A century-old lighting brand and a leader in automotive LED lighting. Shanghai Feilo Acoustics (the Company) has two subsidiaries, Yaming Lighting and Sunlight. They are respectively engaged in the general lighting and the automotive LED lighting businesses. (i) Incorporated in 1923, Yaming Lighting is principally engaged in the manufacture and sale of light bulbs. In 2013, fuelled by its notable advantage in industrial lighting and well-known “Ya” brand, it posted revenue of Rmb1.65bn. (ii) Sunlight targets the high-end automotive LED lighting market and posted revenue of Rmb385mn in 2013. Its corporate customers include heavyweights like Guanghou Stanley Electric, Changzhou Xingyu and Changchun Hella and its international end-users are well-known brands like Volkswagen, Audi, Honda and Toyota.
Acquisition of Shenan will help develop a mixed ownership system. The Company plans to buy a 100% stake in Shenan Group for cash and stock. The latter’s assets are estimated at Rmb1.85bn and the offering price is set at Rmb6.84/share. Following the acquisition, the Company will become a mixed ownership company with INESA (state-owned) holding 22% and Shenan holding 19%. Additionally, the Company’s management will invest ~Rmb10mn to participate in the follow-on offering. Shenan Group is a large provider of LED lighting solutions and possesses a Grade 3 contractor qualification for municipal and road lighting projects. Following the asset restructuring, the Company will have three main businesses: “lighting manufacturing + lighting engineering + automotive LED lighting”.
The “new Feilo” is projected to see three major development opportunities. (i) Industry position: Shanghai Energy Efficiency Center and Shanghai Energy Conservation Supervision Center signed strategic cooperation agreements with INESA and Yaming Lighting, respectively, which grant the Company a strategic advantage in the lighting engineering market; (ii) improved operating efficiency: Yaming Lighting’s current net margin of (2~3%) is notably lower than the industry average (10%). Introduction of Shenan is forecast to improve the Company’s management efficiency and thus sharply increase its net margin; and (iii) business synergy: Yaming’s manufacturing strength is expected to have significant synergies with Shenan’s solid engineering capabilities. This should greatly improve the Company’s core competitiveness and profitability.
On track for robust growth upon asset integration. After the restructuring, the Company’s three main lines of business are all expected to see robust growth: (i) Yaming Lighting’s manufacturing business will benefit from support of Shenan’s engineering expertise. This should improve the Company’s operating efficiency and lead to an accelerated increase in its revenue and net margin; (ii) Shenan’s engineering business is expected to make full use of the major shareholder’s and Yaming’s strategic advantages to reap handsome returns from explosive growth in the LED lighting market; and (iii) Sunlight is forecast to receive funding and resource support and make full use of its product and customer advantages to post accelerated growth.
Risks associated with investing in the Company: progress of asset restructuring is slower than expected.
Earnings forecast, valuation and investment rating. For 2014-16E, we forecast: (i) Shanghai Feilo Acoustics’ EPS to be Rmb0.14/0.22/0.33 and (ii) Shenan’s net profit will hit Rmb118/176/229mn (Shenan’s earnings commitment has yet to be disclosed. We will adjust our forecast based any future announcement). Given Shenan’s profit contribution and the expansion of capital base from the follow-on offering, we Shanghai Feilo’s fully diluted pro forma 2014-16E EPS will be Rmb0.22/0.33/0.46. The Company’s earnings are forecast to enter a path of accelerating growth upon the asset restructuring and there is a possibility of an earnings upgrade. Given industry peers’ average prospective 2014/15E PER of (53x/32x), we apply a target price of Rmb10.56/share (equivalent to prospective 2014/15E PER of 48x/32x. Initiate coverage of the Company with a BUY rating.
