【AMTD Research】 Initiation of Coverage: Far East Consortium
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
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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.
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