Company update : From strength to strength
Pub operations on a recovery path. Since the UK eased COVID restrictions on social contact in Jul-21, Cheung Kong Assets Holdings’ (CKAH) pub operations has been on the road to recovery. It returned to profitability in 2H21 with segment profit contribution of HK$1.16bn, excluding impairment provision of HK$144m on fixed assets. Post COVID, profit recovery of pub operations should more than compensate for the earnings shortfall led by the disposal of aircraft leasing business and 5 Broadgate. Coupled with fullyear contributions from utility and infrastructure assets acquired from LKSF in 2021, the company’s recurrent earnings are set to grow further in FY22.
Strong development earnings visibility. CKAH’s near-term development profit should be well secured. In Dec-21, the company had contracted sales but not yet recognized of HK$29.5bn, with HK$19.3bn from Hong Kong and HK$10bn from China. About HK$25.2bn is expected to be booked in FY22. This included HK$15.5bn from Hong Kong projects which stemmed mainly from Sea to Sky in Tseung Kwan O and 21 Borrett Road in Mid-levels. Aided by the smooth project pre-sale, we estimate the company has locked in >85% of our projected FY22 development earnings. Initially launched in Jun-20, all the 1422 units at Sea to Sky (Lohas Park Package 8) has been completely sold for HK$16.3bn or c.HK$17,250psf on average. Pre-tax profit margins should exceed 35% even allowing the profit shared with MTRC. A part of the profit has been recognized in FY21 with the bulk in FY22.
Since Feb-21, CKAH has sold 30 apartments at 21 Borrett Road for HK$6.2bn or c.HK$85,000psf. The specialty unit commanded selling price of HK$136,000psf. Located in the Mid-levels,21 Borrett Road comprises two phases with a total of 181 units. Total GFA is 0.44msf. The site was acquired via government auction for HK$11.65bn or HK$26,764psf back in Jun-11. Given relatively low land costs, 21 Borrett Road should be lucrative with estimated pre-tax margins of >40%.
The company also pre-sold c.60% of units at El Futuro in Kau To for c.HK$2.2bn or >HK$20,000psf on average, since its initial launch in Oct-20. The launch of #LYOS in Hung Shui Kiu in Nov-21 received strong response thanks to improved buying sentiment in the Northern Metropolis following the government’s Policy Address. About 90% of total 341 units has been taken up for c.HK$1.8bn. These two residential projects are expected to contribute in FY23.
CKAH is applying for pre-sale consent for its Tuen Mun project (TMTL 463), which offers 800 units with 0.35msf GFA, upon scheduled completion in 2024. The company has a 40.9% stake in this residential development with the balance held by SHKP.
Asset divestments to boost war chest for accretive investments. In Dec-21, CKAH had net debt of HK$33.1bn representing 9% of shareholders’ fund. Following the HK$33.2bn disposal of aircraft leasing business in Dec-21, CKAH sold 5 Broadgate in London to South Korea National Pension Fund for GBP1.21bn. CKAH acquired this office property for GBP1bn from British Land and GIC in 2018. Completed in 2015, 5 Broadgate offers 1.17msf GFA. The property is leased entirely to UBS until 2035 and serves as the headquarters of this investment bank. With exit yield of c.3.5%, this property disposal is expected to produce gains of GBP108m or HK$1.1bn to CKAH.
Divestment of aircraft leasing business and 5 Broadgate should not only bring in c.HK$2.4bn profit to CKAH but also significantly bolster its balance sheet strength. Taking into the proceeds from disposal of aircraft leasing business, CityLink in Shanghai, and 5 Broadgate in London, the company’ should turn net cash. This puts CKAH into an advantageous position to pursue accretive acquisitions in Hong Kong and overseas for next round of earnings growth. Should the company gear up to 20%, it would have c.HK$80bn for new investments.
Stepping its land bank restocking in Hong Kong via different channels. Since 2021, the company has acquired four development sites in Hong Kong with total GFA of 1.39msf , mainly for residential use, for c.HK$17.4bn In Feb-21, CKAH outbid four other developers to secure the Kai Tak lot for HK$10.28bn or HK$15,861psf. Situated on the former Kai Tak airport runway overlooking the Victoria Harbour, this project will provide total GFA of 0.65msf, primarily for residential use, upon completion. This also marked the company’s first project in the Kai Tak area.
Following the Kai Tak site acquisition, the company won the tender for a Yuen Long residential site for HK$716m or HK$9,112psf in Aug-21. This site is adjacent to the School of Motoring (Yuen Long) and a five-minute drive from both Yuen Long Station and Long Ping Station. Total GFA is 78,574sf. CKAH plans to build two-storey garden houses on this site given the tranquil environment in the neighborhood.
The company also converted agricultural land in Kam Tin into residential use with GFA of 137,584sf after paying the land premium of HK$388m or HK$2,820psf in May-21. This lowdensity residential development is about 15-minute walk from Kam Sheung Road Station. Adding up construction and financing costs, we estimate all-in development cost at HK$8,000psf on a saleable area basis. CKAH intends to increase the number of units to be built to maximise the development value.
In Feb-22, CKAH secured URA’s combined development in To Kwa Wan through public tender with a winning bid of HK$6bn which is near the low end of market consensus. This translated into an accommodation value of HK$11,382psf, lower than the two redevelopment projects awarded to Henderson Land and Kerry Properties in the vicinity in late 2021. Located at Hung Fook Street, Kai Ming Street and Wing Kwong Street, this redevelopment project will offer total GFA of 0.53msf. About 890 units are expected to be built above retail podium of 87,800sf. URA shares 20-50% of surplus revenue exceeding HK$10.2bn from residential sales. The retail portion will be retained for rental for 10 years with CKAH and URA entitled to 70% and 30% of rental income generated respectively.
Currently, CKAH has development land bank of c.4.6msf in Hong Kong. We believe that the company will continue to explore land acquisition opportunities in Hong Kong in the year ahead.
More deal to come. In early Mar, CKAH also confirmed that potential buyers have expressed an interest to acquire its stake in UK Power Networks. CKAH has 20% stake in UK Power Networks, one of the UK’s largest power distributors comprising three regional networks with distribution networks covering London, and southeast and east of England. Any positive news flow on stake disposal of UK Power Networks could be near-term share driver.
Li Family casting a vote of confidence. Following the injection of utility and infrastructure assets into CKAH for 333.3m new shares in mid-2021, the Li family has bought 35m shares from the market for >HK$1.7bn, increasing its stake to 46.5%. Upon the completion of Cheung Kong group restructuring in 2015, Li family held only a 30.15% stake in CKAH. Since then, the family has been consolidating its control over CKAH which signals the company’s strong embedded value.
The stock is trading at 56% discount to our appraised current NAV. Stake increase by Li Family should lend support to its share price. Impeccable balance sheet should allow the company to pursue acquisition-led growth. By assigning a 50% discount to our Dec-2022 NAV estimate, we derive our TP at HK$64.3, which suggests 17% upside from the current level. Maintain BUY.