Morningstar | Zoomlion Announces the Disposal of its Remainder 20% Stake in its Environmental Equipment Arm. See Updated Analyst Note from 19 Jul 2018
Zoomlion and the other shareholders of Changsha Zoomlion Environmental Industry Co., Ltd, have announced that they will dispose of 100% of the company to Infore Environment Technology Group, or IET, for CNY 15.25 billion, which will be settled via new shares of IET. Based on Zoomlion's ownership of a 20% stake in the company, it will be getting 399 million shares, or a 12.6% stake (worth CNY 3.05 billion) in IET, a provider of online pollution monitoring equipment, environmental treatment solutions and operational services in China that is listed on the Shenzhen Stock Exchange. We have factored this in our model and the impact on our fair value estimate is minimal as the decline in income from associate is offset by the higher valuation that Zoomlion gets for its stake in Changsha Zoomlion. Nonetheless, we have lowered our fair value estimate for our Hong Kong-listed shares to HKD 4.20 from HKD 4.50 mainly due to the depreciation of the Chinese renminbi. Our fair value estimate for its A-shares is unchanged at CNY 3.60. Our no-moat and stable moat trend ratings on the firm remain intact.Zoomlion's intention to focus on the industrial and agricultural machinery businesses has led to the company's decision to dispose of 80% of Changsha Zoomlion for CNY 11.6 billion in cash in 2017. We view this opportunity for it to dispose of its remaining 20% stake positively as the company manage to realize a higher valuation for Changsha Zoomlion (valued at CNY 15.25 billion currently compared with CNY 14.5 billion in 2017 on a 100% basis). On a P/E basis, the current sale price translates to a P/E of 24.4 times based on annualized 2018 earnings which is higher than the sale price in 2017 which was on a P/E of 19.1 times on 2017 earnings. Besides, it can still participate in future growth of the business through its stake in ICT, which it can liquidate if needed.
This proposed disposal is subject to relevant parties' approval, including shareholders and the China Securities Regulatory Commission.
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