SUNeVision profit rises, but near-term pressures worry investors

The Hong Kong data center operator’s revenue rose 10% in its fiscal year through June, fueled by demand from AI applications and cross-border data traffic

Key Takeaways:

• SUNeVision’s revenue rose 10% to HK$2.94 billion in its latest fiscal year, while its net profit rose 8% to HK$980 million
• The data center operator’s shares plummeted 13.8% after it published its latest annual results, though they remain up over 50% year-to-date

By Lee Shih Ta

Booming demand for low-latency data processing fueled by AI inference engines, cross-border e-commerce platforms and financial trading systems is transforming Hong Kong to an important gateway between China and the rest of the world for data centers. One player that’s well-placed to benefit from that trend is SUNeVision Holdings Ltd. (1686.HK), though the data center operator’s latest annual results failed to impress investors.

SUNeVision reported HK$2.94 billion ($376 million) in revenue for its fiscal year through June, up 10% from the previous year. Its core infrastructure unit – consisting of data centers and related facilities – contributed the lion’s share of the total at HK$2.72 billion, up 11% year-on-year. Capacity upgrades from existing tenants, specifically from cloud platforms enabling AI inference workloads, was a key driver behind the segment’s growth, management noted.

SUNeVision provides large-scale data center and connectivity services, operating as a wholesale co-location provider. The company leases server-hall capacity to cloud service providers, telecommunications carriers, and financial institutions using extended contracts that ensure high tenant-retention rates and dependable revenue visibility.

The company operates purpose-built facilities across Hong Kong. Its MEGA-i center in Hong Kong’s Chai Wan district ranks as Asia’s most connectivity-dense data hub. Its MEGA Plus center in the city’s Tseung Kwan O district and MEGA Two in Sha Tin support multinational cloud applications and AI-powered high-density computing. Its MEGA Gateway in Tsuen Wan is adjacent to international submarine cable landing stations. And its new MEGA IDC facility is ramping up with its Phase One currently online and Phase Two underway.

New tenants

Management noted that growing AI application investment in deployments requiring close user proximity was playing to its advantage in signing up new customers thanks to Hong Kong’s strategic geographical and network advantages. That helped utilization rates across its MEGA IDC facility maintain steady yearly gains during the fiscal period. And even though some of that leasing momentum slowed during the year, talks with potential customers continued to grow, indicating healthy demand going forward.

The company’s profit reached HK$979 million for the latest fiscal year, up 8% year-on-year, slightly trailing the revenue growth rate. Despite maintaining steady cash flow from its core hosting operations, executives said that elevated financing burdens were constraining stronger growth for the company’s profits. SUNeVision’s interest costs ballooned 53% to HK$337 million in the latest year due to reduced interest capitalization following the launch of MEGA IDC Phase One, weighing on the company’s profits. EBITDA still rose 15% to HK$2.13 billion, helping to improve the company’s operating margin by three percentage points to 72% — reflecting greater efficiencies from economies of scale and budgetary discipline.

The company acknowledged macro pressures in the form of hefty capex needs in the near-term for projects including MEGA IDC Phase Two, as well as other projects in the Sha Tin and Tsuen Wan districts requiring significant spending in the years ahead. The company has some financial flexibility though its parent, local real estate giant Sun Hung Kai Properties. Still, financing costs will remain an important factor over the short-term, especially in a high interest rate environment.

The company emphasized how its infrastructure is in an operational sweet spot, with its utilization rates rapidly climbing due to the growing use of AI applications and demand for cross-border data flows. China’s strict compliance requirements have positioned Hong Kong as an important transit hub, with international financial institutions increasingly preferring to route their sensitive data through local security frameworks.

But such positioning is also attracting both global majors and Chinese companies, resulting in intensifying competition in Hong Kong from the likes of Equinix (EQIX.US) and Digital Realty (DLR.US) from abroad, as well as major Chinese operators such as China Mobile (0941.HK) and GDS (9698.HK; GDS.US).

Stock selloff

While SUNeVision put a positive face on its latest performance and prospects, investors didn’t seem to agree. On the first trading day after the report’s release, the company’s shares plummeted 13.8% to close at HK$6.99. The stock fell as much as 16% in intraday trading, while its volume was eightfold the daily average.

Investors’ primary concerns center on whether SUNeVision can maintain leasing momentum at its newer facilities, such as MEGA Gateway and MEGA Two. Any failure of utilization rates to rise as anticipated would directly weigh on the company’s revenue growth. Simultaneously, escalating financing costs in the current high-interest rate environment are eroding confidence in future earnings resilience. Notably, SUNeVision shares had nearly doubled this year ahead of results announcement, suggesting some of the recent selloff may have been the result of profit taking.

From a valuation perspective, things look a bit brighter for SUNeVision. The stock now trades at a price-to-earnings (P/E) ratio of roughly 29 times, representing a significant discount to Equinix’s 75 times and Digital Realty’s 43 times, making its shares look comparatively cheap. Crucially, the company’s backing by Sun Hung Kai provides some inherent advantages in terms of future capital support and land sourcing, reducing some potential financial risks. A pickup in leasing for the company’s new capacity initiatives could help to improve its cash flow, acting as a catalyst for some valuation upside.

BofA Securities noted SUNeVision’s latest results were generally in line with expectations, and maintained its “buy” rating on the company while modestly trimming its price target to HK$9.20 from HK$9.60. The broker believes demand for Hong Kong data centers will be strong, buoyed by AI. It projects the average rental rate for MEGA IDC will hit roughly 40% during the current fiscal year through next June, and climb to about 80% by the fiscal year through June 2027. Such a ramp-up should eventually kick SUNeVision’s EBITDA growth into higher gear.

While SUNeVision’s shares could face some short-term pressure after this year’s run-up, they could fare better over the medium- and long-term on growing demand for data centers in Hong Kong, driven by AI and cross-border data requirements. In such an environment, investors may want to consider the shares after the current correction runs its course.

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