FEH reported FY20 net profit of RMB 4.7bn, up 5% YoY, 4%/1% higher than CMBIS/consensus estimates. Top-line came in above expectation at RMB 29.0bn (+8% YoY) mainly on higher IEA growth and wider NIM expansion, as well as better hospital and equipment operation income. We expect industrial operation to increase 27% YoY (vs. 17% of financial business) in FY21E on recovering demand for healthcare and infrastructure construction post-pandemic, and fuel further upward re-rating. We raise FY21E-22E earnings by 5-6% and lift our SOTP-derived TP to HK$ 11.10. Reiterate BUY.
- Equipment operation: scale-up enhanced market leadership; potential spin-off listing of HCD earliest by YE FY21E. FEH’s equipment operation achieved 40%/29% YoY of revenue/PAT in FY20, as the Compa.ny enhanced its leading position by further asset and network expansion, i.e. AWP fleet size (55k, +175% YoY), turnover materials (1.3mn tons, +44% YoY) and outlets (207, +40% YoY). We expect this business to continue scaling up to grow top-line in FY21E (+51% YoY); the potential spin-off listing of HCD could provide capital for mid-term expansion and boost the valuation of FEH.
- Hospital operation: disposed less efficient hospitals; post-pandemic recovery and ongoing integration to drive growth. FEH’s hospital operation revenue grew 18% YoY, though GP/PAT was down 9%/35% YoY due to impact from pandemic. The Company disposed its holding in 31 “less efficient” hospitals in FY20, slightly reducing the no. of its available beds to 11,000, but the per bed revenue improved 12% YoY in FY20. We believe the continuous integration of hospitals, recovering healthcare demand after pandemic together with a low base in 1Q20 could well support efficiency improvement and better profitability of hospital operation in FY21E.
- Financial business: FY20 NIM expansion and asset quality b-t-e; NIM and IEA growth to stabilize in FY21E. FEH’s NIM expanded 61bps HoH in 2H20 to 4.12%/17 bps YoY in FY20 to 3.83%, thanks to lowering funding cost (-32ppt YoY to 4.63%) and better yield in 2H20. NPA ratio improved 1bps YoY/3bps HoH to 1.10%, as FEH increased write-offs. It is worth noticing that FEH’s 30D overdue ratio was 0.99%, lower than NPA ratio, as FEH adopts stringent NPA recognition policy to include overdue loans & receivables even not exceeding 30 days. Looking into FY21E, as monetary policy normalizes, we expect FEH’s NIM to slightly decline 3bps YoY on higher funding cost, and IEA growth to moderate to 9% YoY. The Company has allocated ~80% of its IEA to less-cyclical sectors ended FY20, therefore we are confident that it can maintain stable asset quality ahead.
- Raise TP to HK$ 11.10. Reiterate BUY. We revise up FEH’s FY21E-22E net profit by 5%-6%, mainly to reflect higher NIM assumption and better profitability of industrial operation. We derive our new TP of HK$ 11.10 from SOTP method, applying unchanged 0.85x FY21E P/B to leasing business, a 12x (vs. prev. 10x) FY21E P/E to industrial operation and 20% valuation discount. We also factored in the CB conversion in Jan 2021 that increased total share base by 5%. Our TP reflects 0.97x FY21E P/B and 7.2x FY21E P/E. FEH now trades at 0.81x forward P/B and 5.9x forward P/E, both at historical average. As domestic equipment operator and hospital operator peers now trades at 20x/10x FY21E P/E, we believe a higher revenue contribution from industrial operation business could drive an upward re-rating of FEH. Reiterate BUY.
- Key catalysts: 1) major progress in spin-off IPO of HCD; 2) release of 1Q21E operating data. Key risks: 1) asset quality deterioration; 2) weaker demand for industrial operation.
