Event:
In Jan 2016, Tech-New Group, the largest shareholder of Tongfeng,announced to inject the Zhejiang Yongkang Hardware E-commercePark, which covers a land area of 695.9 mu, into the listed company,kicking off the path of industrial integration.Comments:
Tongfeng Electronics: a major listed vehicle of Tech-New Group.Tongfeng Electronics is a producer of film capacitors and relevant filmmaterials based on Anhui, and its products are widely applied in the railtransit, power grid, alternative energy, and home appliance fields.Weighed down by slipping product prices due to fast expansion of themidstream industries, the Company reported revenue of merelyRmb670mn and net loss of Rmb83mn in 2014; and its capitalization wasonly Rmb3.2bn when it came to trading halt at the end of Sep 2015.Later, Tongfeng Electronics reorganized its management team in Sep2015 and sold its old plant to the local government at the end of 2015 forRmb220mn, thus effectively shrugging off the burden of obsoleteproduction capacities and making preparation for businesstransformation.
Following the deal, Tech-New Group will significantly boost itsstake in Tongfeng Electronics.Headquartered in Yongkang, a county-level city of Zhejiang province,Tech-New Group has set up an industrial cluster that is dominated byautomotive parts over the past more than two decades, and become theactual controller of Tongfeng Electronics in 2011 by fully taking overTongfeng Group.The first part of this asset restructuring plan is to inject 695.9 mu land ofTech-New Group in Yongkang as well as properties to be built on it(over 50% of the properties are expected to be sold out in 2017E) intoTongfeng Electronics for Rmb4.53bn, and Tech-New Group promises tomake net profit of Rmb2.5bn during 2016~18 if the transaction iscompleted in 2016, equivalent to 5.4x 2017E PE.The second part is to raise Rmb2bn through private placement to nomore than 10 qualified investors to fund construction of the hardwaree-commerce park project. Yongkang city has over 10,000 hardware toolcompanies that employ over 300,000 workers and produce over 10,000types of hardware tools. The hardware industry accounted for ~90% ofthe local industrial output, and posted offline transactions of Rmb38.6bnand online transactions of Rmb22bn in 2014. Following the deal, webelieve the e-commerce platform will gain rapid development on theback of the robust local hardware industry.Once the deal is completed, Tech-New Group will lift its stake in Tongfeng Electronics from 16.8% to39%.
A rosy prospect for the new materials and high-end component business.During its trading halt, Tongfeng Electronics announced its subsidiary, Hehui Jinyuan, obtainedRmb231mn in medium to long-term loans from Anhui Branch of China Development Bank at apreferential annualized interest rate of only 1.27%. Relevant funds will be spent on construction of thenew materials, alternative energy and high-end component R&D industry bases.In the future, Tongfeng Electronics is expected to take advantage of the customer resourcesaccumulated in the traditional capacitor and film material business and speed up business expansion infuture.Additionally, the capacitor products of Tongfeng Electronics will be applied in the alternative energyvehicles and green energy fields in future, given rapid development of Zotye Auto, a subsidiary ofTech-New Group focusing on R&D and manufacturing of autos and major automotive parts.
Risks: Disappointing asset restructuring, and little earnings contribution from the e-commerce park.
Earnings forecast, valuation and investment rating: We predict that Tongfeng Electronics will reversethe loss-making condition in 2015, and its property resources will start making contributions in 2016.Overall, we project the Company’s 2015/16/17E EPS to be Rmb0.01/0.17/0.43. Factoring in theexpected fast growth in 2017 and based on valuation of comparable companies, potential of thee-commerce park and the external acquisitions, we value the Company at 26x 2016/17E PE, equivalentto TP of Rmb7.8. Initiate BUY.
