Company Profile

Huida Sanitary Ware Co., Ltd. is a China-based company principally engaged in the design, research,development, manufacture and sales of sanitary products. The Company operates through threemain segments. The Sanitary Wares segment is primarily involved in the design, manufacture andsales of sanitary ceramics, sanitary hardware fittings, bathtubs and bath cabinets. The Ceramic Tilessegment is mainly engaged in the manufacture and sales of interior wall tiles and floor tiles. TheOther Business segment is primarily engaged in the interior design and decoration, gasoline anddiesel retail, among others. （Source: Reuters）Event

Huida Sanitary Ware （the company） announced its private placement scheme, stating that it plannedto raise no more than CNY 500,000,002.00 （included） with no more than 60,975,610 shares（included）。 The issuance price was CNY 8.2 per share and the stocks are not allowed to transfer within18 months. All the capitals after deducting issuance expenses will be used to replenish workingcapitals.

Comment

The join of Country Garden Venture Capital as the strategic investor will make two sides get mutualbenefits and win-win results.

The company inked an agreement on strategic cooperation and private placement of stock withCountry Garden Venture Capital, with validity of 2 years, which can be extended by mutual agreementwhen it expires.

The strategic cooperation fields include corporate governance, products design, research anddevelopment, products sales and the establishment of industrial investment funds.

We hold that the join of Country Garden Venture Capital as the strategic investor will push forwardthe strategic cooperation in corporate governance, products design, research and development, salesof products including sanitary wares, ceramic tiles and fabricated and complete bathrooms in a bid to improve the company’s governance, enhance its intrinsic value, promote its sales performance andachieve the mutual benefits and win-win results.

The private placement helps replenish working capitals and optimize capital structure.

The company’s asset-liability ratio was 22.79%, 24.89% and 25.59% for 2017, 2018 and 2019respectively. With the fast expansion of engineering business and the increase in current liability, thecompany’s asset-liability rate is to rise.

The company’s turnover of accounts receivable was 6.59/ 5.36/4.9 for 2017/2018/2019, showing aslowdown of payment collection.

The raised funds via private placement will be used to replenish working capitals. According to ourcalculation, the asset-liability rate will be reduced to 25.5% and below after the private placement,based on the upper limit, and the cash and cash equivalents will reach CNY 1.09 billion, which isconducive to lower asset-liability rate, optimize capital structure, mitigate the mid- and short-termoperating cash flow pressure and strengthen its anti-risk capability.

The private placement helps enhance the company’s capital strength to facilitate production capacityexpansion.

The company has been accelerating expansion of production capacity in recent years. The projects inconstruction at the end of 2019 reached CNY 233 million, flat with that in 2018, maintaining at highlevels in record.

Meanwhile, the sanitary ceramics production line with annual output of 800,000 sets of smartsanitary products is in construction as planned and scheduled to put into operation in September2020.

This private placement will build up the company’s capital strength, accelerate its production capacitydeploy, gradually realize its nationwide deploy, further lower the production costs, and improveproduction efficiency to realize scale effects and to gain more competitive edges.

Earnings forecast and investment recommendationWe estimate the company’s net profit attributable to shareholders to be CNY 390 million/CNY 460million/CNY 530 million for 2020/2021/2022, implying a P/E ratio to be 11.2x/9.6x/8.2x, based on theclosing price on May 20th 2020. Reiterate “Outperform”。

Potential risks

worse-than-expected demand decline; slower-than-expected new business expansion