Premier **** presided over an executive meeting of the State Council yesterday to determine measures to complete the task of upgrading rural power grids ahead of schedule.
This is in line with our view that grid investment is likely to accelerate in 2019, which will drive economic growth.
Willfar Information Technology (Willfar) applied for listing on the Science and Technology Innovation Board earlier, and the second inquiry has now begun.
We believe that Weisheng Holdings' spin-off of Weisheng Information will help unlock the value of non-grid-related businesses, and that the dilution impact of the spin-off is manageable. As the outlook for the industry is more positive, I believe the company's power grid business will continue to grow.
Maintaining the “buy” rating, the target price is HK$5.43, based on a price-earnings ratio of 13 times 2019.
Investment in power grids is speeding up
Premier **** of the State Council presided over an executive meeting of the State Council yesterday to determine measures to complete the task of upgrading rural power grids ahead of schedule. According to reports, the 13th Five-Year Plan target for rural power grid upgrades will be completed in 2019, one year earlier than expected.
This is in line with our view that grid investment is expected to accelerate in 2019. Until now, the National Grid has been promoting the development of the ubiquitous power Internet of Things, which will generate demand for high-end measuring equipment. This is also in line with our view that grid investment will accelerate in 2019. As part of infrastructure investment, power grid construction will drive economic growth. We believe the data and operation layer will be further developed as the energy internet develops, which will benefit the company, as Viosheng supplies measurement equipment and communication ICs and systems with communication and sensor functions. Upgrading power transmission standards should drive Weisheng to achieve the next phase of growth. The latest on-hand order is around RMB 2 billion, which is expected to support the company's revenue and profit growth in 2019.
The spin-off is progressing smoothly
As far as we understand, after the company submitted an application for the spin-off of Weisheng Information Technology's listing in April, the listing process has entered into a second inquiry. We expect Victory to complete the spin-off in the next few months. Following the spin-off, Viosheng's shareholding in Viosheng Information Technology will drop from 65% to around 59%. Victory Information Technology plans to issue no more than 150 million new shares (10% of the current number of outstanding shares) to raise RMB 605 million. However, the exact size of the sale will depend on market conditions after the spin-off plan is completed. Weisheng Information engages in three businesses: data acquisition terminals, water, gas and heat meters, and IoT architectures for related solutions. The company's products include sensors, networks, data, and applications. Victory Information Technology has been expanding the range of industries it covers, from utilities such as electricity, water, and heat to smart city applications such as smart fire alarms and smart street lights. Weisheng Information Technology's net profit in 2018 was RMB 177 million, up from RMB 149 million in 2017 and RMB 80.5 million in 2016. The company's turnover also increased from RMB 680.3 million in 2016 to RMB 1,0386 million in 2018. R&D expenses accounted for about 7% of the company's total revenue in 2016-2018.
Stock price adjustments are due to weak market conditions
As far as we understand, the recent adjustment in Weisheng's stock price was due to weak market sentiment rather than any change in fundamentals. We understand that investors will prefer stocks with higher liquidity in current market conditions. However, we are still seeing several catalysts for Victory, including the divestiture of Weisheng Information Technology, accelerated investment in electricity, and expected solid 2019 results. We expect VIA to release impressive interim results in August. We maintain our “buy” rating with a target price of HK$5.43 based on a price-earnings ratio of 13x 2019.