Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) (601669)
Event: Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) announced that in order to properly solve the problem of horizontal competition, the company plans to replace the real estate sector assets held by the company (hereinafter referred to as “purchased assets”) with the high-quality power grid auxiliary assets held by the controlling shareholder power construction group (hereinafter referred to as “purchased assets”), and the difference shall be paid by power construction group to the company in cash.
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The controlling shareholder paid 65.34 million yuan in cash and made a commitment to the net profit of Shanghai Institute in the next three years. The invested assets in this transaction are the equity of 18 subsidiaries held by power construction group (mainly Electric Power Design Institute and engineering company, see Table 2), and the invested assets are the equity of 3 subsidiaries held by the company (real estate company, see Table 3). The difference between the invested assets and the invested assets is RMB 65.3426 million, which shall be paid by power construction group to the company in cash. This transaction will enable the company to obtain richer cash reserves and help the company expand its business scale. At the same time, PowerChina group promises that the accumulated net profit of Shanghai Electric Power Co.Ltd(600021) Design Institute Co., Ltd. (i.e. “Shanghai Institute”) invested in assets will not be less than RMB 456 million from 2022 to 2024; For the part where the actual accumulated net profit is less than the total committed net profit, PowerChina group will make cash compensation to the company according to the equity proportion (50%) of Shanghai Institute transferred this time.
The controlling shareholder promised to pay off the debt, and the overall financial strength of the company was further enhanced. As of November 30, 2021, the disposed assets have a non operating debt principal of RMB 13.11 billion for the company and its subordinate enterprises (excluding disposed assets) and disposed assets; The invested assets enjoy a non operating debt principal of RMB 730 million for PowerChina group and its subordinate enterprises (excluding the company and its subordinate enterprises and invested assets). PowerChina group promises that before the completion of the delivery of the purchased assets of this asset replacement, it will take measures to ensure the repayment of the purchased capital assets, and all the principal and interest of its non operating debts to the company and its subordinate enterprises (excluding the purchased assets) and the assets before the delivery; At the same time, it promises to take measures to ensure that the power construction group and its subordinate enterprises (excluding the company, its subordinate enterprises and the placed assets) repay all the non operating debt principal and interest of the placed assets before the completion of the delivery of the placed assets in this asset replacement. Therefore, in this transaction, the company and its subsidiaries will get the arrears repaid by the assets (real estate business), and all debts will be recovered before the assets are transferred to the company. The above measures will further thicken the company’s cash reserves and enhance the company’s overall financial strength.
Asset replacement is expected to thicken the company’s net profit and help solve the problem of horizontal competition. The controlling shareholder power construction group made a commitment to solve horizontal competition to the company in December 2014. Through this asset replacement, the controlling shareholder will inject high-quality assets in horizontal competition with the company into the company, which is conducive to reducing horizontal competition between the company and the controlling shareholder, enhancing the company’s independence and protecting the rights and interests of the company and minority shareholders. At the same time, the overall profitability of the invested assets (see Table 2) is higher than that of the invested assets (see Table 3), which is conducive to thickening the scale of the company’s operating revenue and net profit, and improving the company’s profitability and asset quality. Due to the tight financing environment of real estate enterprises and the restrictions on equity financing of Central real estate enterprises to a certain extent, stripping the real estate business will help the company broaden financing channels or provide an important source of funds for the company’s investment and development of new business (new energy power generation operation asset business) during the 14th Five Year Plan period.
Profit forecast, valuation and rating: Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) has competitive advantages in the fields of power construction and operation investment, water conservancy and water environment treatment and operation. After the asset replacement, the company’s financial strength and profitability will be further enhanced, and the financing channels will be widened. We are optimistic about the company’s business development in the field of new energy power generation operation assets during the 14th Five Year Plan period. Since the asset replacement has not been implemented, the company’s EPS forecast from 2021 to 2023 is maintained at 0.58 yuan, 0.65 yuan and 0.72 yuan, and the current price corresponds to the company’s 21-year dynamic P / E ratio of 14x respectively, maintaining the “buy” rating.
Risk tip: the demand for contracted construction of new energy power generation projects is lower than expected, the growth rate of newly signed orders slows down, the project payment collection is lower than expected, and the profitability of real estate business is lower than expected.
