Bank of Communications International has published a research report initiating coverage on CTF SERVICES (00659) with a "buy" rating and a target price of HK$9.42, based on a sum-of-parts valuation model with a 30% liquidity discount applied to fair value.

CTF SERVICES (formerly New World Development Company Limited) operates as a conglomerate with a diversified business portfolio primarily across Hong Kong and mainland China. The bank believes CTF SERVICES benefits from multiple positive factors, including stable cash flows and a continuously growing insurance business that drives earnings prospects, along with attractive dividend yields and potential interest rate cuts that could enhance valuations.

Over the next five years, the insurance business is expected to contribute more to Adjusted Operating Profit (AOP) than other business segments. CTF SERVICES has demonstrated stable financial performance in recent years, primarily supported by its resilient toll road and logistics business portfolio, which generates robust and highly visible cash flows.

The bank expects the insurance business (Chow Tai Fook Life Insurance) to become the primary earnings driver going forward, with its AOP contribution rising from 23% in FY2024 to 34%/36% in FY2028/29, surpassing the toll road business, which has been another major profit contributor.

The progressive dividend policy is expected to provide attractive returns. The company's core dividend per share (DPS) has grown steadily from HK$0.58 in FY2020 to HK$0.65 in FY2024. Meanwhile, CTF SERVICES' adjusted EBITDA has reached HK$5-7 billion over the past few years, corresponding to a payout ratio of approximately 35-40%.

The bank believes the company can generate sufficient cash flows to support annual dividend payments of approximately HK$2.5-3 billion in the future. Core DPS is projected to reach HK$0.65/0.68/0.71 for FY2025/26/27 respectively (excluding special dividends), representing core dividend yields of 8.4%/8.8%/9.2% based on the September 2 closing price.

For FY2025-29, revenue and AOP are expected to achieve mid-single-digit growth. The bank views the insurance business (Chow Tai Fook Life Insurance) as the main earnings driver, with AOP expected to grow approximately 10% over the next two years. The bank estimates company revenue will achieve a 5-year CAGR of 5.6% during FY2025-29, while AOP is projected to grow 4.7% year-over-year in FY2025 and FY2026, reaching HK$4.36 billion and HK$4.57 billion respectively, before accelerating to approximately 8% year-over-year growth in FY2027-29.

Key risks include: 1) Heavy dependence of the business portfolio on Hong Kong and mainland China economies; 2) Prolonged period of elevated interest rates; 3) Hong Kong insurance market growth falling short of expectations; 4) Policy adjustment risks for toll road operations.