On July 19, 2019, JD.com [JD US; unrated] and 360 [601360 CH; unrated] were introduced as shareholders of Cai Life.
The placement will reduce Cai Life's debt ratio and financing costs in fiscal year 2019.
We believe that with the introduction of two Internet giants, it will help the company to develop value-added services and export service platforms.
To reiterate the "overweight" rating, the latest target price is HK $7.30, based on 12.5 times 2020 price-to-earnings ratio.
JD.com and 360 participate in the placing
On July 19, 2019, Cai Life announced that it would issue shares to two companies respectively. JD.com and 360 will subscribe for 71.1 million shares / 23 million shares at HK $5.22 per share respectively. After the completion of the placement, JD.com and 360 will respectively own 5.08% / 1.70% of the shares, and Caisheng will raise HK $486 million. However, as Zhou Hongyi, the 360 controlling shareholder, is also a non-executive director of Cai Life, the placing matters relating to 360 are subject to the approval of the independent shareholders.
Strengthen network-based value-added services
In addition to reducing the leverage ratio of lottery life, the placement will also allow the company to further cooperate with Chinese Internet giants. According to Cai Life, JD.com 's subscription will strengthen cooperation between the two companies, including commercial, logistics, financial and technology businesses. The placement to 3600 will also promote cooperation between the two companies, widely applying the former's technologies such as core security capabilities, big data, Internet of things and artificial intelligence to community security. This has also enabled 360 to enhance its brand awareness and influence in terms of urban and community safety.
Improve the financial situation in the short term
The placement will benefit the overall financial position of the company. Caisheng's net debt ratio was 30.8% at the end of 2018, while the financing cost in 2018 was close to 300 million yuan. After all the placements are completed, Cai Life will raise a total of HK $486 million, which will reduce its net debt ratio and financing costs for fiscal year 2019. We expect that when the company releases its 2019 interim results, it will provide more guidance on plans to reduce its debt ratio.
In the long run, the synergy will be more obvious.
We expect that the launch of JD.com and 360 will further strengthen Cai Life's leading position in providing Internet value-added services. This will also enable Caisheng to enhance its bargaining power when exporting its service platform to other property management companies. This will allow lottery life to highlight its advantages in the same industry. The main driver of the company's growth is the sale of its service platform to other companies, while most of the listed industry will rely on the growth of the relevant developers.
Valuation is relatively low, reiterate "buy"
We have slightly lowered our earnings forecast to reflect the dilution impact of the placing. Based on 12.5 times 2020 price-to-earnings ratio (previously: 12.5 times 2019 price-earnings ratio), we raised our target price to HK $7.30. Repeat "buy". The performance of color life services lags behind in the industry because the company has the highest debt ratio after a series of acquisitions. The introduction of two internet giants should allay some of the concerns and promote revaluation.