The current situation of the company
Hailong Holdings issued an announcement this morning, announcing that it would extend the period for early participation ($5 cash award), which had been scheduled to expire today, to June 3, the expiration date of the entire exchange offer. We believe that the reason for the delay is that the bond exchange is not satisfactory, and management hopes to maintain or even increase the incentive for bond exchange.
The current incentive mechanism for the exchange mainly includes: 1) 9.75% interest rate (corresponding to a 2.5% increase), plus 0.5% cash reward; 2) Chairman Zhang Jun's personal guarantee; 3) overseas drilling rigs with a book value of about 77.4 million US dollars; and 4) an extension of 1.75 years, but with a put option with a strike price of 104 expiring on August 2, 2021. In addition, the company has the right to redeem the bonds at a strike price of 104 before the maturity of the new bonds.
Comment
Some creditors have yet to agree to the swap or worry about the risk of future default and incentives that fall short of expectations. Some creditors still do not agree to the exchange, we expect that the main reason is that the creditors will face a new risk of default after the extension, and the exchange incentive conditions offered by the company do not meet the expectations of investors.
If the bonds are successfully rolled over, we believe that the company's current crisis will be temporarily resolved, and the success of the extension will also win the company time to transfer domestic funds abroad, and the company will have more time and opportunities to seek other financing channels in the coming year.
If the bond fails to roll over and the domestic funds are still unable to get out of the customs when they mature, we remind investors of the risk of failure in corporate debt restructuring, which may lead to: 1) We expect the company to use overseas / foreign currency assets for repayment. By the end of 2019, the company's US dollar-denominated accounts receivable is about 1.3 billion yuan. We estimate that the company's overseas cash may be 300-400 million yuan. In addition, the company also has some fixed assets overseas, such as the aforementioned overseas drilling rigs; 2) bankruptcy liquidation or reorganization. We believe that any consequence will have a more serious impact on the fundamentals of the company.
Adjust the net worth calculation. By the end of 2019, the company's fixed assets were about 3.17 billion yuan, inventory was about 860 million yuan, and trade receivables and other receivables were 2.34 billion yuan (of which 2.09 billion yuan were receivable). We calculated the above items at a discount of 6, 7 and 20% to get about 3.82 billion yuan, 4.46 billion yuan and 5.1 billion yuan respectively. In addition, the company has restricted funds and cash totaling 910 million yuan and total liabilities of 4.83 billion yuan. According to this calculation, the net value of the company's assets less liabilities may be about 0, 540 million yuan and 1.18 billion yuan.
Valuation proposal
Maintain the company's earnings forecast and target price of HK $1.1, corresponding to 7.7 times 2020 price-to-earnings ratio.
The current share price trades at 2.3 times 2020 price-to-earnings ratio. Maintain outperform industry ratings, but remind investors of the risk of short-term debt restructuring.
Risk.
The completion of the offer failed, the exit of domestic funds failed, and the fundamentals were lower than expected.