Brief Industrials: StubWorld: Wharf Under Pressure As Cooling Measures Bite and more

In this briefing:

1. StubWorld: Wharf Under Pressure As Cooling Measures Bite
2. Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent
3. ITD Cementation India Ltd- Uncomplicated Pure Play Infra Service Provider with No Asset Ownership!!

1. StubWorld: Wharf Under Pressure As Cooling Measures Bite

This week in StubWorld …

• Wheelock & (20 HK) is coming up “expensive”, but it’s Wharf Holdings (4 HK) which is under-performing after PRC property sales targets are lowered amid Beijing’s cooling measures.

Preceding my comments on Wheelock and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

2. Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent

Dongzheng Automotive Finance (2718 HK) is raising up to US$428m in its upcoming IPO. We have covered the background of the company in Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth. 

In this insight, we will look into the company’s valuation, compare it to listed auto peers, and run the deal through our framework.

3. ITD Cementation India Ltd- Uncomplicated Pure Play Infra Service Provider with No Asset Ownership!!

ITD Cementation India Ltd (ITDCIL) is one of the few pure-play infrastructure execution companies left in India, in the last decade the entire infra space in India has diversified into debt funded asset heavy infra ownership which has led to tremendous value destruction. The company is engaged in the construction of marine structures, highways, bridges & flyovers, metros, airports, hydro-tunneling, dams & canals, water & wastewater segment, industrial structures, buildings and specialist foundation engineering projects with presence across India. IDTCIL receives technological support from its parent company Italian-Thai Development Public Company Ltd (ITDPCL). ITDPCL has a presence across the globe and has expertise in the airport, Mass Rapid Transit System (MRTS), high-speed bullet train projects, marine projects among others.

In the last 12 months, ITDCIL has grown at 24% with revenue at INR 25.9 bn. EBITDA and PAT stood at INR 3.34 bn and INR 1.18 bn receptively with EBITDA margin and  PAT margin at 12.9% and 4.57% receptively. EBITDA margins contracted by 174 bps and PAT margin expanded by 109 bps. During the same period EBITDA grew by 9% and PAT increased by 62.4%.

The company’s order book as of Dec’18 stands at INR 95 bn with 45 bn order inflow between Jan’18 to Dec’18 its Book to Bill ratio is 3.73 times.

Drivers:
India is an infra deficit country. In 2015, India spent about 5% of GDP on Infra and this expenditure needs to cost about 8.5% (Climate adjusted investment under high growth scenario of 7.8% GDP growth) over 2016-2030 and estimated infra spending though 2030 is expected to be USD 5.5 tn. Per the Global Competitive Index, India’s infrastructure score had increased from 3.4 out of 7 in 2008 to 4.2 points out of 7 in 2017. Being the fastest growing among large economies and infra deficit country, India offers enough opportunities for investment in the infrastructure sector.

ITDCIL has proven expertise in urban infra ( especially metro rail) and marine structures which are seeing a huge impetus in India with almost all major cities either building or planning to develop metro rails and significant investments going into developing port infrastructures and inland waterways through the Sagarmala, river cleaning through Namami Gange among others. The Government of India (GOI) is expected to spend about INR 8 trillion through Sagarmala and INR 200 bn through Namami Gange. ITD Cementation India Ltd is expected to be one of the beneficiary due to its experience in metro and marine segment.

The company is expected to grow at 65% in FY19 (15-month financial year) and is expected to register EBITDA margin of 12.4% and Profit margin of 4.26% with EBITDA at INR 4.3 bn and Profit at INR 1.57 bn. The company’s shares at the current price of INR 132 are trading at a PEx 19.21x its TTM EPS, 19.12x its FY19F EPS (calculated for 12 months) and 16.31x its FY20F EPS. The company’s ROE and ROA for the previous financial year stood at 11.81% and 3.05% respectively.