Investor Notes - Phillip Securities (HK) Ltd

31 May, 2019 (Friday)

CHINA EDU GROUP(839)
Analysis：
Being the largest listed higher and vocational education provider in China in terms of student enrollment, China Education Group (839) has formulated its merger and acquisition strategy to achieve its growth target. For the six months ended 28 February 2019, the Group recorded revenue of RMB927 million, representing an increase of 71% over the same period in 2018. Net profit increased 34% to RMB343 million. Thus far, its M&A team has already reviewed over 200 potential M&A targets and some of them are in due diligence process. It is expected more schools will join the Group in the future. (I do not hold the above stock)
Strategy：
Buy-in Price: $11.80, Target Price: $13.20, Cut Loss Price: $11.00

FLAT GLASS(6865)
Analysis：
Flat Glass is the world`s second largest PV glass manufacturer, and by the end of 2017, the company accounted for 20% of the global share. At present, the company has a PV glass production line with daily melting capacity of 4,000 tons and a float glass production line of 1,200 tons per day. The production bases of the company are located in Jiaxing City, Zhejiang Province, and Bengbu City, Anhui Province. In addition, the PV glass production base in Haiphong, Vietnam is also under construction. About 60% of the products are sold in the domestic market, and 40% are exported to countries such as Japan/South Korea/Malaysia/Vietnam/India. At present, the company has sufficient orders.
Strategy：
Buy-in Price: $4.00, Target Price: $5.00, Cut Loss Price: $3.50

ETFMG Prime Mobile Payments ETF ( IPAY )
ETFMG Prime Mobile Payments ETF is the first and only ETF to track the performance of the mobile payment industry, with market cap of approximately USD 489.90 million and expense ratio of 0.75%. IPAY ETF passively tracks the performance of the Prime Mobile Payments Index. Some of the top 10 holdings include MasterCard Inc., Visa Inc., Square Inc., PayPal Holding Inc. and Adyen NV. IPAY ETF is a thematic ETF which enables investors to capitalize on the shift from credit card & cash transactions to digital & electronic. There are several factors supporting the growth of the industry. First, the penetration rate of smartphones has increased greatly over the past few years due to affordable prices for customers. With the evolving global 4G connection, thousands of smartphone users can make electronic payment conveniently. Besides, the adoption rate of mobile payments in emerging market is huge. Particularly, consumers in china embrace mobile payments at a faster rate than rest of the world According to a PWC report, the current share of Chinese Internet users making mobile digital payments is about 68 % compared to that of the US ( about 15% ). Chinese consumers appreciate the convenience from mobile payment and don`t concern its data privacy & security issue as the American consumers do. The explosive growth of global e-commerce business helps promote the use of mobile payment as well. Not only online retail, it is expected that mobile payment will increase its penetration rate towards other areas of our daily life such as financial and healthcare area. According to Allied Market Research, the global mobile payments market reached $601.3 billion in 2016, and is expected to reach $4,573.8 billion by 2023, registering a CAGR of 33.8% from 2017 to 2023. Suggested to buy at $44.31, target price $49.27, cut loss if drop below $42.18.

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 31-5-2019
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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