China South City
Target Price: HKD3.03
Tencent To Become Strategic Shareholder
• After the market closed yesterday, China South City (CSC) announced that Tencent (700 HK, SELL, TP: HKD321) will become a strategic investor in the company through the subscription of 680.3m new shares at HKD2.20/share (a 1.4% premium to its last closing price). Upon completion of the transaction, Tencent will own a 9.9% stake in CSC, which will be subject to a 3-year lock-up period and CSC will receive HKD1.5bn in cash.
• Tencent has the option to subscribe to a further 244.8m shares at HKD3.50/share within two years or 15 days after CSC’s shares close above HKD3.85 for 30 consecutive trading days.
• In our view, this development signals Tencent's intention to create and develop CSC's B to B online to offline business. We believe Tencent will help CSC use its portal, www.csc86.com generate revenues through advertising and subscriptions from tenants (online). Moreover, using its trade centres, CSC can facilitate its tenants and their customers that meet on its website to conclude deals at the trade centres (offline). We note that this is the business model of HC International (8292HK, BUY, TP:HKD14.30) and Alibaba.
• At this stage, it is very difficult to quantify the value added aspect to CSC (if any) of Tencent's involvement. However, we can say with more certainty that CSC’s share price is likely to soar when it resumes trading today. This is because a shareholder of Tencent’s calibre should greatly improve investor confidence in CSC and lead to a re-rating of its stock.
• Immediately upon completion of the deal (between 7 to 45 days from 15 January), we calculate that our end FY14F (31 March FYE): i) net debt/equity ratio will drop to 19% from 29% and ii) ENAV/share will decrease by 4.8% to HKD4.57.
• Pending more details of the tie-up, we are keeping our forecasts and TP unchanged at HKD3.03, which is currently based on a 37% discount to existing end-FY14 ENAV of HKD4.80.
Publish date: 16/1/14