Incident: Commodity City issued the “Notice Concerning Proposed Transfer of Shares and Related Transactions by Wholly-owned Subsidiaries”.
It is proposed to transfer 100% of the shares in “Xing Chen Enterprise Management” of its holding Sun Company to the controlling shareholder Mall Holdings. The transaction consideration is 0 yuan. The main assets of Xing Chen Enterprise Management are Haicheng Yiwu China Commodity City Investment and Development Co., Ltd. (Xing Chen Enterprise Management holds 95% of the latter shares).
Significance: Release incremental profits, optimize asset structure, and optimize cash flow.
Divesting loss-making assets to controlling shareholders will increase profits of listed companies: According to the company announcement, Xing Chen Enterprise Management achieved a net loss of 100 million yuan in 2023, and a net loss of 36.46 million yuan in 2024Q1.
After the divestment of Xing Chen Enterprise Management is released, it will improve the future profits of listed companies by reducing losses.
Optimizing the assets of listed companies: As of 24Q1, the net assets of Xing Chen Enterprise Management were -960 million yuan. After the transaction is completed, the rights of owners of listed companies will be increased and the assets of listed companies will be optimized. It is anticipated that this transaction will not generate one-time benefits/losses such as asset disposal gains.
Improving the cash flow of listed companies: The debt balance between Xing Chen Enterprise Management and listed companies was 2,544 billion yuan. As a precondition, before the settlement of this transaction, the controlling shareholder (Mall Holdings) will undertake the relevant debt in advance and settle the relevant amounts of the listed company. This will supplement the liquidity of listed companies.
The deal highlights the company's determination to reform state-owned enterprises: the Commodity City is the hub and core target of China's small commodity export industry chain. In recent years, the company has implemented state-owned enterprise reforms, and governance improvements have achieved remarkable results. After the transaction is completed, the asset quality of listed companies will be optimized, demonstrating the determination of state-owned enterprises in the Small Commodity City to reform.
In the future, as ① the company promotes state-owned enterprise reform, governance, and continuous optimization of asset quality, ② the growth of new businesses such as Chinagoods and cross-border RMB, ③ Yiwu market rent increases & global digital trade centers expand to increase operating profits in the main business market, ④ Yiwu's export boom and export value grows rapidly, so there is plenty of room for development in the small commodity city.
Profit prediction and investment rating: After the divestiture of the small commodity market's loss-making company is completed, the asset quality of listed companies will be improved, and net profit will be increased by reducing losses. Therefore, we raised the company's net profit forecast for 2024-26 from 31.2/35.2/4.0 billion yuan to 31.7/36.2/410 billion yuan, corresponding to 4/22 P/E of 14/13/ 11 times, maintaining a “buy” rating.
Risk warning: transaction progress falls short of expectations, new market construction and new business development fall short of expectations, weak external demand, etc.