Low investor expectations for upcoming results
- We expect seven of the 12 property companies we cover to post yoy declines in underlying profits in the upcoming release of their annual or interim results.
- We expect most companies to maintain their DPS unchanged, but a few are likely to see rather stretched dividend payout ratios.
- Current valuations (57% discount to NAV) are among the lowest since 1991, in our view, implying low investor expectations for the sector’s profit outlook.
Expect yoy declines in underlying profit for seven companies
Most of the HK property stocks we cover are set to announce their annual or interim results within the next six weeks. Please refer to Figs. 3 and 4 for a summary of our underlying profit estimates for these companies. We expect seven of the 12 companies to report yoy declines in underlying profit on the back of yoy surges in interest expenses (e.g. higher HIBOR) and lower profit margins from sales of development properties (DP). On the other hand, we expect 1) Wharf HL to report a significant jump in underlying profit in FY23F on the back of a yoy decline in impairment provisions; and 2) Swire Prop to report a 31% yoy increase in underlying profit in FY23F following the disposal of several floors of One Island East (OIE) office tower to Securities and Futures Commission (SFC) and the disposal of car parking spaces at Taikoo Shing.
Most companies likely to maintain their dividends, with risks
We expect nine of the 12 companies to maintain or raise their DPS. Having said that, a few of these companies appear to have rather stretched dividend payout ratios (>70%), in our view, and as such, there could be a risk of dividend cuts should their underlying profits miss Bloomberg consensus or should they tighten their payout ratios in a bid to conserve cash. On the other hand, we believe the market has already priced in a notmore- than-20% yoy decline in DPS/DPU for SHKP, NWD and Champion REIT.
Impairment provision risks should not be ignored
Impairment provisions should not be ignored by investors, in our view. Wharf HL and HKL have made, or will make, impairment provisions in FY23F for their DP projects in China. In general, we believe companies with significant exposure to China DP or the Kai Tai new area for HK DP face a higher risk of impairment provisions in FY23F, in particular for the land parcels acquired in 2018-21 when land costs in HK and China peaked – this is one of the key downside risks to their FY23F underlying profits, in our view.
Valuations imply very low investor profit outlook expectations
HK property trades at a 57% discount (market-cap-weighted) to one-year forward NAV (2 s.d. below 10-year average), one of the lowest levels since 1991 (Fig. 5), reflecting investors’ low expectations for the sector’s profit outlook. Reiterate sector Neutral rating; key sector top picks: SHKP, CK Asset, Link. Key sector downside risks: low project sell-through rates and unexpected DPS/DPU cuts. Successful disposals of non-core assets are key upside risks for the sector.
