Company Update: Acquired four luxury development sites within a year
In the past 12 months, Lai Sun Development has been proactively restocking its development land bank with a focus on the luxury segment.
After joining hands with New World Development, Empire Group, and CSI Properties to secure the development rights of Wong Chuk Hang Station Package 5 in Jan-21, the company acquired a three-storey building at 116 Waterloo Road in Ho Man Tin for HK$328m in Sep-21. The transaction is expected to be completed with vacant possession in mid-22. The company intends to redevelop it into a residential property with a GFA of c.46,000sf subject to a land premium payment.
In Oct 21, Lai Sun Development defeated 16 other developers to secure a luxury residential site (NKIL6638) in Kowloon Tong via government tender at a land premium of HK$1.61bn or HK$22,465psf. Formerly the Educational Television Centre, the site will be developed into a luxury project with a GFA of 71,591sf upon completion. Adding construction and financing costs, we estimate all-in development costs at HK$36,000psf on a saleable area basis.
In Jan-22, the company bought two ageing residential buildings at 1 & 1A Kotewall Road in Mid-Levels through private treaties for HK$1.3bn in total. The company plans to redevelop the sites into a luxury project with 20 apartments. Total GFA is 57,450sf. Including construction and financing costs, total investment is estimated at HK$1.7-1.8bn.
Following these land acquisitions, we estimate the company’s gearing to rise to c.50% (or c.3% excluding net debt of eSun and Lai Fung Holdings).
That said, the company’s financial risk should not be overly concerning. Lai Sun Development is applying for pre-sale consent for Bal Residence in Kwun Tong. This development will provide 156 units with a residential GFA of c.64,000sf upon scheduled completion in 3Q23. The project is expected to go on sale in 1H22. When fully sold, Bal Residence should generate sales proceeds of >HK$1.2bn. Elsewhere, the company is developing another residential project in Yuen Long with a GFA of 42,200sf. Improved market sentiment there following the government’s announcement of the plan to develop the Northern Metropolis should facilitate the future sales of this project.
The stock is trading at an 84% discount to our appraised current NAV. A string of land acquisitions should lay down a solid foundation for future growth of the company’s development earnings. This should, in turn, brighten the medium-term profit outlook. In the near term, the stake change by its second largest shareholder, the Yu family, would play a key role in dictating its share performance. Based on a target discount of 80% to our Dec-2022 NAV estimate, we set our TP at HK$5.26 and hence recommend a BUY call.