A New Business Driver Is Coming Soon for Sun Hung Kai & Co.

Note: An earlier version of this article was first published on our affiliates' website on 8 October 2021.

Highlights:

• Sun Hung Kai & Co. performed well in 1H2021, mainly driven by the massive gains in investment management. The new funds management is expected to act as a catalyst for future growth.
• The company's financial position remained stable and liquid during the period, and its net gearing ratio continued to improve year by year.
• Investors may consider its newly issued bond due in 2026 which offers around 4.7% net YTM.

Sun Hung Kai & Co. (Stock Code: 86.HK) delivered very strong results in 1H2021 and its financial position also remained stable. In this article, we will provide an update on its business overview and introduce its bonds.

Business Overview

Despite continued volatility in the financial market, Sun Hung Kai & Co. had a very strong performance in 1H2021. The company's revenue was approximately HKD 2.1 billion, and the attributable profit sharply increased 287% YoY to HKD 2.7 billion which was mainly driven by the significant gains in the investment management.

Table 1: The profit before tax by segment

During the period, most of the profits were contributed from the investment management business, and its investments are divided into: alternative investments (external hedge funds and private equity), public markets (credit and corporate holdings), and real assets, accounting for 66% and 22% and 12% respectively. Due to the successful exits from several flagship investments in healthcare and TMT sectors, the pre-tax profit of investment management business substantially increased 430% to HKD 2.3 billion in 1H2021.

For consumer finance business, due to higher loan business demand and lower credit impairment in the first half of the year, the company's subsidiary UA Finance recorded a 67% YoY increase in pre-tax profit. Specialty finance business recorded a loss due to the increased impairment provisions. Meanwhile, the mortgage loan business operated by Sun Hung Kai Credit was less profitable than the same period last year.

Sun Hung Kai & Co. has gradually transformed into an alternative investment company these years. It shows that the company intends to focus on its investing business in the future, supplemented by its stable financing business, and the newly established fund management platform (SHK Capital Partners) will be seen as the company's future growth driver. Currently, five partnerships have been established on the platform such as East Point Asset Management, E15VC, ActusRayPartners, etc., and it is planned to be launched in the second half of 2021. The fund management platform mainly serves institutional investors and family offices, and it is expected that it will generate more income for the company.

Credit Overview

As of 30 Jun 2021, the company's total asset increased 8% to HKD 47.7 billion while total liabilities increased 6% to HKD 19.2 billion.  The liabilities to assets ratio was kept at around 40%; financial position remained stable.

Table 2: Financial Indicators

As the company has completed the redemption of its USD 250 million notes in the first half of this year, as at the end of June, the company's net gearing ratio had fallen from 54.1% in 2019 to 39.2%, indicating a healthier leverage level. And due to a significant increase in earnings, the interest coverage ratio sharply raised to 10 times, which shows that the company has strong ability to pay its interest expenses.

As at the end of June, total borrowings of the company amounted to HKD 15.7 billion, of which 45% was repayable within one year. The total cash reserve amounted HKD 5.8 billion and the financial assets amounted HKD 6.7 billion. Its current ratio was 2.3 times, showing that the company's liquidity remained comfortable.

In addition, the company issued a five-year bond worth USD 375 million recently in September for refinancing and general corporate use. The newly issued bond was oversubscribed for six times, clearly highlighting the company's strong financing ability.

Bond Review

For bond investment, there are three Sun Hung Kai & Co. USD bonds, maturing in 2022, 2024 and 2026 respectively. Sun Hung Kai & Co. and its bonds are non-rated, and bond investors should understand that being non-rated does not necessarily imply credit problems.

Table 3: Sun Hung Kai USD Bonds

It is noted that the newly issued bond due in 2026 has a longer investment period with higher YTM. Taking into account the decent credit quality of bond issuers and the current low interest rate environment, we believe that these bond yields are suitable for investors with low investment risk appetites, so that it balances the risks of an investment portfolio.

Corporate Risks

The two primary businesses of Sun Hung Kai & Co. are consumer finance and investment management business. Besides the inherent risks in the financial service industry, investors should pay extra attention to the major financial risks in the company's investing business, which include market risk, credit risk and liquidity risk. While the company's biggest business is personal loan business, it mainly provides unsecured loans for individuals and SME. The business is similar to micro credit in mainland banks that have a higher interest but at the same time also a higher bad debt rate.

In other words, it is a high-risk-high-return business. In addition, the company's investing business is affected by factors such as the macroeconomic and financial markets, altering the market value of the investment assets.

Conclusion

Sun Hung Kai & Co. delivered a very strong performance in 1H2021, mainly driven by the significant gains in the investment management. The new funds management is expected to act as a catalyst for future growth. The company's financial position remained stable with a high liquidity during the period, and its net gearing ratio continued to improve year by year. Investors may consider its newly issued bond due in 2026 which offers around 4.7% net YTM.

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