HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Zhejiang Expressway Co H / Equity Bottom-Up

<p>After reporting an 8.65x surge in profit in 1H21, we think there are three drivers that should bring better outlook for <a href="https://www.smartkarma.com/entities/zhejiang-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2178:1" rel="noopener">Zhejiang Expressway Co H (576 HK)</a> (ZJEC) over the next twelve months. These positive factors include further rebound in traffic and toll revenue, additional contribution from new projects and good upside from profit of <a href="https://www.smartkarma.com/entities/zheshang-securities-co-ltd" target="_blank" data-smartkarma-citation="entities:29981:1" rel="noopener">Zheshang Securities Co Ltd (601878 CH)</a>. </p><p>YTD, share price of ZJEC increased by 10%, but we still see good upside potential given that it trades on only 0.9x P/B for FY21 and its ROE for 1H21 already reached 10.1% (before annualised). On earnings valuation, its 5.7x and 5.0x PER for FY21 and FY22, respectively, also appeared very attractive, in our view. </p>

After reporting an 8.65x surge in profit in 1H21, we think there are three drivers that should bring better outlook for Zhejiang Expressway Co H (576 HK) (ZJEC) over the next twelve months. These positive factors include further rebound in traffic and toll revenue, additional contribution from new projects and good upside from profit of Zheshang Securities Co Ltd (601878 CH). YTD, share price of ZJEC increased by 10%, but we still see good upside potential given that it trades on only 0.9x P/B for FY21 and its ROE for 1H21 already reached 10.1% (before annualised). On earnings valuation, its 5.7x and 5.0x PER for FY21 and FY22, respectively, also appeared very attractive, in our view. 

Zhejiang Expressway (576 HK): Drivers in Place for Robust Outlook

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<p><a href="https://www.smartkarma.com/entities/qilu-expressway-co-ltd" target="_blank" data-smartkarma-citation="entities:27431:1" rel="noopener">Qilu Expressway Co Ltd (1576 HK)</a> is an expressway operator with the concession rights to construct and operate the Jihe Expressway, the Deshang Expressway and the Shennan Expressway. Revenue is derived primarily from tolls collected from users of the expressways. Qilu listed its H-shares on 19 July 2018 at HK$2.50 per H-share to raise net proceeds of HK$1,172.12 million ($151 million). </p><p>Due to the completion of the merger by absorption of Qilu Transportation by Shandong Hi-Speed Group on 16 November 2020, Shandong Hi-Speed Group and Shandong Hi-Speed Investment owned 38.93% and 5.19% of the outstanding shares. Subsequently, public shareholders accounted for 19.81% of the outstanding shares, which falls below the minimum public float requirement. To date, Shandong Hi-Speed Group has failed to address the minimum public float requirement by its fulfilling its plan to dispose of its H-shares to independent third parties.</p><p>Today, Qilu entered a trading halt pending the release of an announcement pursuant to the Code on Takeovers and Mergers. Subsequently, Qilu disclosed that <a href="https://www.smartkarma.com/entities/shandong-hi-speed-co-ltd-a" target="_blank" data-smartkarma-citation="entities:7178:1" rel="noopener">Shandong Hi Speed Co Ltd A (600350 CH)</a> intends to acquire the 778.5 million domestic shares (86.50% of domestic shares, 38.93% of outstanding shares) held by Shandong Hi-Speed Group. Post-completion, Qilu’s direct controlling shareholder will be changed from Shandong Hi-Speed Group to Shandong Hi-Speed which may trigger a mandatory general offer for all the shares under Rule 26.1 of the Takeovers code, unless it is granted a waiver from the Executive. Notably, Shandong Hi-Speed and Shandong Hi-Speed Group will jointly seek a waiver from the Executive.</p><div class="content-highlight"><p>We note that on 20 August 2020, Shandong Hi-Speed Group was granted a waiver from a mandatory general offer by the Executive in relation to the merger by absorption of Qilu Transportation by Shandong Hi-Speed Group. We think that the Executive will grant a similar waiver for the proposed share acquisition. In combination with ongoing challenges to satisfy the minimum public float requirement, we would not chase the shares. </p></div>

Qilu Expressway Co Ltd (1576 HK) is an expressway operator with the concession rights to construct and operate the Jihe Expressway, the Deshang Expressway and the Shennan Expressway. Revenue is derived primarily from tolls collected from users of the expressways. Qilu listed its H-shares on 19 July 2018 at HK$2.50 per H-share to raise net proceeds of HK$1,172.12 million ($151 million). Due to the completion of the merger by absorption of Qilu Transportation by Shandong Hi-Speed Group on 16 November 2020, Shandong Hi-Speed Group and Shandong Hi-Speed Investment owned 38.93% and 5.19% of the outstanding shares. Subsequently, public shareholders accounted for 19.81% of the outstanding shares, which falls below the minimum public float requirement. To date, Shandong Hi-Speed Group has failed to address the minimum public float requirement by its fulfilling its plan to dispose of its H-shares to independent third parties.Today, Qilu entered a trading halt pending the release of an announcement pursuant to the Code on Takeovers and Mergers. Subsequently, Qilu disclosed that Shandong Hi Speed Co Ltd A (600350 CH) intends to acquire the 778.5 million domestic shares (86.50% of domestic shares, 38.93% of outstanding shares) held by Shandong Hi-Speed Group. Post-completion, Qilu’s direct controlling shareholder will be changed from Shandong Hi-Speed Group to Shandong Hi-Speed which may trigger a mandatory general offer for all the shares under Rule 26.1 of the Takeovers code, unless it is granted a waiver from the Executive. Notably, Shandong Hi-Speed and Shandong Hi-Speed Group will jointly seek a waiver from the Executive.We note that on 20 August 2020, Shandong Hi-Speed Group was granted a waiver from a mandatory general offer by the Executive in relation to the merger by absorption of Qilu Transportation by Shandong Hi-Speed Group. We think that the Executive will grant a similar waiver for the proposed share acquisition. In combination with ongoing challenges to satisfy the minimum public float requirement, we would not chase the shares. 

Qilu Expressway’s Largest Shareholder Seeks Another MGO Waiver

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

<div>
<p>On the 12 August last year, <a href="https://www.smartkarma.com/entities/qilu-expressway-co-ltd" target="_blank" data-smartkarma-citation="entities:27431:1" rel="noopener">Qilu Expressway Co Ltd (1576 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0812/2020081201368.pdf" target="_blank" rel="noopener">announced</a> its largest shareholder Qilu Transportation would be merged and absorbed by Shandong Hi-Speed Group (SHSG). The absorption simplified the holdings of Shandong SASAC, the ultimate parent of both Qilu Transportation and SHSG, into Qilu.</p>
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<p>The restructuring triggered an obligation for SHSG to make a mandatory general offer for all shares not owned, and SHSG and Qilu Transportation jointly made an application to the SFC to waive this obligation, which was granted on the <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0821/2020082100191.pdf" target="_blank" rel="noopener">20 August</a>. </p>
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<p>There was also the issue over the resulting free float, as the public float would fall below the minimum prescribed percentage of 25% under the restructuring. The restructuring was completed on the <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1117/2020111700550.pdf" target="_blank" rel="noopener">17 November</a> and an application for a  "<em>waiver from strict compliance</em>" with the public float was concurrently lodged, and subsequently granted on the 20 November, with an <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0504/2021050400876.pdf" target="_blank" rel="noopener">extension granted</a> to the 30 June 2021 in which to comply.</p>
<h3>The New News</h3>
</div>
<div>
<p>Qilu has now <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0513/2021051300351.pdf" target="_blank" rel="noopener">announced</a> SHSG  plans to inject 778.5mn domestics shares, or 38.93% of Qilu, into Shandong Hi-Speed, an entity 70.91% controlled by SHSG.</p>
<p>The completion of this restructuring also triggers an MGO - unless a waiver is granted. </p>
<p>This all looks like history repeating itself. Don't expect an MGO to unfold.</p>
</div>
<div>
<p>More below the fold.</p>
</div>


On the 12 August last year, Qilu Expressway Co Ltd (1576 HK) announced its largest shareholder Qilu Transportation would be merged and absorbed by Shandong Hi-Speed Group (SHSG). The absorption simplified the holdings of Shandong SASAC, the ultimate parent of both Qilu Transportation and SHSG, into Qilu.


The restructuring triggered an obligation for SHSG to make a mandatory general offer for all shares not owned, and SHSG and Qilu Transportation jointly made an application to the SFC to waive this obligation, which was granted on the 20 August. 


There was also the issue over the resulting free float, as the public float would fall below the minimum prescribed percentage of 25% under the restructuring. The restructuring was completed on the 17 November and an application for a  "waiver from strict compliance" with the public float was concurrently lodged, and subsequently granted on the 20 November, with an extension granted to the 30 June 2021 in which to comply.
The New News


Qilu has now announced SHSG  plans to inject 778.5mn domestics shares, or 38.93% of Qilu, into Shandong Hi-Speed, an entity 70.91% controlled by SHSG.
The completion of this restructuring also triggers an MGO - unless a waiver is granted. 
This all looks like history repeating itself. Don't expect an MGO to unfold.


More below the fold.


Qilu Expressway (1576 HK): Deja Vu All Over Again

<p><a href="https://www.smartkarma.com/entities/zhejiang-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2178:1" rel="noopener">Zhejiang Expressway Co H (576 HK)</a>'s (ZJEC) subsidiary <a href="https://www.smartkarma.com/entities/zheshang-securities-co-ltd" target="_blank" data-smartkarma-citation="entities:29981:1" rel="noopener">Zheshang Securities Co Ltd (601878 CH)</a> pre-announced a set of solid FY20 result on 26 Jan. With the current strength of the A-share market, we believe this business will add to the recovery of toll road business in FY21, driving encouraging momentum for ZJEC.</p><p>Focusing back to the core toll road business, both traffic and toll revenue are showing positive YoY growth in Dec 2020, suggesting good recovery pace. ZJEC is also progressing ahead with the plan to list the toll collection rights of Hanghui Expressway as a public infrastructure REIT. We think these factors are important catalysts for ZJEC in this year. Its 5.9x PER and 0.86x P/B for 12-month forward are undemanding and its ROE vs. P/B is also inexpensive in the sector.  </p>

Zhejiang Expressway Co H (576 HK)'s (ZJEC) subsidiary Zheshang Securities Co Ltd (601878 CH) pre-announced a set of solid FY20 result on 26 Jan. With the current strength of the A-share market, we believe this business will add to the recovery of toll road business in FY21, driving encouraging momentum for ZJEC.Focusing back to the core toll road business, both traffic and toll revenue are showing positive YoY growth in Dec 2020, suggesting good recovery pace. ZJEC is also progressing ahead with the plan to list the toll collection rights of Hanghui Expressway as a public infrastructure REIT. We think these factors are important catalysts for ZJEC in this year. Its 5.9x PER and 0.86x P/B for 12-month forward are undemanding and its ROE vs. P/B is also inexpensive in the sector.  

Zhejiang Expressway (576 HK): Gaining from Both Growth and Stable Business Exposures

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<p>After <a href="https://www.smartkarma.com/entities/qilu-expressway-co-ltd" target="_blank" data-smartkarma-citation="entities:27431:1" rel="noopener">Qilu Expressway Co Ltd (1576 HK)</a> was <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0812/2020081200112.pdf" target="_blank" rel="noopener">suspended</a> yesterday <em>"pursuant to the Code on Takeovers and Mergers</em>", it appeared the shareholder restructuring was the likely rationale.</p>
<p>This was confirmed last night after Qilu <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0812/2020081201368.pdf" target="_blank" rel="noopener">announced</a> its largest shareholder Qilu Transportation shall be merged and absorbed by Shandong Hi-Speed Group (SHSG).</p>
<p>The absorption simplifies the holding of Shandong SASAC, the ultimate parent of both Qilu Transportation and SHSG, into Qilu.</p>
<p>The restructuring <em>may</em> trigger an obligation for SHSG to make a mandatory general offer for all shares not owned. SHSG and Qilu Transportation will jointly make an application to the SFC to waive this obligation.  </p>
<p>There is also the issue over the resulting free float - as the public float falls below the minimum prescribed percentage of 25% under the restructuring, before any MGO.</p>
<p>But even if the SFC forces an MGO, expect a nil premium. </p>
</div>
<div>
<p>More below the fold.</p>
<hr>
<p><em>This is a brief insight to discuss the updated announcement. For a more detailed overview of Qilu,  please refer to <a href="https://skr.ma/XZPiJ" target="_blank" rel="noopener">Qilu Expressway: C-REIT Pilot Or Restructuring?</a>.</em></p>
</div>


After Qilu Expressway Co Ltd (1576 HK) was suspended yesterday "pursuant to the Code on Takeovers and Mergers", it appeared the shareholder restructuring was the likely rationale.
This was confirmed last night after Qilu announced its largest shareholder Qilu Transportation shall be merged and absorbed by Shandong Hi-Speed Group (SHSG).
The absorption simplifies the holding of Shandong SASAC, the ultimate parent of both Qilu Transportation and SHSG, into Qilu.
The restructuring may trigger an obligation for SHSG to make a mandatory general offer for all shares not owned. SHSG and Qilu Transportation will jointly make an application to the SFC to waive this obligation.  
There is also the issue over the resulting free float - as the public float falls below the minimum prescribed percentage of 25% under the restructuring, before any MGO.
But even if the SFC forces an MGO, expect a nil premium. 


More below the fold.

This is a brief insight to discuss the updated announcement. For a more detailed overview of Qilu,  please refer to Qilu Expressway: C-REIT Pilot Or Restructuring?.


China

Anhui Expressway Co. Ltd. principally holds, operates and develops toll expressways and highways in Anhui province in China.

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Anhui Expressway Co Ltd H (995 HK)

Zhejiang Expressway (576 HK): Drivers in Place for Robust Outlook

We believe sustained traffic and toll recovery, contribution from new project addition and positive outlook for Zheshang Securities will drive...

Osbert Tang, CFA

Qilu Expressway’s Largest Shareholder Seeks Another MGO Waiver

We think that the Executive will grant a similar waiver for the proposed share acquisition. Along with the challenges to satisfy the minimum public...

Arun George

Qilu Expressway (1576 HK): Deja Vu All Over Again

Qilu has announced another restructuring that could trigger an MGO - unless a waiver is granted. This all looks like history repeating itself....

David Blennerhassett

Zhejiang Expressway (576 HK): Gaining from Both Growth and Stable Business Exposures

Sustained toll revenue recovery, further strength at Zheshang Securities and possible REIT issuance of Hanghui Expressway are potential drivers in...

Osbert Tang, CFA

Qilu Expressway: MGO Waiver Sought

After Qilu Expressway Co Ltd (1576 HK) was suspended yesterday "pursuant to the Code on Takeovers and Mergers", it appeared the shareholder...

David Blennerhassett

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