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.

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Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

Sun Hung Kai &amp; Co.<a target="_blank">&nbsp;[86_HK; HK$6,923 million/ US$900 million market cap; HK$6.45 million total average daily value traded]</a>&nbsp;reported a resilient set of numbers for the 1HFY2022 amidst a challenging and volatile economic and investment environment.&nbsp;Despite the headwinds, the results were above our expectations, as the revenue remained flat with a marginal decline of only 1.9%. The company reported revenue of HK$2,056 million in 1HFY2022 as compared to HK$2,096 million in the 1HFY2021, due to resilient Consumer Finance business in both Hong Kong and China. Importantly, the book value per share continues to remain strong at HK$12.10, resulting in the stock trading at an extremely discounted “deep value” 0.28x price/book multiple.
&nbsp;HK12 cents per share Dividend - 1H2022, 7.4% Annualized Yield
The Board has declared an interim dividend of HK12 cents per share for the six months ended 30 June 2022. Considering consistent dividend paid out by the company historically, if a dividend of HK14 cents per share is paid in the second half of 2022, it would imply an annualized dividend yield of 7.4% for 2022.
&nbsp;Financial and Valuation Highlights for 1HFY2022&nbsp;
<ul type="disc">
<li>Despite Headwinds Revenue Remains Flat at HK$2,056 million</li>
<li>BVPS Remains strong at HK$12.10</li>
<li>Funds Management Platform – Launched partnership: GCO Asset Management</li>
<li>Funds Management Platform - SHKCP established the SHK Capital Partners Private Access Fund</li>
<li>Funds Management Platform – encouraging progress in increasing external capital totaling US$165 million raised by Partner Funds, bringing total AUM to US$866 million</li>
<li>Interim dividend of HK12 cents per share in 1HFY2022</li>
<li>Dividend Yield: Annualized at 7.4%</li>
<li>Target Price HK$7.94 = 125% Upside</li>
<li>Stock at 0.28x tangible P/B and at 1.9x P/E on our FY2023 earnings estimate</li>
<li>Stock at 0.32x tangible P/B on FY2021 actual numbers</li>
<li>For 1HFY2022–Total Buyback of 829 thousand shares (HK$3.1 million)</li>
</ul>
&nbsp;The 1HFY2022 was a challenging period not only for SHK &amp; Co. but for the global financial services industry characterized by extreme volatility across all asset classes, spurt in inflation and interest rates, along with intermittent COVID-19 lockdowns, which resulted in sharp moves in markets and a drop in business activities across the world. The strengthening of the US Dollar, triggered by a hawkish central bank and steepening interest rates during 1HFY2022 also contributed to the volatility in the Investment Management segment of the business. Against this economic backdrop the company’s financial performance for the first half was impacted, but due to their diversified businesses, SHK &amp; Co. was able to cushion the impact from the market volatility. The company successfully maintained their market leadership in the Consumer Finance business through these headwinds. United Asia Finance (UAF), the Consumer Finance business company of SHK &amp; Co. continued to lead in the Hong Kong unsecured loan market, ranking first amongst all money lenders and was one of the top five lenders amongst all market players including banks in terms of outstanding unsecured loan balance.
&nbsp;HK$7.94 PT = 125% Upside
The stock is currently trading at just 0.28x tangible P/B and at 1.9x P/E on our FY2023 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 a conservative 0.65x 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$5.44 bn for SHK’s 63% stake in the business.
We value the non-UAF business including Investment Management and Mortgage Loans at a conservative 0.65x 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$10.24 bn. As a result, we arrive at a value of HK$15.68 bn for SHK which equals HK$7.94 per share, an upside of about 125% over the current stock price of HK$3.53. Based on 1HFY2022 reported numbers, our price target implies a Price to Tangible Book of 0.65x and P/E of 4.4x on our FY2023 earnings estimate of HK181 cents. We have revised down our FY2023E earnings per share estimates to HK181 cents due to global uncertainty and volatility.

Sun Hung Kai &amp; Co.&nbsp;[86_HK; HK$6,923 million/ US$900 million market cap; HK$6.45 million total average daily value traded]&nbsp;reported a resilient set of numbers for the 1HFY2022 amidst a challenging and volatile economic and investment environment.&nbsp;Despite the headwinds, the results were above our expectations, as the revenue remained flat with a marginal decline of only 1.9%. The company reported revenue of HK$2,056 million in 1HFY2022 as compared to HK$2,096 million in the 1HFY2021, due to resilient Consumer Finance business in both Hong Kong and China. Importantly, the book value per share continues to remain strong at HK$12.10, resulting in the stock trading at an extremely discounted “deep value” 0.28x price/book multiple.
&nbsp;HK12 cents per share Dividend - 1H2022, 7.4% Annualized Yield
The Board has declared an interim dividend of HK12 cents per share for the six months ended 30 June 2022. Considering consistent dividend paid out by the company historically, if a dividend of HK14 cents per share is paid in the second half of 2022, it would imply an annualized dividend yield of 7.4% for 2022.
&nbsp;Financial and Valuation Highlights for 1HFY2022&nbsp;

Despite Headwinds Revenue Remains Flat at HK$2,056 million
BVPS Remains strong at HK$12.10
Funds Management Platform – Launched partnership: GCO Asset Management
Funds Management Platform - SHKCP established the SHK Capital Partners Private Access Fund
Funds Management Platform – encouraging progress in increasing external capital totaling US$165 million raised by Partner Funds, bringing total AUM to US$866 million
Interim dividend of HK12 cents per share in 1HFY2022
Dividend Yield: Annualized at 7.4%
Target Price HK$7.94 = 125% Upside
Stock at 0.28x tangible P/B and at 1.9x P/E on our FY2023 earnings estimate
Stock at 0.32x tangible P/B on FY2021 actual numbers
For 1HFY2022–Total Buyback of 829 thousand shares (HK$3.1 million)

&nbsp;The 1HFY2022 was a challenging period not only for SHK &amp; Co. but for the global financial services industry characterized by extreme volatility across all asset classes, spurt in inflation and interest rates, along with intermittent COVID-19 lockdowns, which resulted in sharp moves in markets and a drop in business activities across the world. The strengthening of the US Dollar, triggered by a hawkish central bank and steepening interest rates during 1HFY2022 also contributed to the volatility in the Investment Management segment of the business. Against this economic backdrop the company’s financial performance for the first half was impacted, but due to their diversified businesses, SHK &amp; Co. was able to cushion the impact from the market volatility. The company successfully maintained their market leadership in the Consumer Finance business through these headwinds. United Asia Finance (UAF), the Consumer Finance business company of SHK &amp; Co. continued to lead in the Hong Kong unsecured loan market, ranking first amongst all money lenders and was one of the top five lenders amongst all market players including banks in terms of outstanding unsecured loan balance.
&nbsp;HK$7.94 PT = 125% Upside
The stock is currently trading at just 0.28x tangible P/B and at 1.9x P/E on our FY2023 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 a conservative 0.65x 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$5.44 bn for SHK’s 63% stake in the business.
We value the non-UAF business including Investment Management and Mortgage Loans at a conservative 0.65x 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$10.24 bn. As a result, we arrive at a value of HK$15.68 bn for SHK which equals HK$7.94 per share, an upside of about 125% over the current stock price of HK$3.53. Based on 1HFY2022 reported numbers, our price target implies a Price to Tangible Book of 0.65x and P/E of 4.4x on our FY2023 earnings estimate of HK181 cents. We have revised down our FY2023E earnings per share estimates to HK181 cents due to global uncertainty and volatility.

SHK 86_HK: Dividend Yield 7.4%, P/E 1.9x, P/B 0.28x