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

SHK &amp; Co. [86_HK; HK$7,180 million/ US$933 million market cap; HK$6.45 million total average daily value traded]<a target="_blank"></a> recently announced that the consolidated loss for the four months ended 30th April 2022 is approximately HK$200 million, as compared to the corresponding period in 2021 which was approximately a profit of HK$1.1 billion. The primary reason for the loss for the four months ended 30 April 2022 is mark-to-market losses on financial instruments in the company’s Investment Management business, which is in line with recent global markets volatility. The financial performance of the Financing business continues to be resilient and is on track to witness further recovery in 2022.
The financing business continues to provide stability in terms of revenue and consistent cashflows to the overall business of the company. United Asia Finance is the prominent leader in the unsecured lending market in Hong Kong. The credit losses during the first four months of 2022 period are expected to remain flat compared to that of last year, which reflects smart underwriting and resilience of the loan book. The mortgage business and private credit business also demonstrated strong resilience continuing to see recovery from the pandemic. The greater focus, which is the Investment management business and the funds management business continues to provide higher growth prospects to the overall business of the company. The company remains confident about the future performance of their portfolios as the underlying investments have strong and resilient businesses and the fund managers selected have proven track records. The Funds Management initiative is a catalyst for SHK &amp; Co’s growth adding additional revenue streams and diversifying SHK &amp; Co’s products and strategies.
Investment Management Segment Performance Impacted Due to Global Uncertainty 
The performance of the Investment Management segment of the company’s business was impacted by the mark-to-market losses mainly in its public book due to global uncertainty. On a conservative basis, even if we assume a contribution of HK$220 million in net profit from the Consumer Finance business of the company, the overall loss to the tune of HK$200 million suggests that the Investment Management segment has reported HK$420 million in mark to market losses on a fund value of HK$21 billion at the end of December 2021. This indicates that the fund has declined only by approximately 2% during the first four months of 2022 as compared to the drastic decline in the benchmark indices. Also, if globally the markets recover then the mark-to-market losses may decline and give a positive surprise when the company reports their results in the month of August 2022.
The main impact was on the investments in the Healthcare and Technology sectors. This impact due to global uncertainty was mainly attributable to the Russia Ukraine War coupled with US-China tensions with clamping down on US listed Chinese ADRs especially in the technology space. The other domains such as private equity and real estate continue to deliver on the expected lines for SHK, thereby providing stability to the overall Investment Management segment of the business. In our opinion, given severe bear market declines globally, it comes as absolutely no surprise that financial-market linked organizations experience some temporary mark-to-market declines.&nbsp; SHK’s diversified portfolio, including real estate, fixed income, PE, and hedge funds, has helped to cushion such declines.&nbsp;
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/278/716/original/image_77965151821654071284011.png?1654071285" width="476" height="338" class="editor-image img-responsive" data-smartkarma-image-id="278716"></figure>
Valuation Highlights
<ul type="disc">
<li>Target Price HK$7.94 = 118% Upside</li>
<li>Stock at 0.29x tangible P/B and at 2.1x P/E on our FY2022 earnings estimate</li>
<li>Stock at 0.33x tangible P/B on FY2021 actual numbers</li>
<li>Dividend Yield: 8.24%</li>
</ul>
&nbsp;HK$7.94 PT = 118% Upside 
The stock is currently trading at just 0.29x tangible P/B and at 2.1x P/E on our FY2022 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 0.72x 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 0.72x 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 118% over the current stock price of HK$3.64. Based on FY2021 reported numbers, our price target implies a Price to Tangible Book of 0.72x and P/E of 4.64x on our FY2022 earnings estimate of HK171 cents. We maintain our FY2022E estimates to HK171 cents considering the recovery momentum of its financing business and the diversification of the investment management portfolio.&nbsp;
For further details and financial model,&nbsp;please see our attached Business Update Note.

SHK &amp; Co. [86_HK; HK$7,180 million/ US$933 million market cap; HK$6.45 million total average daily value traded] recently announced that the consolidated loss for the four months ended 30th April 2022 is approximately HK$200 million, as compared to the corresponding period in 2021 which was approximately a profit of HK$1.1 billion. The primary reason for the loss for the four months ended 30 April 2022 is mark-to-market losses on financial instruments in the company’s Investment Management business, which is in line with recent global markets volatility. The financial performance of the Financing business continues to be resilient and is on track to witness further recovery in 2022.
The financing business continues to provide stability in terms of revenue and consistent cashflows to the overall business of the company. United Asia Finance is the prominent leader in the unsecured lending market in Hong Kong. The credit losses during the first four months of 2022 period are expected to remain flat compared to that of last year, which reflects smart underwriting and resilience of the loan book. The mortgage business and private credit business also demonstrated strong resilience continuing to see recovery from the pandemic. The greater focus, which is the Investment management business and the funds management business continues to provide higher growth prospects to the overall business of the company. The company remains confident about the future performance of their portfolios as the underlying investments have strong and resilient businesses and the fund managers selected have proven track records. The Funds Management initiative is a catalyst for SHK &amp; Co’s growth adding additional revenue streams and diversifying SHK &amp; Co’s products and strategies.
Investment Management Segment Performance Impacted Due to Global Uncertainty 
The performance of the Investment Management segment of the company’s business was impacted by the mark-to-market losses mainly in its public book due to global uncertainty. On a conservative basis, even if we assume a contribution of HK$220 million in net profit from the Consumer Finance business of the company, the overall loss to the tune of HK$200 million suggests that the Investment Management segment has reported HK$420 million in mark to market losses on a fund value of HK$21 billion at the end of December 2021. This indicates that the fund has declined only by approximately 2% during the first four months of 2022 as compared to the drastic decline in the benchmark indices. Also, if globally the markets recover then the mark-to-market losses may decline and give a positive surprise when the company reports their results in the month of August 2022.
The main impact was on the investments in the Healthcare and Technology sectors. This impact due to global uncertainty was mainly attributable to the Russia Ukraine War coupled with US-China tensions with clamping down on US listed Chinese ADRs especially in the technology space. The other domains such as private equity and real estate continue to deliver on the expected lines for SHK, thereby providing stability to the overall Investment Management segment of the business. In our opinion, given severe bear market declines globally, it comes as absolutely no surprise that financial-market linked organizations experience some temporary mark-to-market declines.&nbsp; SHK’s diversified portfolio, including real estate, fixed income, PE, and hedge funds, has helped to cushion such declines.&nbsp;

Valuation Highlights

Target Price HK$7.94 = 118% Upside
Stock at 0.29x tangible P/B and at 2.1x P/E on our FY2022 earnings estimate
Stock at 0.33x tangible P/B on FY2021 actual numbers
Dividend Yield: 8.24%

&nbsp;HK$7.94 PT = 118% Upside 
The stock is currently trading at just 0.29x tangible P/B and at 2.1x P/E on our FY2022 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 0.72x 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 0.72x 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 118% over the current stock price of HK$3.64. Based on FY2021 reported numbers, our price target implies a Price to Tangible Book of 0.72x and P/E of 4.64x on our FY2022 earnings estimate of HK171 cents. We maintain our FY2022E estimates to HK171 cents considering the recovery momentum of its financing business and the diversification of the investment management portfolio.&nbsp;
For further details and financial model,&nbsp;please see our attached Business Update Note.

SHK 86_HK: Dividend Yield 8.2%, P/E 2.1x, P/B 0.29x: Business Update Note

Sun Hung Kai

SHK 86_HK: Dividend Yield 8.2%, P/E 2.1x, P/B 0.29x: Business Update Note