Key points of investment:
China Special Convertible Bonds (127056.SZ):
AAA grade, with a bond balance of 5 billion yuan, accounting for 99.99% of the total issuance amount, with a remaining term of 3.84 years. The latest closing price was 108.62 yuan, the conversion premium rate was 65.65%, the pure bond premium rate was 7.78%, and YTM 0.29%.
Original stock: CITIC Special Steel (000708.SZ):
The latest total market value is 77.8 billion yuan. It is a state-owned enterprise (the largest shareholder accounts for 75.05%). It is a high-quality special steel production base with a large global coverage of all types of steel. The main products are gear steel, bearing steel, spring steel, etc., which are widely used in automobiles, electricity, machinery manufacturing, navigation and aerospace. 2023 revenue +15.9% YoY, net profit to mother -13.8% YoY, latest PE TTM 15.0x, dividend ratio 3.62%.
Main highlights of Sino-Special Convertible Bonds:
YTM > 0, with debt base support: the absolute price of China-Special Convertible Bonds is low, YTM >0, the premium rate of pure bonds is not high, central enterprise endorsement, AAA ratings, and strong debt support.
The leading position in the original stock market is stable, and its advantages continue to improve: CITIC Special Steel is a leading enterprise in the field of special steel in China. In February 2023, it took control of Tianjin Steel Pipe and increased production capacity to 20 million tons. At the same time, shareholder CITIC Taifu completed holding Nangang Steel, and the Group's special steel sector production capacity exceeded 30 million tons, once again improving its leading advantage. In 2023, the company's “two highs and one special” sales volume was +37% year-on-year, and focused on cultivating more than 80 “little giant” projects (market segment champions), with related sales exceeding 6.68 million tons.
A recovery in gross margin can be expected: The decline in gross margin in 2023 also shows that Tianjin Steel Pipe is an important factor. Since the merger, Tianjin Steel Pipe's profit is 340 million yuan, but the net interest rate is only 2%, which is a drag on the company as a whole. Tianjin Steel Pipe Q124 has turned a loss into a profit. In the future, the company will continue to optimize its variety structure, reduce its interest-bearing debt, and increase its share of high-end products in the oil, gas and petrochemical industry. Overall profitability can be expected to recover.
Steady performance and high dividend payment rate: Zhongte's downstream coverage is extensive and mainly provides customers with highly customized services. It has strong cost transmission ability and is relatively resistant to cycles. The 2023 annual report revealed that it is intended to distribute 5.65 yuan (tax included) in cash to all shareholders for every 10 shares, with a dividend payment rate of 49.8%. It has maintained a cash dividend of around 50% for 5 consecutive years.
Investment Proposals and Reasonable Valuation Derivation for Debt Conversions
Based on the valuation model of the Mountain Securities Convertible Bond, assuming that the underlying stock price remains unchanged and no downsizing is considered, we believe that the reasonable valuation of China Special Convertible Bonds is roughly equivalent to the current market price. However, in the current market environment, we believe that the high dividend market may continue, and that the underlying stock price increase may bring greater upward flexibility to the conversion of bonds, drawing attention.
Risk warning: The share conversion premium rate is high, market demand falls short of expectations, subsidiary operations fall short of expectations, etc.