Dip in booking little impact on EPS
- SHKP’s underlying profit was down 4% in FY6/22. It targets contracted sales of HK$35bn in HK in FY6/23F, slightly lower than its medium-term target.
- Growth of its rental income in China remained solid while recovery of HK’s rental was still slow amid border closure.
- It has a rich pipeline for farmland conversion and successfully converted one site in FY6/22. Reiterate Add with a lower TP of HK$130.5.
Underlying profit fell 4% in FY6/22
SHKP’s underlying profit fell 4% yoy in FY6/22 to HK$28.7bn (1% below our forecast), mainly due to lower development property (DP) sales booking. Total operating profit (OP) was down 11% yoy to HK$39bn. It declared final DPS of HK$3.7 (flat yoy), and FY22 DPS of HK$4.95 (flat yoy).
Targets HK$35bn contracted sales in HK in FY6/23F
OP from DP sales declined 25% yoy to HK$15.9bn as the pandemic dampened its sales delivery in China. OP from HK was up 2% yoy to HK$14.8bn with an OP margin of 45%, vs. 42% in FY21. Its attributable contracted sales in FY6/22F were HK$30bn, up 28% yoy but below its medium-term annual target of HK$40bn. Since Jul 22, SHKP has achieved HK$10.5bn of contracted sales in HK, thanks to the launch of Novo Land. SHKP targets contracted sales of HK$35bn in HK and HK$5bn in China, respectively, in FY6/23F.
Slow recovery in HK IP; growth in China IP remains solid
Its gross rental income (GRI) from HK investment properties (IP) declined 3% yoy to HK$17.5bn, due to negative rental reversions. Two office towers (GFA: 650k sf) adjacent to Millennium City are scheduled to be completed in late-2022; we expect slow ramp-up on the back of excess office supply in Kowloon East. Management commented that footfall at HK malls have recovered to levels before the fifth wave of the Covid-19 outbreak. However, as HK’s borders are still closed, we project slow rental recovery at its HK malls. Its GRI from China increased 4% yoy in Rmb terms despite lockdowns in 1HCY22, indicating premium quality of its China IP portfolio.
No rush for landbank, with rich conversion pipelines
At end-Jun 22, SHKP had about 22m sf attributable land bank GFA under development. It added 1.1m sf of land bank in HK in FY6/22 by means of lease modifications (upzoning of Shap Sz Heung and farmland conversion near Fairview Park). With rich conversion pipelines, we think SHKP is not in a rush to replenish land aggressively. Meanwhile, its China IP accounted for c.64% of its total land bank in China, so we think the downturn in China’s residential market has little impact on its underlying profit.
Reiterate Add with a lower TP of HK$130.5
We cut FY23-24F EPS by 12-17%, primarily to reflect a shift in DP sales booking, and cut TP to HK$130.5 based on a 35% discount to NAV. See p.2 for rationale for changes in EPS and TP. SHKP remains our preferred name among HK developers. Key downside risks: faster-than-expected increase in HK’s interest rates. Stronger-than-expected contracted sales are a key re-rating catalyst.
