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

We are reiterating our investment thesis, rating and price target on Sun Hung Kai &amp; Co Limited [86_HK;&nbsp; HK$7,148 million/ US$929 million market cap; HK$6.45 million total average daily value traded], and believe the stock is trading at very attractive “deep value” levels.&nbsp; As part of our ongoing effort to provide high quality, consistent and objective research coverage, we are issuing a 30-page “Updated Initiation Report” on the stock.&nbsp; This report reassesses our overall thesis, and refreshes our original 38-page Initial Report from July 2017, and makes it easier for new investors [and even existing] to understand the company and its prospects.&nbsp; We have also been publishing regular Earnings Update Reports on them since July 2017.&nbsp; Evaluate Research remains the only company following Sun Hung Kai &amp; Co., and while most research providers will not take the time and effort to reissue a very detailed Initiation Report, we believe it is important to have timely and updated research on all the companies we cover.
The company reports 5 operating segments namely Consumer Finance, Principal Investments, Financial Services, Mortgage Loans and Group Management and Support. &nbsp;Of these, Consumer Finance and Principal Investments are the largest segments accounting for about 42% and 37% of the company’s assets and 66% and 20% of its profit before tax, respectively in FY2018 [further details in the report below].
The company’s performance for the first half ended June 2019 amidst a tough external market environment was commendable. &nbsp;The revenue increased marginally to HK$2,072mn in the first half of&nbsp;FY2019 as compared to HK$2,059mn in the same period last year despite protests in Hong Kong. &nbsp;EPS rose by 5% to HK51.50 cents in 1H2019 vs. HK49.20 cents during the corresponding period last year on account of share buybacks. &nbsp;Further, the company expects the 2019 full year profits to significantly increase due to gain on financial instruments during the year.
Conclusion: HK$7.90 PT = 120% Upside
We use a sum of the parts [SOTP] methodology to value SHK. We value the UAF [United Asia Finance] business at 1.1x tangible loan book value taking into account the high net interest margin resulting in higher ROE and 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 at about 1.0x book value. Plus, the company also has a strong balance sheet with substantial amount of net cash and cash equivalents amounting to net cash of HK$1.7 per share. &nbsp;Together, the value of cash and the non-UAF business comes to about HK$11.46 bn. &nbsp;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$3.6. Based on FY2018 reported numbers, our price target implies a Price to Tangible Book of 1.05x and P/E of 12.7x on our FY2019 earnings estimate of HK62 cents.
0.47x P/B; 5.62x P/E
SHK is currently trading at only 0.48x tangible P/B vs. its own 5-year historical average ratio of 1.0x. &nbsp;Similarly, the stock is cheap even on a P/E basis. &nbsp;The company’s current P/E multiple on FY2018 actual reported EPS is 7.7x vs. its 5-year historical average ratio of 12.7x. &nbsp;Based on our FY2019 EPS forecast of HK62 cents, the P/E comes to 5.78x 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. &nbsp;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 principal investment business, etc. to revive the company’s growth. &nbsp;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. &nbsp;This could likely result in a re-rating of the stock to its historical average multiples. &nbsp;Applying the historical average P/E multiple of 12.7x to our FY2019 EPS estimate of HK62 cents gives a stock price of HK$7.90, which is about 120% higher than the current stock price.

We are reiterating our investment thesis, rating and price target on Sun Hung Kai &amp; Co Limited [86_HK;&nbsp; HK$7,148 million/ US$929 million market cap; HK$6.45 million total average daily value traded], and believe the stock is trading at very attractive “deep value” levels.&nbsp; As part of our ongoing effort to provide high quality, consistent and objective research coverage, we are issuing a 30-page “Updated Initiation Report” on the stock.&nbsp; This report reassesses our overall thesis, and refreshes our original 38-page Initial Report from July 2017, and makes it easier for new investors [and even existing] to understand the company and its prospects.&nbsp; We have also been publishing regular Earnings Update Reports on them since July 2017.&nbsp; Evaluate Research remains the only company following Sun Hung Kai &amp; Co., and while most research providers will not take the time and effort to reissue a very detailed Initiation Report, we believe it is important to have timely and updated research on all the companies we cover.
The company reports 5 operating segments namely Consumer Finance, Principal Investments, Financial Services, Mortgage Loans and Group Management and Support. &nbsp;Of these, Consumer Finance and Principal Investments are the largest segments accounting for about 42% and 37% of the company’s assets and 66% and 20% of its profit before tax, respectively in FY2018 [further details in the report below].
The company’s performance for the first half ended June 2019 amidst a tough external market environment was commendable. &nbsp;The revenue increased marginally to HK$2,072mn in the first half of&nbsp;FY2019 as compared to HK$2,059mn in the same period last year despite protests in Hong Kong. &nbsp;EPS rose by 5% to HK51.50 cents in 1H2019 vs. HK49.20 cents during the corresponding period last year on account of share buybacks. &nbsp;Further, the company expects the 2019 full year profits to significantly increase due to gain on financial instruments during the year.
Conclusion: HK$7.90 PT = 120% Upside
We use a sum of the parts [SOTP] methodology to value SHK. We value the UAF [United Asia Finance] business at 1.1x tangible loan book value taking into account the high net interest margin resulting in higher ROE and 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 at about 1.0x book value. Plus, the company also has a strong balance sheet with substantial amount of net cash and cash equivalents amounting to net cash of HK$1.7 per share. &nbsp;Together, the value of cash and the non-UAF business comes to about HK$11.46 bn. &nbsp;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$3.6. Based on FY2018 reported numbers, our price target implies a Price to Tangible Book of 1.05x and P/E of 12.7x on our FY2019 earnings estimate of HK62 cents.
0.47x P/B; 5.62x P/E
SHK is currently trading at only 0.48x tangible P/B vs. its own 5-year historical average ratio of 1.0x. &nbsp;Similarly, the stock is cheap even on a P/E basis. &nbsp;The company’s current P/E multiple on FY2018 actual reported EPS is 7.7x vs. its 5-year historical average ratio of 12.7x. &nbsp;Based on our FY2019 EPS forecast of HK62 cents, the P/E comes to 5.78x 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. &nbsp;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 principal investment business, etc. to revive the company’s growth. &nbsp;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. &nbsp;This could likely result in a re-rating of the stock to its historical average multiples. &nbsp;Applying the historical average P/E multiple of 12.7x to our FY2019 EPS estimate of HK62 cents gives a stock price of HK$7.90, which is about 120% higher than the current stock price.

SHK [86_HK]: 7% Div Yield, 0.4x P/B - Updated Initiation Report