Proposal to inject all cash raised from mixed ownership to HK listed CU
The HK listed CU has announced that it will issue new shares to Unicom BVI atHKD13.24/share, representing a 10% premium to the last close. The placementwill raise ~RMB75bn for CU, representing 27.77% of CU’s current total issuedshares. Unicom BVI is 82% owned by the CU A-share company, which hasrecently raised RMB78bn from strategic partners under the mixed ownershipreform. The proposal is now subject to vote by the minority shareholders. Welike the urgency with which CU is implementing the reform measures andbelieve the company will waste no time in carrying out other operationalchanges that will further improve its business fundamentals.
Financial implications for the HK listed CU
Should the vote be passed through, we see the following financialimplications: 1) the A-share’s effective ownership of the HK listed CU willincrease from 33.3% to ~44%, while the effective government ownership ofthe red chip company will decrease from 62% to 52% (~58% if we includeindirect holdings from other SOEs), 2) the raising will dilute FY18E EPS by ~4%and FY19E EPS by ~9%, which we believe is reasonable and a necessarysacrifice to align the interests of management and H-shareholders (we showthe EPS dilution sensitivities in the table below), 3) FY17E net debt to EBITDAwould reduce from 1.3x to 0.4x, 4) the impact on EV/EBITDA is fairly limited, asthe increase in market cap will be offset by the reduction in net debt.
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