Result analysis : FY23 underlying earnings expected to be stable or marginally lower
- FY22 underlying profit rose 2% to HK$7.1bn, slightly below our forecast
- Management expects FY23 underlying earnings to be stable or marginally lower
- Partial disposal of Wing Hong Street commercial project
- Reiterate BUY despite lower TP of HK$30
New World Development’s FY22 underlying profit grew 2% to HK$7.1bn, slightly below our estimate. Final DPS was unchanged at HK$1.50. This brought the full-year DPS to HK$2.06, the same as in FY21. This represents a payout ratio of 73%.
Development profits were 4% lower at HK$9bn. This was led by reduced contributions from Hong Kong which recorded 30% decline to HK$2.4bn, mainly from 888 Lai Chi Kok Road. The company has sold 73% of this commercial project for c.HK$6bn since its initial launch in Dec-20. Contributions from China went up by 11% to HK$6.6bn, of which c.70% came from the projects in Greater Bay Area (GBA) with high margins of 70%.
In FY22, New World achieved contracted sales of HK$8.2bn from Hong Kong. In China, the company’s contracted sales amounted to Rmb17.1bn, of which around HK$12.5bn or 73% was derived from the projects in the GBA. In Jun-22, New World launched its first project in Hangzhou with all 601 residential units being snapped up. Total subscription exceeded Rmb7bn.
The company’s sales targets for FY23 and FY24 are HK$30bn and HK$35-40bn respectively.
In Hong Kong, among the unrecognized attributable contracted sales in Jun-22, about HK$25bn (from The Pavilia Farm I & II) would be recognized in FY23 with HK$4.1bn (mainly from inventory sales at Mount Pavilia and Fleur Pavilia) in FY24. In China, New World had a net order book of Rmb8.7bn, of which Rmb7.6bn will be booked in FY23 with the balance in FY24.
New World expects to expedite the farmland conversions with six or seven plots of agricultural land expected to be converted for residential use in FY23-25. This should help replenish its residential land bank.
Earnings from property investment grew 8% thanks to improved occupancy and operational efficiency of K11 projects in Hong Kong and China. In Hong Kong, K11 Art Mall was fully leased with tenants’ sales growth of 6%, which has outperformed the market. K11 Musea fared even better with 9% increase in retail sales. K11 malls in in China saw retail sales up 15% (vs 2% for overall market).
The 11 Skies project at Chep Lap Kok is scheduled for completion in phases from 2022 to 2025. With GFA of 0.57msf, the office portion commenced operations in Jul-22 with leasing rate expected to reach 65% by end-2022. Entertainment facilities will open between late 2023 and early 2024. This, coupled with portfolio expansion in China, should widen the company’s rental income base.
In FY22, New World Development had disposed of HK$13.9bn worth of non-core assets, exceeding its target of HK$9bn. The company expects to sell HK$10bn and HK$15bn worth of non-core assets in FY23 and FY24 respectively.
Recently, New World Development sold a 51% stake in Wing Hong Street commercial project in Cheung Sha Wan for HK$3.08bn (or HK$16,600psf on GFA basis) to Ares SSG. This resulted in deemed disposal profit of HK$450m. In the event that the company obtains the consent for strata title sales, Ares SSG has an option to sell its stake in this commercial development back to New World for HK$3.46bn. This partial stake disposal enables the company to crystallize the value of this commercial development in the current uncertain market which makes strata title sale difficult. This commercial project offers a total GFA of 0.36msf. Superstructure works are underway with project completion expected in 2023.
In FY22, New World repurchased 26m shares for HK$963m or HK$37.03/sh on average.
As of Jun-22, consolidated net debt stood at HK$124.3bn in Jun-22, unchanged from Dec-21’s. This represented 43.2% of total equity (Dec-21: 41.3%). Gearing ratio is expected to stay at the mid-to-high 40s in the coming year. All refinancing of borrowings due in FY23 has been taken care of. Interest costs for c.48% of gross debt is fixed. The hedging ratio should stay at mid-to-high 40s in the coming 12-18 months. In view of higher interest rates, the management expects an additional interest expense of HK$1.2bn in FY23. However, this should be largely offset by increased development earnings and growing rental income. Thus, the management has guided for stable or slightly lower underlying earnings in FY23.
In the past three months, the share price of New World Development has tumbled 21% amid interest rate hikes. Meanwhile, the stock is trading at a 66% discount to our assessed current NAV, c.2SD below its 10-year average . Our estimated dividend yield for FY23 is high at 9.2%. Such a low valuation should help cushion the stock price against further downside risk. Based on a wider target discount of 60% to our Jun-2023 NAV estimate, we set our TP at HK$30. Reiterate BUY. Continued interest rate hikes should remain the key investment risks, amongst others.