China Wheel Holdings Ltd - Proposed issue of convertible bonds

Proposed issue of US$25 million 5-year convertible bonds. China Wheel Holdings (“CWH”) announced that it has entered into a subscription agreement with Lehman Brothers Commercial Corporation Asia Limited (“Lehman”) for the issue of US$25 million 5-year convertible bonds, which bear interest at 3% per annum and can be converted into shares at a conversion price of S$1.045 per share. Under the terms of the agreement, Lehman has agreed to subscribe and pay for, or procure subscription and payment for the bonds.
Net proceeds will be used to finance the construction of the new Tianjin plant. As mentioned in our initiation report of 2 April 2007, CWH expects to invest a total of about RMB780 million in the new Tianjin plant (RMB500 million for the construction of the plant and purchase of machinery and RMB280 million for working capital) through a combination of equity financing, bank borrowings and internal resources. CWH will use the net proceeds from the bonds issue to finance the construction of the Tianjin plant. Following the issue of convertible bonds, we expect CWH to finance its remaining investment in the Tianjin plant through bank borrowings and internal resources.
Maintain BUY and raise Fair Value Estimate to S$1.36. In our previous forecasts, we have assumed that CWH will tap the equity market for RMB150 million of funding by placing out new shares at S$0.90 per share in FY08. We have revised our share base dilution assumptions by factoring in a full conversion of the convertible bonds into shares during FY09, leading to increases in our EPS estimates for FY08 and FY09 by 11% and 2% respectively. Based on our revised forecasts, we now expect CWH to grow its EPS at a 3-year CAGR of 26%. CWH remains an appealing proxy to China’s booming auto sector. We maintain our BUY recommendation and raise our Fair Value Estimate from S$1.23 to S$1.36, based on the same relative valuation of 12x FY08 PER.