Company Update: Embarked on new round of value-accretive land acquisitions
- Clinched three residential lots via public tender at favourable prices
- Strong financials enable more value-accretive acquisitions
- New rental footage to beef up recurring income
- Prime beneficiary of falling land prices; BUY with HK$10.78 TP
In recent months, Sino Land has been stepping up its land bank replenishment, capitalising on softening land prices. This lays down good foundation for the company’s future development earnings growth.
In Sep-23, Sino Land teamed up with China Overseas Land, Great Eagle and Chinese Estates to secure a residential/retail site in Kai Tak through a government tender for HK$5.35bn. This translated into an accommodation value of HK$5,392psf on GFA basis, which is 12% lower than that of a neighbouring site that Cheung Kong Asset Holdings secured in Dec-22. Located close to Sung Wong Toi MTR Station, the project will provide total GFA of 992,270sf upon completion. This is split into 856,236sf for residential use and 136,034sf for retail purposes. About 1,325 residential units are expected to be built on the site. Including construction and interest costs, we estimate total development cost at c.HK$12,300psf on saleable area basis. Based on the current selling prices in the area, we project the residential portion could offer pre-tax profit margin of >35%. Sino Land has a 50% stake in this development while China Overseas Land, Great Eagle and Chinese Estates own 20%, 20% and 10% interest respectively.
In Dec-23, Sino Land, through a consortium with China Merchants Land and Great Eagle, clinched the URA’s Shing Tak Street/Ma Tau Chung Road redevelopment project with winning bid of HK$1.934bn. Taking into account the gross floor area for the three reserved flats for URA and related construction costs, the accommodation value works out to be HK$4,694psf, below market estimate. The site is about an eight-minute walk from Sung Wong Toi MTR Station. When completed, this redevelopment project will offer 640 units with total GFA of 414,928sf. Adding construction and financing costs, we estimate total development costs to be c.HK$11,200psf on saleable area basis. Pre-tax development margins should exceed 35%. If total sales revenue exceeds HK$8.25bn, URA would share 40% of the surplus revenue.
Moreover, Sino Land won the tender of a residential lot in Cheung Sha on Lantau Island for c.HK$204m or HK$2,492psf. The site is close to Whitesands that was developed by Swire Properties. It is earmarked for low-density residential development, providing total GFA of 81,806psf. Based on our estimated all-in cost of Hk$7,800psf, we project this luxury resort type development offers pre-tax profit margins of c.50%.
Sitting on strong net cash holding of HK$42bn in Jun-23, Sino Land sees no difficulty in funding these land acquisitions. In our view, Sino Land is well placed to pursue more value-accretive land purchases to take advantage of the correction in land prices. This should in turn brighten the company’s growth prospects in the medium term.
In addition to offering new projects including Villa Garda III and La Montagne for pre-sale, the company has re-launched completed units at La Marina in Wong Chuk Hang and One SOHO in Mongkok for sale in 2H23.
In 2024, Sino Land plans to launch Grand Mayfair III in Yuen Tong, Yau Long Ventilation Building project and One Central Place in Central.
Leasing of newly built investment properties is making good progress. MTRC committed office space of 134,000sf at One North. This office/commercial development in Yuen Long is currently 40% committed. If fully leased, One North should yield an annual rental income of c.HK$100m. Elsewhere, Landmark South in Wong Chuk Hang is >50% let. Backed by contributions from new rental properties, Sino Land’s gross rental receipts should rise 2% in FY24. This is despite the office income shortfall led by negative reversionary growth.
In the previous three months, shares of Sino Land fell 5%. Meanwhile, the stock is trading 61% below our appraised current NAV. Excluding its net cash holding, the remaining stub is trading at a 77% discount. Key investment appeal lies in its impeccable balance sheet strength. This places the company in an advantageous position to pursue more value-accretive land banking to underpin its long-term growth. By applying target discount of 50% to our Dec-24 NAV estimate, we set our TP at HK$10.78 and hence our BUY call.
