In a market that repeatedly fluctuated and bottomed out in 2023, the high dividend strategy “stood out” and “excelled” in a weak market. In 2023, the China Securities Dividend Index showed good defensive capabilities, bucking the trend and rising 0.89%, outperforming mainstream broad-based indices.

The adjustments since the beginning of the year and the high dividend strategy have once again become a shock absorber in Hong Kong, and continue to be favored by investors in the A-share and Hong Kong stock markets. In A-shares, cyclical sectors such as coal, electricity, and shipping strengthened sharply, while energy stocks in Hong Kong stocks rose collectively for a while.

High dividend strategies have become “top class” because high dividend characteristics bring steady returns. Under high risk aversion, for many investors, this is a deterministic win rate strategy logic.

Sun Hung Kai Corporation (00086) is unquestionably representative of high-dividend stocks. In terms of shareholder returns, since 2007, the company's shareholders have reported a total of HK$13.9 billion. In 2023, Sun Hung Kai's dividend per share totaled HK26 cents, the same as last year. By the close of trading on March 22, the dividend rate was about 11%, which highlighted the allocation value.

On March 21, Sun Hung Kai Corporation announced its 2023 annual results: during the period, the company's total revenue was $3,998 million (unit: HK$), which remained relatively stable; profit before tax was $76.6 million, turning a year-on-year loss into a profit; shareholders' losses amounted to 471 million yuan, a year-on-year decrease of 69.29%. In addition, the company's other core financial indicators all performed well, such as strong cash flow and reduced capital-to-debt ratio.

The annual report's “report card” is remarkable, showing that Sun Hung Kai's various business segments are developing steadily. Under the synergy, the company's growth momentum is expected to be more adequate. The increase of 3.49% on the trading day after the company's results also showed that investors recognized it.

The investment management business resumed strongly, and the fund management business entered a new profit cycle

Sun Hung Kai's business can be divided into three major sectors: credit business (previously known as financing business), investment management and fund management, and there is strong synergy between the businesses. There is also a group management and support section, which provides liquidity, supervision and administrative functions for all business segments.

Among them, the credit business is a cash cow business, consolidating the foundation for development. The investment management business started in 2015, and has grown to a considerable scale so far, and has had a great impact on overall performance. Based on investment management, new business fund management has the broadest development prospects. It brings new revenue sources to the Group, contributes to performance growth, and is expected to change the market's pricing logic for Sun Hung Kai and help the company achieve value revaluation.

In 2023, Sun Hung Kai's investment management business and fund management business both achieved leaps and bounds: among them, the investment management business recovered strongly, the fund management business ushered in a new cycle of break-even balance, and further expanded the scale of asset management from external investors to achieve landmark development.

According to the 2023 financial report, Sun Hung Kai's investment management business assets are about $16.26 billion. The investment sector mainly focuses on alternative investments (accounting for 71.4%), mainly covering private equity, hedge funds and special opportunities; open market (13.8%), which mainly covers corporate shareholding and strategic shareholding; real estate (accounting for 14.8%), including interests in commercial real estate in Hong Kong and hotels and commercial investments in overseas markets.

Looking back at the performance of the international financial market in 2023, it can generally be summed up as resilience and differentiation. In 2023, the international financial market spent a frightening year in an environment where the US and Europe controlled inflation and the geopolitical conflict intensified. High interest rates and tight liquidity led to the bankruptcy and closure of Silicon Valley Bank and signature banks in the international financial market last year, but there was no systemic financial crisis, and the international financial market still showed strong resilience; under the high interest rate environment, stocks rose and fell, and prices in different markets and financial products varied greatly and clearly differentiated, which fully reflected the differences in investors' opinions in the international financial market.

In the macro context of divergent fluctuations, Sun Hung Kai has always adopted a prudent capital allocation strategy. The overall annual return on investment management in 2023 increased by 5.9 percentage points to -2.0% year over year.

In terms of performance, after deducting operating costs, the investment management business recorded a loss of 1,291 billion yuan before tax, an increase of 46.8% over the previous year. Unrealized losses due mainly to alternative investments and real estate fell to $134 million, compared to $1,859 million in 2022. The realized loss on alternative investments and real estate was $190 million during the period due to the rebalancing of the investment portfolio, which made its risk exposure more conservative. Notably, “Special Opportunity”, as a new sub-item reported separately by the company, achieved strong revenue of 19.3%.

Zhitong Finance App believes that the underlying asset attributes of the investment management business management division determine that the performance of its investment management division will be largely affected by the global macroeconomy, stock market, and bond market. However, aside from uncontrollable macro-level factors, the future performance of Sun Hung Kai's investment management division also depends on the professional level of the asset management team, which is reflected in quantitative indicators, that is, return on investment.

Judging from past performance, Sun Hung Kai's investment management division performed well overall, with stable, moderate and positive returns on segmented assets. For the four years from 2020 to 2023, the cumulative realized income from alternative investments and real estate was $5.162 billion, and the total return on the investment management segment for four years was 18.6%. The return on investment was quite ideal, proving Sun Hung Kai's investment management team's project resource channels and investment project selection capabilities.

In 2023, Sun Hung Kai continued to strengthen the professionalism of its investment management business and invested heavily in strengthening technical infrastructure, optimizing business processes, expanding teams, and strengthening risk management systems. It is worth looking forward to the company's investment management team actively cooperating with the fund management department to accelerate its transformation into a leading alternative investment platform.

The investment management business has not been disclosed for the time being. Sun Hung Kai's financial report also showed important news. The fund management business achieved break-even, and net profit before tax was 16.8 million yuan. Financial reports show that during the period, the asset management scale of the company's funds and fund partners reached nearly 1 billion US dollars at the end of the year, of which third-party assets exceeded 600 million US dollars, and the net inflow for the year exceeded 150 million US dollars.

Meanwhile, Sun Hung Kai's multi-family office platform “Family Office Solution” has seen encouraging developments. Using the Group's extensive relationships and leveraging Sun Hung Kai's resources of various types of credit, open market and private equity opportunities accumulated over 55 years of operating history, the Family Office Solution was able to connect with family offices and high-net-worth individuals pursuing similar investment strategies and time frames with the same company.

Numbers are the best litmus test. As the scale of asset management continues to grow, the fund management business is expected to provide new impetus for the company's performance growth. Sun Hung Kai's second growth curve is imminent.

The background color of the credit business “cash cow” will not change

The credit business is Sun Hung Kai's traditional strong business, and this year it continues to contribute to stable cash flow. In 2023, the business contributed 886 million yuan in profit before tax.

Consumer finance is the core of credit business. It contributes stable cash flow over a long period of time, and has nothing to do with capital market fluctuations. Thanks to Asia Joint Finance's solid performance, the company's consumer finance business already has a large and stable base. Since 2017, in terms of unsecured loan outstanding balances, Asia United Finance has been ranked first among all Hong Kong money lenders and ranked in the top five of all market participants.

Financial reports show that Sun Hung Kai's credit business showed a clear contraction trend in 2023. Among them, consumer finance contributed 980 million yuan in profit before tax, a year-on-year decline of 18.2%; the mortgage loan business and private equity financing business also declined to varying degrees.

According to the Zhitong Finance App, the change in performance was due to Sun Hung Kai's choice of strategic contraction and greater focus based on the macro environment. In 2023, Asia United Finance implemented a plan to reduce its unsecured personal loan business in the mainland market and focused on the mortgage business. As a result, its total loan balance fell 3.7% year on year to RMB 11.2 billion. This strategy has achieved remarkable results in improving quality and efficiency. During the period, Asia United Finance's operating costs decreased by 12.5% year on year, and net impairment loss also decreased by 3.8% year on year.

In Hong Kong, the consumer finance business continues to maintain its leading position in the market. The amount of new loans added in 2023 increased by 3.1% year on year, bringing the total loan balance at the end of the year to 9.124 billion yuan, a record high in the 30 years since the establishment of Asia Joint Finance.

It is worth noting that Asia United Finance continues to introduce new innovations and officially launched the SIM credit card business in the Hong Kong market, and the total number of cards issued has exceeded expectations. The initiative aims to enter new market segments, further boost loan size growth, and continue to consolidate its market leadership position. In terms of current progress, it is off to a strong start and is poised for subsequent growth.

Growth combined with high dividends, value revaluation is imminent

In an environment of high interest rates, the company puts capital efficiency first, allocates capital carefully, and actively reduces leverage. In 2023, the company took the opportunity to continue to repurchase medium-term notes with a total principal amount of $59.5 million, bringing the total amount of medium-term note repurchases since 2022 to US$119 million. The company also repurchased 2.2 million shares this year at a total net cost of HK$5.9 million. The company plans to continue to repurchase shares as usual. Real money continues to buy back stocks, sending a clear signal to the market: full of confidence in the company's future development.

According to the Zhitong Finance App, Sun Hung Kai has both high dividends and growth potential, and value revaluation is imminent.

On the one hand, Sun Hung Kai takes advantage of its strong cash flow to continue to give back dividends to investors.

In the context of a weak recovery, high-growth and high-boom industries are relatively scarce. Using the boom as an anchor to obtain excess profits is increasing, and dividend assets with stable profits and strong ability to withstand market fluctuations are expected to continue to outperform. The opinion of Guotai Junan Securities also points out that it is optimistic about dividend assets with high dividends in the medium to long term and is becoming the “new core asset” of Hong Kong stocks.

Sun Hung Kai's stable returns highlight the defensive attributes brought by its dividend strategy. In the long run, this “safety cushion” makes the company very attractive in the capital market.

On the other hand, Sun Hung Kai's fund business has been profitable. The diversification and optimization of fund strategies on the platform has led to healthy development of the assets managed and the continuous growth of expenses and income, and the growth attributes are prominent. Zhitong Finance App believes that this business is expected to help the company achieve value revaluation. The core support logic is as follows:

First, Sun Hung Kai's fund management business is expected to benefit from the overseas asset allocation needs of Chinese residents. Comparing the overseas asset allocation ratio of high-net-worth individuals in other countries, it can be found that while the overseas asset allocation of high-net-worth individuals in the world has reached 24%, the overseas asset allocation of domestic high-net-worth individuals accounts for only 5%. There is plenty of room for growth in overseas asset allocation for high-net-worth individuals.

Second, currently, Sun Hung Kai's performance is affected by sharp profit fluctuations in the investment management division, leading to large overall fluctuations. Furthermore, its credit business division is also affected by macroeconomic factors. As a result, the market's pricing for Sun Hung Kai is conservative, resulting in Sun Hung Kai's net market ratio being only 0.22 times (at the closing price on March 22).

However, the continued development of the fund management business and the increase in the share of third party capital are expected to release Sun Hung Kai's balance sheet and drive an increase in fund management fee revenue. Fund management fees, as recurring revenue, can effectively improve the stability of Sun Hung Kai's profits, thereby gradually changing market expectations and pricing logic. Currently, the break-even balance of the business is dawning, and the company's valuation increase is just around the corner.

In summary, Sun Hung Kai's major businesses collaborated to continue its steady business trend. Continued high dividends highlight its dividend asset advantages. Coupled with the unchanged undertones of cash and growth stocks, the allocation value is prominent.