Company Update: Villa Lucca to go on sale soon
HKR International has obtained the pre-sale consent for Villa Lucca in Tai Po, a 40/60 joint venture with Hysan Development. This luxury project is near completion and should be available for sale soon. It contains 262 residential units including 41 houses with GFA of 0.5msf. The consortium acquired the two sites where the projects are built through government tender for HK$3.39bn in total in Nov-16. This translated into accommodation value of HK$6,823psf on GFA basis. Adding construction and financing costs, we estimate total development costs at HK$15,700psf on saleable area basis. Based on our estimated ASP of HK$21,000psf, we estimate that a complete sale of this development should yield attributable pre-tax earnings of c.HK$1bn to HKR. This luxury project will become the mainstay of the company’s development profit in FY23.
Contribution should also stem from inventory sales of Poggibonsi and IL PICCO in Discovery Bay. HKR has sold 188 units at Poggibonsi for HK$2.51bn or HK$16,500psf on average since its initial launch in Mar-19. Profit from the majority of sold units has been recognised. The company sold five houses at IL PICCO for HK$287m or HK$27,600psf on average with profit recognition expected in FY22. Elsewhere, Creekside One and Mansion One, both in Jiaxing, have been completely sold with profit recognition in FY22.
In 2021, HKR paid the land premium for Discovery Bay Master Plan 7.0E which was fixed at HK$5.24bn or HK$4,030psf. This sizeable plot of land is located close to Poggibonsi. It will be developed in four phases with total GFA of 1.3msf. Construction works of the first phase, which will provide >0.3msf GFA, is scheduled to commence in 2H22. This large residential development should play a crucial role in driving its medium-term development earnings.
In Hong Kong, rental flagship CDW Building in Tsuen Wan remains >90% occupied. While office income should remain steady, retail operations have been impacted by the COVID resurgence recently. West Gate Tower in Cheung Sha Wan has been converted into commercial use from industrial following the completion of HK$150m renovation. Leasing has been underway with committed occupancy reaching 50-60%. Occupancy of DB Plaza New Extension has been ramping up.
In Shanghai, HKRI Centres 1 & 2 remained fully let in Mar-22. Spot rates ranged between Rmb350psm and Rmb450psm with positive reversionary growth. Committed occupancy of HKRI Taikoo Hui mall increased to 98% in Mar-22 from Dec-21’s 97% but tenants’ sales fell 27% in 1Q22 primarily due to the COVID resurgence
Following the disposal of three properties in Tokyo in Nov-21, HKR sold the remaining two residential properties there for JPY3.49bn or HK$237.4m in Feb-22. Based on combined net profit from these two properties for FY3/21, the implied exit yield is low at 2%. This disposal would yield net gains of HK$33.5m. The company now does not hold any property in Tokyo.
HKR sold GenRx Holdings to EC Health for HK$68m in Mar-22. Based on disposal price and net profit of HK$7.1m for 1HFY22, the implied PE was c.5x. GenRx operates a comprehensive healthcare network in Hong Kong and Macau, covering specialist services that focus on chronic disease management and dental care. Following this divestment, HKR has ceased health care operations.
A string of non-core asset divestments not only brings in disposal gains but also frees up capital for new investments.
The stock is trading 84% below our appraised current NAV. Such a low valuation should lend support to its share price performance. The upcoming launch of Villa Lucca, if greeted with favourable response, should improve the sentiment towards the counter. The company has been optimising its asset portfolio which should pave way for its long-term growth. Based on target discount of 75% to our Dec-2022 NAV estimate, we set our TP at HK$4.76. Maintain BUY.