Receive first-hand news on the latest bond issues, credit updates and special events when you join us on our Telegram channel at https://t.me/bondsupermart!
Highlights:
- Leveraging its years of investment management expertise, Sun Hung Kai & Co. established a fund management platform to provide the company with another stable source of income in addition to its credit business. In 2023, the company adjusted its hedging strategy to capture special investment opportunities, effectively narrowing its investment losses.
- The company's balance sheet remains strong, with ample cash reserves, a large amount of financial assets, good leverage and a strong credit profile.
- Currently, the yield to maturity of its 2026 bonds is as high as 8.9%, making it an attractive high-yield option for investors to consider.
Company Background
Sun Hung Kai & Co. (SHK&Co), established in 1969, is a local financial services company in Hong Kong. Its main businesses include credit, investment management, and fund management. The company is currently listed on the Hong Kong Stock Exchange (stock code: 86.HK) with a market capitalization of approximately HKD 4.7 billion.
SHK&Co follows a straightforward business model. Its credit business provides funds for its investment and fund management operations (see Chart 1). Within its credit business, the UA Finance and Sun Hung Kai Credit brand generate stable returns and cash flow for the company by offering unsecured loans, as well as first and second mortgage loans. Leveraging on its years of investment expertise in public markets, alternative investments and real estate, the company further expanded its business to manage third-party funds by establishing a fund management platform, Sun Hung Kai Capital Partners, in 2021. This initiative effectively capitalizes the company's strengths in fund management, providing it with an additional stable source of income while diversifying its investment strategy and business.
Chart 1: SHK&Co’s Business Segments
UA Finance Brings Stable Cash Flow and Investment Management Rarely Dragged Down Profitability
In 2023, SHK&Co generated a revenue of HKD 3.9 billion, representing a 3% YoY decline. The net loss attributable to shareholders was approximately HKD 500 million, indicating an improvement compared to the HKD 1.5 billion loss in the previous year. Yet, its operating performance was in fact quite stable with operating profits reaching HKD 2.4 billion. The poor profitability in the last two years can be attributed to the downturn in the Hong Kong and Mainland China stock markets. It has not been the usual case where the investment management business dragged down the company’s profitability.
The credit business is the primary source of operating profit for the company. It recorded an HKD 1 billion net profit in 2023, marking a 23% YoY decline (see Chart 2). The decline was mainly due to a rise in Hong Kong interbank interest rates exerted pressure on the company's funding costs and impacted the performance of mortgage loans. Nevertheless, SHK&Co’s UA Finance brand has achieved a historic high loan balance in 2023. We believe this core business will continue to support the company's operational cash flow and provide stable returns.
Chart 2: SHK&Co’s Segment Profits
Revamped Investment Strategy and New Fund Business to Provide Another Stable Income Source
Investment management has always been a company's forte. Except for 2018, SHK&Co’s annual investment return has been consistently above 10% since 2015, demonstrating profound investment performance (see Chart 3).
SHK&Co's investment management business posted a total return of -2% in 2023, which is a marked improvement from the previous year's loss of HKD 2.4 billion, albeit at a loss of HKD 1.3 billion. During the year, the company adjusted its hedging strategy and strengthened its real estate speculation, resulting in improved investment performance in both public markets and alternative investments, as well as gains of 3% and 19% in real estate investment and proprietary trading respectively.
In addition, the new fund management business launched in 2021 turned profitable in 2023, generating a profit of HKD 17 million. We believe that this new business could serve as another stable source of income for the company and help mitigate the profit volatility from its investment business.
Chart 3: Investment Management Performance
Healthy Balance Sheet Structure and High Loan Return Rate
SHK&Co's balance sheet remains healthy, with total debt and loan assets (receivable) amounting to roughly the same value and having matching durations (see Chart 4). This implies good risk management capabilities and indicates that the company’s loans from its credit business could be a source of debt servicing.
Additionally, the company's loan return rate is as high as 20.2%, which is much higher than its average cost of financing of about 6.7%. This interest spread provides a safety net for the company, even in the event of an economic downturn that may result in an increase in the non-performing loan ratio.
Chart 4: SHK&Co’s Total Loan vs Total Debt
Sufficient Potential Source of Liquidity and Good Credit Position
By the end of 2023, SHK&Co's total debt stood at HKD 15.0 billion, down 5% YoY (see Table 1). Its net gearing ratio fell from 44% to 39%. At the same time, the company has up to HKD 15.4 billion of financial assets which could be seen as a potential source of liquidity for the company. If we categorize these financial assets as cash and cash equivalents, the company is considered at net cash and good leverage position.
In terms of debt structure, 39% of SHK&Co's debt is its 2 USD bonds maturing in November 2024 and September 2026 while the rest is mainly bank loans. The company has cash reserves of about HKD 6.7 billion on hand, which is sufficient to repay the two bonds with a principal amount of about HKD 5.4 billion (USD 700 million). In addition, given its business is running stably, bank loans are generally not difficult to renew. Hence, its refinancing risk is relatively low and its overall credit profile is decent.
Table 1: SHK&Co’s Credit Metrics
| (HKD billion) | 2021 | 2022 | 2023 |
| Total Asset | 48.8 | 42.9 | 40.9 |
| Cash Reserve | 6 | 5.9 | 6.7 |
| Financial Assets* | 20.7 | 16.4 | 15.4 |
| Total Debt | 18.3 | 15.7 | 15 |
| Total Loan | 16.3 | 14.4 | 13.3 |
| Net Gearing Ratio | 49% | 44% | 39% |
| *Financial Assets include equity securities, bonds, funds, and derivatives Source: Company's report, iFAST Compilations Data as at 31 December 2023 | |||
Bond Investment
The fact that SHK&Co and its bonds do not have a credit rating does not mean that they are of poor credit quality. There are currently two USD bonds issued by the company on Bondsupermart. The two bonds maturing in 2024 and 2026 have yields to maturity of around 6.2% and 8.9% respectively (see Table 2). Given the company's good credit profile and ample liquidity, we believe the default risk on its short- and medium-term bonds is low.
The bond maturing in 2024 has a low yield and is due to mature soon. On the contrary, the bond maturing in 2026 has a high yield of 8.9%, which is an attractive high-yield option for investors to consider.
Table 2: SHK&Co’s Bond Information
Bond | Tenor (years) | Net Yield to Maturity |
0.5 | 6.2% | |
2.3 | 8.9% | |
Source: Bondsupermart Data as of 3 May 2024 | ||
Corporate Risks
SHK&Co is rather dependent on its investment returns as a source of earnings. This means that the company's earnings are affected by its investment strategy. Should company's investment strategy fail or the global economy enters a severe recession, its investment portfolio may face losses. This could result in a decline in its investment assets, which in turn affects leverage and profit levels.
While a cycle of interest rate increases is generally beneficial to the company's credit business, it can also put pressure on the local and mainland economies. Increased interest rates could increase loan defaulting risk as businesses and individuals face higher borrowing costs.
Conclusion
Leveraging its years of investment management expertise, SHK&Co established a fund management platform to provide the company with another stable source of income in addition to its credit business. In 2023, the company adjusted its hedging strategy to capture special investment opportunities, effectively narrowing its investment losses.
The company's balance sheet remains strong, with ample cash reserves, a large amount of financial assets, good leverage and a strong credit profile.
Currently, the yield to maturity of its 2026 bonds is as high as 8.9%, making it an attractive high-yield option for investors to consider.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
Our podcast series, Yield Hunters, is available on Spotify, iTunes Podcasts and Google Podcasts. We share our thoughts on new bond issues and hold discussions on the fixed income space. Listen to our latest episode below and follow us!
