2 FAR EAST CONSORTIUM INTL [35.HK, HK$3.42, NOT-RATED] FUTURE READY, THE BEST IS YET TO COME Analyst: Rachel Chui, Tel: ) Stay calm and carry on from traditional family business to modern professional management Far East Consortium International Limited (Far East) is a conglomerate with property development, hospitality and car-parking ventures in Mainland China, Hong Kong, Malaysia, Singapore, Australia, New Zealand and the United Kingdom. Its shareholding structure is shown in Figure 1. In 2008, the traditional family management brought in professional managers to expand the business. On top of defensive businesses in Hong Kong and Mainland China (hotels, car parks and leasing), they marched into the more dynamic property development industry all over the world (Singapore, Malaysia, Australia, New Zealand and the UK). Due to the project cycle of this business, the harvest season commenced only recently. Far East Consortium INTL [35.HK, HK$3.42, Not-rated] January 19, 2017 As at Sept 30, 2016, Far East s net debt was HK$6,679m; total equity was HK$10,429m; net gearing was 64.0%; its hotel revaluation surplus was HK$10,732m; and its adjusted gearing ratio was 31.6%. The stock is trading at 6.4x FY17E PER based on consensus. The full-year dividend is expected to be no less than last year s (~5% dividend yield). Far East is included in SZ-HK Stock Connect, which may attract more Mainland investors in the future. Think globally, act locally proven track record and strong allies in Australia In Australia (Figure 3), rapid development is preferred. Once a piece of land is purchased, planning and construction are launched immediately. This strategy ensures a predictable investment return cycle. A natural hedge is applied to cope with FX risk, and all construction debt is in local currency. Additionally, in Australia there is no 30-month presale limit as in Hong Kong, which means residential units can be sold any time after project commencement. An earlier presale record can be expected, and a longer period is allowed for sales. This helps the developer meet its sales target for the project. Far East signed a memorandum of understanding with The Star and Chow Tai Fook Enterprise involving casino sites with substantial residential development potential in Sydney and Gold Coast, with planning approval in progress. Far East is providing 25% of the capital for the commercial development and 50% of the capital for the residential development. The grand opening of these sites is expected in 2022; the presale of the first batch of residential units is expected in Visible project pipeline: Well-trodden path for revenue growth The robust presale figures for property development will contribute to a solid part of the Company s future revenue. As shown in figure 2, the gross profit from property development is an increasingly important part of total gross profit. Revenue from sales of properties in 1H FY2017 stood at HK$1,960m, up 120%YoY; the FY2017 figure is expected to be over HK$3,000m. Total revenue in 1H FY2017 climbed to HK$3,000m, up 59% YoY; FY2017 is expected to be HK$5,000-6,000m. In 1H FY2017, net profit attributable to shareholders rocketed to HK$681m, up 158%YoY, mainly because of the completion of development projects in Melbourne, Hong Kong and Shanghai. As at Sept 30, 2016, the Company achieved record-high cumulative presales of HK$9.8bn. Its 2017 interim dividend was HK$3.5 cents. EPS was HK$ 32.0 cents, up 133.6% YoY. The remaining business has stable recurring income and acts as a foundation for substantial future growth. The not yet recognized presale value of the projects is HK$9,767m (figure 4). Market Cap: US$ 978.0m; Free Float:: 45.2% FY ended on March A 2016A 2017E 2018E 2019E Revenue (HK m) 5,110 3,995 5,528 6,748 9,348 Operating profit (HK m) 1,217 1,027 1,732 2,058 2,674 EBIT margin 23.8% 25.7% 31.3% 30.5% 28.6% Reported net profit (HK m) ,161 1,230 1,723 Adjusted net profit (HK m) ,315 1,398 2,058 Adjusted net margin 13.4% 15.6% 23.8% 20.7% 22.0% Adjusted EPS (HK$) Dividend (HK$) Payout ratio 44.4% 51.6% 32.7% 31.9% 29.6% ROE (%) Dividend yield (%) PER (x) PBR (x) Source: Bloomberg consensus The potential sales value of the development project pipeline is HK$28,607m, (figure 5). The Company managed 76,204 car-park bays as at Sept 30, 2016; it added around 5,200 bays in 1H FY2017. On Dec 23, 2016, it added another 1,500 car park bays in the UK. In general, the yield of purchased projects is expected to be 8-9% and to increase to around 12% after improvement. As for hotels, as at Sept 30, 2016, it had 6,000 rooms under management; around 700 new rooms are expected to be in operation in FY2017, with the opening of one hotel in Hong Kong and one in London. Figures 6 and 7 demonstrate the growth in the number of hotel rooms and the development pipeline. Risk factors: (1) FX rate risk; (2) regional property price fluctuations; and (3) uncertainty about the occupancy rates, hotel tariffs and car park fees. Recent news 1. The last fund-raising exercise on Sept 8, 2016 raised US$300,000,000 in 3.75% notes due in 2021 (Stock Code: 4310). This reflects the Company s credibility and market confidence in the Company. 2. On Jan 12, 2017, Dorsett Hospitality International Limited and Dorsett Hospitality International Services Limited, both wholly owned subsidiaries of the Company, entered into Heads of Terms with Golden Wheel Jasper Company Limited in relation to the Proposed Sale of a hotel involving the sale of shares and the assignment of a sale loan, and subsequent management of the Silka West Kowloon Hotel. The amount involved has not yet been announced. The book value of the hotel is HK$109m and the capital value is HK$394m.
3 Figure 1: Shareholding structure *Note: Mr. Deacon Te Ken CHIU passed away on 17 March 2015; his interests in the ordinary shares of the Company forms part of his estate. Sources: HKEX Figure 2: 1H FY17 and 1H FY16 gross profit comparison Figure 3: 1HFY17 total revenue by location and business segment
4 Figure 4: Not yet recognized presale value (HK$ M) Total presale value not yet recognized: 9,767 Figure 5: Potential sales value of development project pipeline (HK$ M) All potential sales value: 28,667
5 Figure 6: Number of hotel rooms from FY06A to FY22F Note: The Silka West Kowloon has not yet excluded from the table as the transaction has not been completed yet. Figure 7: Hotels in the Development Pipeline