The company's recent situation
On May 20, Hilong Holdings issued an offer announcement. It intends to exchange all outstanding existing notes for $165,114,000 (about 165 million) dollars in “exchange costs”. The company will simultaneously sell new notes. The “exchange cost” for every $1,000 of the principal amount of an existing note includes: 1) the principal amount of the new note of $1,000; 2) $5.00 in cash (early cash reward); 3) accrued interest; 4) if the eligible holder is entitled to any new note whose principal amount is not a full multiple of $1,000, the amount of the new note issued will be rounded down and the unissued portion replaced by cash.
Furthermore, the minimum yield for new notes is tentatively set at 9.75% per year, which is higher than 7.25% of existing notes. The final interest rate is expected to be determined according to the pricing of simultaneous issuance of new funds.
Fulfilment of the exchange offer requires no less than 75% of the current principal amount of notes to be validly submitted before the deadline of $165 million. The exchange offer takes effect from May 20, the early cash award deadline is May 27, and the entire exchange offer period expires on June 3. The company's current $165 million notes will expire on June 22.
reviews
Exchanging offers will incur additional costs. If the company's offer is completed, we expect the company's financial costs and expenses for the plan to be approximately $826 million in “early cash rewards” (assuming all early exchanges), plus about $16.1 million in financial costs over a year, totaling about $16.93 million or 120 million yuan. However, compared to not making an offer, the company also needs to use bank loans or issue new bonds to repay old debts. The next year will also require financial expenses, so we expect the actual additional costs to be less than estimated.
The exchange offer may be Plan B, and domestic funding is still being approved. We expect that although the company has issued an exchange offer, the company is still preparing for repayment. Currently, domestic capital is being approved by relevant departments, and the exchange offer may only be the company's Plan B. We alert investors to the risks of corporate short-term debt restructuring.
The balance sheet is stable and resistant to cyclicality. As of 2019, the company's current ratio (current assets/current liabilities) was 1.5, and the balance sheet was stable. Furthermore, in the last round of the low oil price cycle, the company was one of the few oil service companies that continued to make profits and continued to have positive operating cash flow. In recent years, its anti-cycle capacity has also been continuously strengthened.
Valuation recommendations
Maintain the company's profit forecast and target price of HK$1.1, corresponding to 7.7 times the price-earnings ratio in 2020.
The current stock price is trading 2.4 times the 2020 price-earnings ratio. Maintains outperforming industry ratings, but reminds investors of the company's short-term debt restructuring risks.
risks
The completion of the offer failed, the domestic capital failed to leave the country, and the fundamentals fell short of expectations.