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$6,170 million/ US$802 million market cap; HK$6.45 million total average daily value traded] showed resilient performance for the 1HFY2020 amidst a tough external market environment with revenue ahead of our expectations. The revenue declined modestly only by 1.4% to HK$2043 mn in 1HFY2020 despite the impact being very severe in the overall financial services industry in Hong Kong and China.&nbsp; EPS declined by 32% to HK35 cents vs. HK52 cents during the corresponding period last year mainly on account of an increase in finance costs and total net impairment losses. Finance&nbsp; costs&nbsp; increased&nbsp; by&nbsp; 17%&nbsp; to&nbsp; HK$438&nbsp; mn on account of an increase in borrowings at the end of the last year. The total net impairment losses from loans and advances to customers increased due to the ongoing economic crisis as a result of the pandemic&nbsp; by&nbsp; 26%&nbsp; to&nbsp; HK$528&nbsp; mn, partly&nbsp; offset&nbsp; by&nbsp; recoveries&nbsp; of&nbsp; trade&nbsp; receivables&nbsp; of&nbsp; HK$44 mn. However, operating&nbsp; costs&nbsp; declined&nbsp; by&nbsp; 14%&nbsp; to&nbsp; HK$626&nbsp; mn&nbsp; with&nbsp; cost&nbsp; control&nbsp; and&nbsp; reduced&nbsp; office&nbsp; operations. With finance and operating costs expected to remain stable in the second half of FY2020, any recovery in the consumer finance business would aid profitability going forward. The company was successful in maintaining healthy levels of&nbsp; liquidity in its operations in addition to reporting positive profitability by being cautiously conservative in its lending practices in the first half of FY2020.
The results for the first half of 2020 reflect a solid performance primarily as a result of a marginal increase in the Consumer Finance business in Hong Kong where other companies are going into losses along with a liquidity crunch.&nbsp; The first half results demonstrate that the company’s core financing business continues to provide stable returns and strong cash flows. The investment business seeks 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 can generate significant profitability going forward. The company is in fact ready to launch its Fund Management platform in the current year and begin taking in third party capital to further develop additional stream of revenues.
Amidst the uncertainty the company has&nbsp; declared&nbsp; an&nbsp; interim&nbsp; dividend&nbsp; of&nbsp; HK12&nbsp; cents&nbsp; per&nbsp; share&nbsp; for&nbsp; the&nbsp; first half of&nbsp; 2020,&nbsp; which&nbsp; is&nbsp; the&nbsp; same&nbsp; as&nbsp; the&nbsp; corresponding&nbsp; period&nbsp; in&nbsp; 2019, resulting in a high 8.4% current dividend yield. Importantly, book value per share increased 2% to HK$10.4 at the end of June from HK$10.2 at the end of December 2019, resulting in the stock trading at an extremely discounted “deep value” 0.36x price/book multiple.&nbsp;
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Fundamentals Remain Strong and Intact Amidst Uncertainty
SHK’s balance sheet remains strong, with shareholders’ equity comprising 55% of all liabilities.&nbsp; Net gearing is modest at only 44.6%, and the current ratio is 2.6x.&nbsp; The total cash has also increased by 31% to HK$7.5 bn since December 2019.&nbsp; Low levels of gearing has resulted in a healthy interest coverage ratio of 3.2x in the first half of 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.
HK$7.90 PT = 155% Upside 
The stock is currently trading at just 0.31x tangible P/B and at 2.8x 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 1.1x 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 amounting to net cash of HK$1.7 per share. 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 155% over the current stock price of HK$3.10. Based on FY2019 reported numbers, our price target implies a Price to Tangible Book of 0.9x and P/E of 7x on our FY2021 earnings estimate of HK109 cents.&nbsp;
Focus on Financing and Investment Management Business
Sun Hung Kai &amp; Co. started its operations over 50 years ago by offering brokerage and related services in Hong Kong. The Group then strategically entered the Consumer Finance business in Hong Kong and Mainland China, and eventually expanded into Investment Management, making it a stronger and more diversified player in Financial Services. The Group has strategized to focus attention on two business segments namely Financing and Investing. The strategy for a two segment business model aims to focus on its core lending business in Hong Kong and China to provide stable returns and strong cash flows. Investing, on the other hand, seeks to garner additional revenue streams and opportunities for increased returns across a broad range of sectors, strategies and geographies. We expect the investment management business to be a major driver of the company’s future growth and the financing business to be a steady cashflow generator in the long run.
During our recent conversations with the management, the company mentioned that it is gearing up for the launch of its fund management platform. The company has also strengthened their investment and operation teams and the necessary infrastructure and systems have been designed and constructed well in advance of its launch. The company remains focused on building a world-class team with institutional grade architecture in order to support the planned growth of the Investment Management business.
0.36x P/B; 3x P/E
SHK is currently trading at only 0.36x 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 FY2019 actual reported EPS is 3x vs. its 5-year historical average ratio of 7.7x. Based on our FY2021 EPS forecast of HK109 cents, the P/E comes to 2.8x 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 7.7x to our FY2020 EPS estimate of HK102 cents gives a stock price of HK$7.90, which is about 155% higher than the current stock price.
For further details and financial model, please see our attached Earnings Update Note.

Sun Hung Kai &amp; Co. [86_HK; HK$6,170 million/ US$802 million market cap; HK$6.45 million total average daily value traded] showed resilient performance for the 1HFY2020 amidst a tough external market environment with revenue ahead of our expectations. The revenue declined modestly only by 1.4% to HK$2043 mn in 1HFY2020 despite the impact being very severe in the overall financial services industry in Hong Kong and China.&nbsp; EPS declined by 32% to HK35 cents vs. HK52 cents during the corresponding period last year mainly on account of an increase in finance costs and total net impairment losses. Finance&nbsp; costs&nbsp; increased&nbsp; by&nbsp; 17%&nbsp; to&nbsp; HK$438&nbsp; mn on account of an increase in borrowings at the end of the last year. The total net impairment losses from loans and advances to customers increased due to the ongoing economic crisis as a result of the pandemic&nbsp; by&nbsp; 26%&nbsp; to&nbsp; HK$528&nbsp; mn, partly&nbsp; offset&nbsp; by&nbsp; recoveries&nbsp; of&nbsp; trade&nbsp; receivables&nbsp; of&nbsp; HK$44 mn. However, operating&nbsp; costs&nbsp; declined&nbsp; by&nbsp; 14%&nbsp; to&nbsp; HK$626&nbsp; mn&nbsp; with&nbsp; cost&nbsp; control&nbsp; and&nbsp; reduced&nbsp; office&nbsp; operations. With finance and operating costs expected to remain stable in the second half of FY2020, any recovery in the consumer finance business would aid profitability going forward. The company was successful in maintaining healthy levels of&nbsp; liquidity in its operations in addition to reporting positive profitability by being cautiously conservative in its lending practices in the first half of FY2020.
The results for the first half of 2020 reflect a solid performance primarily as a result of a marginal increase in the Consumer Finance business in Hong Kong where other companies are going into losses along with a liquidity crunch.&nbsp; The first half results demonstrate that the company’s core financing business continues to provide stable returns and strong cash flows. The investment business seeks 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 can generate significant profitability going forward. The company is in fact ready to launch its Fund Management platform in the current year and begin taking in third party capital to further develop additional stream of revenues.
Amidst the uncertainty the company has&nbsp; declared&nbsp; an&nbsp; interim&nbsp; dividend&nbsp; of&nbsp; HK12&nbsp; cents&nbsp; per&nbsp; share&nbsp; for&nbsp; the&nbsp; first half of&nbsp; 2020,&nbsp; which&nbsp; is&nbsp; the&nbsp; same&nbsp; as&nbsp; the&nbsp; corresponding&nbsp; period&nbsp; in&nbsp; 2019, resulting in a high 8.4% current dividend yield. Importantly, book value per share increased 2% to HK$10.4 at the end of June from HK$10.2 at the end of December 2019, resulting in the stock trading at an extremely discounted “deep value” 0.36x price/book multiple.&nbsp;

Fundamentals Remain Strong and Intact Amidst Uncertainty
SHK’s balance sheet remains strong, with shareholders’ equity comprising 55% of all liabilities.&nbsp; Net gearing is modest at only 44.6%, and the current ratio is 2.6x.&nbsp; The total cash has also increased by 31% to HK$7.5 bn since December 2019.&nbsp; Low levels of gearing has resulted in a healthy interest coverage ratio of 3.2x in the first half of 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.
HK$7.90 PT = 155% Upside 
The stock is currently trading at just 0.31x tangible P/B and at 2.8x 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 1.1x 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 amounting to net cash of HK$1.7 per share. 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 155% over the current stock price of HK$3.10. Based on FY2019 reported numbers, our price target implies a Price to Tangible Book of 0.9x and P/E of 7x on our FY2021 earnings estimate of HK109 cents.&nbsp;
Focus on Financing and Investment Management Business
Sun Hung Kai &amp; Co. started its operations over 50 years ago by offering brokerage and related services in Hong Kong. The Group then strategically entered the Consumer Finance business in Hong Kong and Mainland China, and eventually expanded into Investment Management, making it a stronger and more diversified player in Financial Services. The Group has strategized to focus attention on two business segments namely Financing and Investing. The strategy for a two segment business model aims to focus on its core lending business in Hong Kong and China to provide stable returns and strong cash flows. Investing, on the other hand, seeks to garner additional revenue streams and opportunities for increased returns across a broad range of sectors, strategies and geographies. We expect the investment management business to be a major driver of the company’s future growth and the financing business to be a steady cashflow generator in the long run.
During our recent conversations with the management, the company mentioned that it is gearing up for the launch of its fund management platform. The company has also strengthened their investment and operation teams and the necessary infrastructure and systems have been designed and constructed well in advance of its launch. The company remains focused on building a world-class team with institutional grade architecture in order to support the planned growth of the Investment Management business.
0.36x P/B; 3x P/E
SHK is currently trading at only 0.36x 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 FY2019 actual reported EPS is 3x vs. its 5-year historical average ratio of 7.7x. Based on our FY2021 EPS forecast of HK109 cents, the P/E comes to 2.8x 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 7.7x to our FY2020 EPS estimate of HK102 cents gives a stock price of HK$7.90, which is about 155% higher than the current stock price.
For further details and financial model, please see our attached Earnings Update Note.

SHK [86_HK]: 8.4% Div Yield, 0.36x P/B - Earnings Update Report