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

The FY2019 results for Sun Hung Kai &amp; Co. (SHK) [86_HK;&nbsp;HK$6,180 million/ US$803 million market cap; HK$6.45 million total average daily value traded] have been solid despite economic headwinds. &nbsp;The ongoing economic slowdown due to the coronavirus pandemic also continues to impact the business for the entire financial services industry in Hong Kong and China in the first half of 2020. We believe SHK is fundamentally robust, and even though the first half of 2020 might witness a slowdown for the entire industry, the second half should see a recovery for which the company is well positioned to leverage its market leadership. SHK’s balance sheet remains strong, with shareholders equity comprising 55% of all liabilities.&nbsp; Net gearing is modest at only 54.1%, and the current ratio is 2.6x.&nbsp; Low levels of gearing has resulted in a healthy interest coverage ratio of 4.5x.&nbsp; Additionally, SHK is getting more liquidity from its Private Equity and other investments, further improving liquidity.&nbsp; 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. &nbsp;We believe this posture is appropriate, especially in light of the ongoing coronavirus pandemic and EM equity and currency volatility.
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. During 2019, the company added new team members and further formalised the internal processes and compliance systems to build the analytical and investment framework across businesses with a focus on risk management and control. 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.
8% Dividend Yield, HK$7.90 PT = 153% Upside 
The stock is currently trading at just 0.36x tangible P/B and at 3x P/E on our FY2019 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 153% over the current stock price of HK$3.12. 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 HK113 cents.
The total dividend per share was HK26 cents for 2019, representing a pay-out ratio of 25% (excluding share buybacks) implying a very attractive 8% yield.&nbsp; This is very attractive to dividend and yield oriented investors given that the dividend payout ratio is only 25%.&nbsp; The company has ample room to increase its dividend, and we suspect the board will look at both a larger dividend and continued buybacks going forward.
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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 2.99x vs. its 5-year historical average ratio of 7.50x. Based on our FY2021 EPS forecast of HK113 cents, the P/E comes to 2.77x 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 7.50x to our FY2020 EPS estimate of HK105 cents gives a stock price of HK$7.90, which is about 153% higher than the current stock price.&nbsp;
Pioneer in Modern Loan Disbursement
The Consumer Finance business operated through the United Asia Finance (UAF) Company has a market leadership in Hong Kong and has a significant market presence in China. UAF is a licensed money lender providing loans for individuals and businesses through branches and online platforms in Hong Kong and China. UAF HK is a pioneer in launching Faster Payment System services around the clock for loan disbursements, demonstrating its commitment to deliver enhanced customer experience through innovation. With increase in the number of transactions conducted on-line, UAF HK will allocate more advertising resources to promote business through the online media. UAF HK will continue to launch various advertising campaigns using market intelligence tools to raise the efficiency of marketing dollars spent to reach target customers. Leveraging on the strong brand position, market leading role and experienced management team, UAF HK continues its strategy of growing the business while managing its credit risk.
Expansion into Fund Management
Over the last five years, the company has built an investment platform by leveraging its capital, business expertise and networks in financial services. The company in the year 2019 has strived to establish the Investment Management business through careful and continuous efforts to build a strong and diversified portfolio. The company believes that its experience and the returns generated by the Investment Management business segment has put it in a strong position to expand to the next phase which is Fund Management. The Company is nearly ready to launch a fully licensed and regulated fund management platform. Three funds (APAC long/short equity, global unconstrained credit and real estate direct lending) will be launched at the start, with each fund seeded by the company and able to take in third party capital. The equity and credit funds are the next evolution of the investment program detailed above. The real estate fund will have a focus on direct lending across Australia, Greater China, the UK/Ireland and Europe. Going forward, the company expects Fund Management to be a new driver for sustainable growth in assets under management and revenue. In the first quarter, Sun Hung Kai &amp; Co. have received regulatory approval to proceed and have been working to build out the infrastructure to support this new business. The company plans to use the networks and relationships built over the last five years to create specialised and attractive fund offerings which will allow their internal teams to build an investment base, expand reach and diversify risk.
For further details and financial model, please see our attached Business Update Note.

The FY2019 results for Sun Hung Kai &amp; Co. (SHK) [86_HK;&nbsp;HK$6,180 million/ US$803 million market cap; HK$6.45 million total average daily value traded] have been solid despite economic headwinds. &nbsp;The ongoing economic slowdown due to the coronavirus pandemic also continues to impact the business for the entire financial services industry in Hong Kong and China in the first half of 2020. We believe SHK is fundamentally robust, and even though the first half of 2020 might witness a slowdown for the entire industry, the second half should see a recovery for which the company is well positioned to leverage its market leadership. SHK’s balance sheet remains strong, with shareholders equity comprising 55% of all liabilities.&nbsp; Net gearing is modest at only 54.1%, and the current ratio is 2.6x.&nbsp; Low levels of gearing has resulted in a healthy interest coverage ratio of 4.5x.&nbsp; Additionally, SHK is getting more liquidity from its Private Equity and other investments, further improving liquidity.&nbsp; 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. &nbsp;We believe this posture is appropriate, especially in light of the ongoing coronavirus pandemic and EM equity and currency volatility.
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. During 2019, the company added new team members and further formalised the internal processes and compliance systems to build the analytical and investment framework across businesses with a focus on risk management and control. 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.
8% Dividend Yield, HK$7.90 PT = 153% Upside 
The stock is currently trading at just 0.36x tangible P/B and at 3x P/E on our FY2019 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 153% over the current stock price of HK$3.12. 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 HK113 cents.
The total dividend per share was HK26 cents for 2019, representing a pay-out ratio of 25% (excluding share buybacks) implying a very attractive 8% yield.&nbsp; This is very attractive to dividend and yield oriented investors given that the dividend payout ratio is only 25%.&nbsp; The company has ample room to increase its dividend, and we suspect the board will look at both a larger dividend and continued buybacks going forward.

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 2.99x vs. its 5-year historical average ratio of 7.50x. Based on our FY2021 EPS forecast of HK113 cents, the P/E comes to 2.77x 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 7.50x to our FY2020 EPS estimate of HK105 cents gives a stock price of HK$7.90, which is about 153% higher than the current stock price.&nbsp;
Pioneer in Modern Loan Disbursement
The Consumer Finance business operated through the United Asia Finance (UAF) Company has a market leadership in Hong Kong and has a significant market presence in China. UAF is a licensed money lender providing loans for individuals and businesses through branches and online platforms in Hong Kong and China. UAF HK is a pioneer in launching Faster Payment System services around the clock for loan disbursements, demonstrating its commitment to deliver enhanced customer experience through innovation. With increase in the number of transactions conducted on-line, UAF HK will allocate more advertising resources to promote business through the online media. UAF HK will continue to launch various advertising campaigns using market intelligence tools to raise the efficiency of marketing dollars spent to reach target customers. Leveraging on the strong brand position, market leading role and experienced management team, UAF HK continues its strategy of growing the business while managing its credit risk.
Expansion into Fund Management
Over the last five years, the company has built an investment platform by leveraging its capital, business expertise and networks in financial services. The company in the year 2019 has strived to establish the Investment Management business through careful and continuous efforts to build a strong and diversified portfolio. The company believes that its experience and the returns generated by the Investment Management business segment has put it in a strong position to expand to the next phase which is Fund Management. The Company is nearly ready to launch a fully licensed and regulated fund management platform. Three funds (APAC long/short equity, global unconstrained credit and real estate direct lending) will be launched at the start, with each fund seeded by the company and able to take in third party capital. The equity and credit funds are the next evolution of the investment program detailed above. The real estate fund will have a focus on direct lending across Australia, Greater China, the UK/Ireland and Europe. Going forward, the company expects Fund Management to be a new driver for sustainable growth in assets under management and revenue. In the first quarter, Sun Hung Kai &amp; Co. have received regulatory approval to proceed and have been working to build out the infrastructure to support this new business. The company plans to use the networks and relationships built over the last five years to create specialised and attractive fund offerings which will allow their internal teams to build an investment base, expand reach and diversify risk.
For further details and financial model, please see our attached Business Update Note.

SHK [86_HK]: 8% Div Yield, 0.36x P/B - Business Update Note