Stock research on global mid-cap companies

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Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

Sun Hung Kai &amp; Co. [86_HK; HK$8,600 million/ US$1,118 million market cap; HK$6.45 million total average daily value traded] had reported a solid set of numbers for the FY2020 amidst a tough external market environment with a staggering 23% EPS growth to HK128.30 cents in FY2020. The company has recently announced that for the four months ended 30 April 2021, the unaudited consolidated profit is approximately HK$1.1 billion as compared to a small loss reported for the same period last year. The primary reasons for a significant improvement in the net profit were mark-to-market and realized gains in financial instruments in the company’s Investment Management business, higher interest income and lower provisions for expected credit losses for the company’s lending business due to improved business conditions. In the same period last year the company in its Investment Management business had faced mark to market losses as a result of significant market volatility. Business conditions were also unfavorable that resulted in lower interest income and higher provisions for expected credit losses last year.
The expected performance for the first four-month period of FY2021 indicates a robust performance primarily as a result of a resilient Consumer Finance business in Hong Kong and Mainland China where other companies continue to witness losses along with a liquidity crunch.&nbsp; The expected performance demonstrates that the company’s core financing business continues to provide stable returns and strong cash flows.
In 2015, SHK &amp; Co. entered the Investment Management space, growing its assets under management to over HK$14.6 billion as on 31st December 2020. The Investment Management division has consistently contributed to generate net profit since its inception, and has recorded over HK$4.5 billion in pre-tax profit over the last five years at a cagr of 71%. &nbsp;
We expect the Consumer Finance business to contribute to the steady growth in revenues and profitability for the company and the Investment Management business would continue to generate significant profitability going forward. Also, a greater focus for the company will be on its newly established Funds Management platform, Sun Hung Kai Capital Partners. The fund platform has announced 3 partnerships, which have also launched their respective funds. In addition, Sun Hung Kai Capital Partners has launched a real estate debt fund and is expecting to launch its fund of hedge funds in July.
Funds Management Platform Updates
SHK had announced in April 2021, the launch of a real estate debt fund managed by its in-house real estate investment group, Multiple Capital Investment Partners (MCIP). The team is targeting to raise between US$200 and US$300 mn for the fund, which will invest in first and second mortgages for commercial and residential real estate in Asia-Pacific over its five-year life. SHK has committed US$100 million of capital.
MCIP is focused on investing in high-quality mortgage loans in developed markets, for development, repositioning or refinancing of the properties. Target markets include Australia and New Zealand, Greater China, South Korea and Southeast Asia. The United Kingdom and selective European Union countries will also be considered on an opportunistic basis. The strategy aims to take advantage of Asia’s secular growth trends while securing downside protection and generating yield, to provide investors carefully risk-managed access to the region’s real estate markets.
The team is co-led by partners and portfolio managers Rai Katimansah and Simon Tozer, based in Singapore and Melbourne, respectively. Rai has more than two decades of real estate investment experience with various real estate funds and Standard Chartered Bank. Simon has likewise held several senior roles across 20 years, including with banks such as Nomura Securities and ABN AMRO Bank.
The company had previously announced a partnership and seed commitment of US$150 mn with East Point Asset Management and a partnership and commitment of US$15 mn with global technology venture capital firm E15VC. East Point Asset Management is a newly established alternative asset management firm, led by CEO and CIO Simon Walsh, a former&nbsp; SHK &amp; Co. employee. E15VC has demonstrated a strong track-record from its first fund of investing in entrepreneurs who focus on addressing significant problems in tech, healthcare and in deep tech. The Hong Kong-based firm has successfully invested in many innovative companies including Vicarious Surgical, Home Bay, Frankie and Auris Health.
SHK had also previously announced its commitment to the ActusRayPartners European Alpha Fund which launched on 18th March 2021. The fundraising target over the first few months is US$100 million. This fund focuses on listed equities in the European time-zone markets. It covers all sectors and companies of all market capitalisations across the region. Based on over thirty-five years of investment experience, ActusRayPartners employs a differentiated investment process called Discretionary Probabilistic Investing. The process has a quantitative base but with a discretionary edge to handle situations that may be problematic for a pure systematic process. Their work is underpinned by proprietary quantitative systems and analytical tools. The objective is to generate meaningful levels of alpha and strong risk-adjusted returns.&nbsp;
The company now has a strong pipeline of potential partnerships and fund launches planned for the second half of 2021 covering various strategies including fund of hedge funds, crypto, equity long/short and index arbitrage. SHK is expanding its external partnerships, including seeding and providing acceleration capital as it grows the fund management platform.
HK$7.90 PT = 82% Upside 
The stock is currently trading at just 0.45x tangible P/B and at 3.1x P/E on our FY2021 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 0.85x 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.
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. 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 82% over the current stock price of HK$4.34. Based on FY2020 reported numbers, our price target implies a Price to Tangible Book of 0.8x and P/E of 6x on our FY2021 earnings estimate of HK140 cents. We maintain our already revised FY2021E estimates to HK140 cents from the earlier HK134 cents due to robust growth of 23% in the earnings per share in FY2020.
For further details and financial model, please see our attached Business Update Note.

Sun Hung Kai &amp; Co. [86_HK; HK$8,600 million/ US$1,118 million market cap; HK$6.45 million total average daily value traded] had reported a solid set of numbers for the FY2020 amidst a tough external market environment with a staggering 23% EPS growth to HK128.30 cents in FY2020. The company has recently announced that for the four months ended 30 April 2021, the unaudited consolidated profit is approximately HK$1.1 billion as compared to a small loss reported for the same period last year. The primary reasons for a significant improvement in the net profit were mark-to-market and realized gains in financial instruments in the company’s Investment Management business, higher interest income and lower provisions for expected credit losses for the company’s lending business due to improved business conditions. In the same period last year the company in its Investment Management business had faced mark to market losses as a result of significant market volatility. Business conditions were also unfavorable that resulted in lower interest income and higher provisions for expected credit losses last year.
The expected performance for the first four-month period of FY2021 indicates a robust performance primarily as a result of a resilient Consumer Finance business in Hong Kong and Mainland China where other companies continue to witness losses along with a liquidity crunch.&nbsp; The expected performance demonstrates that the company’s core financing business continues to provide stable returns and strong cash flows.
In 2015, SHK &amp; Co. entered the Investment Management space, growing its assets under management to over HK$14.6 billion as on 31st December 2020. The Investment Management division has consistently contributed to generate net profit since its inception, and has recorded over HK$4.5 billion in pre-tax profit over the last five years at a cagr of 71%. &nbsp;
We expect the Consumer Finance business to contribute to the steady growth in revenues and profitability for the company and the Investment Management business would continue to generate significant profitability going forward. Also, a greater focus for the company will be on its newly established Funds Management platform, Sun Hung Kai Capital Partners. The fund platform has announced 3 partnerships, which have also launched their respective funds. In addition, Sun Hung Kai Capital Partners has launched a real estate debt fund and is expecting to launch its fund of hedge funds in July.
Funds Management Platform Updates
SHK had announced in April 2021, the launch of a real estate debt fund managed by its in-house real estate investment group, Multiple Capital Investment Partners (MCIP). The team is targeting to raise between US$200 and US$300 mn for the fund, which will invest in first and second mortgages for commercial and residential real estate in Asia-Pacific over its five-year life. SHK has committed US$100 million of capital.
MCIP is focused on investing in high-quality mortgage loans in developed markets, for development, repositioning or refinancing of the properties. Target markets include Australia and New Zealand, Greater China, South Korea and Southeast Asia. The United Kingdom and selective European Union countries will also be considered on an opportunistic basis. The strategy aims to take advantage of Asia’s secular growth trends while securing downside protection and generating yield, to provide investors carefully risk-managed access to the region’s real estate markets.
The team is co-led by partners and portfolio managers Rai Katimansah and Simon Tozer, based in Singapore and Melbourne, respectively. Rai has more than two decades of real estate investment experience with various real estate funds and Standard Chartered Bank. Simon has likewise held several senior roles across 20 years, including with banks such as Nomura Securities and ABN AMRO Bank.
The company had previously announced a partnership and seed commitment of US$150 mn with East Point Asset Management and a partnership and commitment of US$15 mn with global technology venture capital firm E15VC. East Point Asset Management is a newly established alternative asset management firm, led by CEO and CIO Simon Walsh, a former&nbsp; SHK &amp; Co. employee. E15VC has demonstrated a strong track-record from its first fund of investing in entrepreneurs who focus on addressing significant problems in tech, healthcare and in deep tech. The Hong Kong-based firm has successfully invested in many innovative companies including Vicarious Surgical, Home Bay, Frankie and Auris Health.
SHK had also previously announced its commitment to the ActusRayPartners European Alpha Fund which launched on 18th March 2021. The fundraising target over the first few months is US$100 million. This fund focuses on listed equities in the European time-zone markets. It covers all sectors and companies of all market capitalisations across the region. Based on over thirty-five years of investment experience, ActusRayPartners employs a differentiated investment process called Discretionary Probabilistic Investing. The process has a quantitative base but with a discretionary edge to handle situations that may be problematic for a pure systematic process. Their work is underpinned by proprietary quantitative systems and analytical tools. The objective is to generate meaningful levels of alpha and strong risk-adjusted returns.&nbsp;
The company now has a strong pipeline of potential partnerships and fund launches planned for the second half of 2021 covering various strategies including fund of hedge funds, crypto, equity long/short and index arbitrage. SHK is expanding its external partnerships, including seeding and providing acceleration capital as it grows the fund management platform.
HK$7.90 PT = 82% Upside 
The stock is currently trading at just 0.45x tangible P/B and at 3.1x P/E on our FY2021 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 0.85x 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.
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. 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 82% over the current stock price of HK$4.34. Based on FY2020 reported numbers, our price target implies a Price to Tangible Book of 0.8x and P/E of 6x on our FY2021 earnings estimate of HK140 cents. We maintain our already revised FY2021E estimates to HK140 cents from the earlier HK134 cents due to robust growth of 23% in the earnings per share in FY2020.
For further details and financial model, please see our attached Business Update Note.

SHK 86_HK: Positive Profit Alert, Funds Management Platform Updates