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Stock To Watch 2000-07-10

LEGEND HOLDINGS <0992.HK>

INVESTMENT RATING: MARKET PERFORMER HK$7.15

Investment highlight

Legend, China¡¦s No 1 personal computer manufacturer, is principally engaged in the design, manufacture and sale of Legend brand PC, distributions of foreign brand IT products and system integration business.
Legend reported a 75 pct increase in net profit to HK$481m with a turnover of HK$17,450m, representing an upsurge of 50 pct from the corresponding period during last year.
IDC estimates the number of personal computers or network computers using the Internet in the PRC will grow to 30.4m in 2004.
Legend officially launched its Chinese language portal, FM365.com on April 18, 2000 and is likely to get the ISP license in 2H2000.
FM365.com has been growing rapidly and acquired an average of 2 to 3m daily pageview in June 2000.
At HK$7.15, Legend is trading at 55.1x FY2002 earnings ¡V relatively high when comparing with those PC manufacturers listed in US.
By applying the method of sum-in-parts, Legend can be valued in a range from HK$5.71 to HK$8.21 or 14.8 pct higher and 21.2 pct lower than its current price HK$7.15. MARKET PERFORMER

BASIC DATA
Closing price (July 7, 2000): 7.15
PER (x): 105.1
52 week high/low (HK$): 17.5/1.575
Issued shares (m): 7,417
Market cap (HK$m): 52,662

EARNINGS SUMMARY
HK$m 1999 2000 2001F 2002F
Revenues 11,633.6 17,449.6 23,989.7 31,875.7
Net Income 275.3 480.9 718.8 960.1
EPS (HK cents) 4.0 6.8 9.7 13.0
PER 178.8 105.1 73.6 55.1
DPS (HK cents) 0.4 1.3 1.9 2.6
Yield ( pct) 0.1 0.2 0.3 0.4

BACKGROUND

Legend, China¡¦s No 1 personal computer manufacturer, was incorporated in Hong Kong in 1988 and was listed on The Stock Exchange of Hong Kong in February 1994. Legend is principally engaged in the design, manufacture and sale of Legend brand PC, distributions of foreign brand IT products and system integration business. It is planning to restructure its existing business into two major areas ¡V Internet related business and e-commerce related business ¡V to cope with the rapid development of Internet business in the PRC and is expecting the restructuring to be completed by 2002.

Legend`s parent company, Legend Group Holdings Company, was established in Beijing in 1984, under the Chinese Academy of Sciences. With the strong technological backing of the Chinese Academy of Sciences, Legend Group Holdings Company has become one of the largest high-tech enterprises in the PRC.


LATEST RESULTS

For the year ended 31st March 2000, Legend reported a 75 pct increase in net profit to HK$481m with a turnover of HK$17,450m, representing an upsurge of 50 pct from the corresponding period during last year.

Both of its turnover and profit recorded a significant growth. This was primarily due to the Internet fever sparked through the PRC leading to a booming PC market. In addition to maintaining its leading position, Legend PC¡¦s market share also has had increased from 14.4 pct to 21.5 pct.

During the year, Legend has developed a number of new computer models, including the first generation Internet PC ¡V Legend Conet PC ¡V which is widely accepted by the market.
HK$m 1999 2000 pct chg
Revenues 11,633.6 17,449.6 50.0
Net Income 275.3 480.9 74.7
EPS (HK cents) 4.0 6.8 70.0


BUSINESS OVERVIEW

The Internet fever and the popularity of Internet application led to a significant growth in the PRC computer market. IDC estimates the number of personal computers or network computers using the Internet in the PRC will grow to 30.4m in 2004.
pct growth in 1999
Consumer PCs 59
Commercial PCs 15
Notebook computers 34
Servers 28
Overall 26


According to government figures, Internet subscribers increased four folds to 8.9m in 1999 and it is expected this figure will be doubled by the end of 2000. Furthermore, IDC estimates Internet population in the PRC will reach 33.1m in 2004.

The rise of Internet also increases the awareness of e-commerce. The overall e-commerce value in Asia Pacific (excluding Japan) is predicted to rise from approximately USD723m in 1998 to USD32.6b by the end of 2003.


INTERNET RELATED BUSINESS

Internet access devices

Legend intends to sell 2.5m units of access devices in FY2001, including personal computers, set-top boxes and others, of which about 1.0m would be sold to family users.

Personal computers

The outlook for the PC market in China remains bright in the coming years since the household penetration rate is still under 6 pct (7m units) in the urban area of China, a figure which is well below the world average of 60 pct.

According to a forecast (Forbes), it is expected the market will expand quickly to reach 12.6m units by 2003.

With the success of the launch of a high-end Internet PC ¡§Legend Conect PC¡¨ last year, Legend launched another low-end Internet PC "Tongxi 100", a personal computer with a retail price of 5,999 yuan (US$725) and mainstream configurations suitable for home users in May 2000.

Both Legend Conet PC and Tongxi 100 PC provide users with Internet connection services throughout PRC and a nationwide roaming ¡§one touch to net¡¨ function, together with one-year and seven-month free Internet connection service respectively.

It is expected that Legend PC sales will likely to grow 50 pct and 40 pct in FY2001 and FY2002 respectively.


Set-top box

PCs remain scarce in China. There are an estimated 7m units in the country or a penetration rate of lower than 1 pct. With set-top box, TV sets can be a tempting alternative to computer users to connect with the Internet world.

Legend has already launched its set-top box early this year.


Notebook computers and servers

Notebook computers and servers are another areas of growth for Legend. Legend notebook and severs ranked first and fourth in the PRC respectively last year.

Legend added ¡§one touch to the net¡¨ function to its newly launched notebook computers. By teaming up with China Telecom, Legend¡¦s notebook computers offer a nation-wide easy access to the net feature. This further enhances the mobility of notebook computers. All customers of Legend notebook computers are entitled to 7 months free Internet access, representing a coverage of nearly 2,000 cities throughout China via China Telecom¡¦s 163 network, which will likely to boost the sales of Legend notebook computers. It is estimated that Legend would possible have a sale of 120,000 to 150,000 notebooks this year, a double to the sales in 1999. In addition, it will also further enhance the development of Legend¡¦s Internet strategies.


ISP/ICP

Legend officially launched its Chinese language portal, FM365.com on April 18, 2000 and is likely to get the ISP license in 2H2000.

For this portal service, Legend aimed at being one of the China¡¦s largest Internet portals by FY2001. The initial investment will be HK$200m and it is targeted to acquire 1.5m subscribers and 8m daily pageview. FM365.com has been growing rapidly and acquired an average of 2 to 3m daily pageview in June 2000.

In order to enrich its content and service of this portal, Legend has signed cooperative deals with nearly 200 content and technical service providers like Hollywood.com under different cooperation models and FM356.com will include Information Channels such as news, education and entertainment. This portal will generate revenue from advertising, as well as from online-trading and electronic-commerce commissions.

Leverage on the strong brandname and market position, we expect its 1.5m subscribers target can be achieved without difficulty, as the company will bundle the portal with its personal computers and notebook computers selling to non-corporate users. Legend also offers one year free internet subscription to its Legend Conet PC and 7 months free internet subscription to Tongxi 100 PC and its middle to high end notebook computer users.

Legend has no initial plan to build infrastructure for the ISP business. Instead, Legend now plans to continue to team up with China Telecom and act as a wholesaler. Legend will continue to offer ISP service to its PC purchasers ¡V Legend Conet, Tongxi and notebook ¡Vafter the expiration of the free Internet subscription.

Earnings contribution from the ISP/ICP business will be negligible in the near term. However, with a robust growth in the number of units being sold of Legend PC, the subscribers of its ISP/ICP will likely to increase explosively in the coming years. Hence, the business potential arising from the ISP/ICP segment will be enormous.


Distribution Business

Legend continues to expand its distribution network to over 3000 distributors. After restructuring of its business in the beginning of this fiscal year, the efficiency has been greatly improved leading to a growth of 55 pct in its revenue in FY2000

With the growing popularity of Internet applications, the demand for networking products in the market will be rocketed. In order to capture this golden opportunity, Legend teamed up with D-Link to jointly develop the PRC networking market.

Legend also plans to transform its existing distribution business into e-distribution business, which consists of a B2B e-commerce platform and logistics system.


System Integration Business

The Internet fever not only boosts the demand of computer hardware but also the demand for system integration and Internet relation solutions, especially for the B2B e-commerce solutions for different industries.

In order to capture this market in a more profitable and efficient way, Legend has restructured its system integration business with a focus on three major industries namely finance telecommunications and taxation. The business sector has launched a number innovative of products including:
Industry Product
Finance Smart Banking,
Power Automated Banking System

Telecom Telecommunications Billing Account System,
Mobile Information Integration Management System,
Legend Call Centre

Taxation China Taxation Administration Information System,
Regional Taxation Information Management System



Motherboard Manufacturing Business

Legend¡¦s motherboard manufacturing business turned around during 1999, with annual sales of over 2.3m units (30 pct were used for manufacturing Legend PC). By exploring the European market, focusing on the high margin product lines, together with a better control in inventory and quality, the overall gross margin for this division improved remarkably to 25 pct.


FINANCIAL

Legend placed 200m new shares in March 2000 with net proceeds of about HK$1.65b attained. The group has used HK$240m to repay its borrowings. As a result of which, the group has net cash reserve of HK$1.8b as at 31st March 2000, which is sufficient for Legend¡¦s CAPEX plan. Legend plans to use US$25m to enlarge its production capacity in the Beijing production plant and to invest US$20m in the joint venture with D-Link.


COMPARATIVE VALUATION

PC and distribution business
6-Jul-2000 Price 2000 PE 2001PE
Legend (HK$) 7.3 75.2 56.3
Dell (US$) 47.4375 51.6 39.2
Gateway (US$) 54.4375 29.7 24.2
Compaq (US$) 25 25.0 18.5


Legend is the No. 1 PC seller in the PRC and has an distribution network of over 3,000 distributors. Legend¡¦s PC and distribution businesses account for 91 pct of its operating profit. The closest valuation benchmarks of Legend¡¦s PC business can be compared with Dell. We value Legend¡¦s PC business on 39x FY2001 earnings, which is HK$4.61.


ISP/ICP
US$ Price Mkt Cap (bn) No of subscribers (mn) Value per subscribers
American On Line 56.25 129.22 22 5,873
Excite@home 49.25 5.44 1.2 4,531
Pacific Internet 15.937 0.20 0.3 672


The ISP/ICP business would have to be valued based on its number of potential subscriber. By comparing the ICP/ISP companies listed in Naqsad, the valuation of subscribers is ranged broadly from US$672 TO US$5,873. With potential to acquire 1.5m subscribers in the short term, the ISP/ICP business of Legend can be valued at between HK$1.1 and HK$9.3 per share.

We believe determining Legend¡¦s ISP/ICP by directly comparing with AOL or Excite@Home is not pragmatic. However, by comparing with Pacific Internet, an Asian Internet company, it can provide us some hints of a possible bottom price for Legend¡¦s ISP/ICP business. Taking 50 pct of the valuation of Excite@Home or US$2,265 per subscriber as a benchmark for the upper limit of the valuation of Legend¡¦s ISP/ICP business, we can value its ISP/ICP at between HK$1.1 and HK$3.6.


INVESTMENT RATING

At HK$7.15, Legend is trading at 55.1x FY2002 earnings ¡V relatively high when comparing with those PC manufacturers listed in US.

By applying the method of sum-in-parts, Legend can be valued in a range from HK$5.71 to HK$8.21 or 14.8 pct higher and 21.2 pct lower than its current price HK$7.15. MARKET PERFORMER


EARNINGS FORECAST
HK$m 1999 2000 2001F 2002F
Revenues 11,633.6 17,449.6 23,989.7 31,875.7
COGS, SG&A expenses & other op expenses -11,248.6 -16,846.4 -23,150.1 -30,760.1
Depreciation Expense -72.2 -93.3 -127.8 -146.9
Other Operating Income 0.4 2.8 3.1 3.4
Operating Income 313.1 512.8 715.0 972.2

Interest Income 13.6 16.4 65.4 43.2
Interest Expense -46.3 -41.5 -26.6 -11.2

Earnings Before Taxation 280.5 487.7 753.7 1,004.1
Income Taxes -5.0 3.2 -20.3 -24.4
Minority Interest -0.3 -10.0 -14.7 -19.6
Net Income 275.3 480.9 718.8 960.1

EPS (HK cents) 4.0 6.8 9.7 13.0
PER (x) 178.8 105.1 73.6 55.1


Kary Sei CFA
e-finet Research

[Perth]

ist doch wohl eher verkaufsargument, dieses research...

At HK$7.15, Legend is trading at 55.1x FY2002 earnings ¡V relatively high when comparing with those PC manufacturers listed in US

=> INVESTMENT RATING: MARKET PERFORMER HK$7.15