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 Group announced its interim results on February 22, and its revenue reached HK$760 million during the period, up 18.5% YoY, while we should see the net interest-bearing debt-to-equity ratio to rise significantly. We derive a target price of HK$5.82. Due to the recent rally on stock price, we downgraded the rating to “Accumulate” with a potential upside of approximately 5.05%. (Closing price at 26 Feb 2019)

Corporate Update

The Group announced its interim results on February 22, and its revenue reached HK$760 million during the period, up 18.5% YoY. However, the gross profit margin decreased from 59.3% to 57.2%, due mainly to the increase in depreciation expenses and the upfront expenses of new customers entering MEGA Plus and MEGA Two. In addition, operating costs as % of revenue also increased, with selling expenses accounting for 1.86%, up 0.05% YoY; administrative expenses as % of revenue was 4.5%, increased by 0.2% YoY. The increase was mainly used to promote new capacity in data centers. The interest expenses from bank loan and other financial costs were HK$26.07 million, and the capitalization amount was HK$18.82 million, representing, a financed expenses of HK$7.24 million. Besides, the increase in fair value of investment properties during the period was HK$90 million. The core profit attributable to shareholders of the company was HK$321 million, a YoY increase of 7.5%.

Compared with our forecast, the Group's revenue growth in the first half of the financial year was higher than our expectation, reflecting that the new capacity of the data center was sold faster than we expected. However, the drop in gross profit margin rate is also faster than our forecast, but the group said that the revenue generated by new customers will show up in the second half of 2019FY, so we are optimistic about the gross profit margin in 2019FY. In terms of operating costs, selling expenses and administrative expenses as % of revenue were slightly higher than our earlier forecasts.

Judicial review

As we mentioned earlier, the Group launched an application for judicial review against Hong Kong Science and Technology Parks Corporation (HKSTPC) in relation to TKOIE. The Group also mentioned this event in its interim results. It believes that HKSTPC has not complied with its policies and not enforced those lease restrictions properly, leading to rampant subletting or third party's occupation inside TKOIE. Hence, the Group launched an application for judicial review to the High Court to seek for clarification. However, the Group did not provide further updates for the case. We believe that the results of the review will have a significant impact on the competitive landscape of data centers in Hong Kong.

Source of funding

The Group announced on December 12 that it had successfully acquired the Tseung Kwan O Data Center site for HK$5.46 billion and stated that the Tseung Kwan O project will be funded from internal and external resources. In this interim results, the group updated that it has obtained two loans from Sun Hung Kai Properties Group and banks, respectively, amounting to HK$3.8 billion and HK$2.18 billion, totaling HK$5.98 billion, which is in line with our earlier forecast of at least HK$5 billion.

We expect the net interest-bearing debt-to-equity ratio to rise significantly from the current 57.3% to 161.9%. We maintain our estimate of a significant reduction in the dividend payout ratio in the future, thus maintaining a 50% forecast dividend payout ratio.

Earnings forecast

In view of the new capacity of the data center being sold faster than our forecast, we have lift the revenue growth forecast of 2019/2020FY to 10.7%/10.4%. Meanwhile, we slightly lowered the gross profit margin of 2019FY by 0.1%, reflecting that the gross profit margin fell slightly faster than expected. In addition, we lift the selling expenses of 2019/2020FY to 1.8%/1.7%, which was an increase of 0.2%/0.2% from the previous forecast; the administrative expenses of 2019/2020FY both increased by 0.1% to 4.5%. Finally, we slightly lower our forecast on interest expenses, because the amount of interest capitalization is larger than our expectation.

Valuation

Assuming 36x P/E in 2019F, we derive a target price of HK$5.82, up 2.6% than previous TP, due to the new capacity of the data center being sold faster than our forecast, implying 33.5x P/E in 2020F. As the stock price has rallied recently, we downgrade to the rating to “Accumulate”, with 5.05% potential upside,

Risk

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

Financials

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