Company Update: Investing for a better future
In Jiaxing, HKR launched Creekside One in Jiaxing for sale in Jul-21, with an overwhelming sales response. All 98 units were sold for c.Rmb500m with pre-tax development margins estimated at 25-30%. Mansion One, which contains 188 mid-rise apartments, has been substantially sold since its launch in mid-Oct. These two developments should dominate the company’s near-term development profits.
In Hong Kong, HKR has sold a further 43 units at Poggibonsi in Discovery Bay for >HK$680m since Apr-21. Thus far, the company has sold 187 units, representing >95% of the total. Recently, HKR sold two more houses at IL PICCO for HK$127m in total. This brought the cumulative number of houses sold to five, representing 24% of the total.
Construction work of the luxury project in Tai Po, a 40/60 joint venture with Hysan Development, is close to completion. This low-density residential development contains 262 units including 41 houses with a GFA of 0.5msf. The project is expected to go on sale when completed in 1H22.
In 1HFY22, HKR concluded the land premium negotiation for Discovery Bay Master Plan 7.0E. Land premium was fixed at HK$5.24bn or HK$4,031psf. Located adjacent to Poggibonsi, this development will provide a total GFA of >1.3msf upon phased completion. With estimated pre-tax development margins of >30%, this sizeable residential project should be the company’s key development earnings catalyst over the medium to long term.
In Sep-21, HKR acquired 12 office floors or 156 office units and 62 car parking lots at Jinsha INCITY in the Qiantang district of Hangzhou for Rmb414m. This marked the company’s first foray into Hangzhou’s office market. The properties generated a total income of Rmb20m p.a. and after-tax profit of Rmb14m p.a.. This implies an initial gross yield and net yield of 4.8% and 3.4%, respectively. This property will be held for rental initially to diversify its rental income base. In Nov 21, the company acquired a residential lot in Songjiang, Shanghai, for Rmb830m. With a GFA of 32,528sm (of which 5% is earmarked for a security housing development), this site will be developed into a low-density residential project.
On the other hand, HKR realised the value of mature property assets. In Oct-21, HKR agreed to dispose of two residential properties and one office property in Tokyo for JPY19.3bn or HK$1.35bn. Based on their aggregate after-tax profit in FY3/21, the exit yield is estimated at 1.94%. The disposal should yield estimated gains of HK$289m in 2HFY22. Net sales proceeds after the repayment of the corresponding onshore bond and bank loan will be recycled into new investments with better growth potential. After this divestment that was completed in Nov 21, HKR still owns two residential properties in Tokyo for leasing.
The stock, trading at 83% discount to our appraised current NAV, is undervalued. Favourable land premium for Discovery Bay Master Plan 7E has laid down a solid foundation for the company’s medium to long-term growth of development profit. The company has been proactively optimising its asset portfolio through divesting mature property assets on one hand and making new investments with better growth prospects on the other. This augurs well for its long-term valuation. BUY with HK$4.84 TP, based on 75% discount to our Dec-22 NAV estimate.