Shenzhen Expressway Acquires 20% Equity Interest of Derun Environment, Giving Birth to Significant Environmental Protection Projects

(25 May 2017, Hong Kong) Shenzhen Expressway Company Limited (“Shenzhen Expressway ", or the “Group”; Stock Code: 00548) is pleased to announce that, Shenzhen Expressway Environment Company Limited, a wholly-owned subsidiary of the Group, acquired 20% equity interest of Chongqing Derun Environment Company Limited (Derun Environment) through an online bidding of Chongqing Assets and Equity Exchange at a price of RMB4.409 billion.

 

 

Important Layout of Environmental Protection Strategy; Acquring the “First Echelon” to Achieve a Leap in New Industry

 

 

Derun Environment is the “first echelon” in the domestic environmental protection industry with quality assets and strong shareholder strength. Suyu Industry, the second largest shareholder of Derun Environment, is a subordinate company of the world’s famous environmental protection company Suez Environment. The major assets of Derun Environment includes Chongqing Water Group Company Limited (stock code: 601158) and Chongqing San Feng Environmental Industrial Group Co., Ltd. (Chongqing San Feng), with two main businesses of water treatment and waste incineration power generation and major clients of Chongqing Municipal Government, Chongqing residents and governments of project locations. Derun Environment possesses the features of stable profit, satisfactory cash flow, and strong scale advantages, regional competitive advantages and growth potential. At the same time, Derun Environment’s business layouts of the soil remediation and water environment treatment segments possess great room of business development.

 

 

The Group’s management said that the acquisition has had positive impacts on the Group’s financial position and long-term development. As the valuation on the fair values of identifiable assets and liabilities of Derun Environment will be carried out after completion of the acquisition, it is expected that the identifiable fair value of Derun Environment will range between its book value and the consideration of the acquisition. Assuming the acquisition will be completed by the end of May 2017, the acquisition is expected to increase the Group’s profit for 2017 by approximately RMB45 million to RMB120 million, representing approximately 3.85% to 10.26% of the audited profit of the Group for 2016.

 

 

That Shenzhen Expressway acquired Derun Environment at a reasonable cost can on the one hand expand the Group’s environmental business and obtain reasonable return on investment, and on the other hand perform in-depth cooperation with Derun Environment, and complement each other’s advantages in business development. The acquisition serves as a significant chance for Shenzhen Expressway to rapidly enter the environmental protection industry and become the first echelon of environmental protection enterprises. In addition, this is an important opportunity for Shenzhen Expressway to overcome its constraints and accumulate managerial experience in the environmental protection industry. Upon the completion of the acquisition, Shenzhen Expressway will have the opportunity to appoint a director and a supervisor in Derun Environment, as well as recommend senior management personnel for Derun Environment, so as to provide opportunities for Shenzhen Expressway to accumulate managerial experience in the environmental protection industry and train environmental protection talents.

 

 

Based on in-depth study on the development trend of internal and external environments, and by combining the country’s industrial policies and the Group’s own advantages, Shenzhen Expressway adopted the environmental protection industry with water environment treatment and solid waste treatment as the main content as a new business development direction, which was Shenzhen Expressway’s strategic choice after serious study and argumentation. As the first step of new business development, the acquisition of 20% equity interest of Derun Environment has significant meaning for the Group’s stable business growth and formation of new growth potential.

 

 

Similar with the toll road industry, the main partner of the environmental protection industry is local governments, which is a characteristics of franchise. Secondly, the environmental protection industry is a capital-intensive industry, which requires stronger financing capability and business model design capability. In addition, investing in the environmental protection industry requires higher project construction management capability, in order to guarantee returns during the operation period from reasonable construction cost. The management of Shenzhen Expressway believes that the Groups’ experience of cooperating with local governments in the toll road industry, good financing capability and business model design capability, as well as ample project construction management capability are important supports for the Group to enter the environmental protection industry.

 

 

Stable Main Business Income; The Second Main Business to Open up Future Growth Space

 

 

In the first quarter of 2017, Shenzhen Expressway’s various income indicators maintained steady growth. The Group recorded revenue of RMB1,031 million, representing a YOY growth of 3.4%. Among which, it recorded toll revenue of RMB941 million, representing a YOY growth of 5.3%. The Group recorded net profit of RMB349 million, representing a YOY increase of 38.5%. The Group entered into the Equity Transfer Agreement with Shenzhen Pingan Innovation Capital Investment Company Limited to purchase 100% equity interest of Yichang Company held by the latter at a consideration of RMB1.27 billion, which helped the Group to expand its toll road asset scale, and further strengthen its core advantages in the investment, management and operation of the highways. At the end of 2016, Shenzhen Expressway participated in the South Gate River comprehensive management project with RMB320 million. In April 2017, Shenzhen Expressway acquired 15% equity interest of Water Planning and Design Institute after its increase in capital. The above-mentioned project investments have opened up new development space of the environment protection industry for Shenzhen Expressway. The acquisition of Derun Environment will become the Group’s second main business, forming a new industrial pillar and an important growth layout of new industry economies of scale and synergies.

 

 

The Group’s management also said that the Group will continue to consolidate and enhance the toll road main business, while further integrating resources and leveraging on the capacity of innovating financing business models. Relying on the capability of resource integration, the Group will actively promote and implement new industrial investment, in order to eventually realize long-term healthy development and create more value for shareholders.

 

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