SMRT – DBS

SMRT announces new S&P for 49% stake in Shenzhen Zona

SMRT announced that it has signed a new Sale and Purchase Agreement (SPA) for a 49% stake in Shenzhen Zona for a total consideration of RMB320m (S$68.4m).

This is a new SPA which is slightly different from the previous one signed in Sep 08. The latter which has since lapsed earlier in 2009 as certain conditions precedent were not met. The new SPA is also subject to certain conditions precedent, including receipt of approval from the relevant PRC authorities. Given that this is a second time a SPA is signed, we think the chance of it coming to fruition is likely.

Upon completion of the acquisition, Shenzhen Zona will be an associate of the company. As completion will take several months, the impact on SMRT’s FY10F earnings will not be material. Assuming an acquisition PER of around 8x – 15x, which is similar to regional/global peers trading range, we estimate the profit contribution of this acquisition is around S$4.6m – S$8.6m (or 3%-5%) of SMRT’s Group profit.

As of Dec 08, Shenzhen Zona has a NAV of RMB376.7m, represented by a negative NTA of
RMB48m and Net Intangible Assets of RMB427.7m. The intangible assets largely comprise taxi operating licences acquired through open bids. The acquisition price works out to be around 1.7x P/NAV.

Shenzhen Zona is engaged in the following services:
• Taxi services in Shenzhen, car and bus repair services in Shenzhen and Huizhou,
• car leasing, scheduled coach services from Shenzhen to other cities, tour and chartered coach services within and beyond Shenzhen; and,
• public bus services in Huizhou.

Maintain Hold, TP of S$1.65

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