SWHY released a research report stating that it maintains a "Buy" rating for GUANGDONG INV (00270). Given that the divestment plan still requires approval from a special shareholder meeting (to be held on January 8, 2025), the profit forecasts for the company for 2024-2026 remain at 4.003/4.101/4.12 billion HKD. The firm believes that the company's core Water Affairs business is developing steadily, the core Dongjiang water assets are of high quality, and with the divestment of the real estate business, the company's performance and valuation are expected to improve significantly. In addition, on December 9, the company announced a proposal for a special dividend in the form of a distribution of GUANDONG INV shares.

The main points of SWHY are as follows:

A special dividend is proposed to divest the real estate business, and in the future, GUANGDONG INV will no longer hold GD LAND and will focus on the Water Affairs business.

Prior to this proposed distribution, the company holds 73.72% of the shares in GD LAND. According to the announcement, the company will distribute a special dividend by distributing 1.262 billion shares of GD LAND that GUANGDONG INV directly holds (approximately 73.72% of GD LAND's equity), with a specific distribution ratio of 0.193 shares of GD LAND for each share of GUANGDONG INV. Through this distribution, the major shareholder GUANGDONG HOLDINGS will maintain its 58.26% equity in GUANGDONG INV, while GUANGDONG INV will no longer hold any shares in GD LAND, making GD LAND a sibling company to GUANGDONG INV.

After the divestiture of GD LAND, the operational performance and overall value of GUANGDONG INV are expected to increase significantly.

According to the company's announcement, in 2023, the company's net income attributable to the parent company plummeted by 34% year-on-year to 3.12 billion HKD, mainly impacted by the real estate impairment of 1.81 billion HKD associated with GD LAND. If excluding the impact of real estate impairment, the company's operating profit for 2023 would reach 4.93 billion HKD. Upon completion of the divestiture, the company's future performance will no longer be affected by fluctuations in the real estate business.

After the spin-off of GD LAND, the company's debt ratio is expected to decline significantly.

According to the company announcement, as of the first half of 2024, GUANGDONG INV has total assets of 139.8 billion HKD, total liabilities of 80.6 billion HKD, and net assets of 59.3 billion HKD, with a debt-to-asset ratio of 58%; GD LAND has total assets of 46.9 billion HKD, total liabilities of 40.7 billion HKD, and net assets of 6.2 billion HKD, with a debt-to-asset ratio of 87%; with the higher leveraged GD LAND divested, the company’s debt ratio is expected to decrease significantly.

Excluding GD LAND, the company's operating cash flow is steadily improving.

According to the company's announcement, in 2023, the company's cash flow from operating activities was 10.71 billion HKD, of which GD LAND's net operating cash flow was 3.61 billion HKD. Excluding GD LAND, the company's operating cash flow was 7.1 billion HKD. In the first half of 2024, the company's cash flow from operating activities was 4.88 billion HKD, of which GD LAND's net operating cash flow was 1.29 billion HKD. Excluding GD LAND, the company's operating cash flow was 3.59 billion HKD, continuing to improve steadily.

In the first half of 2024, the company's dividend payout ratio was 65%, maintaining stability compared to the 2023 dividend payout ratio.

According to the company's announcement, in 2023, the company adopted a new dividend policy, reducing the dividend payout ratio from 84% in 2022 to 65% in 2023. In 2024, the company announced a proposed interim dividend of 23.97 HK cents, with an interim cash dividend payout ratio of 65%, the same as in 2023.

Risk warning: The special dividend plan has not been approved, along with risks related to risk, renewal of the Dongshen project, and foreign exchange risks.