Management: China business remains intact
- NWD’s management stressed that incidents of mortgage repayment suspension in the market have no impact on NWD’s sales or cash flow.
- It targets HK$35bn-40bn contracted sales in HK and China combined p.a. in FY6/23F and FY6/24F.
- Management is confident that the rise in DP booking and rental income could more than offset a surge in interest expense in FY6/23F. Reiterate Add.
Management: recent market events – no impact on China business
? In its business update last Friday after market (15 Jul 2022), NWD’s management made it clear that NWD is unaffected by the recent suspension of mortgage repayments in China, citing that i) NWD has solid financial strength , and ii) c.90% of its land bank in China is located in Tier-1 and emerging Tier-1 cities.
? In Jun 22, NWD pre-sold all the first batch of 601 luxury flats on the first day of the launch of Hangzhou New World City Arts Centre and secured total subscription sales of Rmb7bn.
? Management believes that its focus on young affluent homebuyers and product quality could command c.20% premium in terms of ASP for its new projects compared to its peers’.
Higher contracted sales targets in FY6/23-24F
? NWD targets HK$35bn-40bn contracted property sales from HK and China combined p.a. in FY6/23F and FY6/24F (c.HK$29bn in FY6/22F). In FY6/23F, sales in HK will primarily be driven by flats in Kai Tak while NWD w ill launch projects in Guangzhou and Hangzhou in China.
Growing IP portfolio allows for a higher share of recurring income
? Four NWD’s K11-branded investment properties (IP) of total GFA of 0.2m sqm were completed in FY6/22. Management projects doubling of NWD’s GFA of K11 IP in the next four years, to 2.8m sq m in FY6/26F.
? With an expanding recurring income base, management reiterates its target of achieving at least 50% of its underlying net profit from recurring income businesses (i.e. IP, insurance) by FY6/24F.
? Management expects the impact of rent concessions due to the fifth wave of Covid-19 outbreak in HK to be no more than HK$150m in FY6/22F.
Targets disposal of HK$9bn non-core assets in FY6/23F
? After having disposed of HK$14bn worth of non-core assets in FY6/22F, NWD targets disposal of assets worth c.HK$9bn in FY6/23F and at least HK$10bn in FY6/24F.
? Assets to be disposed include properties which they hold minority stakes in, and hotels and other assets that are unprofitable or yield low IRR.
Measures in place to mitigate impact of rising interest rates
? NWD projects additional c.HK$600m interest expense per 1% pt increase in average borrowing cost (3% currently). Despite this, management stressed that the recognition of sales of development properties (e.g. Pavilia Farm I & II) and an increase in recurring income would more than offset a surge in interest expense and lead to profit growth in FY6/23F.
? Management strives to maintain the proportion of NWD’s fixed-rate debt to total debt (including perpetual securities) at c.50% in future.
? We reiterate our Add rating for NWD with a TP of HK$42.5, based on a 40% discount to NAV of HK$70.8. Its commitment to maintaining absolute DPS with progressive growth over a long run looks very attractive (7.9% FY6/22F dividend yield).
? Key downside risks are a prolonged Covid-19 outbreak in China, leading to slower IP rental growth. Stronger-than-expected DP sales in HK and China and stronger rental reversions for NWD’s IP are potential re-rating catalysts.