Sinotrans’ results inflated by M&A activity

Sinotrans grew revenues and profits in 2017, with its top line up 21.4% and operating income rising 22% against 2016 restated figures.

Annual group revenues came in at CNY72.5bn ($11.6bn) while underlying profits stood at CNY3.1bn, but earnings per share at CNY0.38 grew only 2.7% on a comparable basis.

Here is why: As the largest state-owned logistics services provider in China continues to reshuffle its portfolio of assets, its equity base has expanded and thus dilution becomes the inevitable price to pay for growth.

On 22 August last year, the company “entered into an acquisition agreement with China Merchants under which the company conditionally agreed to acquire the entire issued share capital of the China Merchants Logistics Holdings Company Limited from China Merchants at an aggregate consideration of RMB5,450,000,000, which is to be satisfied by the issuance and allotment of up to 1,442,683,444 domestic state-owned ordinary shares.”

Among other minor corporate activity, in 2017 it disposed of its entire 15% equity interest in China Merchants Finance, while one year earlier it sold a 4% equity interest in Zhoushan Port Group. In the “events after the reporting period” section of its annual results, it flagged that on 28 February 2018 the board announced that the company had entered “into a merger agreement with Sinotrans Air Transportation Development (“Sinoair”)”.

“According to the merger agreement, the company is to apply to the relevant regulatory authorities in the PRC for the issue and listing of A Shares on the Shanghai Stock Exchange and merger of Sinoair,” it said, in a deal financed by equity.

As a result, Sinoair will be de-listed from the Shanghai Stock Exchange, and deregistered, with its assets and liabilities consolidated by the acquirer.

Significant changes in its corporate structure notwithstanding, its core freight forwarding unit, which was responsible for CNY46.6bn of revenues in 2017, generated CNY1.1bn of operating profit, or about 44% of the group’s total.

Meanwhile, logistics activities turned over CNY18.7bn, with CNY649m of operating income, while the storage and terminal services business and logistics equipment leasing activities, with sales of CNY2.2bn and CNY1.4bn, churned out about CNY700m of operating profit, almost evenly split between the two units.

The logistics unit remained the heaviest in terms of capital expenditure needs, with capex of almost CNY2.4bn, which amounts to 70% of the group’s total, and was responsible for the total annual growth in capex at group level from one year earlier.

Dividends per share grew to CNY0.08 from CNY0.075 in 2016.


Source: Transport Intelligence, March 27, 2018

Author: Alessandro Pasetti


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