Key points of investment

The draft buyout for Pearl was released, and the 40-year duty-free veteran gradually came close to entering the capital market: following the disclosure of the transaction plan at the end of May, the company continued to push forward with the restructuring process. On the evening of October 30, a draft report on the acquisition of Zhuji and raised supporting capital was announced. It is proposed to issue 2,655 million shares to the Zhuhai State-owned Assets Administration Commission and Urban Construction Group at 4.3 yuan/share and pay 800 million yuan in cash to acquire 100% of the shares. The transaction consideration is about 12.215 billion yuan, corresponding to 17.9 times PE and 3.36 times PB. Comparing comparable transactions, it is still within a reasonable range.

At the same time, war investment will be introduced. It is proposed to issue no more than 186 million shares to GM Investment in supporting financing of no more than 800 million yuan to pay cash consideration. According to the draft, after the restructuring, the actual controller will still be the Zhuhai Municipal State-owned Assets Administration Commission, while the company's share capital will reach about 4.902 billion shares, and the market capitalization for the exam will reach 50.1 billion yuan.

Based in the Guangdong-Hong Kong-Macao Greater Bay Area, it is deeply involved in the unique form of port duty-free business: Zhu Xuan has 40 years of duty-free experience and revenue of 2.65 billion yuan in 19 years, of which 2.51 billion yuan (+20.0%) was duty-free, accounting for 94.6%.

Zhu Ban, which has the largest land port duty-free shop in the country, has been deeply involved in the Greater Bay Area for a long time, focusing on the unique port duty-free business format. Its products are mainly tobacco and alcohol (accounting for over 90%). At the same time, benefiting from the rent advantage, the net interest rate of Fumo reached 25.7% in 2019, an obvious advantage. Although port duty-free pressure is obvious under the epidemic, and the total revenue for 20H1 is only 463 million yuan, Q3 has picked up rapidly as passenger flow recovers, and future certainty is still strong.

Strong forces will jointly build a “new” duty-free force, deepen the basic market in Zhuhai, and look forward to the national layout: in the future, driven by the expansion of old stores and the expansion of new stores, it is expected to further expand the fragrance category and increase the direct procurement ratio, use the Greater Bay Area to tap port duty-free potential, increase revenue and gross profit margins, and build a basic market. At the same time, it will collaborate with Gree Real Estate to look forward to the layout of Hainan and the whole country, and enjoy the dividends of the duty-free era.

The main real estate business bucked the trend and continued profit growth: on the same day, the company released its report for the third quarter of 2020, continuing the 20H1 growth trend. It achieved revenue of 4.25 billion yuan (+23.85%) in the first three quarters, and achieved net profit of 597 million yuan (+19.02%) to the mother. 20Q3 achieved revenue of 1.27 billion yuan (+66.7%) and net profit of 175 million yuan (+86.41%) for the mother in a single quarter. Looking at the spin-off, the real estate business bucked the trend in 2020, and the opening of the Chongqing project brought growth. The 20H1 real estate revenue was 2,655 billion yuan (+111.7%); at the same time, the 20H1 revenue was rapidly expanded, with revenue of 179 million yuan (+367.9%) from the contract construction project due to the completion and opening of the Hong Kong-Zhuhai-Macao Bridge, but as the fishing port project continues to develop, it is expected to contribute incremental revenue in the future. The Q3 quarterly trend continued to buck the trend and is expected to remain driven by real estate and the marine economy.

Profit forecasting and investment ratings: Through restructuring, the introduction of Zuban will be further explored to explore the potential of the duty-free business format at Zhuhai Port, and look forward to the layout of Hainan and the whole country. Under the main theme of the return of consumption, I am firmly optimistic about the growth space and profitability of the duty-free business. At the same time, the synergistic effects of restructuring will drive rapid growth in various business segments. We expect consolidated revenue for 20-22 to be 58.7/ 82.7/ 9.26 billion yuan respectively, with a year-on-year growth rate of 40.0%/40.8%/12%, net profit of 7.3/14.5/1.69 billion yuan. Based on the total share capital after the restructuring of 4.902 billion shares, corresponding to EPS 0.15/ 0.30/ 0.34 yuan/share, the current price of PE is 68.9/ 34.6/ 29.7 times.

We are optimistic about the development potential of strong alliances and duty-free businesses under the restructuring, and maintain the “buy” rating.

Risk warning: If the asset restructuring is likely to fail; there is a risk of acquisition integration; the pandemic has repeatedly brought about macroeconomic fluctuations; there may be a risk of fluctuations in local policies.