Hutchison Whampoa (0013.HK) Summary
Core Content
Hutchison Whampoa (0013.HK) is planning to spin off its AS Watson business and list it on the Hong Kong Exchange within the next 12-18 months. This move is based on the potential for growth in Asia's retail markets and the strong cash flow generated by AS Watson.
AS Watson has a significant presence with 11,093 retail stores globally, including approximately 7,300 in Europe and 3,800 in Asia, compared to Dairy Farm's 5,700 stores all in Asia. The business has shown strong revenue and EBIT growth, with an 8% and 17% CAGR respectively from 2005 to 2012, leading to margin improvement from 3.7% to 6.8%. AS Watson contributed 17% to the group's EBIT in 2012 and had an EBIT return on asset of 18%, which was among the highest in Hutchison Whampoa's divisions.
The company's stock is currently trading at a 28% discount to NAV and a 12X P/E ratio in 2013E, below its historical average of 15% and 16X. The analyst's 12-month NAV-based target price is HK$110.40, implying a 19% potential upside, and the Buy rating is maintained.
Main Points
- Spin-off Plan: Hutchison Whampoa is considering spinning off AS Watson and listing it on the HKEx in the next 12-18 months.
- AS Watson Performance:
- 11,093 retail stores globally (7,300 in Europe, 3,800 in Asia).
- Revenue and EBIT grew at 8% and 17% CAGR from 2005 to 2012.
- EBIT margin improved from 3.7% to 6.8%.
- Contributed 17% to group EBIT in 2012.
- EBIT return on asset of 18%, among the highest in the group.
- Valuation:
- Trading at a 28% discount to NAV and 12X P/E ratio in 2013E.
- Target price of HK$110.40 implies 19% potential upside.
- Buy rating is maintained.
- Financial Highlights:
- AS Watson generates HK$13bn EBITDA annually, covering its HK$3bn capex budget.
- Strong cash flow and consistent EPS growth expected through 2015E.
- Key Risks:
- Global macroeconomic downturn.
- Intensifying competition in 3G markets.
Key Financial Data
| Metric |
2012 |
2013E |
2014E |
2015E |
| Price (HK$) |
92.90 |
110.40 |
- |
- |
| Market Cap (HK$ mn) |
396,067.1 |
- |
- |
- |
| EPS (HK$) |
6.13 |
7.56 |
8.40 |
9.43 |
| EPS Growth (%) |
-53.4 |
23.4 |
11.1 |
12.3 |
| P/E (X) |
11.9 |
12.3 |
11.1 |
9.8 |
| P/B (X) |
0.8 |
0.9 |
0.9 |
0.8 |
| EV/EBITDA (X) |
13.5 |
14.0 |
12.8 |
11.7 |
| Dividend Yield (%) |
2.8 |
2.5 |
2.7 |
3.0 |
| ROE (%) |
7.0 |
7.8 |
8.1 |
8.6 |
| CROCI (%) |
6.9 |
8.1 |
8.5 |
9.1 |
Key Risks
- Global Macroeconomic Downturn: Potential negative impact on overall business performance.
- Intensifying Competition in 3G Markets: May affect profitability and market share.
Investment Profile
- Asia Pacific Buy List: Hutchison Whampoa is part of the Asia Pacific Buy List.
- Peer Group Average:
- Returns: Return on Capital.
- Valuation Metrics:
- P/E: 11.9, 12.3, 11.1, 9.8.
- P/B: 0.8, 0.9, 0.9, 0.8.
- EV/EBITDA: 13.5, 14.0, 12.8, 11.7.
- Dividend Yield: 2.8, 2.5, 2.7, 3.0.
- ROE: 7.0, 7.8, 8.1, 8.6.
- CROCI: 6.9, 8.1, 8.5, 9.1.
Analyst Coverage
- Analysts: Simon Cheung, CFA, Frank He, Janet Lu, Alex Ye.
- Contact Information:
Summary Financials
| Metric |
2012 |
2013E |
2014E |
2015E |
| Total Revenue (HK$ mn) |
243,089.0 |
259,751.8 |
278,531.8 |
296,049.4 |
| EBITDA (HK$ mn) |
37,927.0 |
41,320.3 |
45,644.0 |
49,346.2 |
| EBIT (HK$ mn) |
23,778.0 |
25,675.3 |
29,617.0 |
32,962.2 |
| Net Income (HK$ mn) |
26,818.0 |
32,329.1 |
36,771.9 |
40,739.5 |
| EPS (basic, pre-except) |
6.29 |
7.58 |
8.63 |
9.56 |
| EPS (basic, post-except) |
6.13 |
7.56 |
8.40 |
9.43 |
| DPS (HK$) |
2.08 |
2.29 |
2.52 |
2.77 |
| Dividend Payout Ratio (%) |
33.9 |
30.3 |
30.0 |
29.3 |
| Free Cash Flow Yield (%) |
0.8 |
3.1 |
5.2 |
7.8 |
Growth and Margins
| Metric |
2012 |
2013E |
2014E |
2015E |
| Sales Growth (%) |
4.5 |
6.9 |
7.2 |
6.3 |
| EBITDA Growth (%) |
11.8 |
8.9 |
10.5 |
8.1 |
| EBIT Growth (%) |
19.1 |
8.0 |
15.4 |
11.3 |
| Net Income Growth (%) |
-53.4 |
23.4 |
11.1 |
12.3 |
| EPS Growth (%) |
-53.4 |
23.4 |
11.1 |
12.3 |
| Gross Margin (%) |
61.4 |
61.4 |
61.4 |
61.4 |
| EBITDA Margin (%) |
15.6 |
15.9 |
16.4 |
16.7 |
| EBIT Margin (%) |
9.8 |
9.9 |
10.6 |
11.1 |
Key Ratios
| Ratio |
2012 |
2013E |
2014E |
2015E |
| CROCI (%) |
6.9 |
8.1 |
8.5 |
9.1 |
| ROE (%) |
7.0 |
7.8 |
8.1 |
8.6 |
| ROA (%) |
3.4 |
4.1 |
4.5 |
4.9 |
| ROACE (%) |
7.1 |
7.8 |
8.2 |
8.6 |
| Inventory Days |
73.7 |
73.9 |
74.3 |
74.7 |
| Receivables Days |
91.7 |
88.1 |
86.0 |
85.9 |
| Net Debt/Equity (%) |
38.8 |
30.9 |
29.4 |
25.8 |
| Interest Cover (EBIT) |
2.6 |
2.9 |
3.5 |
3.9 |
Valuation Metrics
| Metric |
2012 |
2013E |
2014E |
2015E |
| P/E (analyst) (X) |
11.9 |
12.3 |
11.1 |
9.8 |
| P/B (X) |
0.8 |
0.9 |
0.9 |
0.8 |
| EV/EBITDA (X) |
13.5 |
14.0 |
12.8 |
11.7 |
| Dividend Yield (%) |
2.8 |
2.5 |
2.7 |
3.0 |
EBIT Return on Assets
| Division |
2012 |
2013E |
2014E |
2015E |
| Ports and related services |
8.3% |
17.5% |
19.1% |
20.9% |
| Telecom - 2G (HAT & HTHKH) |
10.7% |
10.5% |
11.4% |
12.3% |
| Telecom - 3G |
1.4% |
2.2% |
2.6% |
3.0% |
| Property |
18.2% |
21.7% |
23.6% |
26.1% |
| Retail and others |
17.5% |
19.1% |
20.9% |
22.8% |
| Infrastructure |
17.6% |
19.0% |
19.6% |
20.1% |
| Energy |
13.7% |
15.1% |
16.8% |
17.9% |
| Finance and investment |
1.8% |
2.1% |
2.2% |
2.4% |
| Total EBIT Return on Assets |
7.8% |
8.5% |
9.4% |
10.2% |
Key Observations
- AS Watson's strong performance and profitability make it a significant contributor to the group's earnings.
- The spin-off could lead to questions about the use of proceeds and expected returns.
- The company is undervalued based on NAV and P/E metrics.
- The Buy rating is maintained due to the strong fundamentals and growth potential.