Result analysis: Strong project launch pipeline
Sun Hung Kai Properties’ (SHKP) 1HFY22 underlying earnings came in at HK$14.8bn, down 15%, driven by lower development profit. Despite reduced earnings, interim DPS remained flat at HK$1.25.
Development earnings fell 38% to HK$7.7bn and included HK$622m from China. The drop was due to fewer project completions. In Hong Kong, major contributors included Wetland Seasons Park Ph 2&3 in Tin Shui Wai, Regency Bay in Tuen Mun, and the balance came from continued sales of Grand YOHO Ph 2 and Cullinan West III. In China, key projects booked included Forest Hills in Guangzhou and Oriental Bund Ph 3B in Foshan. As of Dec-21, SHKP has a net order book of HK$34.5bn including HK$28.6bn from Hong Kong and HK$5.9bn from China.
Since Jul-21, SHKP has sold HK$22.7bn worth of properties in Hong Kong representing 50% of its FY21 sales target. The bulk stemmed from the sales of Wetland Seasons Bay Ph 1&2 in Tin Shui Wai and YOHO Hub in Yuen Long which have been >90% and >40% pre-sold respectively. The remaining came from Imperial Kennedy and inventory sales of completed projects such as Cullinan West III. In China, SHKP achieved contracted sales of Rmb2bn amid weak market sentiment.
In the coming ten months, SHKP plans to sell two large mass market developments in Tuen Mun and Tai Po (TMTL463 and TPTL 244) in addition to continued sales of YOHO Hub after the current wave of COVID outbreak subsides. Other developments such as St. Michel Ph 2, Wetland Seasons Bay Ph 3 and Prince Central will also go on sale at an opportune time. Luxury project, Victoria Harbour Ph 2, could be available for sale once the border reopens with the return of affluent Mainland Chinese buyers. In Oct-21, SHKP increased GFA of mega-sized Shap Sz Heung project from 4.8msf to 5.8msf after paying additional premium of HK$3.72bn. The company boasts a land bank of 23.6msf which is sufficient for development over the next five to six years.
Gross and net rental receipts both rose 2% to HK$12.6bn and HK$9.7bn mainly led by improved contributions from its China portfolio. China malls staged robust tenants’ sales. For example, retail sales at Shanghai IFC had more than doubled the pre-COVID level. Fueled by stronger turnover rents and favourable rental reversion, China retail income jumped 23% to HK$2.2bn. This in turn underpinned solid growth of 18% for gross rental billings from China. However, this was partly offset by the shortfall from its Hong Kong counterpart which recorded 3% income decline dragged by negative reversionary growth for commercial properties.
SHKP should see growing rental income stream aided by portfolio expansion in Hong Kong and China. In Hong Kong, the YOHO Mall extension is scheduled to open for business in 2023 followed by retail podium of the How Ming Street development in 2024. Preleasing of office portion that is slated for completion in 2023 is underway with positive market response. In China, a 220m-tall office tower at Shanghai ITC will be completed in mid-2022. The remaining portion of this sizeable mixed-use development will be completed in phases from 2023 onwards. Nanjing IFC Mall is expected to open in phases from mid-2022. With the completion of new investment properties, China rental portfolio should increase from the current 15msf to c.26msf by Jun-24, and further to c.29msf in Jun-26.
Net debt stood at HK$105bn in Dec-21. (Jun-21: HK$95bn) This put its gearing at 17.5%. (Jun-21: 16%). Despite slightly higher gearing, financial position remains sound. This allows the company to pursue accretive land banking for long-term growth.
Meanwhile, the stock is trading at a 62% discount to our appraised current NAV, c.2SD below its 10-average of 45%. Estimated dividend yield for FY22 stands at 5.3%. Valuations are very attractive from a historical perspective. This should lend support to its share price. Portfolio expansion in Hong Kong and China should widen the company’s rental income base, thus improving earnings quality. Longer term, SHKP stands to benefit from the development of Northern Metropolis given its strong exposure there. Overall, SHKP should remain a core holding for those investors betting on the Hong Kong real estate sector. Maintain BUY with HK$118.20 TP, based on 55% discount to our Dec-2022 NAV estimate. Any positive newsflow on the pandemic situation and border reopening could be key catalyst, amongst others