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). The annual results was satisfactory, which revenue increased by 19% to HK$1.63 billion, and profit attributable to shareholders of the company increased by 11% to HK$870 million. We update the rating to “Accumulate”. (Closing price at 27 Sep 2019)

Annual result update

Satisfactory results with excellent development of data center business

The group announced its annual results. During the period, revenue increased by 19% to HK$1.63 billion, and profit attributable to shareholders of the company increased by 11% to HK$870 million. Revenue growth was mainly attributable to new customers, especially cloud operators and the increase in revenue from existing customers. The cost of sales increased by 23% to HK$70 million, mainly due to the increase in depreciation expenses and the increase in operating costs for the upfront expenses of new customers. Therefore, the Group's gross profit margin decreased from 58.5% to 57.2%. In addition, the Group's sales and administrative costs as a percentage of revenue were 1.6% and 6%, respectively, down 0.1% and 1.5% YoY.

The data center business of the Group is developing well. MEGA Plus` new customers in this year include major global cloud service operator and a regional video service provider. MEGA-i has added a leading international e-commerce operation. MEGA Two has also acquired a regional internet business group.

The Group's new project in Tsuen Wan has entered the construction phase; the new project in Tseung Kwan O has also entered the pre-construction design stage. We expect the Tsuen Wan project to be completed in 2021 and the first phase of Tseung Kwan O project to be completed from about 2022 to 2023. The GFA will reach approximately 2.8 million sq. ft. In addition, MEGA-i's expansion project is also underway, providing more data center equipment rooms and power supply to meet the higher demands of cloud providers.

Acquiring data center in Sha Tin, while selling investment properties

The Group has announced the acquisition of the entire industrial building in Sha Tin for HK$2.22 billion. Most of the industrial buildings are currently leased and used by the Group for operation data centre MEGA Two. At the same time, the Group's investment properties were sold to the parent company for HK$1.81 billion, including properties in Standard Chartered Tower, Millennium City 1 in Kwun Tong and Kodak House II in North Point. The net cash outflow from the acquisition and sale was approximately HK$410 million. By selling non-operating properties and acquiring data center industrial building in Sha Tin, the Group further concentrated its assets on the data center, which is beneficial to the long-term development.

Relatively high debt-to-equity ratio, yet no reducation in dividend payout

As of June 30, 2019, the Group had a shareholder loan of HK$3.3 billion and a bank loan of HK$4.75 billion, of which HK$2.18 billion was short-term debt. The net interest-bearing debt-to-equity ratio rose to 181%, which was at a relatively high level compared with peers. Although the Group has not reduced the dividend payout ratio, we believe that the Group will have further funding needs as the Tseung Kwan O project commences. Therefore, we maintain the Group's forecast of reducing the dividend payout ratio in the future.

Valuation

Assuming 35x P/E in 2020F, we derive a target price of HK$6.46, up 5.5% than previous TP, implying 33.8x P/E in 2020F. We upgrade the rating to “Accumulate”, with 8.57% potential upside.

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

Click Here for PDF format...