20131202-富瑞金融香港公司-Key_Beneficiary_of_Shanghai_FTZ,_SOE_Reform__2014_China_Top_Buy_Constituent_12页_802kb

Shanghai Industrial Hldg. (363 HK) Summary

Core Content

Shanghai Industrial Holdings Limited (363 HK) is highlighted as a key beneficiary of the Shanghai Free Trade Zone (FTZ) initiative and state-owned enterprise (SOE) reform. The company has a diversified business portfolio encompassing real estate, infrastructure, and environmental services, with a focus on water treatment and environmental industries.

Main Points

• Strategic Positioning: The company is well-positioned to benefit from the Shanghai FTZ, which is expected to boost transportation demand and land value appreciation. It also stands to gain from the accelerating SOE reform, which could lead to asset consolidation and acquisition opportunities.

• Environmental Business Expansion: Shanghai Industrial has built a strong platform in water and environmental services, supported by government backing, low-cost funding, and experienced management. It has expanded into waste-to-energy and has a significant designed capacity for water treatment, mainly in East and South China.

• Land Bank Monetization: The company has sold a 49% stake in Lot E of its Qingpu landbank for RMB7.7K/sqm GFA, with an estimated fair price of RMB11.8K/sqm GFA after considering a 35% LAT. This move is part of its strategy to monetize land assets.

• Property Business: The company's property segment is expected to benefit from land appreciation, and it plans to sell its 51% stake in a property project in 2014, which is anticipated to improve cash flow and allow for capital reallocation.

• Valuation and Price Target: The stock is trading at a multi-year low of 0.8x P/B and a 35% discount to its NAV. The new price target is HK$34.80, up from HK$26.55, based on a 15% discount to the 2014 NAV estimate. The valuation is considered attractive.

• Financial Performance: The company's earnings are expected to grow, with a 7% increase in 2014 net profit (HK$3.33bn) compared to 2013. It has a strong balance sheet, with increasing book value per share and a consistent dividend yield of around 4.3%.

Key Information

Business Segments

• Infrastructure: Includes toll roads, water treatment, and sewage facilities. The company has a 25-year concession for Hanxi sewage treatment plant and has plans for expansion and upgrading.
• Real Estate: Operates through subsidiaries SIUD and SID. It has a land bank monetization strategy and is expected to consolidate real estate assets under one platform.
• Environmental Services: Strong presence in water treatment with over 9 million tons daily capacity. It has expanded into waste-to-energy and is targeting at least 10% IRR for its projects.

Financial Highlights

• Revenue and Net Profit:

  • 2013E: HK$21,169mn (Net Profit: HK$2,634.3mn)
  • 2014E: HK$23,833mn (Net Profit: HK$3,331.8mn)
  • 2015E: HK$25,064mn (Net Profit: HK$3,290.1mn)

• Book Value per Share (BVPS):

  • 2013: HK$31.37
  • 2014: HK$33.38
  • 2015: HK$35.31

• Price-to-Book (P/B):

  • 2013: 0.8x
  • 2014: 0.8x
  • 2015: 0.8x

• Dividend Yield:

  • 2013: 4.18%
  • 2014: 4.33%
  • 2015: 4.44%

• Net Debt to Total Capital:

  • 2013: 16.3%
  • 2014: 15.2%
  • 2015: 13.6%

• Return on Equity (ROE):

  • 2013: 7.9%
  • 2014: 9.5%
  • 2015: 8.9%

Key Projects

• Henggang Recycling Water Plant: A BOT project with 100k ton/day capacity and 50k ton/day recycling capacity, operational since 2011.
• Guanlan Sewage Treatment Plant: An O&M project with 60k ton/day capacity in Phase 1 and 260k ton/day in Phase 2.
• Hanxi Sewage Treatment Plant: Largest in Wuhan with 400k ton/day capacity, expected to expand to 800k ton/day.
• Qingpu Wastewater Treatment Plant: Acquired 70% equity interest for RMB126mn.

Growth Strategy

• Acquisitions are a key growth driver, especially in water treatment and environmental projects.
• The company aims to achieve a minimum IRR of 10% for its infrastructure projects.
• It is expected to inject toll road assets into its operations in the first half of 2014.

Risks

• Tightening property policies could reduce demand.
• Slower-than-expected M&A or asset injection.
• Weak execution on property projects.

Analysts

• Christie Ju, CFA: Equity Analyst
• Rong Li: Equity Analyst
• Leon Liao: Equity Analyst
• Eric Chen: Equity Associate

Conclusion

Shanghai Industrial is a diversified conglomerate with a strong presence in water treatment and environmental services, as well as real estate and infrastructure. It is positioned to benefit from the Shanghai FTZ and SOE reform, with an attractive valuation and a clear growth strategy. The company is recommended as a "Buy" by Jefferies, with a price target of HK$34.80 for 2014.