Company Update: Strong war chest for acquisition-led growth
- The Coast Line in Yau Tong is virtually sold out with estimated pre-tax margins of c.25%
- Fresh rental contribution from recent acquisition of Civitas Social Housing
- Gearing up to 20% implies the company would have debt headroom of c.HK$70bn for new acquisitions
- BUY with HK$47.3 TP
Cheung Kong Asset Holdings (CKAH) generated contracted sales of c.H$18bn in 11M23. About HK$9bn came from Hong Kong Holdings with the balance mainly from China. The Coast Line in Yau Tong is the key contributor. In Aug-23, CKAH launched The Coast Line on the Yau Tong harbourfront for pre-sale. Market response has been very encouraging with 99% of total 886 units being snapped up for c.HK$6bn within a short period of time. The company converted the site into residential use from industrial in 2019 after paying land premium of HK$2.2bn or HK$5,283psf on GFA basis. Based on our estimated all-in cost of HK$11,900psf and average selling price of HK$15,600psf, we estimate The Coast Line still offers decent pre-tax margins of c.25%.
Meanwhile, CKAH has just obtained pre-consent for Wong Chuk Hang Station package 3 which will provide 1,200 units in four residential towers. If fully sold, this development should yield total sales revenue of c.HK$24bn. CKAH has forfeited deposits with estimated gain of c.HK$1.8bn to be booked in 2H23 after the buyer Sino Suisse Capital failed to proceed with the transaction of 21 Borrett Road in mid-23.
Cheung Kong Center I was about 20% vacant with negative reversionary growth to continue. Near-term focus remains on pre-leasing of soon-to-be completed Cheung Kong Center II which is challenging. CKAH intends to revamp the trade mix of 1881 Heritage with the recruitment of more eateries. The Whampoa sees slightly positive rental reversion while the virtually fully let Hutchison Logistics Centre offers steady rental income. Newly acquired Civitas Social Housing started to provide fresh contributions in FY23 which should grow steadily in the years ahead. This acquisition not only enhances the rental revenue but also diversifies its income base geographically.
Daily hotels stage post-pandemic recovery with occupancy returning to >80%. Serviced suites continued to deliver steady performance. Overall, we estimate earnings from hotel and serviced suite division to more than double to HK$1.4bn in FY23.
Sales volume at Greene King has recovered to c.90% of pre-COVID level. However, cost pressure remains with no meaningful margin improvement.
In 2H23, CKAH bought back 14.5m shares for HK$611m or HK$42.25/sh on average. This not only signalled its strong embedded value but also lent support to its share price.
Gearing is estimated to be in the low single-digit. Should CKAH gear up to 20%, the company would have debt headroom of c.HK$70bn for land banking.
Meanwhile, the stock is trading at a 69% discount to our appraised current NAV, c.2SD below its average discount of 51%. Share repurchase should limit the downside risk on the stock. Robust balance sheet should enable the company to purse value-accretive acquisitions to create shareholders’ value. Based on a target discount of 60% to our Dec-24 NAV estimate, we set our TP at HK$47.3, and hence maintain our BUY call.