Company Profile

Anhui Shengyun Machinery Co., Ltd. researches, produces and sells machinery and equipmentproducts. The Company's products include belt conveyors and integrative equipment of drydesulphurisation and dedusting. (Source: Bloomberg)

Events

Anhui Shengyun Machinery (the company) posted 2 announcements on May 30, 2016, which:

1) Gave supplementary instruction about company’s pledged net profit (for year 2016~ 2018) forits dangerous-waste disposal projects.

2) Stated the company had signed a franchise agreement with Xiangyun County aboutwaste-incineration business.

Comments

Set foot in dangerous-waste disposal market, search for new income source.

According to company’s announcements on May 28, 2016 and May 30, Anhui ShengyunMachinery plans to take over no less than 51% holding of Anhui Amber Environment-ProtectionTechnologies Co. (name of the target company, transliterated) from Anhui Amber SyntheticLeather Co. (name of the target company’s former owner, transliterated). The target companywas founded in March 2016 with CNY 10 million registered capital. Acquiring the targetcompany will mark a first step for Anhui Shengyun Machinery in dangerous-waste-disposalbusiness.

Anhui Amber Synthetic Leather committed to:

1. Inject assets that relate with “DMF waste-liquid-disposal project” (including land, property,equipment, patents, business licence) to the target company within 6 months from theagreement’s signing date by issuing new shares.

2. Transfer all businesses that relate with DMF waste-liquid-disposal to the target company forindependent operation.

3. Transfer 10% holding of the target company to Anhui Shengyun Machinery at the price of CNY10 million.

4. Transfer total control of the target company to Anhui Shengyun Machinery when it’s proper todo the acquisition.

Pledge to make CNY 10~ 30 million revenue within 3 years and agree to do the targetcompany’s acquisition at a price of 8x~ 12x P/E ratios.

The agreement’s two sides agreed to set target company’s predicted value for year 2016~2018at 8x~ 12x P/E ratios (based on the target company’s average predicted revenue for year 2016~2018). Anhui Amber Synthetic Leather pledges that target company can register net profit at noless than CNY 10 million/30 million/30 million for year 2016/2017/2018. Thus the three-yearaverage net profit will be CNY 23.3 million, implying that the predicted acquisition price shouldbe CNY 187 million~ 280 million. The estimated acquisition price is far below industry’s average.

Company’s traditional business of waste-incineration grows steadily. New business indangerous waste disposal sector is expected to report more M&A.

Anhui Shengyun Machinery, having the most environment-protection business contracts inhand now, posts steady progress in its traditional business. The company has announced: newcontract of South-Longnan Wudu (500 metric ton/day) on May 27, Phase-2 Yingtan project (500metric ton/day) on May 28 and Xiangyun County project (800 metric ton/day) on May 30. Thecompany has made clear signals about increasing investment and accelerating acquisition insolid-waste disposal, medical-refuse disposal sectors, which bring bright prospect forcompany’s future M&A.

Earnings forecast and investment grading:

Considering contribution from company’s new contracts, we revised up our estimated netprofit for the company (for year 2016/2017/2018) to CNY 481 million/597 million/798 million,which implies to P/E ratios of 21x/17x/13x (based on company’s spot market capital of CNY10.2 billion). We believe company's expansion into dangerous-waste disposal business willbring over-expected performance, and the company's current valuation level is relatively low.

Potential risks: expansion of company’s dangerous-waste disposal business fails expectation.