What's new

Century Real announced that it planned to dispose of the remaining 49% equity stake in its subsidiary Ruihe Yisheng.This deal is expected to increase net profit by Rmb40mn in 2015.

Comments

Focus on core business after disposal of loss-making business unit. Ruihe Yisheng mainly imports/exportsmedical devices and technologies, mainly including distribution of Given Imaging’s capsule endoscopy in China. Itsuffered losses of Rmb5.75mn in 2014 and Rmb4.15mn in January~September 2015. After sales of 51% equity stake inthis unit in 2014, disposing of the remaining 49% can help Century Real focus on its main business and reduceinvestment losses. The selling price of Rmb77.42mn implies 10x end-3Q15 P/B, relatively fair.

Stepping up efforts to explore rail operation and maintenance market as Century Real announced plans onNovember 18, 2015 to increase stake in Yiweixun by 66.5%. Yiweixun has entered 300 of China’s 500 HSR stations(with a market share of 60%), and this figure has further upside potential. Yiweixun has also entered 100 ordinaryrailway stations, where equipment maintenance demand is likely to increase along with the station upgrades. Yiweixunpromised to post earnings of Rmb40mn/50mn/60mn in 2015/16/17, with >20% from rail maintenance services.

Bright prospect helped by capital market. As of end-3Q15, Century Real had cash of Rmb827mn, includingproceeds of ~Rmb300mn from its IPO. The company had not raised money from the capital market after its IPO, andwe believe the possible deals at the capital market will likely bring key earnings growth driver in 2016.

Ample orders on hand; business volume of new products growing rapidly. At present, Century Real hasRmb550mb backlog, Rmb300mn for rail safety monitoring devices, Rmb100mn for communication equipment roommonitoring devices (a rapidly growing new business), and Rmb150mn for customer services and maintenance(Yiweixun). Yiweixun sees rapid order growth, and we expect new orders to reach Rmb200mn in 2016.

Valuation and recommendation

We estimate EPS at Rmb0.31 in 2015 and Rmb0.41 in 2016. The stock now trades at 46.2x 2015e and 35.4x2016e P/E, a fair to relatively cheap valuation. Maintain BUY and TP of Rmb16.46 based on 40x 2016e P/E.

Risks: business integration disappoints.