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Investor Notes - Phillip Securities (HK) Ltd
Past Investor Notes  
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19 Sep, 2019 (Thursday)

AVIC is the only Chinese military and civilian general aviation high-end equipment manufacturing company in the Hong Kong capital market. Its main business covers helicopters, trainers, general aircraft, airborne systems and aviation components, and aviation engineering services. In 2018, the company achieved a revenue of 71.958 billion yuan, a year-on-year increase of 24%, and a net profit of 641 million yuan, a year-on-year increase of 7.2%. It is expected that domestic military expenditure will further increase in 2019, and the process of military-civilian integration will be further accelerated. The company`s recent capital operation has increased significantly, and it is possible to introduce equity incentives in the future, and the future performance growth ratio is expected to accelerate.
Buy-in Price: $4.00, Target Price: $5.30, Cut Loss Price: $3.30

DIC Corporation (4631)
Founded in 1908 as a chemical manufacturer that manufactures and sells printing inks. Expands their range of businesses based on the fundamental materials of organic pigments and synthetic resins, and offers a wide product lineup from raw materials to processing. Holds the top shares globally for printing inks, organic pigments, and PPS compounds. Has expanded to over 60 countries and regions worldwide.For 1H (Jan-Jun) results of FY2019/12 announced on 8/8, net sales decreased by 3.5% to 385.014 billion yen compared to the same period the previous year, operating income decreased by 24.4% to 18.392 billion yen, and net sales decreased by 11.9% to 13.13 billion yen. Due to the global economic slowdown, there has been a decrease in shipments throughout a wide range of fields such as materials for automobiles, electric, and electronic. Effects from a decrease in conversion for foreign businesses due to the appreciation of the yen have also shown.For its full year plan, net sales is expected to decrease by 1.9% to 790 billion yen compared to the previous year, operating income to decrease by 11.1% to 43 billion yen, and net income to decrease by 6.3% to 30 billion yen. On 29/8, the purchase of Europe's largest BASF chemical pigment business, the German BASF Colors & Effects, was announced. Their product portfolio appears to have low redundancy and high subsidiarity.

SUNeVision (1686.HK) - Satisfactory results with excellent development of data center business

Investment Summary

SUNeVision is one of the leading carrier-neutral data center operators in Hong Kong, owned 74.04% by Sun Hung Kai Properties (16.HK). The annual results was satisfactory, which revenue increased by 19% to HK$1.63 billion, and profit attributable to shareholders of the company increased by 11% to HK$870 million. We update the rating to ¡§Accumulate¡¨. (Closing price at 27 Sep 2019)

Annual result update

Satisfactory results with excellent development of data center business

The group announced its annual results. During the period, revenue increased by 19% to HK$1.63 billion, and profit attributable to shareholders of the company increased by 11% to HK$870 million. Revenue growth was mainly attributable to new customers, especially cloud operators and the increase in revenue from existing customers. The cost of sales increased by 23% to HK$70 million, mainly due to the increase in depreciation expenses and the increase in operating costs for the upfront expenses of new customers. Therefore, the Group's gross profit margin decreased from 58.5% to 57.2%. In addition, the Group's sales and administrative costs as a percentage of revenue were 1.6% and 6%, respectively, down 0.1% and 1.5% YoY.

The data center business of the Group is developing well. MEGA Plus` new customers in this year include major global cloud service operator and a regional video service provider. MEGA-i has added a leading international e-commerce operation. MEGA Two has also acquired a regional internet business group.

The Group's new project in Tsuen Wan has entered the construction phase; the new project in Tseung Kwan O has also entered the pre-construction design stage. We expect the Tsuen Wan project to be completed in 2021 and the first phase of Tseung Kwan O project to be completed from about 2022 to 2023. The GFA will reach approximately 2.8 million sq. ft. In addition, MEGA-i's expansion project is also underway, providing more data center equipment rooms and power supply to meet the higher demands of cloud providers.

Acquiring data center in Sha Tin, while selling investment properties

The Group has announced the acquisition of the entire industrial building in Sha Tin for HK$2.22 billion. Most of the industrial buildings are currently leased and used by the Group for operation data centre MEGA Two. At the same time, the Group's investment properties were sold to the parent company for HK$1.81 billion, including properties in Standard Chartered Tower, Millennium City 1 in Kwun Tong and Kodak House II in North Point. The net cash outflow from the acquisition and sale was approximately HK$410 million. By selling non-operating properties and acquiring data center industrial building in Sha Tin, the Group further concentrated its assets on the data center, which is beneficial to the long-term development.

Relatively high debt-to-equity ratio, yet no reducation in dividend payout

As of June 30, 2019, the Group had a shareholder loan of HK$3.3 billion and a bank loan of HK$4.75 billion, of which HK$2.18 billion was short-term debt. The net interest-bearing debt-to-equity ratio rose to 181%, which was at a relatively high level compared with peers. Although the Group has not reduced the dividend payout ratio, we believe that the Group will have further funding needs as the Tseung Kwan O project commences. Therefore, we maintain the Group's forecast of reducing the dividend payout ratio in the future.


Assuming 35x P/E in 2020F, we derive a target price of HK$6.46, up 5.5% than previous TP, implying 33.8x P/E in 2020F. We upgrade the rating to ¡§Accumulate¡¨, with 8.57% potential upside.


1. Slower than expected demand on data center

2. Significant increase in land supply for data centers within a short period

3. The entry of cloud service giant players to data center industry in Hong Kong

4. Loss on judicial review


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Recommendation on 19-9-2019
Price on Recommendation Date$ 5.950
Suggested purchase priceN/A
Target Price$ 6.460
Writer Info
Terry Li
(Research Analyst)
Tel: +852 2277 6527

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