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8/11/2019 VC-Tradelink(26102007)
1/10
Research Note
26 October 2007
2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.Further information on the companies mentioned here available upon request.
VC Research 1
Tradelink (536.HK) BUY
Ben Leung (852) 2913 6329
Price (24/10/2007)(HK$) 1.14
12-month Target(HK$) 1.65
Market Cap. (HK$m) 887
52-week high 1.05
52-week low 1.65
Historical P/E (x) 10.65
Forward P/E (x) 16.5
Dividend Yield (%) 6.0
Source: VCestimates, Bloomberg
Recommendation. We initiate coverage on Tradelink with a BUYrecommendation. TP is set at HK$1.65, representing a FY08 PE of 16.5x.
Solid core business. Government Electronic Trading Services (GETS) isTradelinks core business. The company enjoys a natural monopoly in thisbusiness and has over 90% of market share.
High dividend yield.With zero gearing and a high level of net cash, Tradelink isexpected to be able to maintain dividend payout ratio at relatively high levels andtherefore support attractive yields.
DTTN: The Growth Driver. This operation was still in the red in 1H07. Webelieve DTTN is of huge market potential and will become the growth driver forTradelink going forward.
Company Profile
Incorporated in 1988, Tradelink is the leading e-commerce services provider in HK. Ithas become a publicly listed company since 28 October 2005. As of 30 June 2007, theHKSAR Government and HSBC the major shareholder of Tradelink with 12.30% stakeand 8.11% stake respectively.
GETS. Government Electronic Trading Services (GETS) is Tradelinks core business,which includes a total of six specified Government-related trade transactions:
Tradelink's core business - Government Electronic Trading Services ("GETS")
Services Details Competition
Import or Export Declaration ("TDEC") e-lodgement of import or export declaration with Customs
Production Notification("PN")e-lodgement of notification to the Trade & Industry Departmentabout cut-and -sewn garments manufactured in HK
Certification of Origin("CO")e-application for CO to the Trade & Industry Department orother government approved organizations
Dutiable Commodities Permit("DCP")e-application for DCP to Customs for import, export,manufacturing or storage of dutiable commodities
Electronic Cargo Manifest ("EMAN")
1) e-submission of manifests for air, rail, water cargo to theCensus Department and the Trade & Industry Department. 2)E-receipt of notice / voucher from Customs and e-communication with other government departments
Notifications under Textiles Trader Registration Scheme("TTRS")
e-submission of notification to the Trade & Industry Departmentfor textile trading under TTRS
Source: Company
8/11/2019 VC-Tradelink(26102007)
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8/11/2019 VC-Tradelink(26102007)
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Traadelink (536 HK) 26 October 2007
2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.Further information on the companies mentioned here available upon request.
VC Research 3
High dividend payout ratio and high yield. In 1H07, Tradelink declared an interimdividend of HK$0.0361/share, representing a 83% dividend payout ratio. Although thedividend payout ratio has dropped since 2005, we believe Tradelink can still maintain arelatively high dividend payout ratio (management guideline: not less than 60%, ourestimation: 70%) mainly due to:
Strong cash position. As of 30 Jun07, Tradelinks cash on hand stood atHK$348.5m, equivalent to HK$0.445/share. The company has no outstandingdebt as at 30 Jun07.
Strong operating cash flows. In FY06, the net cash flow from operatingactivities amounted to approximately HK$110m. In 1H07, the net operating cashflow is about HK$49.9m, representing 45.36% of the FY06 figure. We estimatethat the net operating cash flow in FY07 will be about HK$100m.
On the back of strong cash position, stable earnings and a high dividend payout ratio,We believe Tradelink can provide a very attractive yield at current stock price. Weexpect Tradelink to declare a DPS of HK$0.07 and HK$0.08 for FY07 and FY08,respectively, translating into a 6% and 7% dividend yield at current price of HK$1.14.
Dividend payout ratio
Source: Company data
0
20
40
60
80
100
120
140
FY05 FY06 1H07
(%)
8/11/2019 VC-Tradelink(26102007)
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Traadelink (536 HK) 26 October 2007
2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.Further information on the companies mentioned here available upon request.
VC Research 4
DTTN becoming a growth driver. Trade and Transportation Network (DTTN) is aneutral e-platform to facilitate the data sharing amongst the trade and logistics industrystakeholders. It is operated by DTTNCo, a subsidiary of Tradelink with 51% stake and21% stake in HKSAR Government, under a 15 years licence granted by the governmentfrom 2005.
Currently, DTTN is still under initial investment stage and losing money. In 1H07,Tradelink incurred a loss of HK$11.9m from DTTN. Although management declined togive any guidelines as to when DTTN would turnaround, we expect it can be the growthdriver for Tradelink going forward because:
Increasing client base. In 1H07, DTTN had a customer base of around 1,000companies, compared with over 500 by the end of FY06. We expect the numberof customer can reach over 3,000 by the end of FY07 and 5,000 by FY08.
Large market potential. According to a Consultation Report from thegovernment, the number of electronic documents exchanged in Hong Kong isabout 220m per year. Assuming a transaction fee of HK$2.5 per document(which is the highest fee per transaction approved for DTTN by the government
under the current licence), total market size is about HK$550m.
Opportunities form overseas. According to the company, discussion ofinterconnection between DTTN and other similar platforms from Aseancountries, France, Mexico and a number of logistics parks in China have beenstarted. Recently, a French delegation comprising the Minister of State forEnterprise and Foreign Trade of France, his cabinet adviser for InternationalAffairs, Parliament members and representatives of the French businesscommunity, visited DTTN. We believe DTTN will reach agreements with some ofthese overseas platforms at a later stage.
Valuation
Basedon our DCF model with a discount rate of 11%, Beta 1.15, multi-stage growth witha long-term growth rate of 2%, the fair value of the company is HK$1.65/share, or aforward FY08 P/E of 16.5x. We have set our 12-month target price at HK$1.65/share/.The target price provides a share upside of 44.7%, and together with a 6% dividendyield, total return is near 50% in a 12-month investment horizon. BUY.
8/11/2019 VC-Tradelink(26102007)
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Traadelink (536 HK) 26 October 2007
2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.Further information on the companies mentioned here available upon request.
VC Research 5
Income Statement
Y/E Dec (HK$ '000) 2005A 2006A 2007F 2008F 2009F
Transaction and handeling fees 225,724 225,944 225,673 230,186 232,488
Annual subscription and registration fees 19,120 18,216 17,429 16,732 16,397
Training income 170 139 271 271 325
Sales of software and related installation 42 84 92 92 92
Others 4,045 3,917 5,422 5,476 5,476
Total Turnover 249,101 248,300 248,887 252,758 254,779
interest income 8,064 7,600 9,500 9,500 9,500
Other income / (loss) (1,170) 0 0 0 0
Staff cost (80,084) (77,851) (80,000) (80,000) (85,000)
Depreciation (fixed asset) (15,559) (14,291) (11,999) (16,999) (18,945)
Depreciation (leasehold land) 0 0 (142) (142) (142)
Impairment of investment 0 0 0 0 0
Other operating expenses (50,059) (44,458) (47,289) (48,024) (48,408)
Profit from operations 110,293 119,300 118,958 117,093 111,784
Impairment loss on investment in unlisted equity
securities 0 (10,000) 0 0 0
Finance cost 0 0 0 0 0
Reversal of provision for termination cost and long
service payment 0 0 0 0 0
Loss on sale of assets and liabilities of a subsidiary 0 0 0 0 0
share of net loss of associates (787) (7,694) (20,000) (10,000) (5,000)
Gain on disposal of associate 0 622 0 0 0
Gain on disposal of subsidiary 347 0 0 0 0
Profit/(loss) before taxation 109,853 102,228 98,958 107,093 106,784
Taxation (18,456) (19,012) (17,318) (18,741) (18,687)
Profit/(loss) attributable to equity holders of thecompany 91,397 83,216 81,640 88,352 88,097
Dividend paid 117,730 77,011 57,148 61,846 61,668
DPS (HK$) 0.16 0.10 0.07 0.08 0.08
Earnings per share (HK$)
Basic 0.13 0.11 0.10 0.11 0.11
Diluted 0.12 0.11 0.10 0.11 0.11
Source: Company data, VC estimates
8/11/2019 VC-Tradelink(26102007)
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Traadelink (536 HK) 26 October 2007
2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.Further information on the companies mentioned here available upon request.
VC Research 6
Balance Sheet
Y/E Dec (HK$ '000) 2005A 2006A 2007F 2008F 2009F
Non-current assets
Fixed Assets 63,751 50,568 48,569 51,570 52,625
Interest in leasehold land held for own use 5,911 5,769 5,627 5,485 5,343
Capitalised development costs 0 0 0 0 0
Interest in associates 74,858 67,116 47,116 37,116 32,116
Interest in securities 10,000 69,587 69,587 69,587 69,587
Total non-current assets 154,520 193,040 170,899 163,758 159,671
Current assets
Trade receivables 18,947 23,969 18,411 19,590 20,201
Other receivables and prepayments 43,614 8,494 17,591 18,285 20,136
Amount due from an associate 777 1,415 1,415 1,415 1,415
Deposit with banks 0 0 0 0 0
Cash and cash equivalent 317,177 335,586 378,049 413,869 466,074
Total current assets 380,515 369,464 415,465 453,159 507,826
Current liabilitiesTrade creditors,accounts payable and other payable 223,489 222,141 221,510 210,095 218,829
Tax payable 1,388 7,544 7,544 18,741 18,687
Total current liabilities 224,877 229,685 229,054 228,836 237,516
Net current assets 155,638 139,779 186,412 224,322 270,309
Total assets less current liabilities 310,158 332,819 357,311 388,080 429,980
Non-current liabilities
Deferred taxation 3,236 1,596 1,596 1,596 1,596
Provision for long service payments 3,303 2,000 2,000 2,000 2,000
Total non-current liabilities 6,539 3,596 3,596 3,596 3,596
Net assets 303,619 329,223 353,715 384,484 426,384
Capital and reserves
Share capital 155,527 155,615 155,615 155,615 155,615
Reserves 148,092 173,608 198,100 228,869 270,769
Source: Company data, VC estimates
Cash Flow Statement
Y/E Dec (HK$ '000) 2005A 2006A 2007F 2008F 2009F
Profit before tax 109,853 102,228 98,958 107,093 106,784
Cash generated from operating activities 119,738 127,968 121,599 124,734 121,371
Net cash flow from operating activities 118,667 109,604 100,111 92,705 108,956
Net cash flow from investing activities (277,330) (92,261) (57,648) (56,885) (56,751)
Net cash flow from financing activities 58,368 1,066 0 0 0
Net change in cash and cash equivalents (100,295) 18,409 42,463 35,820 52,205
Cash and cash equivalents at beginning of year 417,472 317,177 335,586 378,049 413,869
Cash and cash equivalents at end of year 317,177 335,586 378,049 413,869 466,074
Source: Company data, VC estimates
8/11/2019 VC-Tradelink(26102007)
7/10
Traadelink (536 HK) 26 October 2007
2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.Further information on the companies mentioned here available upon request.
VC Research 7
8/11/2019 VC-Tradelink(26102007)
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8/11/2019 VC-Tradelink(26102007)
10/10
Traadelink (536 HK) 26 October 2007
2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.Further information on the companies mentioned here available upon request.
VC R h 10
Analyst Cert if ication
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that
with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed
accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed
by that research analyst in the research report.