To The Moon

Proxy to AI Boom

[By Edmund Chan: CIO of Tiger Fund Management]

A lot of AI stocks have run up. So, it is timely to look at laggard plays.

I’ve decided to look at the Hong Kong market since it has lagged behind other developed markets. This year, the Hang Seng Index has declined 3% compared to 17% rise of S&P500 Index.

That is where I found a gem - a company that I have followed for many years.

That company is SUNeVISION.

SUNeVISION $SUNEVISION(01686)$ is the largest data center company in Hong Kong. The ongoing AI boom will result in a surge of data usage and, correspondingly, lead to higher demand for data centers. This will greatly benefit SUNeVISION (@$4.04; 03/07 Close).

Here are some insights:

• Largest data center company in Hong Kong

• Most connected

• Carrier-Neutral Solutions

• Recurring Income

• Undervalued dividend company

Largest data center company in Hong Kong

SUNeVISION is the largest data center service provider in Hong Kong, with a dominant 26% market share and operates six data centers across strategic locations in Hong Kong. The company is backed by Sun Hung Kai Properties (73.5% stake), the largest property developer in Hong Kong. Raymond Kwok, the chairman of Sun Hung Kai Properties, is also the chairman of SUNeVISION.

With a total Gross Floor Area (GFA) of 1.5 million sq. ft., SUNeVISION's data centers are equipped with a cutting-edge fiber optics system that ensures highly reliable Internet connectivity.

Among its exceptional assets, MEGA Plus in Tseung Kwan O stands out as a top-tier greenfield data center located outside the Industrial Estate without any sublease constraint. Other assets include  MEGA-i (Chai Wan, the most connected global telco and ISP hub in the region), MEGA Two (Fotan, Mainland Telco & Internet Gateway), ONE (Kwun Tong, convenient site in Kowloon CBD) and JUMBO (Tsuen Wan, cost-effective site for diversity consideration). 

The company has ambitious plans to double its capacity by expanding another 1.4 million sq. ft. in the coming years.

Most connected

The company has around 15,000 cross-connects for high-speed and reliable interconnectivity. This makes it the most connected company in Hong Kong.

At MEGA-i , the company has attracted over 200 telco carriers and a diverse array of service providers. This hub boasts an impressive presence, housing the Points of Presence (POPs) of 9 submarine cables. Additionally, MEGA-i is equipped with its own Internet Exchange (iAIX) and plays a crucial role in facilitating HKIX's Research and Education (R&E) network.

SUNeVISION's data centers offer a mature network-dense ecosystem, providing substantial cost savings for its customers. By eliminating the need for additional Points of Presence (PoPs) and costly upstream transit fees, the company empowers its customers to expand their business coverage to any corner of the world in an cost-effective manner.

Carrier-Neutral Solutions

SUNeVISION has established the MEGA Campus, extending connectivity from the highly connected MEGA-i to other high-tier data centers like MEGA Gateway, MEGA IDC, MEGA Plus, and MEGA Two.

These facilities are interconnected through a dedicated dark fiber network, supported by around 15,000 cross-connects. With City Points of Presence (PoPs) for major submarine cables within their facilities, SUNeVISION facilitates direct connections to multi-cloud platforms and exchanges, reinforcing Hong Kong's role as a regional information hub and a strategic gateway to mainland China.

Recurring Income

Data data centers boast a remarkable attribute: customer stickiness. To minimise operational disruption, clients gravitate towards reliable data center operators such as SUNeVISION.

Furthermore, there are high barriers to entry for companies to enter the data center market. This is because of the substantial capital investments in properties and essential equipment such as racks and electronic devices.

Hence, the data center business is similar to that of a property landlord, with stable and recurring revenue. Hence, it is unsurprising for Sun Hung Kai Properties to enter the data center market via SUNeVISION.

Undervalued dividend company

SUNeVISION is a solid dividend company, trading at 5.1% dividend yield. It has a consistent track record of growing dividends in the past one, three and five-years.

In its recent 1H2023, the net profit of SUNeVision grew 6% to HKD433m, driven by an 11% rise in revenue and EBITDA.

The management highlighted that expansion plan remains on track with the launch of MEGA Gateway. Already, customers are moving in, with 65% of space pre-committed.

The company is trading at 16.0x FY2024 P/E, with estimated FY2024 EPS growth of 19.6%. Stronger earnings growth is expected to be in FY2024 with income contribution from new IDCs.

The prospect of data center in Hong Kong remained robust with several subsea cables due to land in Hong Kong in the next few years. Recently, Asia's largest capacity cable, Asia Direct Cable (ADC), is connected at HKIS-1 for its Hong Kong segment.

In terms of historical valuation, SUNeVISION is trading near bargain levels. In terms of P/B and P/E, it is trading near two standard deviation below its respective 3-year mean.  

In conclusion, SUNeVISION's strong connectivity and carrier-neutral approach showcase its continued dominance in the Hong Kong data center industry. The ongoing AI boom will result in higher demand for data. This is a massive tailwind for SUNeVISION, a solid dividend yield company.