company newsnote, shil expects the quarantine impact on its ip portfolio will be minimal, likely...

Company News

CONNECTED TRANSACTION: DISPOSED INTEREST IN WUFANGZHAI FOR RMB420 MILLION

On 21 April 2020, SIHL announced that Hu-Ning Expressway, its indirectly wholly-owned subsidiary, entered into the Share Transfer Agreement with Shanghai Galaxy, pursuant to which Hu-Ning Expressway agreed to sell approximately 18.1125 million shares of Wufangzhai – a principally producer and distributor of glutinous rice dumplings established in the PRC to Shanghai Galaxy, accounting for approximately 23.97% of Wufangzhai's registered capital with a total consideration of RMB420 million. Immediately upon completion of the Disposal, Hu-Ning Expressway will no longer directly hold any shareholding interests in Wufangzhai. However, Hu-Ning Expressway remains holding 45% equity interest in Shanghai Galaxy, which in turn will hold 23.97% shareholding interests in Wufangzhai, and enjoy the corresponding rights as a shareholder. In view of the current market conditions, the management of the Company is of the view that the Disposal would allow Hu-Ning Expressway to gain more liquid funds and realise a return on its investment, thereby allowing it to concentrate resources to its core business and replenish working capital for implementing strategic transformation plans. The Disposal is expected to result in a gain of approximately RMB40 million to the Group, which will be used to replenish the Company’s working capital.

A SUBSIDIARY OF SIHL (363.HK) GRANTED A LOAN OF RMB100 MILLION TO SHANGHAI GALAXY

On 15 June 2020, SIHL announced that Shanghai Shen-Yu (an indirect wholly-owned subsidiary of the Company) (as lender), the Bank (as lending agent) and Shanghai Galaxy (as borrower) entered into the Entrusted Loan Arrangement on 15 June 2020 for the provision of loan in the principal amount of RMB100 million at a fixed interest rate of 5% per annum, which will be funded by Shanghai Shen-Yu to Shanghai Galaxy for a 12-month period commencing from 15 June 2020 to 14 June 2021.

2nd Edition 2020 | Corporate Newsletter

Stock code: 363.HK

Stock code: 363.HK


CITI: Shanghai Industrial (0363.HK) Solid Balance Sheet + Defensive Businesses = Stable Dividends Shanghai Industrial reported FY19 net profit of HK$3,350m (+0.5% YoY), largely in line with our estimates of HK$3,416m. The Board declared final DPS of HK$0.52 (flat YoY). FY19 total DPS amounted to HK$1.53 (including the non-cash dividend in 1H19 worth HK$1.01/share). Expect Help from Government on Toll Roads — The group was recently asked by the government to waive toll fees for their toll roads during the prevention and control period of the COVID-19 epidemic until such measures end. We are of the view that Shanghai Industrial will receive toll revenue compensation from the government for its agreement to fulfill its social responsibilities. Recall, Shanghai Industrial did receive similar toll revenue compensation in 2009 from the government for expansion work done at the Hu-Kun Expressway amounting to RMB251.60m (which was sufficient to offset the decrease in profit from Jing-Hu Expressway after the completion of its alteration and expansion). ~8.5% Dividend Yield — Management stressed at the earnings call that Shanghai Industrial has a solid balance sheet (~62% net gearing at end-2019) and its businesses (from toll roads and tobacco) should still be able to generate stable operating cash flows despite the COVID-19 outbreak. We conservatively assume the group to go back to 100% cash dividends and pay HK$1/share this year (par to what it paid in 2018). Implications — Reflecting FY19 results and latest forex rates, we raise our FY20- 21E earnings by 0-7%. Our NAV currently stands at HK$27.87 (previously HK$30.93). We reduce our TP from HK$20 to HK$14.20 as we now apply a new target discount of 49% (equivalent to 1 S.D. below mean, which is consistent with what we do to other mid-cap conglomerates). We maintain our Buy rating as the stock’s defensiveness (i.e., stable cash flows from its toll roads and tobacco business) has been largely ignored by the market, in our view. Valuation is undemanding with the stock trading at 58% NAV discount (>1 S.D. discount to its LT average).

Research Reports

Stock code: 363.HK

HSBC: Shanghai Industrial (0363.HK) Buy: DPS maintained during COVID-19 challenge

Flat FY19 earnings in line with expectations

Challenging outlook for toll roads during toll-free policy, but management aims to maintain DPS of HKD1.0 for 2020

Maintain Buy with a new TP of HKD15.40 from HKD17.70 on lower estimates, 8% yield for 2020e Results met expectations: Shanghai Industrial (SIHL) reported FY19 turnover of HKD32bn (+6.4% y-o-y) and an attributable profit of HKD3.3bn (+0.5% y-o-y). The company declared a final dividend of HKD0.52 (2018: HKD0.52). Infrastructure facilities (48% of profit): Toll roads delivered an attributable net profit to the company of HKD1.1bn (2018: HKD1.2bn). The decrease can be attributed to a diversion of traffic flow and implementation of the electronic toll collection (“ETC”) policy; traffic flow was 176.5m (2018: 174.2m). The water services segment’s revenue was up 11% y-o-y. Real estate (21% of profit): Segment profit fell 30% y-o-y in 2019 due to a high base and the disposal of its partial interest in SIUD (563 HK, from 70% to 47%). Both of its two major subsidiaries SIUD and SID (600748 CH) reported positive earnings growth, of 19% and 5% y-o-y respectively. Consumer products (30% of profit): The consumer products business recorded an attributable profit of HKD1.1bn (up 2.5% y-o-y), with Nanyang Brothers Tobacco and Wing Fat Printing maintaining stable net margins. Toll roads to be most affected by COVID-19. China has adopted a toll-free policy during the COVID-19 outbreak, affecting SIHL’s toll road segment which accounted for c13% of the company’s total operating profit. According to management, the company is losing around RMB200m revenue per month and there’s limited visibility on how long this policy will last. However, SIHL will try to negotiate with local governments regarding potential compensation or an extension of the concession period for its toll roads. …but management aims to keep stable DPS for 2020: Although SIHL’s earnings outlook this year will be impacted by the toll road segment, management mentioned it is keen to maintain a stable DPS of HKD1.0 per share. This implies a 2020e dividend yield of 8.4%. Maintain Buy: Although SIHL’s toll road segment is taking a hit this year, the company has committed to a decent yield outlook. In our view, its toll road and tobacco business should recover quickly post outbreak. We cut our target price to HKD15.40 from HKD17.70, based on a five-year mean discount of 48% applied to our SOTP-based NAV of HKD29.65 (from HKD34.12). The company is trading at 0.3x 2020e PB, and we rate the stock Buy, with 30% implied upside.


Stock code: 363.HK


Goldman Sachs: Shanghai Industrial (0363.HK) FY19 results inline; seeking gov’t reimbursement for toll road traffic control; valuation undemanding; Buy Shanghai industrial reported FY19 headline profit of HK$3.4bn (-1% yoy). Excluding one-off items including HK$222mn fair gain in IP offset by HK$291mn impairment losses on development properties in FY19 and HK$170mn in exceptional gains in FY18, core earnings grew +14% yoy to HK$3.5bn, in line with our and market expectation. Profit in Infrastructure outperformed (+10% yoy) other segments, driven by +0.8 ppt margin expansion (to 33.5% by FY19). The Consumer segment’s profit was flat as the business maintained flattish margin (-0.5ppt to 29.5%). Core profit contribution from the Property segment slipped -4% yoy due to booking of lower-margin properties (-2.6% ppt to 32.3%) in lower-tier cities. The group declared a final DPS of HK$0.52. Accounting for the 1H19 special dividend (one share of SIUD with a closing price of HK$1.01 on ex-dividend date) implies a HK$1.53 dividend payout in FY19, above the HK$1.00 in FY18 (at a 32% payout ratio). Looking ahead, management guided for a HK$1.00 DPS similar to the FY18 level dividend payout level. In reviewing the recent Covid-19 outbreak situation, management expects more severe impacts on its toll road (29% of FY19 earnings) and property businesses (24% FY19 earnings) versus utilities (18% FY19 earnings) and consumer staples businesses (29% FY19 earnings). So far, domestic quarantine controls have led to a temporary shutdown and material reduction of toll road traffic. The company highlighted that it is in discussion with the government to seek reimbursement for the losses. In the event of further extension of operating rights granted by the government, the company believes the overall impact will be minimum, but doesn’t rule out the possibility that it might have to bear the full loss should the government not agree to its proposal. Regarding its property businesses, the company expects lower contract sales due to the sales channel shutdown and weaker consumer sentiment, though did not give guidance. On a positive note, SHIL expects the quarantine impact on its IP portfolio will be minimal, likely translating to a low single-digit earnings impact. Overall, the group plans to continue to seek more capital allocation towards the infrastructure and utilities segments vs property to improve its earnings quality. Factoring in the above, we now lower our FY20-21E earnings by 5-12%, implying a -12% FY20 earnings decline followed by a +16% yoy recovery thereafter. Accordingly, our 12-month TP edges down to HK$17.5 (from HK$20 previously), offering 40% upside. After their 21% correction ytd (vs Hang Seng China Ent -12%), SHIL’s shares are now trading at 0.3x FY20E P/B, 4x FY20E P/E and 9% FY20E dividend yield, below its HK$27 cash per share. We see value against its defensive earnings profile and strong balance sheet in terms of both liquidity and flexibility for value-accretive acquisitions. Maintain Buy.

Stock code: 363.HK


GUOTAI JUNAN SECURITIES: Shanghai Industrial (0363.HK) Low Valuation and High Dividend Payout, Maintain "Buy" Net earnings in 2019 stayed relatively flat at HK$3,350 mn, in line with expectation. Sales in 2019 went up by 6.4% YoY to HK$32,345 mn, while net earnings increased merely by 0.5% YoY to HK$3,350 mn. During the reporting period, sales from infrastructure facilities segment was up 3.3% YoY to HK$9,094 mn, while that of real estate and consumer products went up by 8.4% and 4.5%, respectively, to HK$18,650 mn and HK$4,602 mn. In terms of profit contribution in 2019, infrastructure facilities/ real estate/ consumer products represented 48.2%/ 21.4%/ 30.3%, respectively. Toll roads and bridge revenue expected to fall in 2020. In February 2020, the Chinese government has called for the waiving of toll fees for toll roads across the country during the prevention and control period of the COVID-19 pandemic until such control measures end. It is expected that the revenue from toll roads is to record a sharp decline in 2020. We estimate that revenue from toll roads and bridges is set to drop YoY by 23.7% in 2020 before bouncing by 37.2% YoY in 2021. As water business sales is on track to grow by 12.0% YoY in 2020, overall revenue of the infrastructure facilities segment is expected to stay flat in 2020 despite a sharp drop in revenue of toll roads. Infrastructure facilities revenue is expected to grow at 0.2%/ 16.5%/ 9.5% from 2020 to 2022, respectively. Reiterate the "Buy" rating but trim the TP to HK$18.00. SOTP valuation method with a 25% conglomerate discount was applied in valuing the Company. Our TP of HK$18.00 represents 5.6x/ 5.3x/ 5.0x FY20/ FY21/ FY22 PER and has 43.3% potential upside based on the last closing price.

Stock code: 363.HK


PROFIT ATTRIBUTABLE TO SHAREHOLDERS OF SIIC ENVIRONMENT (807.HK) DOWN 13% YoY TO RMB130 MILLION IN THE FIRST QUARTER OF 2020 On 8 May 2020, SIIC Environment announced its first quarter results as of the end of March, with a revenue of RMB1.053 billion, representing a year-on-year decrease of 21.2%; Gross profit amounted to RMB413 million, down 3.8% year-on-year; Profit attributable to shareholders down 13.3% to RMB130 million and diluted earnings per ordinary share was RMB5.00 cents. The Group's operating and maintenance income and financial income from service concession arrangements in 1QFY2020 surged by 15.7% as both wastewater treatment volume and average treatment tariff increased. Benefiting from the operating gross profit, the Group's gross profit margin improved significantly from 32.1% in 1QFY2019 to 39.2% in 1QFY2020, up 7.1 percentage points YOY. To a limited extent, the operations of the Group were impacted by the COVID-19 outbreak in the first quarter. As the outbreak in China has been effectively controlled, local governments are gradually resuming the construction and tendering activities of new municipal environmental protection projects. The Group expected to achieve its original construction progress in the following months to make up for construction delays in the first quarter of this financial year.

SIIC ENVIRONMENT (807.HK) INCORPORATION OF SUBSIDIARY WITH PROJECTS LOCATED IN SHANDONG AND HEILONGJIANG PROVINCES COMMENCED COMMERCIAL OPERATION On 18 June 2020, SIIC Environment announced that the Company’s 57.9687% indirect owned subsidiary, Longjiang Environmental Protection Group has incorporated a wholly-owned subsidiary, Heilongjiang Bolan Water Co., Ltd with registered capital of RMB20 million, while principal activities including Wastewater treatment and reclamation; trade agency; tap water treatment and supply. Bolan Water’s projects located in Shandong and Heilongjiang Provinces have commenced commercial operation with satisfactory progress, and the Company was awarded an O&M Project in Zhejiang Province. Weifang City Shawo WWTP Resumption and Upgrade Project 1st Phase (“Shawo Project”) located in Shandong province formally commenced commercial operation retrospectively since January 1, 2020 with a designed capacity of 60,000 tonnes per day. While the part two of Fujin City Municipal Second WWTP (“Fujin Second Project”) commenced commercial operation retrospectively since 13 December 2019 with a designed capacity of 25,000 tonnes per day.

Infrastructure Facilities News


REVENUE OF SHANGHAI INDUSTRIAL DEVELOPMENT (600748.SH) AMOUNTED TO RMB1.59 BILLION IN THE FIRST QUARTER OF 2020 On 30 April 2020, Shanghai Industrial Development announced its first quarter results as of the end of March, with a revenue of RMB1.59 billion; profit attributable to shareholders was RMB167 million; total assets reached RMB40.101 billion and total net assets attributable to shareholders was RMB11.72 billion.

SHANGHAI INDUSTRIAL DEVELOPMENT (600748.SH) LAUNCHED RMB800 MILLION CORPORATE BOND WITH A COUPON RATE OF 2.74% On April 27, 2020, Shanghai Industrial Development announced it had successfully launched the first round of its RMB800 million corporate bond, offering a coupon rate of 2.74%. The total amount of Shanghai Industrial Development Co., Ltd.’s publicly issued corporate bonds in 2020 in the first round shall not exceed RMB800 million. The 5-year bond has an issuer adjustable-coupon option and an investor call-back option at the end of the third year. The principal underwriter and trustee manager of the bond is CITIC Securities, and the settlement took place on April 28, 2020. The bond was comprehensively evaluated by CCXI, assessing that the issuer ’s main credit rating is “AA+”, and the bond rating is “AA+”.

Stock code: 363.HK

Real Estate News

Shanghai Industrial Holdings Limited

Corporate Communications Department

Tel: +852 2821 3936

Email: [email protected]

Hill+Knowlton Strategies Asia

Tel: +852 2894 6321

Email: [email protected]

# Name of Shareholders Number of shares %

1 Shanghai State-Owned Assets Supervision & Administration Commission

674,056,748 62.00%

2 The Vanguard Group, Inc. 15,619,522 1.44%

3 BlackRock Fund Advisors 9,867,599 0.91%

4 Dimensional Fund Advisors, L.P. (U.S.) 5,032,963 0.46%

5 BlackRock Advisors (U.K.), LTD 2,906,948 0.27%

6 Nordea Investment Management AB 2,337,000 0.21%

7 Artemis Fund Managers, LTD 2,068,865 0.19%

8 Research Affiliates, LLC 1,464,000 0.13%

9 Merian Global Investors (UK), LTD 1,464,000 0.13%

10 State Street Global Advisors 1,362,455 0.13%

Company’s Existing Top 10 Shareholders

Contact Us

Sources：Bloomberg (As of 30 June 2020)


SI URBAN DEVELOPMENT (563.HK) ENTERED INTO A LOAN AGREEMENT OF RMB2.4 BILLION TO REDUCE THE INTEGRATED FINANCIAL COST

On June 17, 2020, SI Urban Development announced that the Company as the borrower entered into a loan agreement with a bank as a lender for a term loan facility in the amount of RMB2.4 billion for a term of thirty-six months. The Facility will be used to repay the borrowings from shareholders and related companies. The Loan Agreement provides that Shanghai Industrial Investment (Holdings) Company Limited, being

a controlling shareholder of SI Urban Development and Shanghai Industrial Holdings Limited, shall directly or indirectly own not less than 51% of the total share capital of the Company and maintain management control of the Company. The board of directors of SIUD is of the view that financing by way of the Facility will reduce the integrated financial cost of the Company and optimize the Company’s debt structure.

Stock code: 363.HK
mailto:[email protected]:[email protected]

company newsnote, shil expects the quarantine impact on its ip portfolio will be minimal, likely...

Documents