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Legend Holdings (3396.HK) Summary

Core Investment View

Legend Holdings is a diversified investment group in China with a proven management capability, evidenced by the success of its holdings in Lenovo and China Auto Rental. The company is recognized for value creation, achieving above-peer CROCI of 14%–17% in 2012–2014. However, the investment rating is initiated at Neutral due to the stock trading close to the 12-month NAV-based target price of HK$36.2.

Key Growth Drivers

• Projected Earnings CAGR of 13% for 2014–2017E: Driven by the integration of the Motorola Mobility and x86 businesses acquired by Lenovo in 2014, as well as the turnaround of the modern services, food, and chemical divisions.
• Leverage of Capital and Cash Flow: The company's strong capital base and cash flow from mature divisions allow for flexibility in investing in new segments. With group capex likely peaking in 2016, free cash flow (FCF) is expected to turn positive in 2017E.
• Capital Raising Potential: The group could leverage its net debt to capital (excluding Lenovo) from 41% at end-2015E to 50%, raising up to Rmb17.5bn.

Valuation

• 12-Month Target Price: HK$36.2, based on a 25% discount to 2015E NAV/share of HK$48.3.
• Valuation Metrics:
  • Implies 1.28x P/B and 10.2x P/E.
  • EV/EBITDA is projected at 5.9x for 2017E.

Industry Context

Legend Holdings operates in seven business segments and is a diversified investment group. Chinese conglomerates generally trade at 41%–63% NAV discount, and Legend is positioned to benefit from key macroeconomic trends.

Investment Profile

Financial Highlights

Key Strengths

(1) Diversified Portfolio Aligned with Macro Trends

Legend's diversified portfolio spans across multiple sectors, including IT, property, financial services, modern services, agriculture, chemicals & energy, and financial investments, which together account for 61%, 17%, 4%, 2%, 1%, 3%, and 11% of the group's total assets at end-2014, respectively. These sectors represent over half of China's GDP, making Legend a proxy for the broader Chinese economy.

(2) Quality Assets with Strong Market Positions

• IT: Lenovo, which holds a dominant position in China's PC market.
• Property: Raycom, with 50 projects across 15 cities.
• Financial Services: Legend Capital and Hony Capital, leading in venture capital and private equity.
• Modern Services: China Auto Rental (CAR), the largest car rental company in China by fleet size in 2013.
• Agriculture & Food: Joyvio, which held the No.1 market share in kiwi and blueberry by retail sales volume in 2013.
• Chemicals & Energy: Levima and Phylion Battery.
• Financial Investments: Includes venture capital, private equity, and angel investments.

(3) Strong Management Capabilities and Track Record

Legend's management team has successfully nurtured Lenovo into a leading PC company and has a clear strategy to diversify and capitalize on new economic trends. The group has a strong track record in managing and optimizing its portfolio.

(4) Established Investment Platform for Future Growth

Legend has established platforms such as Legend Capital, Hony Capital, and Legend Star to identify and invest in new opportunities. These platforms provide support through brand leverage, financial assistance, and synergies across the portfolio.

Risks

• Capital Market Volatility: 40% of FY15E NAV is attributed to financial and listed investments.
• Regulatory and Operational Risks: Portfolio assets may be subject to regulatory changes and operational challenges.

Growth Strategies by Division

• IT (29% of GAV, 20% of earnings): Focused on leveraging the growth of the IT sector and the strategic importance of IT in the development of an information-based society.
• Property (19% of GAV, 16% of earnings): Positioned to benefit from urbanization and government support for smart and low-energy-consuming office developments.
• Financial Services (11% of GAV, 9% of earnings): Includes venture capital, private equity, and insurance services.
• Modern Services (10% of GAV, 0.4% of earnings): Includes car rental and senior care services.
• Agriculture and Food (2% of GAV, -1.5% of earnings): Focus on retail sales and market share in specific products.
• Chemicals and Energy (4% of GAV, -3% of earnings): Includes both traditional and emerging sectors.
• Financial Investments (24% of GAV, 58% of earnings): A significant contributor to earnings, highlighting the importance of financial returns.

Summary of Key Financials

Legend is projected to achieve a 13% CAGR in earnings from 2014 to 2017E, driven by the integration of acquired businesses and the turnaround of other divisions. The company's FCF is expected to turn positive in 2017E, indicating improved financial flexibility. The net debt/equity ratio is projected to decline from 67.2% in 2014 to 46.9% in 2017E.

Shareholding Structure

• Public Free Float: 15.1%
• CAS Holdings: 29.0%
• Lian Chi Zhi Yuan: 20.4%
• Lian Heng Yong Xin: 7.6%
• China Oceanwide Holdings Group: 17%
• Individuals (including Chairman Liu Chuanzhi): 9.4%

Conclusion

Legend Holdings is a well-positioned diversified investment group with a solid management team and a diversified portfolio that aligns with key macroeconomic trends in China. While the company has a strong growth potential and value creation track record, its current valuation is seen as fair, leading to a Neutral investment rating with a target price of HK$36.2. The company's ability to leverage its investment platform and manage its portfolio effectively will be crucial for its future performance.