The Zhitong Finance App learned that CICC released a research report stating that it maintains the “outperforming industry” rating of TEP International (01368) and temporarily maintains the company's 2024/25 EPS forecast of 0.45/0.52 yuan, considering that the company's transactions have not yet been implemented. The target price was raised by 20% to HK$6.58, taking into account the company's plans to divest loss-making businesses to boost market confidence. The company announced that it plans to sell KP Global, which owns the Gashway and Palatin brands, to the controlling shareholder Ding's family for US$151 million. Pending completion of the sale, the company plans to declare a special dividend of US$151 million.

The main views of CICC are as follows:

Teb International announced the following transactions:

1) The Ding Family, the controlling shareholder of the company, plans to acquire KP Global, which owns the Gashway and Palatin brands, for a book value of US$151 million. 2) After the transaction is completed, the company plans to use the cash proceeds from the transaction to pay a special dividend of US$151 million. 3) KP Global used the principal amount of $65 million to redeem Gashway convertible bonds held by Gao Lin. 4) Teb International issued 3.5% convertible bonds due in 2030 with a capital of HK$500 million to Gao Lin. 5) The Ding family gave Gao Lin the option to buy back 20% of KP Global's issued shares for $65 million within 5 years. 6) The company has approximately US$154 million in accounts payable from KP Global. To settle the arrears, KP Global will issue 3.5% convertible bonds due in 2032 with a capital amount of US$154 million. If all shares are converted, it is expected to correspond to 30% of KP Global's shares.

If the above deal is successfully completed, the bank expects a significant improvement in the company's profitability.

For listed companies, the company plans to distribute all of the US$151 million it received from the sale of KP Global to shareholders in the form of a special dividend, in addition to Gao Lin's plan to redeem Gestway convertible bonds for $65 million while subscribing to the company's convertible bonds for HK$500 million (the principal amount of the two convertible bonds are similar). Therefore, the bank believes that the transaction will not cause significant net change in cash flow for the listed company. In terms of profit, 1) Since 2019, the Gestway and Palatine brands have accumulated losses of more than 100 million US dollars, which has dragged down the company's performance. If KP Global is successfully divested this time, the company's new brand losses are expected to decrease significantly. 2) After KP Global issues convertible bonds to the company, the bank estimates that the company will receive more than 5 million US dollars of interest income from KP Global every year. After deducting interest on the convertible bonds paid to Gao Lin, the company is expected to earn an additional annual interest income of more than 20 million yuan.

The company plans to invest resources more on Sauconie and Millet to support the rapid development of new brands.

The company's cash flow situation may improve significantly after the divestment of KP Global. The company plans to focus on two new brands, Sauconnie and Mille, which are developing well, to promote faster growth by increasing channel construction and marketing resource investment. Furthermore, in January-April of this year, Sauconi and Mille performed better than the company's expectations. Among them, Sauconi achieved rapid year-on-year growth, and Mille also entered a profitable state.

Risk: Competition in the industry intensifies, the terminal retail environment falls short of expectations, and the progress of divestment of loss-making businesses falls short of expectations.