In the gem, the share price tripled in two years, from HK $2.30 to more than HK $7, but after switching to the motherboard, it was like an electrocardiogram, but the share price fell by 20% two years later. Xinyi Group (01686) suffered a sigh.

Source: Zhitong Finance and Economics

Zhitong Financial APP observed that the share price of Xinyi Group fluctuated downwards last week, and it was barely red on the 21st, and after the same day, Xinyi Group announced interim results for the six months to December 31, 2019, with an increase of 12.4% in revenue and a slight drop in net profit of 0.4%, casting a shadow over the stock price that was not strong. Sure enough, the share price fell unilaterally after the opening of trading on the 24th of this week, falling 3.55% to HK $5.15 at the close, with a turnover of 1.16 million shares.

Although the stock price has fallen, the trading volume has not been significantly enlarged, indicating that it has not caused panic flight, and from the stock price in the past year, it has fallen again to a position with strong support, so does Xinyi Group have any concern value?

Cut down investment property and focus on data center

Zitong Financial APP understands that SUNe.com Group, established on January 25, 2000, is an indirect wholly-owned subsidiary of Sun Hung Kai Properties and has become the holding company of several information technology infrastructure and Internet services businesses of Sun Hung Kai Properties Group. It is mainly engaged in three major businesses, providing data center, facility management and value-added services, system installation and maintenance services, and leasing investment properties.

In 2017, Xinyi Group has developed into a major data center operator in Hong Kong. due to good recurrent earnings, in terms of shareholder profits, management believes that it has met the requirements for listing on the motherboard, so it applies to transfer to the motherboard. The application for transfer to the main board was approved on January 12, 2018, January 19, 2018 became the last trading day of the gem, and trading began on the main board on January 22. Since then, however, there has been a scene in which the stock price has changed from a long bull to a roller coaster.

The company is still the same company, only changed a transaction code. Specific to the business level, the proportion of the three businesses is not equal. In terms of revenue contribution, until the latest performance, the data center business is the core business, mainly operated through the subsidiary Interconnection advantage Co., Ltd., provide comprehensive facility management services from standard shelves to customer-customized facilities, such as power supply, 24-hour monitoring of operation services, data center installation and maintenance and high-speed Internet connection.

Interim results showed revenue of HK $819 million, up 12.4 per cent year-on-year, gross profit of HK $460 million, up 12.6 per cent, and profit attributable to shareholders of HK $410 million, down 0.4 per cent from a year earlier.

Specific to the performance of each segment, according to the ongoing business, the income of data centers and information technology facilities is HK $729 million, the contribution ratio of income is 89%, and that of the same period in 2018 is 88.5%. Income from system installation and maintenance services is HK $89.32 million, accounting for 11% and 11.5% in the same period in 2018.

It is worth mentioning that the group "cut" no income from the investment property business in mid-2019, and the group's property rental income reached HK $31.4 million in mid-2018, which estimated that data center and system security services accounted for 84.7% and 11% respectively.

According to the results announcement, in November 2019, Xinyi completed a related party transaction with Sun Hung Kai Properties, in which Xinyi acquired a company holding a data center facility MEGA Two, and sold two companies of the Group holding properties in Millennium City I and Kodak Tower II, and terminated the investment property-related business after the sale of the property company, further focusing on the data center business.

In terms of profitability, the group's gross profit margin did not fluctuate significantly, with a slight decline of 56.16% compared with 57.24% in the same period last year. However, due to a sharp increase in administrative costs by 47%, financial costs have increased to 2.8 times that of the original, resulting in a slight decline in net profit. Zhitong Financial APP learned that this was related to the acquisition business during the period, while the sharp fluctuation in financial costs was mainly due to a 67% increase in depreciation charges compared with the same period last year, as well as an increase in interest due to an increase in loans.

Just look at the 7% year-on-year increase in operating profit during the period, indicating that the company's business activities are sustainable. If the impact of depreciation expenses is excluded, the net profit performance may be better than it is now, but the loan-related debt problem can not be ignored.

With a debt ratio of 220% and a short debt of 2.2 billion, what is the urgent solution?

Zhitong Financial APP observed that as of December 31, 2019, Xinyi had about HK $490 million in cash, while bank loans and shareholder loans were HK $5.83 billion and HK $3.3 billion respectively, of which shareholder loans were unsecured six-year term loans provided by Sun Hung Kai Properties as a "benefit" as shareholders.

But during the period, the company generated a lot of loans because of the high expenditure. After the acquisition of MEGA Two, the company formed the camp of MEGA Two connecting the mainland, MEGA Plus, the exclusive flagship facility, and MEGA-i, the hub of Asian network connection. In addition to the acquisition of new projects, the facilities of the original projects have also been renovated. At the same time, two new land use projects have been developed.

To cover these capital expenditure, total loans increased by HK $1.08 billion to HK $9.13 billion during the period. In terms of net loans (total loans-bank balances) to shareholders' equity, the debt ratio is 220%. Even excluding long-term unsecured shareholder loans, the debt ratio is still 136%, compared with 103% on June 30, 2019. The sharp rise in the debt ratio increases capital risk.

Even without long-term unsecured shareholder loans, its total bank loans still reached HK $5.83 billion, of which short-term loans reached HK $2.18 billion in one year, far exceeding the company's cash on hand and operating profits combined. However, according to the announcement, Xinyi has obtained HK $3 billion in five-year financing by refinancing short-term bank loans and repaid short-term bank loans within one year.

Through the way of revolving loans to meet the urgent needs, if there are no changes in recent years, but the long-term concerns have not been removed, the current situation of its high debt ratio has not actually changed, the risk still exists, investment still needs to be cautious.