Result Analysis: Stable dividend despite mild earnings decline
- FY22 underlying earnings dropped 4% to HK$28.7bn, slightly missing our expectations due to lower-than-expected development profit booking
- Final DPS unchanged at HK$3.70
- Achieved contracted sales of HK$12bn since Jul-22
- Maintain BUY with a TP of HK$113.6
Sun Hung Kai Properties’ (SHKP) FY22 underlying profit came in at HK$28.7bn, down 4% y-o-y, primarily due to a lower contribution from property development. The result was slightly below our estimate due to weaker-than-expected development profit booking. Final DPS remained flat at HK$3.70. This brought the full year DPS to HK$4.95, unchanged from FY21.
Including associates and joint ventures, development earnings fell 25% to HK$15.8bn, including HK$14.8bn and HK$1bn from Hong Kong and China respectively. Key contributors included Wetland Seasons Park Ph 2 & 3 and Wetland Season Bay Ph 1 & 2 in Tin Shui Wai, St. Michael Ph 1in Shatin and Regency Bay in Tuen Mun. The balance stemmed primarily from inventory sales at Grand YOHO Ph 2 and Cullinan West III. Major projects booked in China included Forest Hills in Guangzhou, Chengdu ICC, and Oriental Bund in Foshan. Development margin was 44.8% (FY21: 45.6%).
Due to social distancing measures led by the fifth wave of pandemic, SHKP’s new project launch has been delayed. Therefore, SHKP achieved contracted sales of HK$29.6bn in Hong Kong in FY22, which came primarily from Wetland Seasons Bay Ph 1 & 2, The YOHO Hub and Silicon Hill Ph 1. This fell short of its target of HK$45bn. In China, SHKP sold only HK$3.9bn (or Rmb3.3bn) worth of properties, below its target of HK$7bn, due to the COVID-led restrictions.
As of Jun-22, SHKP’s net order book stood at HK$26.6bn which comprised of HK$20.5bn from Hong Kong and HK$6.1bn from China respectively. About HK$14.6bn is expected to be recognized in FY23.
Gross and net rental receipts were broadly stable at HK$24.8bn and HK$19.3bn in FY22. China rental earnings grew 8% (or 4 % in Rmb terms) mainly led by increased retail contributions. This was offset by a shortfall from its Hong Kong counterparts which recorded 2.5% decline driven by negative rental reversions. Along with the gradual relaxation of social distancing measures, tenants’ sales at the Hong Kong retail portfolio has been rebounding since 2Q22 with overall footfall now at pre-fifth-wave level. The office and retail portfolio in Hong Kong were 92% and 95% occupied respectively as of Jun-22.
Portfolio expansion should underpin continued rental earnings growth. Scheduled for completion in late 2022, pre-leasing for the office portion at 98 How Ming Street has begun with major quality tenants already committed. The retail portion, spanning a total GFA of c.500,000sf, is expected to open in 2024. Elsewhere, superstructure works of mega-sized office/retail development at High-speed Rail West Kowloon Terminus has commenced. Completed in mid-22, the 220m tall office tower at Shanghai ITC has been handed over to tenants. Nanjing IFC Mall (1msf) is expected to open in phases from early 2023.
Loss from hotel division narrowed to HK$429m from FY21’s HK$551m. This was mainly attributed to the change in business model to cater to long stay and quarantine demand.
In FY23, SHKP targets to sell HK$35bn worth of properties in Hong Kong and HK$5bn in China. Since Jul-22, SHKP has attained contracted sales of HK$10.5bn in Hong Kong. The recent launch of NOVO LAND Ph 1A & 1B in Tuen Mun was well received, with over 1,530 units being snapped up for >HK$9.4bn.
The company plans to launch two completed mass market projects – Wetland Seasons Bay Ph 3 (384 units) and Park YOHO Bologna (164 units) – shortly. This would be followed by the launch of second phases of Silicon Hill, NOVO LAND and The YOHO Hub, which should be popular among homebuyers.
In China, SHKP has achieved contracted sales of Rmb1.5bn, mainly from the first batch of residential units at Hangzhou IFC since Jul-22. In the coming ten months, the company plans to launch Oriental Bund Ph 6 in Foshan, Jovo Town Ph3A in Chengdu, Guangzhou South Station ICC Ph1 and Shanghai Arch Ph 3. Including the two JV projects, The Woodland Ph 5B in Zhongshan and Hangzhou IFC (residential portion Ph 2), attributable GFA available for sale amounts to 3msf.
Net debt stood at HK$105bn as of Jun-22, unchanged from Dec-21’s. This translated into gearing of 17.4%. (Dec-21: 17.5%). SHKP has arranged another syndicated sustainability-linked loan of HK$20.7bn for 5 years in Jun-22 after its maiden HK$8.65bn 4-year syndicated sustainability-linked loans in Nov-21. Overall, the company remains financially sound to pursue accretive land banking for long-term growth.
The stock is attractively valued, trading at 61% discount to our assessed current NAV, c.1.5SD below its 10-year average of 47%. Estimated dividend yield is 5.3%. While strong sales of its mass market projects would help to unlock the company’s NAV, continued portfolio expansion in Hong Kong/China should strengthen its rental earnings stream. SHKP remains a core holding for those investors betting on the Hong Kong property market which could benefit from potential border re-opening for international travellers. By applying a 55% discount to our Jun-2023 NAV estimate, we set our TP at HK$113.6. Reiterate BUY.