The bank also pointed out that if China Building Materials' stock price did not rise sharply after resumed trading, China National Materials Co., Ltd.'s independent shareholders may ask the company for an increase in the share exchange ratio. Overall, in the following two most likely situations, the bank believes that China National Building Materials shares will be the better choice: if China National Building Materials stock price rises, China National Building Materials shares will automatically follow; if China National Building Materials stock price does not change much or falls, China National Building Materials may need to increase the attractiveness of the transaction agreement, which will reduce the downward space of China National Building Materials stock price.
Independent shareholders of China Materials Co., Ltd. may require an increase in the share exchange ratio
Zhitong Finance learned that China Construction Materials Co., Ltd. and China Construction Materials Co., Ltd. jointly announced that the merger will be carried out in a share exchange method, with the share exchange ratio of 1 China Construction Materials Co., Ltd. for 0.85 shares of China Construction Materials. China Building Materials will need to issue a total of 3.036 billion new shares to complete the transaction. After the transaction is completed, the total number of issued shares of China Building Materials will increase from 5.399 billion shares to 8.435 billion shares. After the merger, China National Materials Co., Ltd. will become a wholly-owned subsidiary of China National Building Materials.
trading price represents the valuation. China Galaxy Securities pointed out that based on the stock prices of the two companies before was suspended by , the above-mentioned share exchange ratio means that China Building Materials will pay HK$4.27 per share to shareholders of China National Materials Co., Ltd., a premium of 19.2% compared with the stock price before suspension. According to 2017 interim data, the price of the acquisition of China National Materials Co., Ltd. is equivalent to 0.7 times the price-to-book ratio.
The independent shareholders of Zhongcai Co., Ltd. may require an increase in the share exchange ratio. If the stock price of China Building Materials does not rise sharply after the resumption of trading, the bank believes that the independent shareholders of China Building Materials may require China Building Materials to increase the share exchange ratio. In the recent two cases of privatization of cement companies (i.e., 未分文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文文� Although the premium of Western Cement is relatively low, it is recommended that the price-to-book ratio represented by the recommended price-to-book ratio of 1.47 times (Note: The price recommended by Taiwan Ni International represents the price-to-book ratio of 0.96 times). Therefore, considering that the share exchange price premium proposed by China Building Materials this time is 19.2% and the price-to-book ratio is 0.7 times (assuming that the share price of China Building Materials does not change much), the bank does not rule out that some independent shareholders of China Building Materials may request an increase in the share exchange ratio.
In addition, one of the key conditions for the merger agreement to take effect is that the special resolution is passed by voting at the shareholders' meeting of H shares in to approve the merger, plus: (a) The merger has been approved by more than 75% of the voting rights attached to the H shares of China Materials Holdings H shares held by the independent shareholders of China Materials Holdings H shares; and (b) the number of votes against the resolution shall not exceed 10% of the voting rights attached to the H shares of China Materials Holdings H shares held by the independent shareholders of China Materials Holdings H shares. Based on this, the bank believes that the bargaining power of independent shareholders of China National Materials Co., Ltd. is not low. After
resumes trading, will China Building Materials stock price rise sharply?
Will China Building Materials stock price rise sharply after resuming trading? The bank believes that there is little chance of a sharp rise in stock price. Before considering any potential synergies (which may take two or three years to fully reflect), the combined 2017E/2018E EPS thickening is estimated to be only 3%/2.5%. If the market consensus forecast for China Building Materials (not our forecast) is used for comparison, the impact of transactions on earnings per share in 2017/2018 is -5.8%/+8.2%. Therefore, the conclusions are roughly the same: the initial stage boost to EPS is not very significant (Figure 1). From the perspective of return on equity , China Building Materials' return on equity/net asset value per share in 2017 before the merger was 5.2%/7.88 yuan, and after the merger it was 6%/7.17 yuan. Although the return on equity will increase after the merger, the benefits to valuation may be limited due to the decline in NAV value per share.
The bank pointed out multiple reasons for the merger: the debt ratio will decline. At the end of June 2017, the net debt-to-equity ratio of China National Building Materials/China National Materials Co., Ltd. was 228%/44%. Therefore, according to management estimates, China Building Materials' net debt-to-equity ratio after the merger will drop to 167%; China Building Materials is China's largest cement producer with an annual output of 409 million tons, while China Materials Co., Ltd. is the fourth largest cement company with an annual production capacity of 112 million tons. Management expects that both parties will achieve synergies through central procurement and better coordinate staggered production; both companies operate engineering services businesses and own more than 10 platforms. After the merger, the two parties will better coordinate to increase the bid price; as the merged merger receives government support, the merged entity is expected to implement equity incentive plans for employees, thereby improving operating efficiency; in addition to the cement business, the merged entity also has a global leading position in commercial concrete production, cement engineering services, gypsum board production, fiberglass production and wind power blade production businesses. The actual benefits of
need to be observed. Although there are many benefits after the merger, the actual benefits still need to be observed. China Galaxy pointed out that the two companies' annual cement production capacity totaled 521 million tons. Management estimates that about 97 million tons of production capacity (18.6%) are located in areas where the two parties overlap, which is expected to bring room for synergy. According to China Building Materials estimates, the cost that can be saved may be about RMB 3-5 per ton, but this may take 2-3 years to fully reflect. The overlap between the two parties' businesses in terms of regional conditions is relatively small, mainly because China National Materials Co., Ltd.'s clinker production capacity exceeds 60% is located in the northwest region, while China National Building Materials has almost no business in the local area.
Secondly, since China National Building Materials’ debt ratio is much lower than China National Building Materials’ net debt ratio, China National Building Materials’ net debt ratio will decline, but despite this, the immediate financing cost savings may be limited. This is because China Building Materials has always had a high credit rating in China, and major domestic banks have also supported their bank loans. These two factors will limit the further decline in the company's financing costs. At the same time, after the merger of the two parties, China National Building Materials will absorb the advance payment (about RMB 12.5 billion) in the financial statements of China National Materials Co., Ltd., which mainly comes from engineering service business. China Building Materials Management believes that as working capital management more effectively uses these advance payments, the company will save some financing costs.
In addition, China Building Materials management said that the company may consider issuing additional issuances after the merger to further reduce liabilities. The additional issuance can be carried out through China Building Materials listed company or China National Materials Co., Ltd.'s original A-share subsidiary. But there is no specific plan at present.
Based on the above, the bank recommends China National Materials Co., Ltd. However, given the limited boost to China Building Materials' earnings per share in the initial stage and the uncertainty in obtaining support from independent shareholders, the bank maintained its holding rating and target price of HK$5.20 (0.55 times the price-to-book ratio in 2018) (share price before suspension: HK$5.02). In addition, since there are no consolidated financial statements for the preparation of the exam, the bank maintains its financial model unchanged at this stage.
It is worth noting that this merger must be personally or appointed representatives at the Special General Meeting of China Building Materials Shareholders, China Building Materials H-class shareholders' meeting and China Building Materials Shareholders' meeting of domestic shareholders, and China Building Materials Shareholders' meeting of China Building Materials' domestic shareholders, and China Building Materials' independent shareholders attending the meeting, to pass the special resolution by voting, to approve the merger and issue of China Building Materials Shares under this merger.
In addition, if China Building Materials agrees to increase the share exchange ratio, but China Building Materials' independent shareholders reject the proposal due to dilution of earnings per share, the merger and acquisition will not be passed and the share price of China Building Materials may fall.
