Report summary
Huaxin Co., Ltd. (formerly known as Jinling, Shanghai) is mainly engaged in the manufacturing of mechanical and electrical products, electrical instruments, etc., to real estate development, and the securities industry. The largest shareholder of the company is Shanghai Yidian Group, with a direct shareholding ratio of 27.49% and a voting power ratio of 53.27%. The actual controller is the Shanghai State-owned Assets Administration Commission.
In 2018, Huaxin Co., Ltd. achieved revenue of 1,184 million yuan and net profit of 21.85 million yuan to its mother. Among them, securities services achieved revenue of 960 million yuan, accounting for 81%. This includes 172 million in revenue contributed by Morgan Huaxin. In the first half of 2019, the company achieved revenue of 573 million yuan and net profit of 72.91 million yuan.
Huaxin Securities was added to the listing platform through asset exchange and issuance of shares (about 4 billion yuan, 9.59 yuan/share) in May 2017. The valuation of Huaxin Securities was assessed at 5.354.9 billion yuan according to August 31, 2016. It also raised 1,272 billion yuan (10.6 yuan/share) in supporting capital, with a three-year lockdown period*.
82% of Morgan Huaxin Securities's revenue comes from the investment business. Two transactions: In January 2016, Huaxin Securities transferred 15.67% of Morgan Huaxin Securities's shares to Daimo. At the end of 2015, the value of Damo Huaxin Securities was assessed at 1,460.2 billion yuan. The valuation of 2% equity value (including controlling interest premium) of this transaction is $376.2 million (assessed at the end of September 2018). Assuming that the controlling interest premium is not taken into account, the valuation is around $18.81 billion.
The latest market capitalization of Huaxin shares is 13.717 billion, which is one of the smallest A-share listed brokerage firms. Huaxin Securities (parent company) had net assets of 4.921 billion yuan at the end of 2018, the overall PBX of the brokerage sector was 1.57 times, and Huaxin Securities itself was valued at 7.726 billion yuan. The 49% equity of Morgan Huaxin Securities is calculated at 9.405 billion yuan. The company holds 65% of Yidian Sibai Financial Leasing shares, with an assessed value of about 200 million yuan at the end of 2017 (3.065* 65%). Listed companies have a static market capitalization of about 17.3 billion yuan and a total share capital of 1,061 million shares, corresponding to a share price of 1,631 yuan/share. This is the first coverage. The “buy” rating is recommended.
Risk warning: The progress of Morgan Huaxin Securities's 2% equity transfer fell short of expectations; Daimo's possible subsequent capital increases and business qualification applications fell short of expectations; the advantages of Morgan Huaxin Securities's investment banking and trading business were limited by the market environment and regulatory environment; Daimo sought to re-establish a wholly-owned securities company in China; the operating risk of Daimo's parent company; the risk of stock market fluctuations.