Horizon CD's share price declined 50% over the past two days, which we believe was a result of share sales from some shareholders of FE Horizon (3360 HK) who need to cash in, regardless of share price level, to fulfil their own financial purposes. While we are surprised by the lack of buying force, our analysis suggests that it would only take another 2-3 days to digest the selling pressure. We see the sharp pullback a buying opportunity as the sell-off is not fundamentally driven. Horizon CD is trading at 5x 2024E P/E, which is attractive in our view. We believe its transformation to the asset-light model will enhance balance sheet and earnings. The overseas expansion will become a new growth driver over the coming years. Maintain BUY.
Rising trading volume following the distribution of shares. A total of 160mn Hoirzon CD's shares were distributed to the shareholders of FE Horizon on 16 Jan. Trading volume of Horizon CD on 17/18 Jan amounted to 6.6mn/15mn, much higher than the two-month average of 0.37mn. We assume the incremental trading volume came largely from the shareholders of FE Horizon.
Our estimate on maximum potential share sales. Sinochem is the largest shareholder of FE Horizon with 21.3% interest. Fanxing KONG, the CEO of FE Horizon, owns a 20.8% stake. DCP Capital Partners, an institutional investor with a seat in the board, owns 8.4%. We believe these three major shareholders, with a total of ~50.5% interest combined, have no intention to sell the shares of Horizon CD. Therefore, assuming the remaining shareholders of FE Horizon to offload all the shares of Horizon CD, there are a total of ~79mn shares to be sold potentially. Subtracting the trading volume over the past two days and assuming 20mn trading volume per day going forward, it would take another 2-3 days to complete the remaining share sales.
Maintain BUY. We maintain our TP of HK$5.2, based on 13x P/E which is equivalent to the two-year average P/E of Huatie (603300 CH, NR). Key drivers: (1) solid 2023E earnings to be released on 12 Mar, and (2) better liquidity.
Key risks: (1) reduction of rental rates and utilisation rates; (2) weakness of manufacturing capex; and (3) unsuccessful overseas expansion.