Citics Research Ideas: Weixing Co., LTD (002003) Stockholders exercise option accounts, already, exercise, option

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Weixing Co., LTD (002003) Stockholders exercise options for the first time-- Li Xing--- "Buy" (reiterate)

Event: On Nov. 8th, the Company announced that it's extraordinary board meeting has already agreed on "The Proposal on the First Exercise of Options by Stockholders Under the Stock Option Incentive Scheme," to issue shares to 9 beneficiaries, this time, shares on which stock holders can exercise option total 6.1651 million shares, which accounts for 3.16% of the Company's total stock capital. Exercise price is RMB 4.25, and the closing price on Nov. 7th was RMB 7.64.

This is the first time that the stock holders will exercise their options, and they may exercise their options a second time after 12 months.  Company's stock ownership incentive scheme was initially implemented on Oct. 27, 2006, awarding 9 investors with 6.08 million stock options, with an exercise price of RMB 9.06.  During 2007-2008, dividends have been paid out three times and after increasing the share capital with some capital reserves, the quantity of stock options were adjusted to 12.3302 million, exercise price was adjusted to RMB 4.25.  

These shares subject to this exercise will not be transferable over the next 6 months, and the most that can be transferred over the next 12 months is 1.5413 million shares.

If every last option is exercised, it will affect accounting of the Company in three ways: 1) Increase Company's share capital and capital reserve. After private placement, total share capital will increase by 6.1651 million to 201 million shares.  Simultaneously, increase other capital reserve funds by RMB 20.0376 million.  2) Increase Company's cash. After private placement and option exercise, based on an exercise price of RMB 4.25, the Company's cash will increase by RMB 26.2018 million (not including service fees), and will be used to replenish their working capital. 3) Increase Company's administrative expenses. According to the Company's incentive scheme, stock option amortization expenses in 2008 & 2009 will be RMB 7.4923 million and 2.5840 million. This expense should be written down from current administrative expenses, and increase capital reserve funds.

Our original forecast for the Company was 08/09/10 EPS RMB 0.80/0.96/1.17. The impact of administrative expenses has already been priced in the earnings forecast we made. In regard to the increase of capital stock, if all the options are exercised, then the Company's capital stock will dilute 08/09/10 EPS to RMB 0.78/0.93/1.13 (not considering the increase of share capital caused by a second option exercise in 2009). Reiterate target price of RMB 14.48 with a rating of "Buy."