| 2015 | 2016 | ||||||
| Price: | 12.00 | EPS | 1.2 | 1.3 | |||
| Shares Out. (in M): | 1,899 | P/E | 10.5 | 9 | |||
| Market Cap (in $M): | 23,130 | P/FCF | - | - | |||
| Net Debt (in $M): | 8,705 | EBIT | 0 | 0 | |||
| TEV (in $M): | 40,610 | TEV/EBIT | - | - | |||
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*** Please note statistics are in HK$ unless otherwise specified. 1US$ = HK$7.8 ***
Executive Summary:
Shenzhen International (152 HK) is a mispriced value stock that has a portfolio of businesses, which provide investors several ways to win. At its stock price of HK$12, Mr. Market is valuing the company at its 10x PE as a boring "toll toll" road business and an asset play, which mask the growth catalysts underlying its logistics business.
The company has 3 key businesses, which have all been consistently profitable and each of them very interesting on their own in the current low interest rate environment. First, the core toll roads business is generating recurring and prodigious free cash flow (FCF) and is a business with strong visibility due to long-term concession rights. Second, logistics parks business with median occupancy rates of nearly 96% is witnessing a very long tailwind of demand for quality logistics and warehouse from e-commerce, warehousing companies and delivery companies in China. This provides investors a “cheap” way to buy into the demand from e-commerce companies in China. Our confidence in SZI’s logistics strategy resides in: 1) strong industry expertise; 2) balance sheet strength with free cash flow from toll roads business; and 3) first-mover advantage with a successful track record. Third being the company's 49% stake in Shenzhen Airlines, which is benefitting from plunging commodity/fuel prices and booming tourism.
Even ignoring the logistics growth story, Shenzhen International (HK 322) at its current valuation offers additional margin of safety as the company has potential for unlocking value from existing assets and land parcel recorded at cost via redevelopment as some of their logistics parks are in excellent locations. Finally, management have been actively divesting non-core investing like CSG, demonstrating that they are value-oriented. And yet the earnings multiple on the stock is just 10x earnings, ignoring the underlying asset value which enhances the margin of safety.
Why is Shenzhen International (HK 152) Worth Your Attention?
· Toll roads business is recurring FCF generative business with attractive IRR in current low-rate environment
o Toll road operations span Shenzhen region, Guandong Province and other provinces through investments in Longda, Wuhuang and Shenzhen Expressways. Long-term concession rights, average of nearly 14 years remaining
o Significant recurring FCF generation and attractive IRR in low interest rate environment. Future maintenance capex is minimal and management deploying excess cash flow into high growth logistic parks business.
o Segment contributes 80% of total revenues. Revenues is derived from owing equity interest in projects: i) Longda Expressway: 89.93% equity interest, ii) Wuhuang Expressway: 45% equity equity interest (with remaining owned by Shenzhen Expressway), iii) Shenzhen Expressway: 50.89% equity interest.
o In 2014, Meiguan Expressway adjustment agreement contributed one-off gain of HK $730mm to net profit to shareholders
o Net margins have expanded from 17% in 2010 to 23.4% in 1H 2015.
o Toll Road Catalysts: Increasing traffic volume, toll revenue and auto ownership due to urbanization.
· Logistic parks has huge growth tailwind with 96% average occupany rates due to huge demand from e-commerce, warehouse and delivery companies. Consensus has ignored this at current valuation.
o Existing 6 logistic parks witnessing strong demand from e-commerce, warehouse and 3PL companies in China. High occupancy rates of 96% with increased economies of scale and consistent margin expansion over the last 5 years
o Logistics segment contributes approx. 17-18% of the revenues and has been consistently profitable with expanding net margins (15.6% in 2010 to 17.4% in 1H 2015)
o Upcoming integrated urban logistics hub with planned site area of 2.55mm sq ft, provides long tailwind of growth due to strong demand, shortage of supply, strong SOE background due to 43.9% ownership by SASAC, government policy and proven operational expertise
o Shenzhen Qianhai land asset value recorded at cost on book, conservatively worth multiples higher
o Logistic Park Catalysts: increasing e-commerce demand and supportive government policy. Increasing earnings will lead to re-rating.
o Refer to PDF page 5 for logistics hub planned site and timing for upcoming parks: http://www.szihl.com/uploadfiles/2015/08/201508271532533253.pdf
· Other financial investments, include 49% stake in Shenzhen Airlines benefits from low fuel prices and booming tourism. Stake disposal of non-core investments, CSG shares highlight value-oriented management and focus on logistics growth
o 49% stake in associate, Shenzhen Airlines benefits from low fuel prices and tourism. 159 passenger aircrafts and 185 routes, including 167 domestic routes.
o Sharp reduction in fuel prices, fuel cost substantially decreased by 30% in addition to the stable RMB exchange rate during the period
o CSG share disposals over last few years demonstrate focus on logistics growth and shareholder-oriented management. Divestment continues to maximise the group and shareholder value. The company has realized a gain of approx. HK$263mm, HK$106mm and HK$42.67mm in 2011, 2013 and 2014 respectively through disposals of CSG.
o The Group still owns approx. 70mm CSG A and shares are freely tradable on the Shenzhen Stock Exchange. CSG manufactures glass and ceramic materials and is publicly listed on the Shenzhen Stock Exchange (000012 SS).
o Non-core investments catalyst: Lower fuel/commodity prices, disposal of CSG shares.
At Current Share Price and 10x PE, Mr. Market Overlooks Business Transformation Into Logistics Play, Core Toll Roads is FCF Generative and Asset Value Unlocking Potential
· At HK$12, Shenzhen International has a market cap of US$2.9bn. At current valuation, the market is valuing Shenzhen at an undemanding 10x PER ignoring growth.
o At current valuation, Market is not valuing logistic parks business which offer long-tail wind of growth. Since SZI’s first investment in a logistics center at Shenzhen Airport in 2000, it has successfully developed 5 logistics parks in Shenzhen, Nanjing, and Shandong. All of them are profitable and witnessing margin expansion due to economies of scale and high occupancy (median of 96%). Based on our research, we believe the company will surprise investors with its earnings potential and given the logistics business will be re-rated at a higher multiple of atleast 15-18x earnings over 12-18 months
Potential for Unlocking Value of Fixed Assets
Shenzhen International (HK 322) at its current valuation offers additional margin of safety as the company has potential for unlocking value from existing assets and land parcel recorded at cost via redevelopment as some of their logistics parks are in excellent locations. For instance, we summarize the progress made on the following projects, which we believe should serve as potential catalysts to the stock price:
o Meilin Checkpoint Urban Revival Project: Signed land agreement in June 2015 and acquired the land use right as planned. The land parcel is adjacent to the Futian District in downtown Shenzhen as a functional development area and a key development zone in the city center. The land parcels have been re-designated as a comprehensive development project with GFA of 486,000 sqm, comprising of residential, commercial, offices etc. Property prices in Shenzhen have increased 20% in 1H 2015 and enhance value of the asset.
o Qianhai land development: The company owns a plot of land within Shenzhen’s Qianhai Development Area that has strong potential for value appreciation. Recorded at cost of approx. 700 RMB per sq m. If one values Qianhai land at HK$10,000 per sqm, which is conservative, fair value is HK$3.8bn. The company is actively liaising with the government to drive the execution of a framework in relation to the land consolidation & preparation of Qianhai Project and to commence the Shenzhen International Qianhai Intelligent Hub.
o Expressway buybacks: The Shenzhen government is looking to buy back more expressways from existing operators to facilitate ongoing urbanization activities. SZI's Longda Expressway and expressways under SZI's subsidiary could be potential targets for the buybacks. Similar to the Meiguan Expressway transaction in 2014, the government could pay a premium to acquire the existing concessions from the operators to open the roads for free public use. If they materialize, such transactions would imply significant disposal gains with strong cash inflows to the group, allowing it to reduce leverage and pay special dividends
References:
· 2015 Interim Results: http://www.szihl.com/uploadfiles/2015/08/201508271249534953.pdf
· 2014 Annual Presentation: http://www.szihl.com/uploadfiles/2015/03/201503271513451345.pdf
· Historical Annual Reports: http://www.szihl.com/nb/list_73.aspx
Disclaimer: The write up is not investment advice or a recommendation or solicitation for any fund or to buy or sell any securities now or at any time. The author and related persons may hold a position and make no representation that it will continue to hold long or short positions in the securities and disclaims any obligation to notify the market of any changes. The author and related persons may change its views about or its investment positions at any time, for any reason or no reason. This includes buying, selling, covering or otherwise changing the form or substance of its investment. The author disclaims any obligation to notify the market of any change. The information and analysis presented is based on publicly available information through filings, sell-side research, industry analysts and/or company or otherwise sourced. The author recognizes that there may be non-public information in the possession of the company or others that could lead the company or others to disagree with the author's analyses, conclusions and opinions. Any forecasts or estimates should not be relied upon (not the least due to the disclosure) and could turn out to be incorrect. While the author has tried to present the facts it believes are accurate, the author makes no representation or warranty, express or implied, as to the accuracy or completeness of the write up, and expressly disclaims any liability relating to the write up or such communications (or any inaccuracies or omissions therein). Thus one should conduct their own independent analysis before independently considering a position in securities. Except where otherwise indicated, the write up speaks as of the date, and the author undertakes no obligation to correct, update or revise the write up or to otherwise provide any additional materials.
Each of the company's 3 businesses have catalysts:
There is also potential for asset value unlocking of logistic parks/land parcel which is currently recorded at cost.
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