Initiate with BUY rating and TP at HK$ 10.4. We believe the industry-leading position of its equipment and hospital operation business, together with its strategically focused sectors in leasing business has made FEH less cyclical and well positioned to welcome a post-pandemic recovery. We expect a 12%/9% revenue/net profit CAGR over FY19-FY22E led by industrial operation (26% revenue CAGR). We think the current valuation is undermining its achievement in industrial operation; the potential spin-off listing of its equipment operation arm could help reveal this hidden value. Our SOTP-derived TP of HK$ 10.4 implies 0.97x FY21E P/B and 7.2x FY21E P/E.
- Industrial operation business: Time to harvest. FEH has achieved rapid expansion in industrial operation by leveraging its deep knowledge gained from 20+ years’ experience in leasing business. Specifically, the Company now owns the largest equipment rental company, HCD, in China, and will effectively benefit from fast penetration of AWPs and robust infrastructure investment ahead. We also see ongoing integration of its hospital mgmt. to lift its revenue and profitability. We expect gross revenue/gross profit contribution from industrial operation to reach 34%/25% in FY22E from 27%/16% in 1H20.
- Financial business: Less cyclical focus to support expansion. Through strategically focusing on nine major sectors, FEH has been maintaining decent NIM and asset quality trend through proactively managing its IEA portfolio. The normalizing monetary policy will potentially favor FEH’s yield trend and asset growth as corporates may seek leasing for bank loan alternatives and liquidity facilitation. We expect more allocation to less cyclical sectors, i.e. urban public utility, healthcare and cultural & tourism can help with a stable asset quality ahead.
- Initiate with BUY. We expect FEH’s net profit will reverse to 2% YoY growth in FY20E from 8% YoY decline in 1H20, and grow at a CAGR of 9% during FY19-FY22E, backed by steady expansion of leasing business and robust growth of equipment operation and hospital management. We expect its ROE to bottom out from 13.9% in FY20E to 15.2% in FY22E. We derive our TP of HK$ 10.4 from SOTP method, applying 0.85x FY21E P/B to leasing business, a 10x FY21E P/E to industrial operation and 80% valuation discount. Our TP reflects 0.97x FY21E P/B and 7.2x FY21E P/E and implies 26.8% upside. Key catalyst: progress in IPO of HCD. Key risks: 1) Asset quality deterioration risk; 2) regulation risks; and 3) contracting demand.
