Introduction

SUNeVision (1686 HK)’s share price has been on a steady uptrend since July this year, rising c.50% from July to date, supported by the easing interest rate cycle. However, there was a retreat from HKD4.1 at the end of October 2024, due to concerns about a potential slower pace of interest rate cuts. Our analysis suggests that dividends can grow at a 10% CAGR from FY6/24 to FY5/27, even if effective interest rates remain stable over the next three years. Additionally, recent rumours indicate that Sun Hung Kai Properties (“SHKP”; 0016 HK) may exercise its convertible notes in SUNeVision. With SUNeVision's current free float at 26%, it would be technically impossible for SHKP to exercise its rights due to HKEx’s 25% minimum free float requirement.

We also revisited our forecasts for the company after (1) conducting channel checks on recent market pricing for colocation and hyperscalers, and (2) adjusting the ramp-up schedule for new facilities. We now expect SUNeVision’s revenue to grow at a 16% CAGR from FY6/24 to FY6/27, driven by the ramp-up of its new data centre facilities – MEGA Gateway and MEGA IDC. We continue to see upside in dividends and expect DPS to grow by 14% CAGR from FY6/24 to FY6/27F.

Within our global data centre coverage, we favour SUNeVision, as the company offers the highest EBITDA CAGRs – at 18% from FY6/24 to FY6/26F – and is trading at only 13.2x 12m forward EV/EBITDA, compared to the 22-24x FY25 EV/EBITDA of Equinix (EQIX US) and Digital Realty (DLR US), which offer EBITDA CAGRs of only 9-11% from FY23 to FY25. Additionally, SUNeVision provides a 3.2% dividend yield for FY6/25, compared to 2-3% from Equinix and Digital Realty for FY25. We also prefer SUNeVision over China IDC companies such as GDS (9698 HK) and VNET (VNET US), which trade at 7-13x FY25 EV/EBITDA, remain loss-making, and face ongoing concerns over high leverage and declining pricing. We believe SUNeVision’s recent share price retreat offers a good entry point to capture future upsides.

Rumours on parent company exercising convertible rights seems to be misplaced

We heard market rumours that SHKP might convert its convertible note into c.1.7b new shares at HKD0.10 each, massively dilutive to existing shareholders. Given the current 26% free float of SUNeVision, we clearly understand that converting all those notes into shares is technically impossible as that would not meet minimum 25% free float requirement of the HKEx. We also conferred with management and understand that SHKP has no intention or need to convert the convertible notes.

As one of the earliest data centre players in Hong Kong, SUNeVision was listed on the GEM Board of the HKEx in 2000 with 83.13% of the issued share capital held by SHKP initially. After almost two decades of growth and development, the company migrated to the Main Board in 2018. Per the rule of listing in the HKEx Main Board (8.08), at least 25% of the issuer’s total number of issued shares (excluding treasury shares) must always be held by the public (the requirement is 15% for the GEM Board).

Until end of FY6/24, for actual number of shares, SHKP held 73.97% while the public held 26.03%, meeting the free float requirement. Moreover, SHKP also held HKD172mn convertible notes unexercised. If fully exercised, SHKP will own 85% interest of the company.

While SHKP is entitled to convert the note into 1.7bn new shares at HKD0.1 each at any time and with no end date on paper, we believe that converting the notes into substantial number of shares is technically impossible.

Revenue assumptions revisited on a per MW basis

The company revenue growth will speed up in FY6/25 and beyond, driven by the ramp up of its new facilities MEGA Gateway and MEGA IDC. We revisited our revenue assumptions on a per MW basis by taking into a deeper look into (1) the ramp up schedule of new facilities, and (2) the latest market pricing of colocations and hyperscalers.

Designed available IT capacity up to 280MW, from current 101MW

SUNeVision’s total available IT capacity gradually increased from 80MW as of end of FY6/22 to 101MW as of end of FY6/24 with MEGA Gateway, a 20 MW facility in Tsuen Wan area which started operations in Mar 2023. We expect available IT capacity to increase to 134MW and 150MW as of end of FY6/25 and FY6/27, respectively, with MEGA IDC phase 1, a 50MW facility in Tseung Kwan O area, which started operations in January 2024. Meanwhile, we understand that the first customer moved in MEGA IDC phase 1 in around April 2024, and three customers have already moved into MEGA IDC phase 1 (taking up around 30% of available IT capacity). SUNeVision is currently in the signing stage with the fourth customer (who will take up around another 30% of available IT capacity) and will eventually move in before end of June 2025. The remaining phase 2 of MEGA IDC, with available IT capacity of 130MW, will come into service by latest in December 2026.

Ramp up of new facilities on track

For MEGA IDC phase 1, we understand that a major US-based cloud service provider and two bank customers have already moved in, taking up 30% of capacity (15MW). Additionally, the company is currently in final signing stage with another cloud customer for MEGA IDC phase 1, and it will take up another 30% of the capacity (15MW), targeted to move in before June 2025. For MEGA Gateway, our check suggests that MEGA Gateway is now fully committed. Therefore, we believe the two new facilities will be on track to be fully filled up in two to three years from operation start.

Overall, we expect the company’s overall utilised IT occupancy rate to increase to 74% in FY6/25F from 69% in FY6/24 and increase to 78% and 83% in FY6/26F and FY6/27F, respectively, riding on the gradual ramp up of MEGA IDC phase 1.

Our recent channel checks suggested pricing for SUNeVision’s new facilities can vary a lot based on customer type. For US-based hyperscalers, wholesale monthly pricing remains steady at c.HKD1,100 per KW (excluding power; equivalent to c.USD1.7mn per MW per year), similar to few years ago. For China-based hyperscalers, monthly pricing can be lower and reach below c.HKD1,000 per KW due to heavy competition, especially with GDS’s new supply in Hong Kong. However, we understand that SUNeVision is not targeting China-based hyperscalers for their new facilities, given that pricing is not favourable.

For financial institutes, wholesale monthly pricing can be much higher at c.HKD1,500 per KW (excluding power; equivalent to c.USD2.3mn per MW per year), c.40% higher than the pricing for US-based hyperscalers. For colocation pricing, we understand that SUNeVision commands a 10-20% premium to market price at c.HKD2,900 (including power; equivalent to c.USD4.5mn per MW per year).

For MEGA Gateway, we understand that most of the facility will serve colocation customers. The company has positioned the facility as an alternative site for customers with higher connectivity demand. On the other hand, for MEGA IDC (both phase 1 and 2), we expect the customer base will be mainly composed of hyperscalers and financial institutes, with a higher mix of hyperscalers.

Overall, we forecast the effective pricing for the company’s two new facilities is HKD1,600 per KW per month (equivalent to c.USD2.5mn per MW per year), taking into account the customer mix. Also, we expect its overall effective MSR (monthly service revenue) to gradually decline from the current HKD2,500 per month per KW (excluding cross-connects), with the company transiting to serve more wholesales customers in MEGA IDC.

Expect revenue CAGR of 16% from FY6/24-27F

While much of the incremental revenue will come from ramp up of new facilities, future incremental revenue will be also driven by cross-connects and rental reversion in existing facilities. Management expects a c.6% rental reversion on existing facility given its strong pricing power.

We estimate that the company’s cross-connect business currently contributes c.12% of the company’s revenue. The company started lifting the cross connect pricing by 10% from March 2024, from the current c.HKD1,800 per month. Additionally, we also expect the number of cross-connects to grow by a low-single-digit percentage per annum going forward driven by the (1) recent landing of ADC (Asia Direct Cable), (2) other upcoming subsea cables landing, and (3) the move-ins of customers in MEGA Gateway with high connectivity demand.

Overall, we expect the company’s total revenue to increase by 19%, 17%, and 13%, in FY6/25F, FY6/26F, and FY6/27F, respectively.

Solid DPS upside even assuming stable effective interest rates

The HKD3.8bn shareholder loan has been extended and will be converted to floating rate Jan 2025 onwards. The company will benefit from its 100% floating-rate debt structure, taking advantage of the declining interest rate environment. In terms of dividend, management does not expect an increase in dividend payout ratio in the coming couple of years. Moreover, management is being prudent committing a at least stable DPS in FY6/25. Despite that, we expect a 14% DPS GAGR from FY6/24-27F, driven by (1) the improving growth profile, (2) lowering interest rate environment. We currently assume a 1.5ppt drop total in effective interest rate, from 5% in FY6/24 to 3.5% in FY6/26F. Even if we assume its effective interest rate remains at 5% for the next few years, DPS will still grow by 10% GAGR from FY6/24-27F.

Conclusion and recommendation

Within our global data centre coverage, we favour SUNeVision, as the company offers the highest EBITDA CAGRs – at 18% from FY6/24 to FY6/26F – and is trading at only 13.2x 12m forward EV/EBITDA, compared to the 22-24x FY25 EV/EBITDA of Equinix (EQIX US) and Digital Realty (DLR US), which offer EBITDA CAGRs of only 9-11% from FY23 to FY25. Additionally, SUNeVision provides a 3.2% dividend yield for FY6/25, compared to 2-3% from Equinix and Digital Realty for FY25. We also prefer SUNeVision over China IDC companies such as GDS (9698 HK) and VNET (VNET US), which trade at 7-13x FY25 EV/EBITDA, remain loss-making, and face ongoing concerns over high leverage and declining pricing. We believe SUNeVision’s recent share price retreat offers a good entry point to capture future upsides.

We largely maintained our revenue forecasts but revised down our EBITDA forecast by 1-3% for FY6/25/26/27F as we factor in higher operating costs during the initial ramp up of MEGA IDC. We forecast EBITDA to grow by 18%, 19%, and 13% in FY6/24F, FY6/25F, and FY6/27F, respectively.

We remain positive on the company’s outlook, given its strong pricing power and robust wholesale demand coming from cloud service providers, as well as financial institutions. Maintain BUY with a slightly lower TP of HKD5.0 (previously HKD5.2), based on a 17x FY25F EV/EBITDA (unchanged), c.0.5 SD above its historical average with improving outlook and upside on dividend.

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