On the night of 10th March, Luen Mei Quantum (600167), a listed company of the main-board market, announced that it intended to spin off its subsidiary Mega-info Media listed on the second-board market of Shenzhen Stock Exchange. After this spinoff, no change will occur to shareQuantum structure of Luen Mei Quantum, which will still reserve the right to control Mega-info Media.

Undoubtedly, this plan will be favorable for the parent company Luen Mei Quantum to focus on its principal businesses. Meanwhile, it will be beneficial to estimating value of Mega-info Media more properly and increasing its brand value. Calculated at the minimum growth of net profits over the past 5 years, the total potential market value might be up to RMB57 billion in two major business sectors of Luen Mei Quantum in 2020.

With Hope for Becoming the First Share on the “Spinoff Second-board Market of the Main-board A-share Market”

The Estimated Value of Mega-info Media Might Exceed RMB13 Billion

On 13th December 2019, the China Securities Regulatory Commission formally promulgated Several Regulations on Several Provisions on the Pilot Program of Listed Companies’ Spinoff of Subsidiaries for Domestic Listing, and domestic policy on spinoff for listing was formally released.

Previously, 6 companies announced their spinoff proposals. For instance, Suzhou Dongshan Precision Manufacturing Co., Ltd (002384), a former listed company of the Small and Medium-sized Enterprise Board, clearly stated that it planned to spin off its subsidiary to the second-board market. Besides, other companies like China Railway Construction Corporation (01186) primarily planned to spin off their subsidiaries for listing on the sci-tech innovation board and main-board market of Shanghai Stock Exchange. Therefore, if this spinoff plan is successfully implemented, Luen Mei Quantum will become the first spinoff on the “spinoff second-board market of the main-board market) by spinning A-shares off into A-shares.

As the leader in segmented industries of public environmental protection, Luen Mei Quantum is a professional operator of clean heat supply. It mainly engages in public utilities such as clean heat supply, power supply and steam supply. Since its acquisition of Mega-info Media in 2018, it has fully initiated both of its principal businesses: “clean heat supply+digital high-speed rail media”. Over the past two years, it has achieved synchronous and high-speed growth in revenues and profits. In 2018, its revenues amounted to RMB3.037 billion, including RMB1.317 billion net profits, which grew by 25% on a year-on-year basis. Over three quarters of 2019, its revenues amounted to RMB1.931 billion, including RMB0.918 billion net profits, which grew by 25.07% on a year-on-year basis.

Digital media services of Mega-info Media have been highly independent of listed companies’ principal businesses all the time, independently managed by a professional team. The performances in such digital medical services have increased significantly.

It is understood that the performance that Mega-info Media undertook to achieve wasn’t low when it was merged with Luen Mei Quantum: The net profits that Mega-info Media that Mega-info Media undertook to make would amount to RMB0.15 billion, RMB0.188 billion and RMB0.234 billion in 2018, 2019 and 2020 respectively. According to the committed performances, the average annual growth of net profits from this business sector must have been above 25% over recent 3 years. The actual net profit of Mega-info Media was up to RMB0.159 billion in 2018 and higher than the amount of the profit that Mega-info Media had been committed to earn.

According to Wind’s latest data, the mean PE folds are about 56 folds in the industry of advertising media over trailing twelve months. In other words, if the profit of Mega-info Media can be up to RMB0.234 billion at minimum as promised, the estimated value of Mega-info Media is expected to be above RMB13 billion after its spinoff for listing. This market value reaches the upper level on the entire sector of advertising media.

Achieving Many Things at One Stroke via Spinoff

Tremendous Space for Growth in Clean Heat Supply

This spinoff plan is expected to create multiple favorable benefits for the parent company Luen Mei Quantum.

According to insiders, as controlling shareholder of Mega-info Media, Luen Mei Quantum will still reserve the right to control the subsidiary listed after spinoff. After the independent listing of Mega-info Media, the industry layout will be further deepened after reasonable valuation. This is, without doubt, helpful for increasing shareholders’ earnings significantly.

 In addition, spinning off its subsidiary for listing is helpful for Luen Mei Quantum to increase its management team’s enthusiasm, internal management efficiency and growth impulses through equity incentives.

For its owners of clean energies, spinoff will promote Luen Mei Quantum to focus on its principal businesses. Based on its existing industry advantages, Luen Mei Quantum will greatly strengthen its investments in upstream and downstream high-quality assets on a nationwide basis with ample cash in hand, in order to constantly increase its market shares.

In view that the annual growth of net profits hasn’t been lower than 20% in Luen Mei Quantum over the past 5 years, based on surveys and forecasts of multiple securities traders, the net profit of Luen Mei Quantum attributed to the parent company would be approximately up to RMB1.6 billion in 2019, and the net profit is expected to reach about RMB1.9 billion. After RMB0.234 billion advertising revenue is deducted from the net profit (based on the performance commitment), the business performance in clean heat supply may be as high as RMB1.6 billion to RMB1.7 billion. Calculated based on 23.4 folds of the weighted mean PE of Wind’s power generation, heat production and supply, the business value of Luen Mei Quantum’s clean heat supply is expected to reach RMB40 billion by 2020.

By the closing on 6th March, the closing price of Luen Mei Quantum has been up to RMB12.59, and corresponding market value is only RMB28.8 billion. There is still space for the market value to increase by about 1 fold.

Furthermore, some analysts have reported that clean heat supply has been always one of key projects in national public utilities of environmental protection. Centralized clean heat supply, spinoff and increasing heat supply efficiency will become inevitable trends of industry development.

According to public data, clean energy businesses of Luen Mei Quantum include efficient coal-fired combined heat and power generation, heat supply by water source heat pumps, biomass combined heat and power generation, and intelligent control and so on. The services of Luen Mei Quantum primarily cover Shenyang of Liaoning Province, Heze of Shandong Province and Taizhou of Jiangsu Province and so on. In 2018, Luen Mei Quantum supplied heat over 60,000,000m2, and its network covered an area of more than 81,000,000m2. Calculated based on the planned heat supply area of 0.15 billion square meters approved by the government, even future visible growth space has been higher than 1 fold. Apparently, the growth potential is tremendous.

As to expansion of foreign investments, Luen Mei Quantum has stated its extended acquisition strategies for “non-local duplication”. It plans to extensively seek high-quality clean energies and continuously increase its listed companies’ performances with its ample cash flow.

（source：Securities Daily; reported by Li Chunlian）