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NRA Capital Pte Ltd

Written by: Jacky Lee

Wednesday 29 Apr 2015

AVIC International Maritime Holdings – Analyst briefing

Acquiring a great potential land with moderate risks

At S$0.12, AVIC share price trades at 0.86x PBR and 10.9x historical PER. We view this to be reasonable however, long term catalyst include the potential land for redevelopment from Shanghai Catic Industrial.

AVIC International Maritime Holdings (AVIC) announced that the group has entered into two separate interested person transactions (IPT), conditional sale and purchase agreements dated 21 April 2015 with each of AVIC Investment Co., Ltd and AVIC International (HK) Group Limited, pursuant to which the Group has agreed to acquire the entire issued equity of Shanghai Catic Industrial Co., Ltd for a total consideration of Rmb207m (approximately S$45m).

Located in the China (Shanghai) Pilot Free Trade Zone, Shanghai Catic Industrial Co., Ltd is principally engaged in the leasing of warehousing facilities and the provision of logistics services for the aviation industry. The company owns a plot of land measuring approximately 32,110 sqm in the Free Trade Zone. The land was first acquired soon after the FTZ was set up in July 1992, on which the company built up the warehousing facilities and began the Warehousing Business. In 2012, the company also started to undertake the trading business, initially engaged only in the import of plastics related products. In 2013, the company expanded into exporting vanes and rollers for air compressors to Japan and Malaysia.

Listed on the SGX-ST Mainboard in September 2011, AVIC International Maritime Holdings Limited (formerly known as AVIC International Investments Limited) together with its subsidiaries, is an active player in the marine and offshore industry. The group provides innovative and integrated solutions along the entire marine business value chain. Services includes shipbuilding project management and consultancy, design and engineering, shipbuilding as well as ship-trading.

 Key takeaway from results briefing:            

  • Business overview:-
  • 2012 – Constructed an internal integration for ship trading business, and established companies in Shanghai, Xiamen and Guangzhou.
  • 2013 – Successfully acquired a 79.57% stake in Deltamarin Group, a Finnish-based naval architecture and engineering company. The remaining 20% stakes is owned by the management. Deltamarin Group is the largest revenue and profit contributor to AVIC International Maritime.
  • 2014 – Change of major shareholding (approximately 74%) to AVIC International Holdings Ltd (HKSE: 161 HK) from AVIC International Kairong Limited, with a market cap close to HK$10bn, which allows the group to enjoy strong support from the major shareholder with better leverage. Its current debt is mostly guaranteed by its parent with interest bearing around 2-3%.
  • 2015 – Acquiring 60% shareholdings of AVIC Zhengjiang Shipyard Marine (AZM), a ship trading company, currently owns 10 ships, which those under construction now.
  • Strong design capabilities of Deltamarin with more than 25 years track record of pioneering concepts, complete engineering packages and effective project management in all major ship types and special offshore units. In total, over 10,000 man-years of experience in creating innovations for construction and operation of ships and offshore units.
  • Deltamarin has new-ship-design order book of over 120 ships amounting to EUR21m and outstanding order book of EUR75.1m.
  • Deltamarin also expanded its services into turnkey engineering projects (scrubber system), loss making in this segment last year but expected to turn profitable this year.
  • Over 100 agencies and offices across 55 countries and regions.
  • Strong government support on ship financing with flexible arrangements.
  • Two shipyards under its parent entity, Weihai and Dingheng, both on China’s white list of approved shipyards. The PRC government is increasingly stringent on environment regulations. Weihai was selected among the second batch of whitelist, where only 9 shipyards was qualified.
  • Ship trading contracts amount to over US$1bn, delivery of 20 new ships and current order book of 66 ships.

Our view:

At S$0.12, AVIC share price trades at 0.86x PBR and 10.9x historical PER. We view its current valuation as reasonable given the down cycle for the shipbuilding industry, high risk ship broker business as well as its higher total debt gearing ratio of 1.5x (excluding coming proposed acquisition). However, long term catalyst can include its new acquisition of Shanghai Catic Industrial Co., Ltd, which owns a large site at Shanghai Free Trade Zone and waiting for redevelopment approval. Management believe this may need 3 – 5 years to develop.

In the announcement, Shanghai Catic Industrial Co., Ltd, made Rmb4.5m net profit in FY14. Assuming the Rmb207m purchased cost is paid 100% by bank borrowing with 3% interest, AVIC will have to bear approximately Rmb1.7m net loss per year assuming the warehouse rental rate does not increase. AVIC is paying around 7x PBR for Shanghai Catic Industrial, but we calculate this is closer to 5x on its non-current asset, and we believe this is mainly the value of the land.

Based on the plot ratio of 3.0x currently, the GFA on proposed development land is estimated around 97,800 sqm. Or we can assumed AVIC is paying approximately Rmb2,000 per sqm as compared to its current office price around Rmb20,000 per sqm. The land was acquired in 1992 and we believe the lease will be for another 28 years, given China’s land right use for industrials is around 50 years. However, management believes the land right use should be extended even when the government approves the redevelopment to commercial/industrial. The group expects to take up more than 30% of the space for its own-use and dispose of the remaining space. This is a one off project for the group and the group has no intention to divest into property sector.

In January this year, Zhongrong River Capital purchased the Sincere Space from Sincere Land for a total consideration of Rmb908m, or a unit price of approximately Rmb22,300 per sqm. The development is located in Zhabei District, near the middle ring road, with a total GFA of 40,736 sqm.


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