Guangzhou Pearl River Piano Group:Private Placement,M&A,Strengthening Leadership Position in Main Business While Seeking for Strategic Transformation

Company Profilen

Guangzhou Pearl River Piano Group Company Limited develops, manufactures, sellspianos and provides related services. The Company's main products include uprightpianos, grand pianos, and digital pianos.

Event

Guangzhou Pearl River Piano Group Co., Ltd announced it was going to raise no morethan CNY 1.33billion through privately offering 90.29million shares at the price of CNY14.73per share which will be invested in the construction of Guangzhou CulturalIndustry Incubation Park, Zengcheng National Cultural Industry Base (Phase Two) andNational Culture & Art Education Center as well as establishing Pearl River MusicalInstrument Cloud Service Platform.

The Company’s wholly-owned subsidiary in Europe is going to spend EUR 26.6millionpurchasing 90% stake in Schimmel KG and Schimmel-Verwaltungs GmbH.

Commentn

Launching four projects to fuel expansion in piano-related sectors

Guangzhou Cultural Industry Incubation Park: Part of old production facilities will bemoved to Zengcheng and the space freed up is going to accept cultural enterprises inmusic, film, animation and advertising industries. The company estimated that, withcomprehensive financial support from funds, loan companies and banks, the park couldattract around 300-500companies in the future.

Zengcheng National Cultural Industry Base (Phase Two): It will take about two yearsfor Guangzhou Pearl River Piano Group to build up several shops in Zengcheng toaccommodate the general assembly line and some other fabrication lines producingcore components which are originally located in downtown area of Guangzhou,increasing its production capacity to 100thousand pianos per year and benefitingimprovement of management efficiency.

National Culture & Art Education Center: 3center stores, 12flagship shops and 5training centers in Beijing, Shanghai, Guangzhou and other major cities in Chinafocusing on music, dancing and art training and are also expected to have fitness andcatering functions.

Pearl River Musical Instrument Cloud Service Platform: As most distributors are notcapable of providing quality after-sales service, Guangzhou Pearl River Piano Groupsteps in to help customers fix problems of its products and offers logistic, consultancyas well as piano tuning services. Information accumulated in the process may flow tonew businesses like e-commerce.

Joining hands with German piano giant

Schimmel is the largest piano manufacturer in Europe enjoying good reputation on themarket for its high-end products (Konzert, Classic, International, Wilhelm, etc.). Revenueof the target company was EUR 16.66million which mainly came from Germany, Europeand North America. Schimmel will continue operating its production base independentlyafter this transaction. And the two parties conduct cooperation in capital, brand,technology and market.

Pioneer in SOE reform

Although Guangzhou government has 81% stake in Guangzhou Pearl River PianoGroup, the Company acted proactively embrace opportunities brought about by marketeconomy through rolling out stock incentive plans and setting performance targets fornewly-established company, indicating an optimized governance structure isfunctioning.

Earnings forecast and investment recommendations: We made EPS forecast forthe Company at CNY 0.17in 2015, CNY 0.20in 2016and CNY 0.23in 2017with theconsideration of its sound fundamentals and SOE reform. Reiterate OUTPERFORM.

Potential Risks: expansion in education industry generate worse-than-expectedresults, price of raw materials rises fast.

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