8% in flight time during the same period.
Motto Investment is the leader in the American general aviation engine industry. According to Euromonitor,Motto Investment, it is one of the leading manufacturers and service providers of general aviation piston engines in the global market. The company has been engaged in piston aircraft engine manufacturing since 1929. The company's products can be used in different aircraft models, and the company also has the ability to produce diesel and gasoline piston engines for general aviation aircraft. from this point of view, the company has a unique industry position. Motto Investment also has the technology to produce UAV systems, which are also a hot field in the market. Mot toInvestment has manufacturing operations in North America and Europe. At present, the company's China business is only engaged in the company's product sales and after-sales service. In the long run, there are expected to be more and more OEM aircraft developers in China, and the company's Chinese entities are also committed to providing technical development and engineering support to these aircraft developers.
Investment idea: we believe that AVIC International is likely to be injected into more general aviation-related assets by the parent company. AVIC International also plans to sell its real estate business. As at the end of June 17, the book value of properties under development and for sale was HK $4.3 billion, while that of investment properties was HK $325 million. Given the changing nature of the two companies' businesses, it is harder to tell how the acquisition will actually change the earnings outlook for 2017 or even 2018. However, with the support of the parent company, we expect this acquisition to increase the value of AVIC International. If the parent company has further plans to restructure its overseas business platform, it should stimulate AVIC's international share price. A case in point is 2357HK, another overseas platform of its parent company, whose market capitalization is now 7.7 times that of AVIC International.