Yuexiu Transport (01052) has announced an asset injection deal with a total consideration of RMB5,998m. The expected project IRR is 9.4%, higher than the company's 8% target.
HSBC Global Research said the transaction was reasonably priced at 1.3x PB, paid by company cash (RMB1.5bn) and bank loan (RMB4.5bn). The three roads, with about 20 years concession period, have passed the initial stage and have entered a strong traffic growth period.
It believes the three projects should make a small contribution to earnings in the next year. However, the deal may result in company net gearing returning to a historical high at about 75% and potentially increase finance costs by RMB600m in 2020. It could also weigh on the company bottom line in the short term.
HSBC maintained its "buy" rating and HK$8.8 target price.
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