Key points of investment:
Huayou Convertible Bonds (113641.SH) Overview:
AA+ grade, with a bond balance of 7.599 billion yuan, accounting for 99.98% of the total amount issued, with a remaining term of 3.97 years. The latest closing price was 102.00 yuan, YTM +2.40%, and pure debt premium of 0.92%.
Original stock: Huayou Cobalt (603799.SH) Overview:
The non-ferrous metal smelting industry, with cobalt as the core, and copper-nickel products as a supplement, lays out lithium products, integrating mining, selection, and deep processing. The products are used in lithium battery cathode materials, aerospace superalloys, hard alloys, etc.
The latest total market value is 46.5 billion yuan. The actual controller, Chen Xuehua, holds a total of 21.65% of the shares. Net profit for the first three quarters of 2023 was +0.18% compared to the same period last year. The current stock price is equivalent to deducting non-PE (TTM) 12.28x, which is at the bottom of the last 5 years.
Main highlights of debt conversion:
The value of debt conversion is undervalued. The absolute price is low, and the yield of YTM is comparable to that of freight and bank wealth management. The premium rate for pure bonds is only 0.47%. The current market price only reflects the value of pure bonds; it does not reflect the value of bullish options or resale options.
Cobalt-nickel-lithium prices bottomed out and rebounded. According to WIND data, as of March 8, the average price of 20.5% cobalt sulfate increased by 1.58% over the past 20 trading days; the 2406 lithium carbonate futures price increased by a cumulative total of 16.16% since February 2024; and the LME nickel price also increased by 10.58% during the same period. We believe that although the upward trend in cobalt-nickel-lithium prices has yet to be confirmed, the signs of recovery are obvious, and the bottom of the cycle can be confirmed.
The integrated strategy is beginning to bear fruit. We approve the company's strategy of integrating and firmly laying out upstream resources, which mainly revolve around Indonesian nickel and cobalt mines. According to the company's 22nd annual report and 23th mid-year report, the Huayue project with an annual output of 75,000 tons is currently overrun. The Huake project with an annual output of 45,000 tons of high-ice nickel has reached production. The Huafei wet process project, which produces 120,000 tons of nickel metal per year, is climbing in production capacity and is expected to be fully produced before the end of the year. The release of production capacity from overseas projects has led to an increase in the company's performance.
Credit risk exposure is less likely. The company implements the “improving quality, efficiency, and valuing return” action, actively buybacks, actively reduces leverage, and suspends some projects. The balance ratio declined for 3 consecutive quarters in the 1-3Q of 2023, reducing capital expenses and ensuring abundant cash flow.
Investment Proposals and Reasonable Valuation Derivation for Debt Conversions
At present, we suggest allocating Huayou bonds based on the reverse investment concept to lay out the new energy materials cycle. Based on the valuation model of Mountain Securities convertible bonds, assuming that the underlying stock price remains unchanged, based on BSM, binary tree, and MC simulations, we believe that the reasonable valuation of Huayou Convertible Bonds is 110-120 yuan.
Risk warning: The share conversion premium rate is high, the price of lithium materials fluctuates, and the new energy industry chain is overcapacity