Investor Notes - Phillip Securities (HK) Ltd

29 May, 2019 (Wednesday)

SINO BIOPHARM(1177)
Analysis：
Sino Biopharmaceutical`s (1177) products comprise a variety of biopharmaceutical and chemical medicines for treating tumours, liver disease, cardio-cerebral diseases, analgesia, respiratory system diseases and orthopeic diseases. The Group continues to focus on developing specialized medicines where its strength lies so as to build up its brand in specialist therapeutic areas. For the three months ended 31 March 2019, the Group recorded revenue of RMB6.2 billion, an increase of 33.4% over the same period last year. Underlying profit attributable to shareholders was RMB976 million, 22.4% higher than that of the same period last year, implying that macro economic uncertainties and the implementation of centralized drug procurement in 4+7 cities by the Chinese government so far had no adverse impact on its operating results. (I do not hold the above stock)
Strategy：
Buy-in Price: $7.75, Target Price: $9.00, Cut Loss Price: $7.20

CHINA TOWER(788)
Analysis：
China Tower`s annual revenue reached RMB 71.819 billion, up 4.6% year-on-year; net profit increased by 36.4% year-on-year to RMB 2.50 billion. Domestic mobile phone manufacturers such as Huawei and Xiaomi have said that they will launch new mobile phones soon. The 5G landing time is getting closer and closer, and the demand for base station construction will increase accordingly.
Strategy：
Buy-in Price: $1.78, Target Price: $2.25, Cut Loss Price: $1.53

Toyota (7203.JT)
Toyota was established in 1937. Centring on the automobile business, company also carries out finance and other businesses. In addition to automobiles such as sedans, minivans, 2BOX, sports utility vehicles, trucks, etc. and their related parts and supplies, company also offers automobile sales finance, housing, and pleasure boats, etc. In the group corporation, there are Hino Motors and Daihatsu Motor. For FY2019/3 results announced on 8/5, net sales increased by 2.9% to 30.2256 trillion yen compared to the previous period, operating income increased by 2.8% to 2.4675 trillion yen, and net income decreased by 24.5% to 1.8828 trillion yen. Efforts in their operations and cost improvements have contributed. Unrealised equity securities evaluation loss of 293.7 billion yen, along with the reaction from the decrease in corporation tax following US tax reforms have eventually led to a decrease in profit. For FY2020/3 plan, net sales is expected to decrease by 0.7% to 30 trillion yen compared to the previous year, operating income to increase by 3.3% to 2.55 trillion yen, and net income to increase by 19.5% to 2.25 trillion yen. FY2019/3 has seen improvements in both major markets, the US and China. North America has seen a shift towards an increase in business profit since 4 terms ago. Lexus is doing well in China, and number of retail units have grown by 14.2%. Recommend to buy at ¥6,400, target price ¥7,200, cut loss if drop below ¥6,000.

SUNeVision (1686.HK) - Robust growth of Cloud services lead to new demand to the high tier data centers

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). Robust growth of Cloud services lead to new demand to the high tier data centers, and the Group has a clear plan on supply for short, medium and long term. Therefore, we believe it will benefit from the rising popularity in cloud services. We derive a TP of HK$6.12. Due to the recent rally on stock price, we downgraded the rating to “Hold”. (Closing price at 27 May 2019)

Robust growth of Cloud services lead to new demand to the high tier data centers

As the cloud services became mature in US, it is gaining popularity in Asia. Not only individual users, but also corporate users are open to this kind of services. According to Gartner, the market size of IaaS, PaaS and SaaS will reach 76.6, 31.8 and 143.7 bn USD in 2021F, representing a CGAR of 25%, 19% and 15%. Besides, the IT infrastructure has to be set up well before the cloud services became popular. As a result, the massive demand on data centers actually arrives before the popularity in cloud services. Moreover, in order to provide services in a high quality, cloud service providers will require a high tier data center which could provides high power density, high uptime and long power provision. Although there a number of data centers in the market, those high tier data centers are the one which could attract the cloud service providers moving in.

Mega Plus is a tier 4 data center, and the attractiveness of Mega Two and Mega-i to cloud services providers could be enhanced after the expansion and optimization work. The power density can lift by 40% after the optimization work. Besides, the new data center for the new project in Tseung Kwan O is believed to be a high tier data center, implying the group will be able to enjoy the robust growth of cloud services.

Clear plan on supply for short, medium and long term

In light of the data center industry characteristics of heavy assets, the supply takes time to build up, meaning the Group needs to prepare in advance to ensure the growth in the future even if there is a massive demand on data center coming later on. We see the Group has a clear plan on supply for short, medium and long term.

Regarding the short-term supply, the occupancy rate of Mega Plus is about 50% since the opening on Oct 2017. Based on the current progress, Mega Plus will be full in around 2021. Besides, the expansion and optimization work at Mega Two and Mega-i is expected to enhance the capacity of the Group.

In relation to medium and long term, the Group expects the project in Tsuen Wan will be finished in 2021-2022, while that in Tseung Kwan O in 2022-2023, but in several phrases.

Based on the projects on hand, we believe the supply from the Group will be able to meet the future demand, so it ensures the growth in the future.

The drop in GPM due to the pre-move-in expenses

The GPM of the Group dropped since 2016. Although we believe the drop was partly attributed to the more intensified competitive landscape, part of the drop was caused by the pre-move-in expenses. Before the clients move into the data center, the Group has to set up the equipment, such as UPS or air-conditioners. The equipment starts depreciating once they are ready, but the Group will receive no income until the client moving in. Therefore, the GPM will reduce during this period, but will resume to the normal once the clients move in. Currently, the occupancy rate of Mega Plus was around 50%, meaning the aforementioned situation will be very likely to continue in the future, so we expected the GPM will suffer a downward pressure.

Earnings forecast

In view of the new capacity of the data center being sold well, we have lift the revenue growth forecast of 2019/2020FY to 16.4%/14.5%.

Valuation

Assuming 36x P/E in 2019F, we derive a target price of HK$6.12, up 5.2% than previous TP, due to the new capacity of the data center being sold well, implying 32.2x P/E in 2020F. As the stock price has rallied recently, we downgrade to the rating to “Hold”.

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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Recommendation on 29-5-2019
Recommendation	Hold
Price on Recommendation Date	$ 6.600
Suggested purchase price	N/A
Target Price	$ 6.120

Writer Info

Terry Li
(Research Analyst)

Tel: +852 2277 6527

Email:
terryli@phillip.com.hk

Enquiry : 2277 6666 OR investornotes@phillip.com.hk
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