NARI Tech:A value-accretive asset injection plan;looking forward to a stronger NARI

Parentco asset injection to enhance overall competitivenessNARI Tech’s preliminary plan for a parentco asset injection via share issuanceentails an above-expectation scope, attractive valuation and decent EPSaccretion. The injection (mainly NR Electric), subject to approvals, would helpenhance its overall competitiveness by cementing its grid automation/protection leadership, adding UHV/HVDC flexible transmission and exportcapability. The stock remains suspended pending further announcements.

    Maintaining Buy and Target price of CNY18.50.

    Details of asset injection proposalThe total deal consideration of Rmb26.5bn mainly comprises 1) Rmb21.6bn foran 87% stake in NR Electric (relay protection, UHV/HVDC flexibletransmission), 2) Rmb1.8bn for Puri Engineering (UHV/HVDC flexibletransmission) and 3) the rest for export, etc. The plan is to fund this via: 1)1,721m of shares issuance (71% of existing share capital) to NARI Group andother counterparties at a price of Rmb13.93/shr (a 16% discount to the lastclosing price); and 2) Rmb2,499m in cash. It also proposes to fund a Rmb6bnproject investment via a private placement (<=486mn shares).

    Attractive deal valuation with decent EPS accretion expectedThe deal pricing represents 2.57x FY16 P/B and 14x FY16 PE, vs. 4.6x P/B and28x P/E for the listco. Valuation appears attractive, given higher ROE (19%) oftarget assets vs. listco (16%). In FY16, the target assets generated Rmb1.9bnof net profit (>80% from NR Electric), 130% of that of the listco. Conservativelyassuming 5% growth in target assets (the profit guarantee details are yet to befinalized), FY17/18 EPS would be enhanced 14%/10% post the share issuance.

    DCF-based target price of Rmb18.5; risksWe maintain our DCF-based target price of Rmb18.5, comprising Rmb15.4/shrfor existing assets and Rmb3.1/shr for an asset injection premium. Our TPimpliedFY17/18E PE of 22x/19x (if factoring the asset injection plan andassuming 15% EPS growth in target assets) is largely in line with its historicalaverage and grid automation peers. Key risks: deal failure, significant variance tothe final plan, grid investment, market share/margin volatility with competition.