AMTD Research - 29 March 2018

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Far East Consortium

Strengthening alliance with The Star

FEC and CTF each will acquire 4.99% of The Star

FEC entered share subscription agreement with The Star Entertainment Group (ASX stock code SGR) in which FEC and Chow Tai Fook Group (CTF) each will subscribe for 4.99% of The Star’s new shares for a consideration of A$245.2m for each. FEC and CTF intend to apply to regulators to increase aggregate stake to over 10%. The consideration would account for around 5.9% of FEC’s NAV and 5.2% of total assets as of Sep-17 and can be easily funded by cash. The transaction is priced at A$5.35 per share which is at 1% premium to The Star’s last closing and 9.6x FY18e (consensus) EV/EBITDA. The Star is to increase the dividend payout ratio to at least 70% of normalized NPAT. We estimate that using FY17 NPAT this would imply a 3.8% dividend yield.

Capturing the booming tourism in Australia

Australia has been an increasingly popular travel destination for Asian tourists. This transaction demonstrates FEC’s strategy in capturing such opportunities. FEC has established its track record in Australia as a residential property developer. The Star and CTF have been long-term partners with FEC through several integrated projects. We view this share subscription as a good opportunity to leverage on The Star’s expertise in operating and marketing casinos and obtain access to The Star’s future development projects. The Star in return, eyes on FEC and CTF’s Asian customer base as potential tourists to its resorts in Australia. Immediate partnership opportunities include The Spit Precinct adjacent to existing Sheraton Mirage Resort at Gold Coast, and Pyrmont Station project in Sydney.

FEC has notably increased resources in the casino segment

Although FEC currently do not have gaming income, FEC has a 25% stake in in Queen’s Wharf Brisbane project (casino, hotel, residential), partnering with The Star and CTF. We noted that FEC recently has significantly increased its resources in the casino business. Recently it acquired Trans World Corporation, which is engaged in hospitality and gaming business in Germany, Austria and Czech. In the next 5 years, we expect to see increasing contribution from gaming revenue. We have not factored in such income in our forecast.

The Star is a leading gaming and entertainment group in Australia

The Star is listed on the ASX with a market cap of A$4.4bn. Its major gaming resorts include 1) The Star Sydney casino since 1994; 2) The Star Gold Coast casino since 1985; 3) The Treasury Brisbane casino since 1995; 4) Queen’s Wharf Brisbane (scheduled for completion in 2022).

Reiterate “BUY” and Price target of HK$5.34 (27% upside); long term player with consistent strategy and deep NAV discount

FEC has established its long-term track record as a residential developer in several overseas markets. We view The Star as a quality partner in helping FEC further expand presence in Australia. We reiterate ‘Buy’ for FEC. We maintain our PT to HK$5.34, which is derived by using sum-of-the-parts method. Current share price implies a 63% discount to our estimated Sep-18 Net Asset Value (NAV).