Company profile:
The company is a professional developer and operator of the second largest market-based industrial park in China throughout the life cycle. It is also a leading DHC investor/operator in China, and is transforming into an asset-light industrial park operation service platform.
China Electronics became the largest shareholder holding 31.9% of the shares, and Optics Valley will steadily lead the development and operation of the industrial park: In February 2016, China Electronics (0085.HK) and Optics Valley jointly announced that the former would sell 100% of its shares in CLP Technology at HK$846 million to the latter, while participating in Optics Valley's IPO. If the transaction is completed, China Electronics will become Optics Valley's largest shareholder holding 31.9% of the shares. We believe that China Electronics, which has a central enterprise background, will bring core regional resources and powerful industrial resources such as IT and information to Optics Valley. The two will join forces, complement each other's strengths, and develop collaboratively. Optics Valley will maintain its leading position in industrial parks: it can add 4 industrial parks in Haikou, Beihai, and Xi'an that complement each other regionally to 12, the existing construction area will reach 4.87 million square meters, the management service area will reach 2005 million square meters, and successfully enter Tier 1 and 2 cities. At the same time, Optics Valley can leverage China's electronic brand, capital, resource advantages, and industrial synergies to transform into service fields such as DHC, information security, and electricity sales, thus laying the foundation for the company's comprehensive transformation into an asset-light operating platform.
Optics Valley is expected to become a platform for the operation and integration of the CEC Industrial Park, fully improving the resource efficiency of the Group Park: China Electronics Divestment Industrial Park will be handed over to professional Optics Valley for joint operation, and attention can be focused on the IC main business in the future. It can be expected that in the future, Optics Valley is expected to become a platform for integrating and operating assets such as the CEC Group's industrial parks/properties, etc., to achieve the leapfrog development of the basic assets of the Group's park sector, thereby achieving the goal of increasing the asset securitization rate of the CEC Group from 55% to 80%. Furthermore, park assets such as Pudong Software Park, Southern Software Park, Changsha CLP Software Park, and Dongguan Industrial Park, which are currently part of the CLP system but are not part of listed companies, are likely to be integrated into Optics Valley in the future. At the same time, in the future, we can give full play to the team advantages of CLP Optics Valley and cooperate to complete the development and operation of Wenzhou Industrial Park, Shenzhen Property Office Building, and Land.
For the first time, we gave Optics Valley United a “buy” rating, and the target price for the next 12 months was HK$1.22: Using DCF's valuation of the company, based on a WACC of 8.66% and a long-term growth rate of 2%, we calculated that the company's value per share was HK$1.22, which has room for 39% increase from the current stock price. The target price corresponds to about 12x 2016 P/E. Although this level is higher than the average of Hong Kong stock pure industrial park property development companies, it is far below the average of 30xPE for property management companies such as Cai Life and CNOOC. The background of China's electronics central enterprise and Optics Valley will be completely transformed into an asset-light operating platform company. We think the valuation pricing given is relatively reasonable (OVU's Makerstar valuation has not yet been taken into account).
Risk Warning: Business integration falls short of expectations; industrial park replication and promotion results fall short of expectations