三一重工:To acquire financing company from parent co.

SANY Heavy announced yesterday that it plans to acquire 91.43% interest in SANY Capital (“三一汽车金融”) from SANY Group (parent company of SANY Heavy) for cash consideration of RMB3.98bn. The implied valuation of 24.4x 2018P/E and 1.5x P/B (equity as at Oct 2019) does not look attractive, in our view. Besides, an additional liability of RMB6.8bn will be consolidated in SANY Heavy’s balance sheet upon completion (attributable liabilities: RMB6.4bn). That said, we believe the overall impact on SANY Heavy is limited given that the deal size is not substantial. We estimate the earnings accretive will be <1%. We have left our forecast unchanged as the deal is subject to shareholders’ approval.n Details of the acquisition. SANY Capital is one of the 25auto financing companies approved by CBIRC in China. SANY Capital is mainly engaged in machinery financing business. SANY Group, parent company of SANY Heavy, currently owns 91.43% stake in SANY Capital, while SANY Heavy owns 3% interest. After the acquisition, SANY Heavy will control 94.43% stake in SANY Capital. Approval from regulators and shareholders of SANY Heavy is required before the transaction.n Reasons for the acquisition. The acquisition can reduce the connected transaction. Besides, SANY Heavy believes that SANY Capital can help support the Company’s overseas expansion and better control risk.n Financial performance of SANY Capital. SANY Capital generated interest income of RMB235mn in 10M19and net profit of RMB84mn. The book value as at end-Oct 2019was RMB2.9bn while total liabilities reached RMB6.8bn, implying gearing ratio of 235%. Based on our calculation, the rate of interest income (net income / loan portfolio) ranged from 2.7% to 3.8% between 2017and 10M19(figure 1).n Not attractive due to high valuation and increased liabilities. We calculate that the implied P/E (based on earnings in 2018) reached 24.4x. Besides, the acquisition cost of RMB3.98bn plus the increased attributable liabilities of RMB6.4bn (RMB6.8bn x 94.43%) from SANY Capital will result in a reduction of attributable net cash by >RMB10bn, though we think is still manageable due to the Company’s strong free cash flow.n Key risks:

(1) Cyclical nature;

(2) Risk of overseas business;

(3) Increase in raw material cost;

(4) Risk of expanding to financing business.