midland ic&i 0459.hk

midland ic&i 0459.hk

2011年1月6日 星期四

market capitalization: 847m hkd @ 0.102, note due to CB conversion there will be another 550m shares

background

-it used to be a unlisted subsidiary of midland co (1200.hk). in 2005, it was spun off and backdoor list by acquiring 8070 EVI education. consideration was 650m hkd, whereby 550m hkd is in terms of CB (mature 2012, strike 0.10 hkd) and 100m is cash


-it became a speculation vehicle after government announced additional stamp duty in december, which effective curb short term investment for residential property

valuation

-if based on 1H10 net profit, which was 40m, the PE10x will be 10.56x. this can only be fair given midland also only trading at single digit PE
-however if one uses december as a benchmark, whereby transaction surge 30% for c&i, it means an adjusted turnover in hong kong will be 130b, if there is 10% rise in quantity transacted, and 20% rise in asset value, it will become 169b and 220b; at 20% market share (calculation see others) and npm 18+2% (based on their latest financial statement +2% because of operating leverage), midland ic&i earns 135m in 2011, 180m in 2012, which is 6x PE11 and 7.8x PE12.
-if ex cash, it is 4.2x PE FY11, 3.15x PE FY12

environment fundamental

-effectively the fundamental environment has changed
1) government policy is likely to be long term. this is because residential supply is limited, and there will only be slight supply up to 2012. in that case it is the interests of politicians to show them they have exert greatest effort to curb residential price from rising; for c&i however, the bargaining powers are on the chalbol's hands. for example wharf, cheung kong. if government rises stamp duty for c&i too they will face huge pressure from these parties, since asset value of ic&i is based on large transactions which are possible only through larger developers/professional investors. therefore they will be quite dumb if officials decide to do any regulatory control over c&i as well
2) for commerical property (office space) hong kong is still low in value compared to tokyo, new york, london. and it will cause huge impact to hong kong has a free trading port should there be disincentive towards investing in real estates, in particular those they cause no direct impact to societal stability (as in residential); affordability is seen much higher for those Foreign Owned Enterprises which has global presence hence holistic approach towards rent payments across the world
3) The probability of mainland Chinese investing in C&I is high. although it does not reflect in current situation in hong kong yet, it is highly likely because the rule of games for residential is similar to ic&i
4) FOE has speeded process to increase investment in China through Hong Kong. This year one can see companies such as hedge funds, MNCs (Starbucks, Mcdonalds) have shown unprecedented effort to invest in China. In this case Hong Kong must benefit
5) land supply: for tier 1 office space it has almost no further increment, except 陸海通 luk hoi tong mansion in Central and the reconstruction of des voeux road mansion next to central market
6) commission is based on QxP which gives notional amount of property transacted. looking at P, it is likely to rise 20% for tier 1 commercial/retail for next 2 years, with at least 10% rise in quantity transacted due to 3 major reason (Chinese investor, Foreign investor, and residential investor going into the ic&i pool)

Financial fundamental


1) company has 285m cash as at 1H10; 12m short term debt; gross gearing 52.90%; net cash -272; net gearing -52.90% (net cash)
2) very high operating leverage, major operating items are labor cost which is 51 and 54% of cost, but it is highly adjustable in downside and grow less than top line in upswing in economy (staff benefit mostly through commission which is variable basis); 回佣 is very stable, for example 224m sales in 1H10 (138m sales in 1H09) but 回佣 was maintained at 17m in these 2 halves
3) after midland convert CB @0.10 hkd, it will have 285+550=835m cash on hand (and more given operating cash inflow). with this money on hand the company most likely will pay out special dividend. this cash if paid out half or 420m already represent a 30% annual dividend; alternative is acquire is chinese business in property dealing. which seems still to have a virgin land (many agencies in china, but well regulated with good network is very few). Anyway a special dividend is in good sense given midland will hold 71% of interests at c&i at that time


Others
1) no market share information. however if based on a rough estimate of turnover in hong kong &i has 100b hkd, and midland get 224m sales, it implies 20% market share; it is 25% larger than centaline so it is 20% and 16% for top 2. add together its still 36%, which means there is still room to grow at expense of smaller companies
2) property agents is close to a heterogeneous service provider (like value partners) than a homogeneous service provide (like brokerage). network and database is very important. that is how midland and centaline can always establish well presence in hong kong different districts because smaller agencies ought to rely on them to increase turnover, by referring good value properties to their clients, or by referring good customers to them