20160427-高盛-利福国际-01212.HK-Spin-off_could_unleash_dividend_potential_of_HK_SOGO_store__add_to_CL_15页_476kb

Summary of Lifestyle International Holdings Document

Core Content

This document outlines the investment potential of Lifestyle International Holdings (Lifestyle) following the proposed spin-off of its China operations. The key focus is on the potential for increased dividend yields and valuation re-rating due to the separation of its Hong Kong (HK) and China businesses.

Main Points

• Spin-off Proposal: Lifestyle announced the spin-off of its China operations (Lifestyle China) on April 22. The spin-off is expected to be conducted via a dividend in specie, with shareholders receiving shares in the new entity.
• Post-Spin-off Structure: Lifestyle will retain its HK business, primarily focused on CWB Sogo, while Lifestyle China will become a separate listed entity.
• Dividend Potential: The HK business is expected to increase its dividend payout to HK$1.3bn in 2017E from HK$1.0bn in 2015, representing a 30% increase. This would result in an 85% payout ratio on earnings, higher than the 54% in 2015.
• Valuation Methodology: The document suggests switching from a P/E to a SOTP (Sum of the Parts) valuation approach, valuing the HK and China businesses separately.
• HK Business Valuation: The HK business is estimated to be worth HK$18bn, with a target dividend yield of 7% in 2017E, implying a higher yield than typical HK REITs.
• China Business Valuation: The China operations are valued between HK$5bn and HK$7bn, which is 0.5X to 0.7X of its book value. This includes a valuation of its core department stores and the Zhabei project.
• Investment Thesis: The spin-off is viewed as a catalyst for rerating the stock, with a 12-month price target of HK$15.3, implying 32% upside potential.
• Risks: If the spin-off does not materialize, the stock may revert to a P/E trading pattern, with a value of HK$14.5 per share.

Key Information

• Current Price: HK$11.58
• 12-Month Price Target: HK$15.30
• Market Cap: HK$18,934.5m (US$2,441.1m)
• Dividend Yield (2017E): 7%
• Dividend Payout Ratio (2017E): 85%
• Free Cash Flow Yield (2017E): 1.5%
• Net Income (2017E): HK$1,887.6m
• EPS (2017E): HK$1.15
• P/E Ratio (2017E): 10.0
• P/B Ratio (2017E): 1.5
• EV/EBITDA (2017E): 10.4

Valuation Breakdown

• HK Business:
  • Dividend Yield: 7% (target)
  • DDM: 8% COE, 0.5% terminal growth
  • P/E: 12X (2017E)
  • Implied Value: HK$18bn
• China Business:
  • Core Operations: Valued at 9X 2017E EV/EBITDA
  • Zhabei Project: Valued at 60% discount to construction cost (HK$1-1.5bn)
  • JVs and Associates: Valued at 0.4X book value (HK$1.2-1.8bn)
  • Net Cash: HK$1.3bn
  • Total China Value: HK$6.1bn
• SOTP Valuation:
  • Total Implied Value: HK$24.7bn
  • Per Share Value: HK$15.30
  • Upside Potential: 32%

Investment Recommendations

• Rating: Maintain Buy
• Add to CL (Client List): Yes

Key Risks

• The spin-off may not materialize, leading to a reversion to P/E trading, with a potential value of HK$14.5 per share.
• Uncertainty around the listing timeline for Lifestyle China.
• Potential negative impact on earnings due to the closure of the Shenyang store.

Analysts

• Ricky Tsang, CFA: +852-2978-6631, ricky.tsang@gs.com
• Joshua Lu: +852-2978-1024, joshua.lu@gs.com
• Alan Lee: +852-2978-0953, alan.lee@gs.com

Financial Highlights

• 2017E DPS: Expected to be HK$0.81
• 2017E EBITDA: HK$2,422.4m
• 2017E Free Cash Flow: HK$2,072m
• 2017E Net Income: HK$1,887.6m
• 2017E EPS (Basic, Post-Except): HK$1.15
• 2017E Dividend Payout Ratio: 70%

Conclusion

The proposed spin-off is seen as a strategic move to unlock the dividend potential of Lifestyle's HK assets and re-rate the stock based on its dividend yield and FCF generation. The HK business is valued at HK$18bn, while the China business is valued at HK$5-7bn, leading to a combined SOTP valuation of HK$24.7bn. The 12-month price target of HK$15.30 implies a 32% upside. The investment thesis is supported by the expectation of improved EBIT and stable cash flows in the HK business, along with the potential for higher dividends and a more REIT-like payout structure.