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;&nbsp;HK$5,828 million/ US$752 million market cap; HK$6.45 million total average daily value traded] reported a solid set of numbers for the FY2019 amidst a tough external market environment. &nbsp;The EPS rose by 86% to HK104.40 cents in FY2019 vs. HK56.20 cents during the corresponding period last year on account of share buybacks and a sharp increase in net profit. &nbsp;Importantly, book value per share increased +7% to HK$10.20, resulting in the stock trading at an extremely discounted “deep value” 0.34x price/book multiple. The revenue increased marginally to HK$4,217 mn in the FY2019 as compared to HK$4,176 mn in the same period last year. &nbsp;&nbsp;
The results for the year reflect a solid performance primarily as a result of changes in the value of the assets of the Investment Management (“IM”, formerly known as Principal Investments) business followed by a profitable and resilient growth in the Consumer Finance business in Hong Kong. &nbsp;The Group has realigned its business segments into two categories: Financing and Investing. &nbsp;Company’s core financing business aims to provide stable returns and strong cash flows, while the investment business seeks new income streams and opportunities for increased returns. &nbsp;We expect the Consumer Finance business to contribute to a steady growth in revenues and profitability for the company and a greater focus on the Investment Management business can generate significant profitability going forward as indicated by a pretax contribution growth of 1202% in FY2019. &nbsp;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.
The total pre-tax profit contribution for the company increased by 50% with Consumer Finance being the biggest contributor to pre-tax profit for the period increasing its contribution by 6% over the previous period. &nbsp;The Investment Management business was the second highest contributor to pretax profit with a stellar increase of 1202% in FY2019 as compared to FY2018.&nbsp; The Mortgage Loans business contributed to an increase in pre-tax profit contribution by 6% compared to FY2018 as it enjoyed operating leverage from an expanded scale of operations.&nbsp; The Specialty Finance business segment however witnessed a 73% decline in the pre-tax contribution due to impairment losses.
As part of our ongoing effort to provide high quality, consistent and objective research coverage, we recently issued 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;
9% Dividend Yield, HK$7.90 PT = 170% Upside 
The stock is currently trading at just 0.31x tangible P/B and at 2.78x P/E on our FY2020 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. &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 170% over the current stock price of HK$2.92. &nbsp;Based on FY2019 reported numbers, our price target implies a Price to Tangible Book of 0.85x and P/E of 7.50x on our FY2020 earnings estimate of HK105 cents.
The Board has declared a second interim dividend of HK14 cents bringing the total dividend per share to HK26 cents for 2019, representing a pay-out ratio of 25% (excluding share buybacks) implying a very attractive 9% yield.&nbsp; This is even more 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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&nbsp;0.34x P/B; 2.80x P/E
SHK is currently trading at only 0.34x 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. &nbsp;The company’s current P/E multiple on FY2019 actual reported EPS is 2.80x vs its 5-year historical average ratio of 7.50x. Based on our FY2020 EPS forecast of HK105 cents, the P/E comes to 2.78x on the current stock price. &nbsp;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 investment management 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 7.50x to our FY2020 EPS estimate of HK105 cents gives a stock price of HK$7.90, which is about 170% higher than the current stock price.
Fundamentals Improve:&nbsp; ROE, Liquidity, BS
Internal fundamentals of SHK have improved, indicating a better quality of results, and the likelihood of increased sustainability of financial performance looking forward.&nbsp; ROE improved to 10.6% for FY2019, the highest level in the past 3 years, and a sharp jump up from 2018’s level.&nbsp; While subject to typical market/economic cyclicality, the company is hopeful of maintaining a double-digit ROE on average over time going forward. &nbsp;Importantly, the management of the company seeks to increase the normalized ROE to mid-teens over a period of time.&nbsp; &nbsp;
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.&nbsp;
Buyback &amp; Capital Opportunities
The aforementioned points regarding ROE and balance sheet strength/liquidity gives SHK a lot of flexibility to deploy capital efficiently, including capital return to shareholders and acquisitions.&nbsp; Our conversations with management suggest the company will likely continue share repurchases on an opportunistic basis.&nbsp; SHK repurchased 9.2 mn shares amounting to approximately HK$33 mn in FY2019.&nbsp; It also increased its ownership stake in UAF to 63% from the earlier 58%.
Management remains focused on balancing capital deployment while maintaining liquidity and BS conservatism, with the goal of increasing ROE.&nbsp; CAPX in terms of branch infrastructure should remain well contained, especially given that Mainland China has seen net branch closures, although the company is now closer to an optimal number of branches both in HK and the Mainland.&nbsp;
Investment Management Business Reports Record Growth
For the FY2019, the annual&nbsp; return&nbsp; on&nbsp; average&nbsp; assets&nbsp; for&nbsp; the&nbsp; segment&nbsp; was&nbsp; 12.4%,&nbsp; compared&nbsp; to&nbsp; 4.1%&nbsp; in&nbsp; 2018. &nbsp;Taking into account operating expenses and funding cost allocation, the segment contributed HK$1083.2 mn to pre-tax profit, an increase of 1202% from HK$83.2 mn achieved in the FY2018. &nbsp;The sharp rise in pre-tax profits came mainly due to mark-to-market gains in the company’s public investments portfolio despite volatile conditions due to the US-China trade war. &nbsp;The year 2019 provided good investment opportunities in both the equity and credit markets. &nbsp;The company mentioned that there were uncertainties around the Sino-US trade war, moves by the Fed along with several events in the Middle East, the active investment strategies in equities and credit produced strong results.&nbsp;
The most significant contributions came from the company’s Public Equity and Alternative portfolios which generated yearly returns of 15% and 17%, respectively during the period, while the real estate investments generated a yearly return of -3.9%. &nbsp;The value of the segment’s assets increased to HK$13.12 bn, from HK$12.4 bn at the end of FY2018. &nbsp;The company continues to focus on the healthcare, technology and financial sectors in which it can leverage its knowledge and industry connections.&nbsp;
For further details and financial model, please see our attached Earnings Update Report and Updated Initiation Report.

Sun Hung Kai &amp; Co. [86_HK;&nbsp;HK$5,828 million/ US$752 million market cap; HK$6.45 million total average daily value traded] reported a solid set of numbers for the FY2019 amidst a tough external market environment. &nbsp;The EPS rose by 86% to HK104.40 cents in FY2019 vs. HK56.20 cents during the corresponding period last year on account of share buybacks and a sharp increase in net profit. &nbsp;Importantly, book value per share increased +7% to HK$10.20, resulting in the stock trading at an extremely discounted “deep value” 0.34x price/book multiple. The revenue increased marginally to HK$4,217 mn in the FY2019 as compared to HK$4,176 mn in the same period last year. &nbsp;&nbsp;
The results for the year reflect a solid performance primarily as a result of changes in the value of the assets of the Investment Management (“IM”, formerly known as Principal Investments) business followed by a profitable and resilient growth in the Consumer Finance business in Hong Kong. &nbsp;The Group has realigned its business segments into two categories: Financing and Investing. &nbsp;Company’s core financing business aims to provide stable returns and strong cash flows, while the investment business seeks new income streams and opportunities for increased returns. &nbsp;We expect the Consumer Finance business to contribute to a steady growth in revenues and profitability for the company and a greater focus on the Investment Management business can generate significant profitability going forward as indicated by a pretax contribution growth of 1202% in FY2019. &nbsp;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.
The total pre-tax profit contribution for the company increased by 50% with Consumer Finance being the biggest contributor to pre-tax profit for the period increasing its contribution by 6% over the previous period. &nbsp;The Investment Management business was the second highest contributor to pretax profit with a stellar increase of 1202% in FY2019 as compared to FY2018.&nbsp; The Mortgage Loans business contributed to an increase in pre-tax profit contribution by 6% compared to FY2018 as it enjoyed operating leverage from an expanded scale of operations.&nbsp; The Specialty Finance business segment however witnessed a 73% decline in the pre-tax contribution due to impairment losses.
As part of our ongoing effort to provide high quality, consistent and objective research coverage, we recently issued 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;
9% Dividend Yield, HK$7.90 PT = 170% Upside 
The stock is currently trading at just 0.31x tangible P/B and at 2.78x P/E on our FY2020 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. &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 170% over the current stock price of HK$2.92. &nbsp;Based on FY2019 reported numbers, our price target implies a Price to Tangible Book of 0.85x and P/E of 7.50x on our FY2020 earnings estimate of HK105 cents.
The Board has declared a second interim dividend of HK14 cents bringing the total dividend per share to HK26 cents for 2019, representing a pay-out ratio of 25% (excluding share buybacks) implying a very attractive 9% yield.&nbsp; This is even more 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.

&nbsp;0.34x P/B; 2.80x P/E
SHK is currently trading at only 0.34x 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. &nbsp;The company’s current P/E multiple on FY2019 actual reported EPS is 2.80x vs its 5-year historical average ratio of 7.50x. Based on our FY2020 EPS forecast of HK105 cents, the P/E comes to 2.78x on the current stock price. &nbsp;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 investment management 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 7.50x to our FY2020 EPS estimate of HK105 cents gives a stock price of HK$7.90, which is about 170% higher than the current stock price.
Fundamentals Improve:&nbsp; ROE, Liquidity, BS
Internal fundamentals of SHK have improved, indicating a better quality of results, and the likelihood of increased sustainability of financial performance looking forward.&nbsp; ROE improved to 10.6% for FY2019, the highest level in the past 3 years, and a sharp jump up from 2018’s level.&nbsp; While subject to typical market/economic cyclicality, the company is hopeful of maintaining a double-digit ROE on average over time going forward. &nbsp;Importantly, the management of the company seeks to increase the normalized ROE to mid-teens over a period of time.&nbsp; &nbsp;
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.&nbsp;
Buyback &amp; Capital Opportunities
The aforementioned points regarding ROE and balance sheet strength/liquidity gives SHK a lot of flexibility to deploy capital efficiently, including capital return to shareholders and acquisitions.&nbsp; Our conversations with management suggest the company will likely continue share repurchases on an opportunistic basis.&nbsp; SHK repurchased 9.2 mn shares amounting to approximately HK$33 mn in FY2019.&nbsp; It also increased its ownership stake in UAF to 63% from the earlier 58%.
Management remains focused on balancing capital deployment while maintaining liquidity and BS conservatism, with the goal of increasing ROE.&nbsp; CAPX in terms of branch infrastructure should remain well contained, especially given that Mainland China has seen net branch closures, although the company is now closer to an optimal number of branches both in HK and the Mainland.&nbsp;
Investment Management Business Reports Record Growth
For the FY2019, the annual&nbsp; return&nbsp; on&nbsp; average&nbsp; assets&nbsp; for&nbsp; the&nbsp; segment&nbsp; was&nbsp; 12.4%,&nbsp; compared&nbsp; to&nbsp; 4.1%&nbsp; in&nbsp; 2018. &nbsp;Taking into account operating expenses and funding cost allocation, the segment contributed HK$1083.2 mn to pre-tax profit, an increase of 1202% from HK$83.2 mn achieved in the FY2018. &nbsp;The sharp rise in pre-tax profits came mainly due to mark-to-market gains in the company’s public investments portfolio despite volatile conditions due to the US-China trade war. &nbsp;The year 2019 provided good investment opportunities in both the equity and credit markets. &nbsp;The company mentioned that there were uncertainties around the Sino-US trade war, moves by the Fed along with several events in the Middle East, the active investment strategies in equities and credit produced strong results.&nbsp;
The most significant contributions came from the company’s Public Equity and Alternative portfolios which generated yearly returns of 15% and 17%, respectively during the period, while the real estate investments generated a yearly return of -3.9%. &nbsp;The value of the segment’s assets increased to HK$13.12 bn, from HK$12.4 bn at the end of FY2018. &nbsp;The company continues to focus on the healthcare, technology and financial sectors in which it can leverage its knowledge and industry connections.&nbsp;
For further details and financial model, please see our attached Earnings Update Report and Updated Initiation Report.

SHK [86_HK]: 9% Div Yield, 0.34x P/B - Earnings Update Report