AMTD Research - 21 October 2016

【AMTD Research】 Initiation of Coverage: Far East Consortium

AMTD Research initiates coverage on Far East Consortium (FEC, 35.HK); price target HK$4.00, upside 25%.

1. AMTD View

AMTD Research initiates coverage on Far East Consortium (FEC)(35.HK); price target HK$4.00, upside 25%. The stock is currently trading at 6.2x PE (FY17e), 0.6x PB (FY17e), with dividend yield at 6.2% and at a 67% discount to our estimated NAV.

2. Introduction on Target Company

Far East Consortium International Limited (FEC) is a medium-sized property conglomerate, listed on the HKEX in 1972. It has a geographically diversified portfolio with a balanced revenue mix in property development, hotel, car park management and property investment. FEC’s expertise in mixed-use property development helps it acquire lands at relatively low costs.

3. Key Highlights

1. High visibility of earnings growth from FY17-19. We forecast net profit growth of 51% in FY17 and a CAGR of 26% during FY16-FY19e. The earnings growth will be driven by increasing delivery of development projects in China, Australia and Hong Kong. We estimate that around 90% of development revenue in FY17 are locked in from presales achieved. As of Jul-16, FEC has unbooked presales of HK$9.8bn, all of which are scheduled to be completed during FY17-19. This represents 67% of our forecasted development revenue during the same period.

2. Recurring income from hotels and car parks. Hotels and car parks contribute HK$2.0bn recurring revenue annually, accounting for close to 50% of revenue in FY16.

3. Deep valuation discount. Current share price implies a 67% discount to our estimated Mar-17 Net Asset Value (NAV). We believe the deep discount to NAV reflects FEC’s relatively small market capitalization. Should its market cap cross the US$1bn hurdle, the NAV discount could narrow significantly.

4. Strong property development pipeline, discipline in land acquisition. FEC currently has HK$39bn residential development pipeline which will support strong growth in next 6 years. Most importantly, 72% of its landbank are located in Shanghai, Guangzhou and major cities in Australia where lands were bought at very low costs and property sales are supported by strong demand. In the past few years, it has been actively accumulating land bank in different countries while maintaining financial discipline. We expect net gearing to remain stable at 37-39% in the next 2-3 years.

5. A large unrealized revaluation surplus of hotels. Current book value of HK$10bn has not factored in the HK$10bn revaluation surplus of its hotel assets. Potential sale of hotels in next 12 months can improve the company’s liquidity.

6. Catalysts: We expect strong growth of 1H17 net profit of HK$441mm (+74% yoy), which is to be reported in Nov-16. We also expect FEC to be eligible for the upcoming HK-SZ connect in Nov-16. Potential sale of hotels in next 12 months.

4. Connect AMTD

For the full report, please contact

Important Disclosures: Transactions in the past 12 months

On 31 August 2016, AMTD acted as Joint Bookrunner and Joint Lead Manager on a successful Regulation S US$300mm 5-year senior unsecured notes offering by Far East Consortium International Limited (35.HK). In addition, AMTD also acted as a Joint Dealer on the Company’s debut US$1bn Medium Term Notes Programme establishment.

Legal Disclosures

This article is only a summary (the “Summary”) of a published research report (the “Report”). It only includes part of the comments and views stated in the Report, which has been issued by Research Department of AMTD. The mentioned comments and views such as target price, company profit forecast, industry trend forecast, etc. are based on a series of preconditions and assumptions. Readers should study the full version of the Report issued in details so as to form a thorough understanding on the expressed comments and views.

The Summary is solely for AMTD clients’ information. A person will not be regarded by AMTD as its client solely because he or she receives this Summary. The contents of the Summary will not constitute investment recommendations to any person in any event. AMTD will not assume any legal responsibilities regarding any consequences or losses arising from the direct or indirect use of the Summary, or investment made accordingly.

The extracted valuations, forecasts and ratings in the Summary represents the judgments or opinions formed on the issuance date of the Report. The contents of the Summary may become inaccurate or invalid as a result of changes in circumstances or other factors subsequent to the issuance of the Report. AMTD is not obliged to update inaccurate or outdated information subsequently. Meanwhile, AMTD will not separately inform the readers of the Summary after updates have been made.

AMTD reserves the copyrights of the contents of the Summary. No part of the Report shall be forwarded, modified, quoted, copied or reproduced in any form by any mean to any other person without the prior written consent of AMTD. The Company retains all legal rights in this Report.