Result Analysis: Reduced rentals from the Hong Kong and London portfolios
Stripping out the fair value change on investment properties, Lai Sun Development (LSD) recorded underlying loss of HK$571m for 1HFY22, compared with HK$420m loss in 1HFY21, due to higher finance cost. The prolonged pandemic has continued to weigh on its theme park, cinema, hotel and restaurant operations. No interim dividend was declared.
Total attributable rental income fell 2% to HK$725m in 1HFY22. Contributions from the Hong Kong rental portfolio fell 6% led by Cheung Sha Wan Plaza as a result of low occupancy. Revenue from its London portfolio declined 23%, on reduced contributions from 107 Leadenhall Street. The shortfall was partially offset by higher income from its China portfolio.
Shanghai Skyline Tower (formerly Shanghai Northgate Plaza Redevelopment project) and Guangzhou Lai Fung International Center (previously known as Guangzhou Haizhu Plaza project) are both scheduled for completion in 2Q22 and 2H22 respectively. Pre-leasing is currently underway. With a combined GFA of >1.3msf, these two commercial projects should beef up the company’s rental income.
In Jan-22, LSD had contracted but not recognised sales of HK$2.16bn, with the bulk from Zhongshan Palm Spring and Alto Residences in Tseung Kwan O.
Since 2021, Lai Sun Development has been proactively replenishing its land bank for development with a focus on the luxury segment. It firstly teamed up with New World Development, Empire Group, and CSI Properties to secure the development rights of Wong Chuk Hang Station Package 5 in Jan-21. This was followed by the HK$328m acquisition of a three-storey building at 116 Waterloo Road in Ho Man Tin in Sep-21. The transaction is expected to be completed with vacant possession in mid-22. The company plans 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 secured a luxury residential site (NKIL6638) in Kowloon Tong via government tender at a land premium of HK$1.61bn or HK$22,465psf. This ex- Educational Television Centre of RTHK will be developed into a luxury project which offers 46 medium-large sized units including three houses with GFA of c.71,600sf upon scheduled completion in 4Q25.
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 intends to redevelop the sites into a luxury project with 25 medium-large sized apartments. Total GFA is 57,500sf. Project is scheduled for completion in 1H26.
In Jan-22, LSD’s consolidated net debt stood at HK$18.2bn, up 13% from Jul-21’s HK$16.2bn, mainly due to the land acquisitions in Hong Kong, despite HK$1.3bn proceeds from share placement and rights issue. This puts its gearing at c.52% (Jul-21: 47%). Excluding net debt of eSun and Lai Fung Holdings, the company’s gearing would be lower at c.35%. Stripping out the net debt of its London portfolio, which had a positive carry net of financing costs, LSD’s gearing would have been c.34%.
Following the acquisition of Kotewall Road property, we estimate the company’s gearing to rise to c.55% (or c.39% excluding net debt of eSun and Lai Fung Holdings). The company is applying for pre-sale consent for its 156-unit Bal Residence in Kwun Tong, a jv with Urban Redevelopment Renewal. A complete sale of this redevelopment project should generate total proceeds of >HK$1.2bn, which will help to relieve its debt burden.
The stock is trading at an 85% discount to our appraised current NAV. The current low valuation should limit any further downside risk on share price. The recent land bank replenishment lays down a solid foundation for future growth. Near term, any stake change by its second largest shareholder, the Yu family, would play a key role in dictating share price performance. Based on 80% discount to our Dec-22 NAV estimate, we set our TP at HK$4.97. Reiterate BUY.