Incident: On June 17, 2020, Gree Real Estate issued an announcement stating that the company plans to purchase 100% of the shares of the Zhuhai Duty Free Group by issuing shares (targeting the Zhuhai State-owned Assets Administration Commission and Urban Construction Group) and paying cash at an issue price of 4.3 yuan/share. At the same time, supporting capital was raised from GM Investment's non-public shares, a subsidiary of China General Technology Corporation. The total amount of capital raised was not more than 800 million yuan (excluding related expenses to pay for the cash consideration of this acquisition and the construction of the target company project), and no more than 100% of Gree Real Estate's purchase of duty-free group shares by issuing shares. It is estimated that the number of shares issued will not exceed 186 million shares, and the number of shares issued will not exceed 30% of Gree Real Estate's total share capital before this transaction. The issue price is 4.3 yuan/share. Duty-free in Zhuhai: It has many port duty-free shops, and the scale is steadily expanding. Duty-free Group's main business is duty-free, integrating various businesses; the actual controller is the Zhuhai Municipal State-owned Assets Administration Commission (77% of shares). The company is one of the five domestic state-owned enterprises (excluding Wangfujing) approved to operate duty-free business at the port and city. The market share of the duty-free market in 2018 was about 5%, and it has many duty-free shops such as Gongbei Port Duty Free Shop, Hong Kong-Zhuhai-Macao Bridge Port Duty Free Shop, and Tianjin Binhai International Airport inbound duty-free shop, among which Gongbei Port Duty Free contributed the most revenue (+ 90% of estimated revenue)。 The product structure is mainly tobacco and alcohol. Cooperative relationships have been established with many well-known tobacco and alcohol brands, and the “Zhuhai Duty Free Mall” applet has been launched to enable online pre-orders. Net profit of 63/987 million yuan was achieved in 2018/19. Gree Real Estate: With real estate as its main business, it continues to expand into new fields. The main business involves the real estate industry, port economy industry, marine economy industry, modern service industry, modern finance industry, etc. The actual controller is the Zhuhai Municipal State-owned Assets Administration Commission. Gree Real Estate has stepped up its transformation efforts in recent years, and mergers and acquisitions have continued. On May 9, it was announced that it plans to invest 1,725 million dollars in Kehua Biotech to become its largest shareholder and accelerate its entry into the medical industry. The company had revenue of 4.19 billion yuan and performance of 530 million yuan in 2019. This restructuring is a reform and upgrade of state-owned enterprises, which is expected to link the port economy and business. The company's recent series of asset restructurings are enterprise transformation and upgrading under the call of state-owned state-owned enterprise reform. If the acquisition is successful, Gree Real Estate is expected to enter a new path of tax exemption and significantly increase the company's profits. The largest shareholder of Gree Real Estate is Offshore Investment Corporation (41% of shares), which has port management rights. Gree Group participated in the operation of the Zhuhai-Hong Kong-Macao Bridge Zhuhai Highway Port through various means. Under the traditional model, port owners have natural core traffic and monopoly advantages, and duty-free shops have poor bargaining power over them and are expensive. Further cooperation between Zhuhai Duty Free, which has a duty-free license, a maritime investment company with port management rights, and Gree Real Estate, which is involved in port operations, is expected to achieve efficient linkage and enhance the competitiveness of the duty-free business. Future highlights: With continuous optimization of its own operations, the strategic significance of Zhuhai is significant, and there is more room for imagination. ① At our own level, currently 80%-90% of the products in duty-free shops in Zhuhai are tobacco and alcohol products. With the addition of 2 floors of duty-free shops in Gongbei in the future (area expands from 2,800 square meters to 5,000 square meters), it is expected that more perfumery products with high gross margins will be added to increase profitability. At the same time, there is huge room for an increase in current customer unit prices and penetration rates compared to Hainan's outlying islands in duty-free conditions. ② The Guangdong-Hong Kong-Macao Greater Bay Area occupies an important position in the overall development of the country. Zhuhai, Hong Kong and Macao are connected by land. In 2019, the number of inbound traffic at various ports reached 173 million. The government plans to make it a tourist city, and the traffic flow is expected to improve further; Hengqin Island and the Hong Kong-Zhuhai-Macao Bridge artificial island have superior geographical locations. The Zhuhai Duty Free Group is collaborating with the Hengqin Management Committee to explore tax exemption on the outlying islands of Hengqin, while promoting duty-free commercial development throughout the Hong Kong-Zhuhai-Macao Bridge artificial island. It is expected that there may be more business opportunities in the future to target Sanya. ③ The company may focus on duty-free shops in the Guangdong-Hong Kong-Macao Greater Bay Area. In the context of the central government attaching great importance to promoting the return of consumption and the March Development and Reform Commission's proposal to “improve the city's duty-free shop policy and build a number of domestic duty-free shops with Chinese characteristics”, we expect that the duty-free policy for Chinese people leaving the city will be implemented at an accelerated pace in the future. The policy dividends may be better than market expectations, which is expected to open up more room for growth. Investment advice: Buy-A investment rating. The net profit of the original real estate business is estimated to be 62/68/780 million yuan, with a corresponding growth rate of 17.2%/10.7%/14.6%. Referring to the historical market capitalization level, the corresponding P/E is about 18x; if the acquisition of Zhuhai is successful, the duty-free business is 30-40xPE according to Dufry and China Travel. Considering the impact of the pandemic, the net profit growth rate of Zhuhai in 2020-22 is expected to be -30%/60%/30%, and the corresponding net profit is 6.9/11.1/1.44 billion yuan. A reasonable valuation in the medium to long term is estimated at 53-65 billion yuan. Considering the catalytic role of future domestic store policies, 20-30% of market capitalization space is given on this basis, with an overall reasonable valuation of 66-80 billion in the medium to long term. Combining that the company currently has about 3 billion dollars in cash, an issue price of 4.3 yuan/share, and the company's intention to invest in GM to issue no more than 186 million shares, the comprehensive estimate for the share capital after the acquisition of Zhuhai tax-free is 1.7-2 times the current range. The above reasonable medium- to long-term valuations correspond to the stock price range of about 16-23 yuan/share. The company's entry into the duty-free circuit is expected to share the dividends of the duty-free industry. It will benefit from the broad development prospects of the Zhuhai-Hong Kong-Macao Greater Bay Area in the future, so continue to recommend it! Risk warning: The COVID-19 pandemic continues to worsen; there is a clear downside risk in macroeconomic growth; duty-free policy dividends are lower than expected; and duty-free shop performance is improving at a slower rate than expected.