Additional share issues increase total share capital by only 3.2%
The company announced in the early morning of Wednesday (July 15) that it would issue an additional 83 million shares (lock-up period: 90 days) at HK $3.75 per share (equivalent to a 13.0% discount of the previous day's closing price of HK $4.31) to raise a net amount of HK $299 million.
The market believes that (1) the additional share offering brings profit dilution; (2) the additional offering price is also lower, so the stock price is adjusted back by a total of 14.2% in the next two days. However, we believe that the market reaction is too strong, because (1) the shareholding ratio of Mr. Lin Ercong and related persons, the major shareholder, will drop moderately from 70.48% to 68.27%, and the total share capital will increase by only 3.2%. Dilution effect is slight; (2) it is also in line with the general practice of the market to issue additional shares at a discount.
The three benefits of additional stock offerings
We believe that this rights issue has in fact brought three major benefits to the company: (1) the funds raised can be used for the current Myanmar and other IBO (investment, construction and operation) projects and finance the company's continued expansion in the future; (2) increasing the share circulation ratio is conducive to the healthy development of the stock price; (3) improving the debt ratio, we expect the net debt ratio to fall from the original estimate of 93.2% to 76.5% by the end of 2020.
Fine-tune earnings per share forecast
We slightly lowered our earnings per share forecasts for 2020-2022 by 1.6 per cent, 3.1 per cent and 3.1 per cent respectively.
Reiterate the "buy" rating, a good opportunity to absorb bargains.
Accordingly, we have adjusted the target price calculated by the discounted cash flow analysis from HK $5.70 to HK $5.65, corresponding to 13.8 times 2021 price-to-earnings ratio and 52.7% room for increase. Reiterate the "buy" rating. The recent pullback in share prices provides a good opportunity to absorb bargains.
Risk hints: (1) delays in project development; (2) tight supply of natural gas; (3) policy risks; and (4) slowdown in electricity demand.