Selling half of the shares in Yunnan's assets at a price of 2.4 billion yuan: Hengding Industrial announced today that it has signed an agreement with Yunnan Dongyuan to sell 50% of the shares in the target company composed of ten subsidiaries, including Fuyuan Dahe and Fuyuan Fude, at a price of 2.4 billion yuan (HK$3 billion). These ten subsidiaries are basically equivalent to all of Hengding's assets in Yunnan Province. The price of this transaction is equivalent to 1.2 times the target company's PB and 48 times the 2012 PE.

The liquidity crisis has abated, but the company's future growth will decline: the 2.4 billion yuan of purchase cash will be used to buy back shares of the company's target companies pledged with Huaneng Trust in August last year. The remaining $1.2 billion will be paid within 10 days of closing the transaction. However, the bank loans that the company had to repay during the year were only about 1 billion yuan, so the company's liquidity crisis was temporarily mitigated. However, the company's assets in Yunnan Province are originally an area that will grow rapidly in the future, and the company obtained financial security at the cost of transferring half of its shares. Since the company will record a net profit of 400 million yuan from this revenue.

There will still be pressure on financial liquidity in the future: the company's convertible bonds and high-interest notes totaled 3.31 billion dollars in 2015, while the company's current operating cash flow is only about 600 million yuan, capital cash flow is about 1 billion dollars, and free cash flow is still negative. According to the current operating situation in the coal coke industry, there will still be very heavy funding pressure in the future.

Upgrading the rating to “neutral”: Since we lowered the company's rating in January of this year, the company's stock price has dropped by about 30%. We believe that the current company's stock price basically reflects the downturn in the industry and the risk of liquidity. Since (1) the company's coal mine in Panxian County has basically resumed production, (2) liquidity risks have been mitigated, and (3) the company's stock price has now reached our target price range. We upgraded the company's rating to “neutral.”

The main risk comes from a rise in coking coal prices exceeding expectations.