Incident: The Company issued equity-linked securities with a total amount of 0.55 billion US dollars and established a call option spread. On January 7, 2025, the Company issued an announcement announcing that it will issue equity-linked securities with a total amount of 0.55 billion US dollars (hereinafter referred to as “securities”) on January 14. Each security has a face value of 0.2 million US dollars, and interest is paid at an annual interest rate of 0.5%, and payments are made every six months. The securities will expire on January 14, 2032, with an initial strike price of HK$64.395 per share, a 33.38% premium over the company's five-day average closing price of HK$48.28 per share as of January 6, 2025.

Meanwhile, the company entered into a call option spread on January 7, including two options: 1) the company bought a corporate call option with an exercise price of HK$64.395; and 2) the company sold a corporate call option at HK$102.10. The exercise dates for both options are during the exercise period of the above securities.

Comment: Low-interest financing supports the company's business expansion. The premium shows the company's confidence. According to the announcement, the company plans to use 50% of the net proceeds from this transaction for overseas store network expansion, supply chain optimization and development, brand building and promotion, overseas operating capital, and other general corporate purposes, while the other 50% will be used to repurchase the company's shares. The company's overseas direct business continues to expand. Unlike the previous agency business, direct management expansion requires the company's large capital investment, so overseas financing methods can better supplement capital. At the same time, the company's current financing interest rate is only 0.5%, and the financing cost is relatively manageable. The premium issuance also reflects the company's confidence in business development.

On the other hand, the company controls financing costs through call option spreads. When the final stock price is below the initial exercise price (HK$64.395 per share), the company redeems the securities; when the final stock price is between HK$64.395-102.10, the company covers the share price premium cost through buying bullish options; when the final stock price is HK$102.10 or more, the company covers the cost of execution of the sale option by issuing new shares. Through the bullish option spread, the company raised the actual share conversion price to a relatively high position of HK$102.10 to avoid dilution of shares at low prices.

Overseas investment continues to increase, maintaining a “buy” rating

This financing reflects the importance the company attaches to the overseas direct market, and the injection of overseas capital also helps to increase the flexibility of the company's capital use. As the company's investment in overseas direct management increases, overseas stores and supply chains are expected to be further optimized, and a more mature business model will help the healthy development of the company's overseas business.

We maintain the 2024/2025/2026 profit attributable to the company's equity shareholders of 2.72/3.4/4.05 billion yuan, corresponding to EPS of 2.18/2.72/3.24 yuan, and maintain a “buy” rating.

Risk warning: Store expansion falls short of expectations, passenger flow recovery falls short of expectations, and consumption recovery falls short of expectations.