Bright Dairy and Dongfang Electric shares tipped to benefit from SOE consolidation

PUBLISHED : Wednesday, 03 June, 2015, 1:36pm
UPDATED : Wednesday, 03 June, 2015, 2:00pm

Spotting the likely stock market beneficiaries of consolidation among state-owned enterprises has become a favoured pastime of investors lately.

Bright Dairy & Food and Dongfang Electric Corp are among the names in the frame for analysts at Credit Suisse.

The State Supervision and Administration Commission (Sasac) planned to reduce the number of central government-owned state-owned enterprises, excluding financial SOEs, to about 40 from the current 112, mainland newspaper Economic Information Daily reported in April.

A Credit Suisse report said Bright Food Group, the state-owned parent of Bright Dairy, was likely to inject Shanghai Dairy Group into the Shanghai-listed dairy products producer.

“M&As are more likely in the same group under one controlling shareholder,” the report said. “Shanghai SOE reform is likely to take place. The consolidation of similar assets and securitisation of unlisted companies under Sasac are two major targets.”

Credit Suisse pointed to the union of state-owned train makers CSR Corp and China CNR Corp as evidence of Beijing’s intent on consolidation in the state sector.

Shanghai Dairy Group is an unlisted subsidiary of the Bright Food Group that manages 4,500 cows on 24 farms.

“Should this occur, Bright Dairy will have a vertically integrated business with secure quality raw milk supply and consistency of finished dairy products. This is going to strengthen the competitive advantage of Bright Dairy,” the Credit Suisse analysts said.

The number of central-level SOEs has fallen from 196 in 2003 to 112 in 2014, Credit Suisse pointed out. Of the 196 central SOEs that existed in 2003, 80 were merged into existing companies and nine were merged to form new companies, the investment bank said. “Indeed, the consolidation of central SOEs has been an ongoing theme since 2003.”

Credit Suisse’s target price for Bright Dairy is 28 yuan, assuming a 29 times price-earnings ratio for 2016. The shares closed at 19.84 yuan on Tuesday. Ping An Securities expects Bright Dairy to have a price-earnings ratio of 26 for 2015, 16 for 2016 and 13 for 2017, while earnings per share will grow 68 per cent, 60 per cent and 21 per cent, respectively. Even without a merger, Ping An projects the company’s revenue will grow by 50 per cent from 20.39 billion yuan in 2014 to 29.66 billion yuan in 2017.

Credit Suisse has an outperform rating on Bright Dairy, while Ping An Securities has a “strongly recommended” rating on the stock.

Credit Suisse said a merger between power generation equipment maker Dongfang Electric and Harbin Electric Corp – which also makes power equipment and provides power services – is another possibility. Dongfang Electric is listed in Shanghai and Hong Kong, while Harbin Electric is listed in Hong Kong.

The consolidation of Dongfang Electric and Harbin Power is possible, if the central government is keen on dramatically reducing the total number of central SOEs
Credit Suisse report

“If the merger takes place, the new company can coordinate on development strategy in a more efficient way,” the report said.

“The consolidation of Dongfang Electric and Harbin Power is possible, if the central government is keen on dramatically reducing the total number of central SOEs. The merged new company may enjoy a recovering price with better coordination in project bidding in the domestic market, while price upside would be capped in the overseas market to serve national interests.”

Credit Suisse said a combined new entity could improve operational efficiency with a more integrated platform.

“We expect the new company to achieve some synergies in R&D as the two companies do have a slightly different focus,” the investment bank said.

In January, Macquarie set a target share price for Dongfang Electric at HK$18.70. The stock closed at HK$17.70 on Tuesday.

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