Jacobs Research Pharmaceuticals (2633.HK/ HK $2.08, buy) announced plans to issue HK $500m of convertible bonds. Dragons 615 Limited (Dragons) and HH InRe JP Limited (HH JP) will subscribe for HK $280 million and HK $220 million respectively. The convertible bond has a maturity of three years and an interest rate of 3.5%. The conversion price is HK $2.50 per share, and 200 million shares will be issued when the conversion right is executed, equivalent to 9.92% of the enlarged share capital.
Our significance for the issuance of convertible bonds is summarized as follows:
(1) New M & A projects are approaching.
According to the company announcement, convertible bond financing is intended for potential acquisitions or strategic alliances to expand the market, while investing in high-tech biopharmaceutical projects to enhance the company's innovative strength.
The company firmly implements the strategy of building a well-known and reliable family medicine series brand. With a large amount of cash on hand, we believe that the company will continue to seek M & An opportunities, especially projects related to the OTC area. We note that the cash on the company's balance sheet as of March 2017 is HK $360 million. Together with the HK $500 million raised by convertible bonds, we estimate that the company's total cash will reach HK $800 million. As the company plans to use some cash to finance potential mergers and acquisitions, we infer that the transaction size may be between HK $300 million and HK $800 million.
According to the company's M & A records, all previous deals have closed at a reasonable price (10-15 times historical P / E). We believe in the company's experience in identifying attractive target companies and believe that the company's new potential mergers and acquisitions will continue to add value to shareholders.
(2) the market has strong confidence in the company's performance and prospects.
Both subscribers to convertible bonds are the world's top institutional investors. Dragons is jointly funded by international institutional investors and a Singapore sovereign fund, a wholly owned subsidiary of Temasek Holdings. HH JP is managed by Hillhouse Capital, a world-renowned investment institution made up of investment professionals with extensive investment experience in the healthcare investment field.
The conversion price of HK $2.50 represents a 21% premium to the average closing price over the past 10 trading days, which is equivalent to 17.4 times the forward price-to-earnings ratio for FY18 based on our earnings forecast. We believe that the conversion price reflects the strong confidence of top institutional investors in the future of the company.
Based on the segment sum-discounted cash flow valuation method, we maintain the target price of HK $3.03. Reaffirm the buy rating of the stock.
