NWS Holdings:Upgrade to Neutral post underperformance; fairly valued

What happened

We upgrade NWS from Sell to Neutral as the stock has breached our 12-mtarget price following recent underperformance (-11% ytd, vs. +4% forMSCI HK). Since we added NWS to the Asia Pacific Sell list on Jan 4, 2013,the stock price has declined 7% vs. +13% for MSCI Hong Kong. Weattribute the underperformance to: (1) muted earnings growth in FY14-1HFY15; (2) 25% yoy DPS cut in 1HFY15 despite lower net gearing; (3)expectation of potential hike in US treasury rate making NWS’ 4.1%/4.6%nominal dividend yield in FY15E/16E less attractive. At current valuations,we think NWS’ risk reward profile looks fair.

Current view

We think earnings should resume growth starting 2HFY15 without thenegative impact from “Occupy Central” and water tariff cuts in itsChongqing projects. We estimate the newly acquired aircraft leasingbusiness, Goshawk Aviation, will start to contribute profit in Feb 2015 (i.e.,5 months in 2HFY15), boosting NWS’ 2015E/16E profit by 2%/6%. Weforecast 7% and 15% yoy earnings growth in 2HFY15 and FY16.At 16% net debt to equity (including the acquisition of Goshawk) vs. NWS’target of 40%, the company still has HK$10.8bn room for future M&A.Management also do not rule out the possibility of a special dividend ifthey cannot identify accretive acquisitions.

Valuation。

Our 12-month target price is unchanged at HK$13.1, based on a 10%discount to 2015E NAV of HK$14.6. The stock is now trading at 11.4x 12mforward P/E and implies 2.5% 12m forward dividend yield spread vs. UStreasury rate, in line with historical averages of 11.6x and 2.7%. We thinkEV/GCI of 0.94x now fairly reflects NWS’ cash return profile (Exhibit 3).

Key risks

Upside – sizeable value accretive acquisitions. Downside – persistent costpressure across all businesses.

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Neutral