Wonderful Sky Financial Group - No.1 market leader stepping up the game

AMTD Research initiates coverage on Wonderful Sky (WSFG, 1260.HK) with Buy rating. We identify it as a growth stock with good defensive value. We see deep valuation discount to its peers with dividend yield at 7.0%, and FY17 PE at 8.6x.

Initiated with Buy rating; #1 Financial PR/IR service firm in Hong Kong

Wonderful Sky is the No.1 financial PR/IR firm in Hong Kong, in terms of IPO funds raised by its clients. Through its integrated Five-in-One service platform, the company provides: 1) Financial public relations (PR); 2) Investor relations (IR); 3) International roadshow; 4) Financial printing and 5) Capital market branding services to companies from pre-IPO to post IPO stages. Since its listing in 2012, it has maintained the No.1 position in Hong Kong IPO market with 90% market share in 10M16, up from the average 70% since 2006.

Upgrade into Seven-in-One service to boost recurring revenue

Management plans to further enrich its product offering with 1) ESG reporting, and 2) Strategy consulting services in order to enhance recurring income, boost revenue per client and attract new clients. In addition, it will launch in 2H17 an O2O Wonderful Cloud service platform that aims to facilitate communication between senior management of listed companies and global institutional investors. Figure 1 illustrates the one-stop service Wonderful Sky provides to clients, throughout all listing stages. We estimate that Wonderful Sky has cumulated a long-term client base of c300 listed companies, and 65% of total revenue in FY16 is recurring and non-IPO, up from around 50% before FY11.

Near term growth driven by IPO printing & expansion in A-share market

We forecast core net profit to grow at a CAGR of 16% during FY16-FY19e. The near term earnings growth will be driven by the high margin IPO prospectus printing business and expansion in A-share market. Wonderful Sky entered into the currently fragmented IPO prospectus printing segment. We view the company as a potential consolidator in the IPO printing market given its established dominance in IPO PR/IR services. The company has launched A- share IPO PR/IR service with China Nuclear Engineering being the first client in 2016. The company has also been actively expanding its client base among the New Third Board listed companies, which is an under-penetrated market in terms of PR and IR services.

Strong financial position & high dividend yield adds to defensive value

The company has maintained strong profitability, strong operating cash flows with very limited capex due to asset-light nature of the business. Its gross margin has been stable at c50%, net margin at 30-40% and dividend payout ratio has been kept at 60% since listing. As a result, it has cumulated HK$ 1.1bn in net cash which has been conservatively invested in fixed income assets. Better utilization of this liquidity could potentially provide revenue upside and better risk-reward of investment.

Catalysts: Potentially strong growth in IPO prospectus printing & A-share market; launch of Wonderful Cloud in 2H17

Price target: HK$ 2.98 (43% upside); deep valuation discount

Our PT of HK$2.98 is derived with DCF method, assuming 14.2% cost of equity, 3% long-term growth rate. This implies 12.3x FY17 PE, which is at a deep discount to global peers. The stock is currently trading at 8.6x FY17 PE with 7% dividend yield (Figure 2).

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