Over the weekend, Ji’nan Truck Company (000951 CH, NR), the major subsidiary of Sinotruk, announced an A-share placement plan to raise a max. of RMB7bn for capacity upgrade. While the potential placement will reduce Sinotruk’s interest in Ji’nan Truck to 51% (from 63.78%) and result in 4% earnings dilution based on our back-of-the-envelope calculation, we see the plan as a strategic move to improve production automation and achieve product upgrade that are crucial for long-term competitiveness. It also suggests that, after more than a year of internal restructuring, Sinotruk begins to take a proactive approach to pursue growth. We have left our earnings forecast unchanged as the placement plan is pending the approval of SASAC and CSRC. Maintain BUY with TP of HK$28.3 (based on 6x 2020E EV/EBITDA).
- What’s new? Ji’nan Truck plans to issue a total of 168mn new A-shares (20% of the enlarged o/s shares) to a max. of 35 institutional investors. The target amount of RMB7bn implies a max. placement price of RMB41.64, 16.5% above the closing price last Friday, whereas the minimum placement price will be no less than 80% of the average trading price 20 days before the day of new share issuance. Subscribers are subject to a lock-up period of six months. Ji’nan Truck targets to complete the fund raising in Nov 2020.
- Purposes for the fund raising: (1) Intelligent heavy-duty truck project (68% of the total proceeds): Ji’nan Truck’s existing production lines have been running for >10 years and upgrade is needed. Ji’nan Truck plans to relocate the existing capacity (160k units of truck annually) and build a new production plant, which will take two years to complete. The daily operation will not be interrupted as the relocation will take place after the construction of the new plant is completed; (2) High performance axle housing production capacity (4% of the total proceeds): Ji’nan Truck plans to build a new production line in order to increase the self-sufficiency ratio. The construction will last for 18 months; (3) Repayment of bank loans and working capital (28% of total proceeds).
- Major risk factors: (1) Slower-than-expected recovery of construction activities, (2) increase in component cost; (3) lower-than-expected return on new projects after fund raising.
