Stock research on global mid-cap companies

Evaluate Research

Evaluate Research provides institutional quality stock research on small-cap and  mid-cap companies on a global basis, thus helping connect investors with the company.

At Evaluate Research, we provide free of cost to all investors a 20-25 page Initiation Report which evaluates in great detail all aspects of the company:  growth opportunities, catalysts, business description, competitive positioning, SWOT analysis, risks, etc.  In addition, we determine specific price targets for the company based on detailed 5-year complete forecasts of financial statements including IS, BS, CF, ratios, etc.  Finally, whereas many sell-side brokers offer sketchy and irregular ongoing maintenance research of companies, if not outright dropped or termination of coverage, at Evaluate Research we systematically monitor and regularly publish Update Notes covering quarterly earnings, major corporate events, etc.

All of the research reports are broadly and freely disseminated globally to leading Fund Managers and analysts who invest specifically in mid-size equities, and also on leading investment information platforms including: Bloomberg, Thomson Reuters, FactSet etc.

Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

Sun Hung Kai &amp; Co. [86_HK; HK$7,256 million/ US$943 million market cap; HK$6.45 million total average daily value traded] reported a solid set of numbers for the FY2020 amidst a tough external market environment with net profit much ahead of our expectations. The EPS rose by a staggering 23% to HK128.30 cents in FY2020 vs. HK104.40 cents during the corresponding period last year on account of share buybacks and a sharp increase in net profit. The sharp increase in net profit was a result of a 65% gain in the pre-tax contribution from the Investment Management business. The Consumer Finance and Mortgage Loans businesses also delivered on the expected lines of maintaining stable profitability in the year 2020. Importantly, book value per share increased +12% to HK$11.40, resulting in the stock trading at an extremely discounted “deep value” 0.37x price/book multiple. The revenue declined modestly by only 3.8% to HK$4,057 mn in FY2020 as compared to HK$4,217 mn in the same period last year, despite the impact being very severe in the overall financial services industry in Hong Kong and China.
Launch of Three Partnerships for the Funds Management Platform
2020 marked a milestone of the company’s five-year transformation from a securities house to an alternative investment platform after it completed the disposal of its stake in Everbright Sun Hung Kai Securities.
&nbsp;Built on the success of the Investment Management business, the company has established an Alternatives Funds Management platform, with a focus on expanding capabilities to manage external capital. This will generate additional revenue streams and further diversify the products base and strategies to benefit the company in the long run.
&nbsp;The Funds Management platform now established has committed and launched three partnerships to date. The first with East Point Asset Management and the launch of their first fund, an APAC Equity Long/Short Fund. This involved a transition of an internally managed strategy and team. The second was a partnership with E15VC to launch a global venture capital technology fund and third is a partnership with ActusRay Partners to launch a discretionary probabilistic investing fund focused on Europe.
&nbsp;The company now has a strong pipeline of partnerships and fund launches planned for 2021 covering various strategies including Real Estate Lending, Fund of Hedge Funds, Crypto, Equity Long/Short and Index Arbitrage.
&nbsp;Fundamentals Remain Strong Amidst Uncertainty, Dividend Pay-out at 20.3%
For FY2020, overall finance costs increased by a modest 3.8% to HK$807 mn on account of an increase in borrowings. The total net impairment losses from loans and advances to customers increased because of the pandemic by 2.7% to HK$1,053 mn. The impairment losses have however reduced drastically in the second half of FY2020 as compared to the first half where they rose by 27%, suggesting that the worst may be over for loan losses. With finance and operating costs expected to remain stable in the first half of FY2021, any further recovery in the consumer finance business would aid profitability going forward. The company was successful in maintaining healthy levels of liquidity in its operations in addition to reporting a significant rise in profitability.
&nbsp;The results for FY2020 reflect a solid performance primarily as a result of a resilient Consumer Finance business in Hong Kong and Mainland China where other companies are witnessing losses along with a liquidity crunch.&nbsp; The results demonstrate that the company’s core financing business continues to provide stable returns and strong cash flows. The Investment Management business is now beginning to generate new income streams and opportunities for increased returns. We expect the Consumer Finance business to contribute to the steady growth in revenues and profitability for the company and a greater focus on the Investment Management business would continue to generate significant profitability going forward.
&nbsp;Amidst the ongoing uncertainty the company has declared an annual dividend of HK14 cents, together with the interim dividend of HK12 cents, with the total dividend per share amounting to HK26 cents for 2020, representing a pay-out ratio of 20.3% (excluding share buybacks), resulting in a high 7.1% current dividend yield. During the year, the company repurchased 16.5 mn shares for a total consideration of HK$53.0 mn with an expectation to continue repurchasing shares in the near future as a part of its long-term strategy.
&nbsp;SHK’s balance sheet remains strong, with shareholders’ equity comprising 58.6% of all liabilities.&nbsp; Net gearing is modest at only 41.4%, and the current ratio is 2.5x.&nbsp; The total cash has also increased by 27% to HK$7.25 bn since December 2019.&nbsp; Low levels of gearing has resulted in a healthy interest coverage ratio of 5.0x in FY2020. The company sees no need to borrow further in the near term in the ongoing volatile market conditions, as the liquidity position continues to remain comfortable. The company’s BS and the Investment Management business are consistent with the company’s stated “cautious” and prudent outlook to financial markets and the overall economy. We believe this posture is appropriate, especially in light of the ongoing coronavirus pandemic and EM equity and currency volatility.
&nbsp;
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/196/397/original/image_33460597021616475716602.png?1616475713" width="463" height="244" class="editor-image img-responsive" data-smartkarma-image-id="196397"></figure>
&nbsp;
HK$7.90 PT = 120% Upside 
The stock is currently trading at just 0.34x tangible P/B and at 2.6x P/E on our FY2021 earnings estimate.&nbsp; We use a sum of the parts [SOTP] methodology to value SHK.&nbsp; We value the UAF [United Asia Finance] business at 0.85x tangible loan book value taking into account the high net interest margin resulting in higher ROE and strong future growth prospects of the business.&nbsp; This provides us with a value of HK$5.18 bn for SHK’s 63% stake in the business.
&nbsp;We value the non-UAF business including Investment Management and Mortgage Loans at about 1.0x book value.&nbsp; Plus, the company also has a strong balance sheet with substantial amount of net cash and cash equivalents. Together, the value of cash and the non-UAF business comes to about HK$11.46 bn. As a result, we arrive at a value of HK$16.64 bn for SHK which equals HK$7.90 per share, an upside of about 120% over the current stock price of HK$3.65. Based on FY2020 reported numbers, our price target implies a Price to Tangible Book of 0.8x and P/E of 6x on our FY2021 earnings estimate of HK140 cents. We have revised our FY2021E estimates to HK140 cents from the earlier HK134 cents due to robust growth of 23% in the earnings per share in FY2020,
&nbsp;0.37x P/B; 2.8x P/E
SHK is currently trading at only 0.37x tangible P/B vs. its own 5-year historical average ratio of 1.0x. Similarly, the stock is cheap even on a P/E basis. The company’s current P/E multiple on FY2020 actual reported EPS is 2.8x vs. its 5-year historical average ratio of 5.6x. Based on our FY2021 EPS forecast of HK140 cents, the P/E comes to 2.6x on the current stock price. In our view, the lower valuation is mainly a result of the difficulties faced by the company over the last couple of years, especially in its Mainland China consumer lending business. However, management has undertaken various strategic initiatives such as reducing small business exposure in China, cost rationalization by closing down underperforming branches, exiting the brokerage business, scaling up its investment management business, etc. to revive the company’s growth. We believe that these initiatives will help the company to deliver healthy and sustainable revenue and EPS growth in the next couple of years and reinstate investor confidence in the stock. This could likely result in a re-rating of the stock to its historical average multiples. Applying the historical average P/E multiple of 5.6x to our FY2021 EPS estimate of HK140 cents gives a stock price of HK$7.90, which is about 120% higher than the current stock price.
&nbsp;For further details and financial model, please see our attached Earnings Update Note.

Sun Hung Kai &amp; Co. [86_HK; HK$7,256 million/ US$943 million market cap; HK$6.45 million total average daily value traded] reported a solid set of numbers for the FY2020 amidst a tough external market environment with net profit much ahead of our expectations. The EPS rose by a staggering 23% to HK128.30 cents in FY2020 vs. HK104.40 cents during the corresponding period last year on account of share buybacks and a sharp increase in net profit. The sharp increase in net profit was a result of a 65% gain in the pre-tax contribution from the Investment Management business. The Consumer Finance and Mortgage Loans businesses also delivered on the expected lines of maintaining stable profitability in the year 2020. Importantly, book value per share increased +12% to HK$11.40, resulting in the stock trading at an extremely discounted “deep value” 0.37x price/book multiple. The revenue declined modestly by only 3.8% to HK$4,057 mn in FY2020 as compared to HK$4,217 mn in the same period last year, despite the impact being very severe in the overall financial services industry in Hong Kong and China.
Launch of Three Partnerships for the Funds Management Platform
2020 marked a milestone of the company’s five-year transformation from a securities house to an alternative investment platform after it completed the disposal of its stake in Everbright Sun Hung Kai Securities.
&nbsp;Built on the success of the Investment Management business, the company has established an Alternatives Funds Management platform, with a focus on expanding capabilities to manage external capital. This will generate additional revenue streams and further diversify the products base and strategies to benefit the company in the long run.
&nbsp;The Funds Management platform now established has committed and launched three partnerships to date. The first with East Point Asset Management and the launch of their first fund, an APAC Equity Long/Short Fund. This involved a transition of an internally managed strategy and team. The second was a partnership with E15VC to launch a global venture capital technology fund and third is a partnership with ActusRay Partners to launch a discretionary probabilistic investing fund focused on Europe.
&nbsp;The company now has a strong pipeline of partnerships and fund launches planned for 2021 covering various strategies including Real Estate Lending, Fund of Hedge Funds, Crypto, Equity Long/Short and Index Arbitrage.
&nbsp;Fundamentals Remain Strong Amidst Uncertainty, Dividend Pay-out at 20.3%
For FY2020, overall finance costs increased by a modest 3.8% to HK$807 mn on account of an increase in borrowings. The total net impairment losses from loans and advances to customers increased because of the pandemic by 2.7% to HK$1,053 mn. The impairment losses have however reduced drastically in the second half of FY2020 as compared to the first half where they rose by 27%, suggesting that the worst may be over for loan losses. With finance and operating costs expected to remain stable in the first half of FY2021, any further recovery in the consumer finance business would aid profitability going forward. The company was successful in maintaining healthy levels of liquidity in its operations in addition to reporting a significant rise in profitability.
&nbsp;The results for FY2020 reflect a solid performance primarily as a result of a resilient Consumer Finance business in Hong Kong and Mainland China where other companies are witnessing losses along with a liquidity crunch.&nbsp; The results demonstrate that the company’s core financing business continues to provide stable returns and strong cash flows. The Investment Management business is now beginning to generate new income streams and opportunities for increased returns. We expect the Consumer Finance business to contribute to the steady growth in revenues and profitability for the company and a greater focus on the Investment Management business would continue to generate significant profitability going forward.
&nbsp;Amidst the ongoing uncertainty the company has declared an annual dividend of HK14 cents, together with the interim dividend of HK12 cents, with the total dividend per share amounting to HK26 cents for 2020, representing a pay-out ratio of 20.3% (excluding share buybacks), resulting in a high 7.1% current dividend yield. During the year, the company repurchased 16.5 mn shares for a total consideration of HK$53.0 mn with an expectation to continue repurchasing shares in the near future as a part of its long-term strategy.
&nbsp;SHK’s balance sheet remains strong, with shareholders’ equity comprising 58.6% of all liabilities.&nbsp; Net gearing is modest at only 41.4%, and the current ratio is 2.5x.&nbsp; The total cash has also increased by 27% to HK$7.25 bn since December 2019.&nbsp; Low levels of gearing has resulted in a healthy interest coverage ratio of 5.0x in FY2020. The company sees no need to borrow further in the near term in the ongoing volatile market conditions, as the liquidity position continues to remain comfortable. The company’s BS and the Investment Management business are consistent with the company’s stated “cautious” and prudent outlook to financial markets and the overall economy. We believe this posture is appropriate, especially in light of the ongoing coronavirus pandemic and EM equity and currency volatility.
&nbsp;

&nbsp;
HK$7.90 PT = 120% Upside 
The stock is currently trading at just 0.34x tangible P/B and at 2.6x P/E on our FY2021 earnings estimate.&nbsp; We use a sum of the parts [SOTP] methodology to value SHK.&nbsp; We value the UAF [United Asia Finance] business at 0.85x tangible loan book value taking into account the high net interest margin resulting in higher ROE and strong future growth prospects of the business.&nbsp; This provides us with a value of HK$5.18 bn for SHK’s 63% stake in the business.
&nbsp;We value the non-UAF business including Investment Management and Mortgage Loans at about 1.0x book value.&nbsp; Plus, the company also has a strong balance sheet with substantial amount of net cash and cash equivalents. Together, the value of cash and the non-UAF business comes to about HK$11.46 bn. As a result, we arrive at a value of HK$16.64 bn for SHK which equals HK$7.90 per share, an upside of about 120% over the current stock price of HK$3.65. Based on FY2020 reported numbers, our price target implies a Price to Tangible Book of 0.8x and P/E of 6x on our FY2021 earnings estimate of HK140 cents. We have revised our FY2021E estimates to HK140 cents from the earlier HK134 cents due to robust growth of 23% in the earnings per share in FY2020,
&nbsp;0.37x P/B; 2.8x P/E
SHK is currently trading at only 0.37x tangible P/B vs. its own 5-year historical average ratio of 1.0x. Similarly, the stock is cheap even on a P/E basis. The company’s current P/E multiple on FY2020 actual reported EPS is 2.8x vs. its 5-year historical average ratio of 5.6x. Based on our FY2021 EPS forecast of HK140 cents, the P/E comes to 2.6x on the current stock price. In our view, the lower valuation is mainly a result of the difficulties faced by the company over the last couple of years, especially in its Mainland China consumer lending business. However, management has undertaken various strategic initiatives such as reducing small business exposure in China, cost rationalization by closing down underperforming branches, exiting the brokerage business, scaling up its investment management business, etc. to revive the company’s growth. We believe that these initiatives will help the company to deliver healthy and sustainable revenue and EPS growth in the next couple of years and reinstate investor confidence in the stock. This could likely result in a re-rating of the stock to its historical average multiples. Applying the historical average P/E multiple of 5.6x to our FY2021 EPS estimate of HK140 cents gives a stock price of HK$7.90, which is about 120% higher than the current stock price.
&nbsp;For further details and financial model, please see our attached Earnings Update Note.

SHK 86 HK:  +23% EPS Growth, 7.1% Div Yield, 3x P/E, 0.37x P/B, Buybacks