20220602-招银国际-CENCHI_–_Buy_on_CENCHIs_3页_431kb

CMBI Credit Commentary Summary

Core Content

This document provides an analysis of Central China (CENCHI) and its potential re-rating due to the strategic investment by Henan Railway Construction & Investment Group Co. Ltd (HNRAIL), a state-owned entity. The key event is the framework agreement between CENCHI and Henan Tongsheng Zhiye (HTSZY), under which the chairman will sell his 29.01% stake and CENCHI will issue HKD708 million in convertible bonds (CBs) to HNRAIL. The CBs have a conversion price of HKD1.2 per share, which is a 85% premium over the last close, and a coupon rate of 5%, with a yield to maturity (YTM) of 9%, implying a redemption price of 108 at maturity.

If the CBs are fully converted, HNRAIL will own 40.8% of CENCHI, becoming its largest shareholder. The transaction is expected to be completed by 1 July 2022, with optimism that it will be finalized by the end of June 2022 with necessary regulatory approvals and due diligence.

Main Points

• State-owned Background as a Re-rating Story: The involvement of HNRAIL, a state-owned company, is expected to improve CENCHI's funding access and credit profile.
• Shareholding Structure:
  • Existing Shareholding: Chairman holds 70.11%.
  • After Share Sale: Chairman will own 41.09%.
  • After CB Conversion: HNRAIL will own 40.80%.
• Funding and Valuation: The CBs are seen as a positive for CENCHI, with a strong valuation basis. The report suggests an additional 10-15 points of upside for CENCHI shares, drawing comparisons with CSCHCNs.
• No Change of Control (COC): The transaction will not trigger a change of control, as the chairman will still hold over 30% of shares post-sale, and CENCHI will not be consolidated into HNRAIL.
• Comparison with China South City: CENCHI is considered more likely to be "bailed out" by the local government due to its smaller size and provincial focus. The deal is expected to be completed faster and with more support due to the current government stance on stabilizing the economy and property market.

Key Information

• HNRAIL Overview:
  • A local government finance vehicle (LGFV) responsible for railway development in Henan.
  • Wholly owned by the Henan government.
  • Rated A2 by Moody's.
  • As of 30 June 2021, had total assets of RMB75.6 billion and cash of RMB3.1 billion.
• CBs Details:
  • Issue amount: HKD708 million (cUSD91 million).
  • Conversion price: HKD1.2 per share.
  • Tenor: 2 years, with an option for one additional year.
  • Coupon rate: 5%.
  • YTM: 9%.
• Market Reaction:
  • CENCHI shares moved up by 20 points.
  • CENCHI 7.25% '23 was the outperformer.
• Recommendation:
  • "Buy on CENCHIs".
  • Longer-dated CENCHIs are expected to have more upside.

Author Information

• Authors: Glenn Ko, CFA (高志和), Polly Ng (吴宝玲), James Wen (温展俊).
• Contact Details:
  • Glenn Ko: (852) 3657 6235 | glennko@cmbi.com.hk
  • Polly Ng: (852) 3657 6234 | pollyng@cmbi.com.hk
  • James Wen: (852) 3757 6291 | jameswen@cmbi.com.hk
• Department: CMBI Fixed Income.
• Email: fis@cmbi.com.hk

Disclaimer and Risk Information

• Investment Risks: The report highlights that investing in securities involves risks and that past performance does not guarantee future results.
• No Investment Advice: CMBIS does not provide individually tailored investment advice.
• Regulatory Disclaimer: The report is intended for specific recipients in the UK, US, and Singapore, and is not suitable for all investors. It is not an offer or solicitation to buy or sell any securities.
• Conflicts of Interest: CMBIS may have investment banking relationships with the companies mentioned, and thus may have conflicts of interest that could affect the report's objectivity.