Key points of investment:

Jiayuan Convertible Bonds (118000.SH):

AA-, the balance of bonds was 978 million yuan, accounting for 78.9% of the total issuance amount, with a remaining term of 2.76 years. The latest closing price was 105.46 yuan, the conversion premium rate was 306%, the pure bond premium rate was -1.41%, and YTM 4.56%.

Original stock: Jiayuan Technology (688388.SH):

Total market value of 5.6 billion yuan; leading lithium copper foil supplier, core supplier of Ningde and BYD. Q124 had revenue of 930 million yuan, net profit of -48 million yuan; 2023 revenue of 4.969 billion yuan, net profit attributable to mother of 19 million yuan.

The current stock price corresponds to PB LF 0.8x. The valuation ratio is the lowest in the last 5 years, and the dividend rate is 3.00%.

The main highlights of Jiayuan bond conversion:

The incident mistakenly killed the target: On May 20, due to the receipt of a regulatory letter on the underlying stock, Jiayuan's shares and convertible bonds fell significantly. Both the underlying shares and convertible bonds fell to the bottom area since listing. Among them, the premium rate for pure debt-converted bonds fell to a negative value. According to the company's latest investor activity record sheet, the content of the regulatory letter is that the exchange urges the company to comply with regulations and prudently carry out foreign investment to prevent large investments from affecting normal operations. Participating in the establishment of an industrial investment fund is in line with the company's development strategy and investment direction, and helps accelerate the implementation of the company's strategy and accelerate the company's industrial layout and high-quality project reserves in the fields of new energy and advanced manufacturing. We think the conversion of Canadian dollars into bonds was mistakenly killed.

Absolute returns are impressive, and there is little room for retracement: on May 22, Jiayuan's shares are showing signs of recovery, and Jiayuan bonds are still at the bottom. Jiayuan Convertible Bonds YTM is impressive, and the premium rate for pure bonds is negative. The company's cash on book far exceeds the balance of debt conversion, and credit risk exposure is unlikely. Under the impact of the extreme events of May 20, the Canadian dollar bond conversion closed at $104.43. We think this can be seen as the biggest retracement in the short to medium term.

The characteristics of asymmetric options are remarkable, giving full play to the advantages of debt conversion clauses: at present, the winning rate of buying Ka-yuan bonds is greater than the odds, and the room for growth is greater than the room for decline, which can give full play to the advantages of uncapped terms under bond-conversion products. Furthermore, Jiayuan bonds are about to enter the resale period, and we expect the company to be more likely to revise within the next 9 months.

Reasonable valuation derivation and investment suggestions for debt conversion

Based on the valuation model of Mountain Securities convertible bonds, assuming that the underlying stock price remains unchanged, we believe that the reasonable valuation of Jiayuan convertible bonds is 108-119 yuan. Since 2023, new energy production capacity has been released intensively, there is a phased oversupply, copper foil processing costs have continued to drop sharply, and the company's performance has been poor. However, we believe that short-term twists and turns will not change the medium- to long-term prospects of the new energy industry; leading targets are worth allocating. We believe that investors with low risk preferences at this point can choose Jiayuan to convert bonds.

Risk warning: the conversion premium rate continues to be high, competition in the original stock market intensifies, downstream demand falls short of expectations, etc.