Company Update: Realizing the value of aircraft leasing business
In Dec-21, Cheung Kong Assets Holdings (CKAH) sold its aircraft leasing business for US$4.28bn or HK$33.2bn to Maverick Aviation Holdings, managed by The Carlyle Group. This deal involves 125 aircrafts, mainly narrow body aircraft. The disposal is estimated to produce gains of US$170m upon completion. Due to the prolonged pandemic outbreak, the operating landscape of aviation has undergone major structural change given travel restrictions and border control measures. This makes the risk and earnings profile of aircraft business more unpredictable. We see this divestment as a sensible move which enables the company to reallocate the capital into businesses with better long-term growth prospects in the post-COVID era.
CKAH has expedited the sales of 21 Borrett Road, the super-luxury development in Mid-levels since May-21, and has sold 29 apartments for a total of HK$6bn or c.HK$85,300psf. Profit booking is expected to kick in from 2H21 onwards. Based on our estimated all-in development costs of HK$47,000psf, we forecast decent pre-tax development earnings of >40%.
In 2021, CKAH was active in exploring investment opportunities in residential land market with HK$11.4bn spent to replenish its land bank in Hong Kong. Following the HK$10.28bn acquisition of a residential site on the former Kai Tak Airport Runway in Feb-21, the company won the tender for a Yuen Long residential site for HK$716m or HK$9,112psf. This site is adjacent to the School of Motoring (Yuen Long) and a five-minute drive from both Yuen Long Station and Long Ping Station. Total GFA is 78,574sf. CKAH plans to build two-storey garden houses on this site. We see this as the best way to exploit the development value of this site which has a tranquil environment on one hand and offers good transportation accessibility on the other.
The company also converted an agricultural land in Kam Tin into residential use with GFA of 137,584sf after paying the land premium of HK$388m or HK$2,820psf. This low-density residential development is about 15-minute walk from Kam Sheung Road Station. Adding up construction and financing costs, we estimate all-in development cost at HK$8,000psf on a saleable area basis.
After repurchasing 410m shares at HK$51 apiece following asset injection from Li Ka Shing Foundation, CKAH bought back another 3.15m shares for HK$164m. This was followed by Li family increasing its stake in the company. Li family bought 27m shares for HK$1.3bn, raising its stake to 46.34%. These not only signals strong embedded value of the company but has also propped up the share price which has risen 9% in the previous three months, outperforming the broad market by 17ppts.
Following the share price appreciation, the stock is now trading at a 57% discount to our assessed current NAV. Valuation remains undemanding. Any further stake increase by Li family would lend support to its share price. We reiterate our BUY call at this stage with HK$63.2 TP, based on target discount of 50% to our Dec-22 NAV estimate.