Abstract: We believe that after the stock price of Tianjin Development was adjusted by 12% in the past few weeks, its “Xiongan Tianjin Development (0882.HK; unrated) concept premium” is close to zero, and investors can refocus their attention on this stock. Although the company's current business is not very strong, we see two catalysts for this company with a net market ratio of only 0.47 times: (i) According to media reports, the mixed ownership reform of state-owned enterprises in Tianjin is accelerating; (2) According to media reports, the Xiong'an New Area planning plan will be submitted to the central government at the end of June.
This year, 5-6 state-owned enterprises in Tianjin will carry out mixed reform pilot projects. Yang Hongyan, deputy director of the Tianjin Municipal State-owned Assets Administration Commission, said at the beginning of this week that 5-6 state-owned enterprises will carry out mixed reform pilots in 2017. This mixed reform will be promoted mainly in 2018 and ended in 2019.
The parent company of Tianjin Development will raise capital through mixed reforms. In her speech, Yang Hongyan focused on the current situation of 10 Tianjin companies and the goals and methods of mixed reform. Tianjin Pharmaceutical Group is one of these 10 companies. Currently, Tianjin Pharmaceutical Group holds 62.8% of the interest in Tianjin Development. Yang pointed out that Tianjin Pharmaceutical Group plans to bring in 1-2 strategic investors through mixed reform to raise 10 billion yuan. We believe that as the parent company's financial resources increase, the future development of Tianjin Development will be supported.
It is expected that there will be more details about the development of Xiong'an New Area in the third quarter. According to media reports, the Xiong'an New Area planning plan (involving transportation infrastructure, etc.) will be submitted to the central government at the end of June. Therefore, if the planning plan is approved by the government, it is expected that more details will be released in the third quarter of this year, which will once again attract investors' attention to Beijing-Tianjin-Hebei integration.
The stabilization of the RMB will help this year's performance. Tianjin Development's net profit in 2016 fell 8.4% year-on-year to HK$551 million. Since the company's statements are presented in Hong Kong dollars, the devaluation of the yuan dragged down net profit by more than 6% last year. Since the RMB is basically stable this year, the impact of the RMB exchange rate will be greatly reduced.
The current business is relatively stable, but the outlook is bleak. The company holds a 34.41% interest in Lisheng Pharmaceutical (002393.CH). Lisheng Pharmaceutical's net profit for the first quarter of 2017 was RMB 40.7 million, a year-on-year decrease of 4.6%. Excluding non-core earnings, its net operating profit remained roughly the same year over year. As for the escalator business developed by Tianjin, net profit attributable to 2016 fell 28% year-on-year to HK$328 million. Although real estate sales in China have rebounded strongly since the second half of 2016, the company did not benefit significantly from this as sales were mainly driven by inventory removal. Performance is likely to improve this year. This is because as large housing companies improve their cash flow after recording strong sales, the pace at which new homes are started should accelerate. As for utilities and other businesses such as ports developed by Tianjin, we expect their performance to remain stable.
Although the consensus forecast is slightly overly optimistic, earnings are still expected to improve in 2017. According to the market consensus forecast, the company's net profit in 2017 is expected to be HK$675 million. We think this forecast is slightly too optimistic, but despite this, profits are still expected to return to the level of HK$600 million because: (i) the impact of the devaluation of the RMB has weakened; and (ii) the amount of asset impairment in the electronics and machinery business has declined.
Is there potential to streamline the business? The current net market ratio of Tianjin Development is only 0.47 times, mainly because the company's diversified business portfolio does not have clear development priorities. However, if its parent company can raise 10 billion yuan through mixed reform, it will make the parent company more capable of integrating/streamlining the business of listing platforms (including Tianjin Development). We believe that Tianjin Development has the potential to release value.