Company Update: Major shareholder raising its stake
During Jul-Nov 2021, K11 malls in Hong Kong achieved retail sales growth of 23%, with average occupancy rate of 97%. This compared favourably with 8% for the overall retail market in the same period,
For K11 Musea, revenue grew 20% y-o-y and operating expense fell 30% in 1HFY22. This resulted in operating profit jumping 150% with operating margins expanding to >65%. This should make it the key rental earnings growth engine in the near term. In mid-2022, leases for >70 tenants, representing one-third of total, are scheduled for renewal. Besides, the company is also revamping the tenant mix at K11 Art Mall.
Three office towers at 11 Skies are expected to be partially opened in May 22. Currently, over 40% of office space has been pre-committed by tenants from the wealth management, wellness and medical sectors. By mid-2022, the commitment rate is expected to reach 65%. Given its close proximity to the Hong Kong-Zhu-Macau Bridge, these office towers should hold strong appeal to those tenants serving the Greater Bay Area after the border re-opens. New contributions from 11 Skies should further strengthen its rental income stream from Hong Kong.
Despite challenging market condition, New World achieved its half-year contracted sales target in China. The bulk of contracted sales (>80%) came from the Greater Bay Area where the projects are selling well. For example, in Dec-21, New World achieved contracted sales of Rmb1.17bn on the first day of pre-sale of The Glory of Legend (GFA: 87,000sm) in Guangzhou with ASP cap increased to Rmb68,000psm.
In 4Q21, New World Development secured two urban renewal projects in Shenzhen and one in Guangzhou from distressed developers at attractive prices. These quick-win acquisitions should enable the company to accelerate returns and achieve better margins. In Hong Kong, New World Development has also joined hands with Far East Consortium to buy a residential site in Kai Tak from financially ridden Kaisa Group for HK$7.95bn.
In 2H21, the Town Planning Board has approved the development plan for its Sa Ha project in Sai Kung which will provide 972 units in 15 residential blocks with a GFA of 956,000sf subject to the land premium payment.
Major shareholder Chow Tai Fook Enterprises bought 1.62m shares from the market for HK$48.9m or HK$30.19/sh on average in late Dec 2021. This represents a vote of confidence over the company’s prospects.
The stock is trading at a 60% discount to our assessed current NAV, 1SD below its 10-year average of 54%. Improving contributions from Victoria Dockside and portfolio expansion in Hong Kong/China should continue to drive the company’s rental income thus improve the earnings quality. This should lead to better valuation over the long term. We reiterate our BUY rating with HK$39.25 TP, based on target discount of 55% to our Dec-2022 NAV estimate.