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Center Power Tech announced that its Hong Kong-based wholly-owned subsidiary plans to purchase 14.78mn shares （a50% stake） from Unicoba’s shareholders for 100mn Brazilian reais in cash. Moreover, its Hong Kong-basedwholly-owned subsidiary would subscribe to Unicoba’s 6.65mn shares for 45mn Brazilian reais in cash. After the deal,Center Power Tech’s Hong Kong-based wholly-owned subsidiary would hold 21.43mn shares or a 59.18% stake inUnicoba; Unicoba would become a subsidiary of its Hong Kong-based wholly-owned subsidiary.

The two parties agreed that, if Unicoba’s total net profit over 2017 and 2018 is lower than 47.50mn Brazilian reais, itsshareholders Young and Eduardo would offer compensation （equivalent to the difference between 50mn Brazilian reaisand Unicoba’s total net profit in the two years） to Center Power Tech’s Hong Kong-based wholly-owned subsidiary; thecompensation would be no more than 12.50mn Brazilian reais. If Unicoba’s total net profit over 2017 and 2018 is higherthan 52.50mn Brazilian reais, Center Power Tech’s Hong Kong-based wholly-owned subsidiary would offercompensation to Young and Eduardo （equivalent to the difference between Unicoba’s total net profit in the two yearsand 50mn Brazilian reais）； the compensation would be no more than 10mn Brazilian reais.

Center Power Tech plans to issue no more than Rmb320mn convertible bonds with coupon rates up to 3% to acquire the59.18% stake in Unicoba.

Comments

Unicoba controls two subsidiaries: UCBMINA and UCB MAO; the two companies mainly focus on producing and sellingbatteries in Brazil. UCB MINA has produced lead-acid batteries for more than 20 years; it’s a leader and well-knownbrand in Brazil’s industrial battery market; the company’s products are widely used in areas like telecom, energystorage, UPS, data centers, power, etc. UCB MAO mainly produces batteries for consumer electronics; its major clientsare well-known consumer electronics brands （Motorola, LG, Samsung, etc.） or their contract manufacturers. Unicoba’snet profit reached Rmb4.89mn in 2015 and Rmb24.89mn during January~October 2016 （exchange losses totaledRmb40.96mn in 2015）。

The acquisition implies 5x 2016e P/E, a reasonable valuation. Brazil’s telecom infrastructure is relativelyweak and has much room for construction and upgrade. The acquisition target is one of the only fourbattery suppliers to telecom operators in Brazil. We believe the deal would help Center Power Techexpand presence in Brazil and South America, and gain market share in overseas markets.

Valuation and recommendation

As its preannounced earnings missed expectation, we trim the company’s 2016e and 2017e earnings by 15.8%and 6.6%, respectively; introduce 2018e earnings at Rmb242mn. Trim TP by 5% to Rmb29/sh, based on 55x2017e P/E. Maintain BUY. Risks: Acquisition fails; volatile raw material prices.