Stock research on global mid-cap companies

Evaluate Research

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Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

Sun Hung Kai &amp; Co. [86_HK; HK$7,912 million/ US$1,029 million market cap; HK$6.45 million total average daily value traded] reported a solid set of numbers for the FY2021 amidst a challenging and volatile economic and investment environment with net profit much ahead of our expectations. The EPS rose by a healthy 11.2% to HK142.7 cents in FY2021 vs. HK128.3 cents during FY2020 on account of a sharp increase in net profit and share buybacks. The healthy increase in net profit despite uncertainty was a result of a 18% gain in the pre-tax profit of HK$3,773 million. The Consumer Finance business delivered, ahead of expectations, an increase in pre-tax profit to the tune of HK$1,665 million in 2021 (2020: HK$1,239 million), hitting a record high with a YoY growth of 34.5%. Importantly, book value per share increased +11.4% to HK$12.70, resulting in the stock trading at an extremely discounted “deep value” 0.36x price/book multiple. The revenue increased by 6.6% to HK$4,324 mn in FY2021 as compared to HK$4,057 mn in the FY2020, due to recovery in the Consumer Finance business in both Hong Kong and China.
&nbsp;Financial Highlights for 2021
<ul type="disc">
<li>Solid +10.4% Growth in Net Profit amounting to HK$2,814 million</li>
<li>Record High Pre-tax profit of HK$1,665 million for the Consumer Finance Business</li>
<li>EPS increases 11.2% to HK142.7 cents (2020: HK128.3 cents)</li>
<li>BVPS gains 11.4% to HK$12.70 (2020: HK$11.4)</li>
<li>ROE and ROA at 11.8% and 7.1%, respectively (2020: 11.8% and 6.8%, respectively)</li>
<li>Investment Management Business Assets reach HK$21 billion for 2021, Realized Gains 98% YoY to HK$3.5 billion</li>
<li>Funds Management Platform – Launched four partnerships: East Point Asset Management, E15VC, ActusRay Partners and Kernel; and two SHKCP managed funds: Multiple Capital Investment Partners (MCIP) and SHK Latitude Alpha Fund in 2021.</li>
<li>2nd Interim dividend of HK14 cents and a Special dividend of HK4 cents per share account for strong Alternatives segment performance in 2021.</li>
<li>Total Dividend +15% at HK30 cents for 2021 (2020: HK26 cents), representing a pay-out ratio of 21.1% (excluding share buybacks).</li>
<li>For 2021 – Total Buyback of 9.1 million shares (HK$37.8 million), Share Buybacks to continue further in 2022</li>
</ul>
&nbsp;Valuation Highlights
<ul type="disc">
<li>Target Price HK$7.94 = 100% Upside</li>
<li>Stock at 0.32x tangible P/B and at 2.3x P/E on our FY2022 earnings estimate</li>
<li>Stock at 0.36x tangible P/B on FY2021 actual numbers</li>
<li>Dividend Yield: 7.52%</li>
</ul>
&nbsp;Fundamentals Remain Strong Amidst Uncertainty
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/264/393/original/image_61057641521647862290735.png?1647862292" width="643" height="332" class="editor-image img-responsive" data-smartkarma-image-id="264393"></figure>
For FY2021 the Financing business of the company recovered as compared to FY2020 with the Consumer Finance business showcasing impressive organic growth by contributing a record high HK$1,665 million in pre-tax profit. Even Mortgage Loans and Private Credit segments witnessed sharp recovery from a loss in 2020 with the Mortgage loans segment contributing a meaningful pre-tax profit of HK$120 million, increasing 6.5% year-on-year.&nbsp;
The Investment Management business also achieved strong growth and the segment assets reached HK$21 billion at the end of FY2021. During the year it recorded HK$3.5 billion of realized gains on financial assets and interest income, increasing 98.4% year-on-year as the company successfully exited from a number of mature investments made in prior years.&nbsp;
For FY2021, overall finance costs decreased by 11% to HK$716 mn on account of reduction in interest cost. The total net impairment losses from loans and advances to customers decreased by 32% to HK$715 mn because of improvement in credit quality. The impairment losses continue to show consistent reduction since the second half of FY2020 indicating that worst is over for loan losses. With finance and operating costs expected to remain flat in the first half of FY2022, any further increase in the consumer finance business would aid profitability going forward. The company was successful in maintaining healthy levels of liquidity in its operations in addition to reporting a significant rise in profitability.
We expect the Consumer Finance business to contribute to the healthy growth in revenues and profitability for the company and a greater focus on the Investment Management business would continue to generate significant profitability going forward. The Funds Management initiative is another catalyst for SHK &amp; Co’s growth adding addititonal revenue streams and diversifying SHK &amp; Co’s products and strategies.&nbsp;
Amidst the ongoing uncertainty the company has declared a second interim dividend of HK14 cents and a special dividend of HK4 cents. The total dividend declared for 2021 is HK30 cents which is 15% higher than the payout in 2020. In 2021, the company repurchased 9.1 mn shares for a total consideration of HK$37.8 mn with an expectation to continue repurchasing shares in the near future as a part of its long-term strategy.&nbsp;
SHK’s balance sheet remains strong, with shareholders’ equity comprising 51.4% of all assets.&nbsp; Net gearing is modest at only 49%, and the interest cover is 6.3x.&nbsp; Low levels of gearing has resulted in an increased interest coverage ratio of 6.3x in FY2021 from 5.0x in FY2020. Sun Hung Kai Credit effectively managed to diversify its funding channels, lowered its financing costs and improved its capital efficiency to deliver solid financial performance in FY2021. 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$7.94 PT = 100% Upside 
The stock is currently trading at just 0.32x tangible P/B and at 2.3x 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.&nbsp;
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 100% over the current stock price of HK$3.99. Based on FY2021 reported numbers, our price target implies a Price to Tangible Book of 0.72x and P/E of 4.6x on our FY2022 earnings estimate of HK171 cents. We maintain our FY2022E estimates to HK171 cents due to healthy growth of 11.2% in the earnings per share in FY2021.
0.32x P/B; 2.3x P/E
SHK is currently trading at only 0.32x tangible P/B on our FY2022 estimates. Similarly, the stock is cheap even on P/E basis. The company’s current P/E multiple on FY2021 actual reported EPS is 2.8x vs. its 5-year historical average ratio of 5.60x. Based on our FY2022 EPS forecast of HK171 cents, the P/E comes to 2.3x 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 after undertaking 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 have revived the company’s growth in FY2021. These initiatives are beginning to deliver healthy and sustainable revenue and EPS growth, along with revival in global business conditions, is all resulting in increasing investor confidence in the stock. This could likely result in a re-rating of the stock to its historical average multiples. On a conservative basis, even if we assume a 4.6x multiple to our FY2022 EPS estimate of HK171 cents gives a stock price of HK$7.94, which is about 100% higher than the current stock price. The book value per share at the end of FY2021 has already increased +11.4% to HK$12.80, resulting in the stock trading at an extremely discounted “deep value” 0.36x price/book multiple.
For further details and financial model, please see our attached Earnings Update Note.

Sun Hung Kai &amp; Co. [86_HK; HK$7,912 million/ US$1,029 million market cap; HK$6.45 million total average daily value traded] reported a solid set of numbers for the FY2021 amidst a challenging and volatile economic and investment environment with net profit much ahead of our expectations. The EPS rose by a healthy 11.2% to HK142.7 cents in FY2021 vs. HK128.3 cents during FY2020 on account of a sharp increase in net profit and share buybacks. The healthy increase in net profit despite uncertainty was a result of a 18% gain in the pre-tax profit of HK$3,773 million. The Consumer Finance business delivered, ahead of expectations, an increase in pre-tax profit to the tune of HK$1,665 million in 2021 (2020: HK$1,239 million), hitting a record high with a YoY growth of 34.5%. Importantly, book value per share increased +11.4% to HK$12.70, resulting in the stock trading at an extremely discounted “deep value” 0.36x price/book multiple. The revenue increased by 6.6% to HK$4,324 mn in FY2021 as compared to HK$4,057 mn in the FY2020, due to recovery in the Consumer Finance business in both Hong Kong and China.
&nbsp;Financial Highlights for 2021

Solid +10.4% Growth in Net Profit amounting to HK$2,814 million
Record High Pre-tax profit of HK$1,665 million for the Consumer Finance Business
EPS increases 11.2% to HK142.7 cents (2020: HK128.3 cents)
BVPS gains 11.4% to HK$12.70 (2020: HK$11.4)
ROE and ROA at 11.8% and 7.1%, respectively (2020: 11.8% and 6.8%, respectively)
Investment Management Business Assets reach HK$21 billion for 2021, Realized Gains 98% YoY to HK$3.5 billion
Funds Management Platform – Launched four partnerships: East Point Asset Management, E15VC, ActusRay Partners and Kernel; and two SHKCP managed funds: Multiple Capital Investment Partners (MCIP) and SHK Latitude Alpha Fund in 2021.
2nd Interim dividend of HK14 cents and a Special dividend of HK4 cents per share account for strong Alternatives segment performance in 2021.
Total Dividend +15% at HK30 cents for 2021 (2020: HK26 cents), representing a pay-out ratio of 21.1% (excluding share buybacks).
For 2021 – Total Buyback of 9.1 million shares (HK$37.8 million), Share Buybacks to continue further in 2022

&nbsp;Valuation Highlights

Target Price HK$7.94 = 100% Upside
Stock at 0.32x tangible P/B and at 2.3x P/E on our FY2022 earnings estimate
Stock at 0.36x tangible P/B on FY2021 actual numbers
Dividend Yield: 7.52%

&nbsp;Fundamentals Remain Strong Amidst Uncertainty

For FY2021 the Financing business of the company recovered as compared to FY2020 with the Consumer Finance business showcasing impressive organic growth by contributing a record high HK$1,665 million in pre-tax profit. Even Mortgage Loans and Private Credit segments witnessed sharp recovery from a loss in 2020 with the Mortgage loans segment contributing a meaningful pre-tax profit of HK$120 million, increasing 6.5% year-on-year.&nbsp;
The Investment Management business also achieved strong growth and the segment assets reached HK$21 billion at the end of FY2021. During the year it recorded HK$3.5 billion of realized gains on financial assets and interest income, increasing 98.4% year-on-year as the company successfully exited from a number of mature investments made in prior years.&nbsp;
For FY2021, overall finance costs decreased by 11% to HK$716 mn on account of reduction in interest cost. The total net impairment losses from loans and advances to customers decreased by 32% to HK$715 mn because of improvement in credit quality. The impairment losses continue to show consistent reduction since the second half of FY2020 indicating that worst is over for loan losses. With finance and operating costs expected to remain flat in the first half of FY2022, any further increase in the consumer finance business would aid profitability going forward. The company was successful in maintaining healthy levels of liquidity in its operations in addition to reporting a significant rise in profitability.
We expect the Consumer Finance business to contribute to the healthy growth in revenues and profitability for the company and a greater focus on the Investment Management business would continue to generate significant profitability going forward. The Funds Management initiative is another catalyst for SHK &amp; Co’s growth adding addititonal revenue streams and diversifying SHK &amp; Co’s products and strategies.&nbsp;
Amidst the ongoing uncertainty the company has declared a second interim dividend of HK14 cents and a special dividend of HK4 cents. The total dividend declared for 2021 is HK30 cents which is 15% higher than the payout in 2020. In 2021, the company repurchased 9.1 mn shares for a total consideration of HK$37.8 mn with an expectation to continue repurchasing shares in the near future as a part of its long-term strategy.&nbsp;
SHK’s balance sheet remains strong, with shareholders’ equity comprising 51.4% of all assets.&nbsp; Net gearing is modest at only 49%, and the interest cover is 6.3x.&nbsp; Low levels of gearing has resulted in an increased interest coverage ratio of 6.3x in FY2021 from 5.0x in FY2020. Sun Hung Kai Credit effectively managed to diversify its funding channels, lowered its financing costs and improved its capital efficiency to deliver solid financial performance in FY2021. 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$7.94 PT = 100% Upside 
The stock is currently trading at just 0.32x tangible P/B and at 2.3x 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.&nbsp;
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 100% over the current stock price of HK$3.99. Based on FY2021 reported numbers, our price target implies a Price to Tangible Book of 0.72x and P/E of 4.6x on our FY2022 earnings estimate of HK171 cents. We maintain our FY2022E estimates to HK171 cents due to healthy growth of 11.2% in the earnings per share in FY2021.
0.32x P/B; 2.3x P/E
SHK is currently trading at only 0.32x tangible P/B on our FY2022 estimates. Similarly, the stock is cheap even on P/E basis. The company’s current P/E multiple on FY2021 actual reported EPS is 2.8x vs. its 5-year historical average ratio of 5.60x. Based on our FY2022 EPS forecast of HK171 cents, the P/E comes to 2.3x 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 after undertaking 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 have revived the company’s growth in FY2021. These initiatives are beginning to deliver healthy and sustainable revenue and EPS growth, along with revival in global business conditions, is all resulting in increasing investor confidence in the stock. This could likely result in a re-rating of the stock to its historical average multiples. On a conservative basis, even if we assume a 4.6x multiple to our FY2022 EPS estimate of HK171 cents gives a stock price of HK$7.94, which is about 100% higher than the current stock price. The book value per share at the end of FY2021 has already increased +11.4% to HK$12.80, resulting in the stock trading at an extremely discounted “deep value” 0.36x price/book multiple.
For further details and financial model, please see our attached Earnings Update Note.


SHK 86_HK: EPS Growth +11%, BV +11%, Dividend Yield 7.52%: Earnings Update