FEH released 1Q21 operating data on 20 Apr, stating its operating income/ net profit grew >30%/~30% YoY, and non-finance leasing business revenue contributed over 30% to total op. income. We think top-line growth was largely in-line with our expectation while bottom-line beat, likely on improved operating efficiency. We expect industrial operation to achieve faster revenue growth than financial business and deliver better profitability in FY21E on recovering demand for healthcare and infrastructure construction post-pandemic, fueling further upward re-rating of FEH. We maintain BUY rating and TP of HK$ 11.10.
- Industrial operations: Equipment/Hospital revenue +>50%/+>30% YoY in 1Q21. Though we believe the stellar growth was partly due to low base in 1Q20 when operation was hit by COVID-19 outbreak, this was also attributable to 1) further expansion of equipment operation (AWP fleet size reached 65k, vs. 55k ended 4Q20, and turnover materials reached 1.4mn tons, vs. 1.3mn tons ended 4Q20), and 2) solid improvement in hospitals’ profitability after consolidation in 2H20. Looking ahead, we anticipate industrial operation revenue to increase 27% YoY (vs. 17% of financial business) in FY21E, largely driven by the rapidly expanding equipment operation business (est. revenue +50% YoY in FY21E), with continuously improving operating leverage. Progress of capitalizing its industrial operation segments could potentially unlock FEH’s hidden value.
- Financial business: stable NIM trend and asset quality. FEH achieved steady growth of interest-earning asset (IEA) growth in 1Q21, retained stable NIM trend (vs. 3.83% in FY20), and at the same time, saw further recovery of its advisory business. As monetary policy normalizes, we expect FEH’s NIM to slightly contract in FY21E. On asset quality front, we believe FEH will continue to allocate more IEA to less cyclical sectors, such as urban public utility, as well as healthcare and cultural & tourism which are welcoming a post-pandemic demand recovery. This will also secure FEH with stable IEA growth in FY21E.
- Maintain BUY. We maintain our earnings forecast and TP unchanged. Our TP of HK$ 11.10 reflects 0.97x FY21E P/B and 7.2x FY21E P/E. FEH now trades at 0.82x FY21E P/B and 6.1x FY21E P/E, both at historical average level.
- Key catalyst: major progress in spin-off IPO of Horizon Construction Development (“HCD”). Key risks: 1) asset quality deterioration; 2) weaker demand for industrial operation.
