Initiate at Buy: One for the long run
Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. MCI (P) 094/06/2016 MCI (P) 085/06/2016 MICA (P) 021/01/2016 Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch View HSBC Global Research at: https://www.research.hsbc.com SCI, an industrial conglomerate, is set for an inflection in 2017-18, driven by new plants in its utilities business It is trading at an attractive 0.6x 2017e PB. Our target price incorporates a 20% holding company discount We initiate coverage of SCI with a Buy rating and SOTP-based target price of SGD3.12 Inflection point in utilities earnings beckons in 2017-18e With new power plants coming on line in India, China, Bangladesh and Myanmar, we see SCI’s utilities business arriving at an inflection point with profit rising 20-25% in 2017-18e. India – SGPL pushes inflection point out to 2018e: We expect India utilities profits to grow more than fourfold from SGD17m in 2016e to SGD72m in 2018e. Both 660MW units at its first India plant are now fully operational with a PLF of 80-90% and 1,070MW of power purchasing agreements (PPA) locked in. Meanwhile, the commercial operation date (COD) for both 660MW units at its second plant has been set for end-2016; but with the PPA not due to begin for another year, the real ramp-up in profits from India should not begin until 2018. We expect SGI to generate stable profits of SGD10-15m pa from its 750MW of wind assets. SCI’s long-term strategy in India is to lock units 1, 2 and 3 (660MW each) into long-term (eight years) PPAs and keep unit 4 for the spot market. Singapore – too much gas in the system, expect improvement from 2019e: While SCI’s Singapore profits are stable, excess gas supply has to be phased out (PNG contracts expire from 2018) before there can be an uptick, in our view. China – replacing Yangcheng with Chongqing: Most of SCI’s China profits came from the Yangcheng plant (SGD45m of SGD95m in 2016e) which it will transfer in November 2016. SCI intends to replace this with a new plant in Chongqing. Rest of Asia – new plants in emerging markets: Two power plants – 225MW in Bangladesh and 426MW in Myanmar – are due to come on stream in 2018e. Pain from offshore and marine (O&M) business to subside from 2017-18e We expect the O&M business to have bottomed in 2016e with no more problems in its order book, and receive SGD2bn of new orders in 2017e. Initiate Buy given attractive long-term value with SOTP-based TP of SGD3.12 We set our TP at SGD3.12 based on SOTP (implying 0.8x target PB), valuing listed entities at market and other entities at book, and applying a 20% holding company discount. Other methodologies also point to a fair value of over SGD3. Key catalysts include inflection from India and other new power plants in Asia and stabilization of the marine business in 2017e. Key downside risks include delay in commencement of China power plant and lower-than-expected oil prices.28 October 2016 INITIATE AT BUY TARGET PRICE (SGD) PREVIOUS TARGET (SGD) 3.12 SHARE PRICE (SGD) UPSIDE/DOWNSIDE 2.45 +27.2% (as of 26 Oct 2016) MARKET DATA Market cap (SGDm) 4,379 Free float 50% Market cap (USDm) 3,152 BBG SCI SP 3m ADTV (USDm) 9 RIC SCIL.SI FINANCIALS AND RATIOS (SGD) Year to 12/2015a 12/2016e 12/2017e 12/2018e HSBC EPS 0.100 0.203 0.251 0.305 HSBC EPS (prev) - - - - Change (%) - - - - Consensus EPS 0.319 0.262 0.275 0.320 PE (x) 24.6 12.1 9.8 8.0 Dividend yield (%) 4.5 3.3 4.1 5.0 EV/EBITDA (x) 11.1 7.1 5.6 4.6 ROE (%) 3.0 5.6 6.6 7.7 52-WEEK PRICE (SGD) Source: Thomson Reuters IBES, HSBC estimates Somesh Kumar Agarwal* Industrials Analyst, South East Asia The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch somesh.kumar.agarwal@hsbc.com.sg +65 6658 0616 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations SembCorp Industries (SCI SP) EQUITIES CONGLOMERATES Singapore 2.002.903.80Oct 15Apr 16Oct 16Target price: 3.12High: 3.61 Low: 2.19 Current: 2.45Initiate at Buy: One for the long run EQUITIES ● CONGLOMERATES 28 October 2016 2 Financial statements Year to 12/2015a 12/2016e 12/2017e 12/2018e Profit & loss summary (SGDm) Revenue 9,545 7,662 8,676 8,479 EBITDA 612 1,220 1,570 1,744 Depreciation & amortisation -405 -500 -536 -572 Operating profit/EBIT 625 770 1,084 1,222 Net interest -205 -383 -553 -559 PBT 426 537 681 813 HSBC PBT 151 478 588 698 Taxation 28 -113 -138 -150 Net profit 549 365 450 548 HSBC net profit 179 365 450 548 Cash flow summary (SGDm) Cash flow from operations -689 720 1,061 1,880 Capex -1,448 -2,300 -1,000 -1,000 Cash flow from investment -1,817 -1,957 -1,000 -1,000 Dividends -197 -146 -180 -219 Change in net debt 2,153 1,383 119 -661 FCF equity -1,765 -1,998 -139 680 Balance sheet summary (SGDm) Intangible fixed ass
