Unity, a LED light energy management contract (EMC) service provider, has solidified its presence in Malaysia following a couple of agreements signed with the local governments since 2022. We expect these agreements will potentially boost Unity's leasing service revenue with a CAGR of 100% in FY25E-26E (Mar year-end). Financially, Unity has gone through the difficult years following the completion of its debt structuring scheme. More importantly, the introduction of Abu Dhabi capital in 2023 will not only enhance the shareholding structure and balance sheet, but also open the door to business expansion in the fast-growing Middle East market. We forecast Unity to deliver core EPS CAGR of 1.8x in FY25E-26E, and breakthroughs in the Middle East to offer further upside to our current forecast. Initiate with BUY and TP of HK$0.64.
Company background. Unity is mainly engaged in (1) LED lighting systems (mainly EMC model and trading), and (2) renewable energy project construction. The business covers Hong Kong (China), the Chinese mainland, Japan and Indonesia traditionally, with Malaysia and the Middle East being the growth regions.
Malaysia project the key growth driver. Back in Feb 2022, Unity undertook a large-scale energy-saving project from a Malaysia state government agency, namely "Light Source in the Darkness" project. The project aims to help local condominiums in Selangor solve lighting problems and improve energy efficiency through the installation of LED lighting system, with Unity enjoying revenue sharing from energy saving throughout the contract period. The ultimate target of the project is to install 6mn units of LED lights for 8,320 condominiums in Selangor by around 2025E. Given that the target is ambitious, we only model 1.5mn units in total by FY26E.
ORIX Finance to provide funding. To satisfy the growing capital requirement for the Malaysia project, Unity has started cooperating with ORIX Finance (a wholly-owned subsidiary of ORIX Corporation [8591 JP / IX US, NR]) since early 2023. ORIX Finance will provide Unity with receivables-based financing. We think such cooperation could help Unity reduce the initial cash outflow at the fast-growing stage of LED lights installation.
Valuation. Given that we forecast 1.8x earnings CAGR over FY25E-26E, we believe PEG is a good valuation methodology the captures Unity's robust growth outlook. Our TP of HK$0.64 is based on 100x FY25E P/E, on the back of ~100% EPS growth in FY26E, which is equivalent to 1x PEG.
Key risks: (1) Interest rate risk; (2) currency risk, (3) a lack of operating cash flow at the initial stage, and (4) potential project delays.