Key points of investment:
The basic situation of Guanghui debt conversion
Guanghui Convertible Bonds was listed on September 15, 2020. The bond balance was 3.366 billion yuan, and the maturity and redemption price was 110 yuan. On June 7, '23, the closing price was 92.63 yuan, YTM 6.75%, the conversion premium rate was 65.43%, AA+ grade, and the total share capital dilution rate was 10.29%.
Basic situation of underlying stocks
Industry: Guanghui Automobile is the leading automobile dealership and service industry in China. Currently, the automobile dealership industry is gradually recovering. On the one hand, fuel vehicles continue the high-end trend, with sales of high-end brand passenger cars in '22 +11.1% compared to the same period last year. On the other hand, new energy vehicles are developing rapidly, with production and sales of new energy vehicles +96.9% and +93.4% year-on-year in '22. Automobile exports from January to May 2023 were +124% year on year, which was the highlight of economic data for 2023.
Company performance: Compared with peers, luxury brands do not account for a high proportion of Guanghui's distribution brands, and the gross profit margin and asset turnover ratio of Guanghui are low, which drags down performance. Q422 returned to the mother's net profit loss of 3.444 billion yuan; Q123 turned a loss to a profit of 530 million yuan. Although the year-on-year decline was still 20.5%, the decline narrowed. The improved performance mainly benefited from business recovery, as well as the company's brand optimization and upgrading strategy and strengthened cost control.
Key highlights:
1) Improved industry pattern: China's automobile dealership industry pattern is scattered and asset-heavy operating model. Currently, some weak enterprises have withdrawn from the market, favoring leading large companies.
2) Increased rebates from automakers: Since 23, brands such as BMW have increased their subsidies. With stable sales, reduced inventories, and cost control, the company's performance is expected to resume positive growth.
3) Actively entering new businesses: The company actively cooperates with new energy brands, optimizes and upgrades offline stores, lays out online channels such as live broadcasts, and obtained qualifications in the first half of this year to get involved in used car exports.
4) Active leverage reduction: The company's balance ratio of Q123 fell to 63.95% from 66.79% and 65.10% at the end of 21/22, and the amount of interest-bearing debt continued to decline. There were three debts due in 23 and 24, totaling 3,245 billion yuan, of which only 600 million yuan was in November '23.
5) Improved cash flow for major shareholders: Benefiting from rising coal prices in '22, Guanghui Energy, the majority shareholder, made a lot of profit. With improved cash flow, it actively repaid interest liabilities, released quality stocks, and increased dividend rates.
Reasonable Price Estimation for Guanghui Convertible Bonds
We think the probability that Guanghui Auto or its majority shareholders will be exposed to credit risk in the short term is low. Based on the B-S model, we expect that under the assumption that the underlying stock price does not change, the reasonable price of Guanghui's convertible bonds will be in the range of 104-110 yuan, which is about 10-20% of the current market price space.
Risk warning: industry competition intensifies, automobile consumption falls short of expectations, macroeconomic downturn, etc.