Matters:
The company plans to transfer 100% of its shares in ECO Industrial Environmental EngineeringPTE Ltd.
The company determined Seche Holdings (SG) Pte through undisclosed multi-party competitive bidding. Ltd. is the final buyer. The company and the buyer signed the “Equity Purchase Agreement” on June 17, 2024, to determine that the 100% equity transaction price of the target company was the benchmark purchase price plus lock box interest minus known losses. Among them, the benchmark purchase price was SGD 606 million (equivalent to approximately RMB 3.199 billion based on the median exchange rate of the Singapore dollar to RMB 1:5.28 of the China Foreign Exchange Administration on June 17, 2024, equivalent to approximately RMB 3.199 billion). The interest rate for the lock box is 3.68% /year.
Commentary:
The Singaporean subsidiary is to be sold, and the lightweight company will focus on the Chinese market. ECO Industrial is a leader in the hazardous waste treatment industry in Singapore. In 2015, the company acquired 100% of its shares at a consideration of SGD 246 million. In 2023, its revenue and net profit were 504 million/117 million yuan respectively. According to financial data from December 31, 2023, the PE multiplier for this transaction is about 27, and the PB multiplier is about 5, which is higher than the valuation of A-share listed company High Energy Environment/Zhejiang Fu Holdings in the same industry. We believe that on the one hand, this transaction will help the company improve its cash flow situation, optimize its balance and liability structure, and reduce financing and capital costs; on the other hand, it will also help the company optimize resource allocation and enhance competitiveness in the domestic environmental protection market.
The transaction may have a positive impact on 2024 results and cash flow. According to the company's announcement, the share delivery date shall be the 10th working day after the final delivery conditions are met or exempted (assuming that the seller's shareholders' meeting is held on July 4, 2024, the delivery date should be July 18, 2024); or any other date separately agreed in writing by the seller and buyer. After the completion of this transaction, it is expected to have a positive impact on the company's 2024 business performance. The final amount of impact is based on the audited regular reports disclosed by the company.
Investment advice: Maintain a “strong” rating. Without considering the impact of the sale of the Singaporean subsidiary on the financial statements, we lowered our 2024-2025 profit forecast and added the 2026 profit forecast: we expect the 2024-2025 net profit to be 1,752 billion yuan/1,927 billion yuan (original value was 1,852 billion yuan/2,058 billion yuan), respectively, and the net profit to mother in 2026 will be 2,071 billion yuan. Using the comparable company valuation method, representative water and solid waste companies were selected for comparison. Also, since the company is a national enterprise and is a leader in the industry, it should enjoy a certain valuation premium. The company was given 15 times PE in 2024, corresponding to a target price of 3.6 yuan, to maintain a “strong” rating.
Risk warning: Cross-border legal risk, exchange rate risk, and tax risk of this transaction.