Zhixing Group is an energy management contract (EMC) service provider for LED lighting products. Since 2022, the company has signed a number of agreements with the Malaysian regional government to strengthen its position in the local market. We expect these agreements to drive Zhixing's rental service revenue to reach a 100% compound annual growth rate in fiscal year 25-26 (March end). On the financial side, Zhixing has gone through a difficult period after completing debt restructuring. More importantly, the company introduced capital from Abu Dhabi in 2023, which will not only improve the company's equity structure and balance sheet, but will also open the door to the rapidly growing Middle East market for Zhixing. We expect the company's core earnings per share compound annual growth rate of ~ 180% in fiscal year 25-26, and the breakthrough in the Middle East market will further improve our current forecast. The first coverage gave a “buy” rating, with a target price of HK$0.64.
Company profile. Zhixing's main business is (1) LED lighting systems (mainly EMC model and trade), and (2) construction of renewable energy projects. The company's business has traditionally covered Hong Kong, mainland China, Japan and Indonesia, while Malaysia and the Middle East are the company's new business growth regions.
Malaysia's energy saving projects drive growth in performance. As early as February 2022, Zhixing undertook a large-scale energy saving project (“Light in the Dark” project) from the Malaysian state government. The project aims to help local apartments in Selangor solve lighting problems and improve energy efficiency by installing LED lighting systems. The total energy savings of the project during the energy management contract period will be converted into a revenue share. The ultimate goal of the project is to install 6 million LED lights for 8,320 apartments in Selangor around 2025. Since the plan's goals are quite aggressive, we only anticipate that the company will install 1.5 million LED lights in fiscal year 2026.
ORIX provided the required financing. To meet the growing funding requirements for the Malaysian project, Zhixing has been cooperating with ORIX Finance (a wholly-owned subsidiary of ORIX Corporation [8591 JP/IX US, NR]) in early 2023. ORIX will provide financing to Zhixing based on its accounts receivable. We believe that during the rapid development phase of LED light installations, such cooperation can help Zhixing reduce initial cash outflows.
valuation. Given our forecast of 180% compound annual growth in core earnings per share for the 25-26 fiscal year, we believe the PEG valuation method can well reflect the strong growth prospects of Zhixing. Our target price is HK$0.64, based on FY2025's 100x price-earnings ratio, corresponding to a 100% increase in earnings per share in FY2026, which is equivalent to double the PEG ratio.
Major risks. (1) Interest rate risk; (2) exchange rate risk; (3) initial operating cash outflow; (4) potential project delay risk.