HUNDSUN TECHNOLOGIES(600570)：ANNOUNCES 2022 ESOP TO RETAIN CORE STAFFS;INDUSTRY LEADER STEADILY DEVELOPING

　　What's new

    　　Hundsun Technologies (Hundsun) announced the draft of its 2022 employee stock ownership plan (ESOP). The firm plans to transfer up to 1.70mn repurchased shares (0.1163% of the total share capital) at a price of Rmb21.5/sh to up to 600 employees under the ESOP. Specifically, 17 directors, supervisors and senior managers would subscribe for up to 19.06% of the shares to be transferred. At the same time, the firm updated that as of 1H22, it had repurchased 1.30mn shares for Rmb53.51mn or Rmb34-47/sh. The buyback target of Rmb100mn-150mn has yet to be achieved.

    　　Comments

    　　The firm aims to retain and incentivize the management team through the 2022 ESOP. The 2022 ESOP, which is designed to incentivize directors, supervisors, senior managers and core staffs of various departments, covers up to 600 persons (vs. a headcount of 13,310 at end-2021). Compared with the ESOP in 2020 which covered 5,500 persons (vs. a headcount of 7,357 at end-2019), we think the 2022 ESOP focuses on the core management team. Statically speaking, the ESOP in 2022 offers continued but fewer incentives to core staffs than that in 2020. We estimate total incentives for directors, supervisors and senior executives under the ESOP [number of shares granted x (current share price - grant price)] at 12-25% of their annual compensation in 2021, implying annual incentives at 4-8% considering the three-year lock-up period. For other staffs, we estimate per-capita incentives at 2,360 shares or Rmb50,000, considering a total of 1.376mn shares to be granted and up to 583 persons included in the ESOP. 3) There is no corporate related unlocking condition for the ESOP due to historical reasons, in line with the ESOP in 2020.

    　　The 2022 ESOP was released at a time when Hundsun’s stock price is relatively low. We see high growth potential in the incentives from a dynamic perspective, conducive to the firm’s long-term development. The firm sets the share grant price at 50% of Rmb43/sh, the closing price of the day the board meeting was held. In 2020, the grant price was 50% of Rmb90.64/sh, the average closing price in the 20 trading days before the disclosure of the ESOP. Considering the firm’s stock price is relatively low at present, we expect the incentives to strengthen as the firm’s stock price trends upwards. We think the incentives will align the interest of employees, thereby motivating core staffs and boosting the firm’s development in the long term. According to the announcement, the ESOP may incur an expense of Rmb36.55mn, with amortization of Rmb8.88mn in 2022, Rmb16.75mn in 2023, Rmb8.07mn in 2024 and Rmb2.84mn in 2025. We believe the impact on recurring profit will be limited. We think the ongoing share buyback and the new ESOP shows the firm’s confidence in its future growth. Considering its low valuation, we think the firm now offers an attractive value for asset allocation.

    　　Financials and valuation

    　　Considering the cost of equity incentives has yet to be determined, we maintain our earnings forecasts and an OUTPERFORM rating. Given the industry uptrend and improving corporate management, we raise our TP by 18% to Rmb58, implying 41x 2022e P/OCF, offering 35% upside. The stock is trading at 31x 2022e P/OCF.

    　　Risks

    　　Loss of core employees; risks related to M&A; disappointing progress of new products.