CENTRAL CHINA REAL ESTATE(00832.HK)：INTRODUCTION OF A HENAN SOE AS STRATEGIC INVESTOR-格隆汇

机构：国泰君安国际
研究员：Chunli Zhan

　　A Henan SOE acquired 29.01% stake in the Company. On 1 June 2022 night, Central China Real Estate （CCRE, or the "Company"） announced that its controlling shareholder will sell 860 mn shares, or equivalent to 29.01% stake, to Henan Tongsheng Zhiye Co., Ltd. （河南同晟置业有限公司）。 The investor is wholly owned by Henan Railway Construction & Investment Group （河南铁路建设投资集团， or "Henan Railway"）， an entity owned by Henan provincial government. The total consideration is HK$688 mn, which implies an average acquisition cost of HK$0.8 per share and represents 0.2x 2021 PBR. After the shares acquisition, Henan Railway will be the second largest shareholder with 29.01% stake, meanwhile Mr. Hu Baosen’s （胡葆森） stake will be reduced to 41.10%.
　　The investor will subscribe for a convertible bond （CB） of up to HK$708 mn. At the same time, Henan Railway will subscribe for a CB of up to HK$708 mn, with a coupon rate of 5% and a yield to maturity of 9% issued by CCRE. The conversion price is HK$1.2 per share, with conversion shares at 590 mn. Assuming full conversion of the CB, Henan Railway will become the largest shareholder with a 40.8% stake in the Company.
　　We believe Henan Railway’s direct capital injection in both equity and debt, has showed its confidence in the Company, which was also encouraged by the local government.
　　The shoe has finally dropped, and CCRE’s financial situation will be largely improved. We believe the Company has been in the process of cooperation with Henan SOEs for a while, considering its heavy focus and long-term development strategy in Henan province. We believe the concrete measures with cash investment （around HK$1.4 bn） from a Henan SOE should largely relieve its financial distress. Furthermore, besides the direct capital injection, we expect more support from Henan Railway, especially from project cooperation and credit upgrade.
　　Investment suggestion: We believe the support from the local government should enhance investor confidence in the Company, and the share price will likely respond positively in the short term, especially considering its undervaluation due to its financial problems. We maintain a prudent optimistic view on the Company and suggest "Accumulate" investment rating, considering its improved credit profile, but still relatively lackluster sales performance.