A positive step in the long run but negative in the short term
Acquisition of 21.4% of GLP at SGD3.38/share
Current price not factoring in the significant slowdown
Dr. Peng announced today that it would look to acquire 49% of Citic Networks’ shares for RMB1.34bn. It came through after a failed attempt by Citic Telecom to acquire the asset due to concerns around foreign ownership. While the deal brings Dr. Peng closer to an integrated fixed broadband provider, restrictions remain around full private ownership of backhaul assets in China with no clear sight of when such rules could be relaxed. Without full operational control, the deal is likely to result in a near-term earnings drag for Dr. Peng and with its top-line growth remaining sluggish, we retain our SELL rating.
After market close on 14July, Vanke announced that Nesta (a consortium inwhich it owns 21.4%) had entered an agreement with GLP for potentialprivatization at SGD3.38/share (25% premium to GLP’s 12July closing). Theattributable consideration to Vanke is SGD3.4bn, and Vanke can appoint twodirectors (out of 11) to the board, but is not entitled to the FY17dividend. Thedeal is pending approval from GLP’s shareholders and the Court, and GLP willbe delisted from SGX-ST if successful (expected to finalize by 14Apr 2018). Weare positive on the deal due to the potential synergies on its logistics propertybusiness.
Dr. Peng continues to see pressure in its core broadband business withbroadband access revenue down 6% and its net adds slowing to ~100k in2Q17, the lowest rate in the past 4-5years. Meanwhile, gross margin andARPU continue to decline and the business had to cut its opex by 10% in orderto deliver a more respectable 3% decline in net profit. Capex slowed sharply in1H17and while this is a prudent move, future growth might also slow. Withthe shares trading on 33x FY17EPS, this slower future growth does not seemto be factored in; retaining Sell.
Limited impact on the major operators
Positive on the deal for providing synergies to its logistics property business
Quarterly data show a deteriorating trend
Given Dr. Peng only has 14m fixed broadband subs, representing only 4% of the market, we see a limited competitive threat to the major operators even if Dr. Peng is able to improve its backhaul capabilities via the deal.
Although we estimate the deal will only lift Vanke’s FY18-19F core profits by~2%, we are positive on it, considering GLP owns a total of 17.5m completedlogistics properties in China with another 11.2m sqm under development. Webelieve its brand equity should provide synergies to Vanke’s existing business,potentially making it one of the largest logistics property operators in China(Vanke now owns 27logistics properties with 2.2m sqm GFA). Also, webelieve the price is fair, given that Vanke is acquiring at 1.3x of GLP’s FY17book value of USD1.85/share (equal to SGD2.54/share).
2Q17revenue declined 5% while gross profit fell 17%, a deterioration vs. thetrends seen in 1Q17. The company cut its 2Q sales and marketing expense by23% and management expense by 18% in order to deliver a flat profit but thisclearly had an impact on customer acquisition with net adds reducing to 100kin the quarter (vs. an average of 700k in the past 2years). With Dr. Peng’sbroadband ARPU at RMB42/m, still significantly higher than China Mobile atRMB35/m, and given limited bundling offerings to differentiate its offerings,we think Dr. Peng’s business model continues to be challenged. Capex diddecline to RMB1.2bn in 1H17from an average of RMB1.9bn in the previousfour halves, but the pace of its network rollout also slowed, adding only 2mhouseholds in coverage in the half.
Citic Networks’ losses continue
GLP is the largest logistics property operator in China
Citic Networks is the only backbone operator in China outside of the major telcos with 32,000km of fiber backhaul connecting the capital cities of almost all provinces in China. It reported a RMB104m loss after tax in FY16 with the trend continuing in 1H17. It was also loss making in FY14 and FY15.
GLP owns a portfolio of 55m sqm of logistics properties, including 28.7m sqmin China (17.5m sqm completed and 11.2m sqm under development) and26.3m sqm in Japan, the US and Brazil (23.6m sqm completed and 2.7m sqmunder development). GLP is also one of the largest real estate fund managersin the world, with AUM of ~USD39bn. Bloomberg consensus expects it toachieve USD1.0-1.1bn revenue and USD315-382m core net profits in FY18-19.
We have reduced our earnings forecasts in line with the lower-than-expected1H17results. We have removed the equity raising, which increased the EPS.
Valuation and risks
Valuation and risks
We raise our TP by 12% to RMB25.42(based on a 10% discount to end-2017FNAV of RMB28.24) after factoring in this deal, the acquisition of GuangdongInternational Trust’s assets (mostly located in Guangzhou), and June landacquisitions. It is trading at 8.7x FY18F P/E and at a 13% discount to NAV.Downside risks include: 1) Baoneng Group selling its shares on the secondarymarket, and 2) a failure to acquire quality sites to sustain growth; while upsiderisks are better-than-expected sales and margin expansion.
We value Dr. Peng based on the mid-point of our peer-based valuation andDCF. Risks relate to market share, tax rate, regulation, and margins.
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