20090105 Macquarie China Everbright (Outperform)
All cashed up and raring to go
Event
We review China Everbright Limited’s (CEL) earnings and NAV outlook after the year end. We expect NAV would have fallen 17% HoH (21% YoY) and 2H08 earnings would be c.70% below 1H08. Continued difficult market conditions would mean a tough 1H09, but investors should take advantage of this to position for a market upswing in 2H09. We retain our OP recommendation with a new target price of HK$12 (previously HK$18).
ImpactValuation looking attractive: We value CEL using a sum-of-the-parts model. If we assume the HK business is valued at book and a stake in China Everbright Bank (CEB) at 1.3x book, the current implied value of the stake in China Everbright Securities (CES) is just 6.9x 2009 PER, compared to its peers at over 15.5x.
Credit risk replaces market risk as the determinant of NAV: The reduction in 2H08 NAV means that book value in HK should be relatively secure, with less than 29% of assets now classified as ‘market sensitive’ (43% at end June). The biggest risk to NAV now lies with the impact of deteriorating credit quality on the value of the CEB stake (16% of CEL’s total assets). Below 5% NPLs, there is limited impact but more than 15% NPLs, would see the investment wiped out. Note that we currently see even 5% NPLs as an outlier.
Near-term sentiment driven by market volumes and level but also an opportunity: Sentiment towards CEL is driven by market volumes and market levels. Our China strategist, Michael Kurtz expects both to suffer a set back in the near term before recovering later in 2009. This will impact CES’ near-term peer valuations and earnings outlook. However, it also provides CEL with an opportunity to invest; CSOF2 and the acquired Lehman Brother’s property team are doing just that, with possibly US$200–250m invested in the next 12 months.
Earnings revision
We have lowered earnings estimates in 2008 to reflect lower investment realisations and some asset impairment.
Price catalyst
12-month price target: HK$12.00 based on a Sum of Parts methodology.
Catalyst: Market recovery, 3Q09 IPO of CES and CEB
Action and recommendation
The expected dip in market activity and sentiment will provide an excellent opportunity to invest in CEL, as both business and rating are expected to benefit from any recovery. Were the market just to revalue China Everbright in line with peers currently, the stock would be worth at least HK$14/sh. We reiterate our OP recommendation