News Analysis: In acquisition mode

Acquired four plots of land in the heart of Shanghai for residential-led mixed-use development for Rmb13.3bn

Sales proceeds from residential portion should be largely sufficient to cover total investment cost

The selected tenderer for six other adjacent plots, earmarked for office/retail development

Kerry Properties won the two-stage tender of a mixed-used development site in Shanghai Huangpu District for Rmb13.3bn (or HK$16.3bn). This translates into an accommodation value of Rmb67,149psm. This did not come as a surprise to the market as the company had earlier made an announcement when it was unveiled as the selected tenderer in the first stage of the tender.

In the last one year, Kerry Properties has been expanding its footprint in Shanghai. This marks the second land acquisition Kerry Properties has made within a year. In Feb-21, Kerry Properties joined hands with GIC to acquire a retail-led mixed-use site in Pudong for Rmb6.01bn. The company has a 40% stake in the project which will provide total GFA of 390,000sm upon completion.

Situated in the heart of Huangpu district in Shanghai in close proximity to landmarks including The Bund, Yu Gardens, East Nanjing Road High Street and the People’s Square, the site comprises four plots of land with total area of 38,103sm. The site is within a neighbourhood with over 160 years of history and is set to be revitalized under the government’s urban redevelopment and preservation plan.

The site is also part of a transit-oriented mixed-use development. It enjoys excellent connectivity with access to the newly opened Yuyuan Station, which is an interchange station of the existing Metro Line 10 and 14, and one stop from Lujiazui Central Business District. 

Upon completion, this mixed-use project will provide total GFA of c.198,500sm comprising c.124,500sm for residential apartments and shikumen townhouses, c.49,000sm for retail, hotel and amenities and c.25,000sm for low-rise offices. Apartment and townhouses are earmarked for sale while retail, hotel and office portions will be retained for long-term investment upon completion.

Based on our estimated ASP of Rmb140,000psm, a complete sale of residential apartments/shikumen townhouses should yield sale proceeds of c.Rmb17bn, largely sufficient to cover total investment costs.

We see this acquisition as a rare opportunity for Kerry Properties to build up its land bank in a prime location in Shanghai. Even though we do not expect any substantial immediate NAV enhancement, this mixed-use project should bring in development earnings as well as strengthen its rental income base, thus brightening its long-term growth outlook. 

Moreover, Kerry Properties was also the selected tenderer for six other adjacent plots, which are mainly for office/retail development. Subject to subsequent grants of land use rights of these adjacent plots, the entire project (10 plots of land)  could offer total planned GFA of 492,000sm.

Capitalising on substantial proceeds from selling Kerry Logistics Network (KLN) shares and KLN’s special dividend distribution, Kerry Properties has been very active in exploring appropriate investment opportunities in Hong Kong and China in 2H21. 

In Dec-21, Kerry Properties won the tender for URA’s Hung Fook Street/Ngan Hon Street redevelopment in To Kwa Wan with land premium of HK$5.59bn. This translates into an accommodation value of HK$12,591psf. This redevelopment project has total GFA of 0.44msf including 73,900sf for retail purpose. About 665 units are expected to be built. 

Taking into account c.HK$11.6bn received from accepting the partial offer in respect of Kerry Logistics Network (KLN) shares, placement of KLN shares and special dividend distribution from KLN, and allowing for interim and special dividend payment, we estimate that its gearing will rise to 36-37% from Jun-21’s 24%. Despite the higher gearing, its financial risk remains manageable in our view. That said, we do not rule out the possibility of the company selling non-core assets to improve its balance sheet strength.

The stock, trading at a 76% discount to our appraised current NAV, is attractively valued. A string of new investments in Hong Kong/China has laid down a strong foundation for its future growth and, hence, our positive view on its long-term investment value. On the other hand, ongoing share buyback should provide strong support to its near-term share price. We maintain BUY rating with HK$29.35 TP.