Sun Hung Kai Properties (16 HK) BUY Farmland to Cashland Share Price HKD 117.80 12M Price Target HKD 136.00 (+15%) Previous Price Target HKD 132.00
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July 27, 2017 Sun Hung Kai Properties (16 HK) BUY Farmland to Cashland Share Price HKD 117.80 12m Price Target HKD 136.00 (+15%) Previous Price Target HKD 132.00 Reiterate BUY and lift TP to HKD136 Reiterate BUY as we lift TP to HKD136 (unchanged 35% target NAV Statistics discount) after raising our 2017E NAV by 3% and 2018 net profit by 3%. 52w high/low (HKD) 124.10/97.15 We expect near-term catalysts to come from SHKP gradually replenishing 3m avg turnover (USDm) 53.2 its land bank via more farmland conversion as well as its strong project Free float (%) 58.6 pipeline. With NAV discount of 40% at 1 STD below its long-term average Issued shares (m) 2,895 discount of 22%, we believe the NAV discount will eventually narrow Market capitalisation HKD341.1B given SHKP’s strong operations, financial position and dividends in the USD43.7B coming years. Major shareholders: Estate Positive on farmland conversion KWOK TAK SENG FAMILY 26.1% KWOK PING SHEUNG 6.7% SHK is less known for tapping farmland for land development. However, Asporto Ltd. 6.5% Real government disclosed that SHKP executed a farmland conversion in Siu Hong (兆康), Tuen Mun for ~HKD6.53b recently. We are positive on this Price Performance less expensive land access as we estimate a project margin of at least 125 120 35% -- above the average of 30% -- based on the conversion premium at 120 116 HKD2,288/sq ft. Together with the potential conversion of the “Shap Sze 115 112 Heung” (十四鄉) project in Sai Kung, we estimate these two projects could 110 108 increase SHKP’s land bank by ~40%. Lower land costs via farmland 105 104 conversion enhance its medium-term margins in the medium term in 100 100 light of intensifying competition in the land market, in our view. 95 96 90 92 Strong 2H FY17 sales and project pipeline ahead Hong KongHong 85 88 Based on government data, we estimate SHKP recorded contracted sales 80 84 of ~HKD22.1b in 2H FY17 (Jan to Jun). Together with ~HKD22.8b Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 recorded in 1H FY17, we forecast contracted sales could have reached SHKP - (LHS, HKD) SHKP / Hang Seng Index - (RHS, %) HKD44.9b, ~36% above its FY17 HKD33b sales target. Looking ahead, we anticipate a strong project launch pipeline including “Victoria Harbour -1M -3M -12M 1B” (海璇) in North Point and “St. Barths” (雲海) in Ma On Shan. Moreover, Absolute (%) 1 1 7 we believe there could be some ASP upside for “St. Barths” given the Relative to index (%) (3) (8) (13) recent tender price of a nearby site reached a record high of Source: FactSet HKD11,588/sq ft. Grand Yoho Mall opening to boost recurring income We visited the Grand Yoho Mall (Yoho Mall Extension I) in Yuen Long, which opened on 21 Jul 2017. The latest extension adds about 100 new shops to the existing retail hub, with tenant mix mainly targeting local upper-middle class spending. About 80-90% of the new shops are open and we observed good footprint on a week day evening. We estimate the mall could generate an annual rental income of around HKD500m, which could further strengthen the company’s recurring income base in FY18E. FYE Jun (HKD m) FY15A FY16A FY17E FY18E FY19E Revenue 66,783 91,184 94,129 105,644 115,000 EBITDA 24,750 30,806 31,624 35,237 36,173 Core net profit 19,825 24,170 25,715 28,539 29,816 Core EPS (HKD) 7.08 8.38 8.88 9.86 10.30 Core EPS growth (%) (10.8) 18.3 6.0 11.0 4.5 Net DPS (HKD) 3.35 3.85 4.04 4.24 4.43 Core P/E (x) 16.6 14.1 13.3 11.9 11.4 P/BV (x) 0.8 0.7 0.7 0.7 0.7 Net dividend yield (%) 2.8 3.3 3.4 3.6 3.8 ROAE (%) 7.2 7.1 5.4 5.8 5.9 ROAA (%) 3.4 4.0 4.1 4.4 4.5 EV/EBITDA (x) 16.5 10.6 12.9 11.8 11.2 Net gearing (%) (incl perps) 11.1 10.7 12.3 13.2 10.7 Consensus net profit - - 25,688 28,119 27,325 MKE vs. Consensus (%) - - 0.1 1.5 9.1 Ricky WK Ng, CFA Christopher Wong [email protected] [email protected] (852) 2268 0689 (852) 2268 0652 THIS REPORT HAS BEEN PREPARED BY KIM ENG SECURITIES (HK) LTD SEE PAGE Error! Bookmark not defined. FOR IMPORTANT DISCLOSURES AND Sun Hung Kai Properties More farmland conversion on the way Market appears to be missing that SHKP has the second largest farmland reserves among peers, totaling about 30m sq ft in HK. We like SHKP as the company is actively exploring alternative ways to replenish its land bank through farmland conversion in light of intensifying competition from Mainland developers in government land tenders. We estimate the Siu Hong site in Tuen Mun and Shap Sze Heung site in Sai Kung could increase SHKP’s land bank (projects under development) by ~40% to about 27.9m sq ft. We think SHKP has a solid track record in executing farmland conversion and realizing good margins. A good example is the “Grand Yoho” project in Yuen Long, which is on a site where SHKP converted the farm land in 2010 for ~HKD2,900 per sq ft and the ASP of the project sold during 2016/17 was around HKD14,000 per sq ft. Fig 1: SHKP’s major farmland conversion projects Land conversion Land conversion Execution Land Lot No. Approx. GFA premium premium in GFA Date / Project Address Purpose (sq ft) (HKD m) (HKD/sq ft) Pending T.P.T.L 157 Sai Sha Rd, Shap Sze Heung, Sai Kung Commercial/Residential 5,109,000 N/A N/A May-17 T.M.T.L 483 Siu Hong, Area 54. Tuen Mun Commercial/Residential 2,853,956 6,530 2,288 Aug-11 Park Yoho 18 Castle Peak Rd Tam Mi, Yuen Long Commercial/Residential 2,333,000 7,021 3,009 Mar-10 Grand Yoho No 9 Long Yat Rd, Yuen Long Commercial/Residential 2,448,700 7,103 2,901 Jul-07 Riva 1 Ying Ho Road, Kam Tin Commercial/Residential 879,500 2,606 2,962 Source: Lands Department, Ming Pao, Apple Daily, Economic Times Siu Hong, Tuen Mun farmland site The Lands Department disclosed that a conversion land premium settlement of ~HKD6.53b for a farmland (T.M.T.L 483) with site area of ~461,302 sq ft in Tuen Mun was reached between SHKP and the government. According to Lands Department data, the land conversion was executed on 15 May 2017 for the commercial-residential site at Siu Hong, Area 54 in Tuen Mun. The site which is located near by the West Rail Siu Hong Station yields a total GFA of ~2.9m sq ft (~59% residential/~41% commercial). Based on the land premium paid of HKD2,288 per sq ft and ASP of nearby new residential projects such as “Eight Regency” (珀御), we estimate the project could yield a margin of at least 35% after factoring in construction and interest costs. Fig 2: Location of T.M.T.L 483 Source: Ming Pao News July 27, 2017 2 Sun Hung Kai Properties Shap Sze Heung, Sai Kung farmland site Meanwhile, the Buildings Department in Apr 2017 approved the building plan for a phase II project located in Sai Sha Rd, Shap Sze Heung, Sai Kung owned by SHKP. According to a HK Economic Times report (dated 20 Jun 2017), the site is currently farmland and approval has been granted to construct 29 residential high-rises (6-22 floors each) and 30 residential houses, providing about 2,600 private homes, with a total GFA of ~3m sq ft. Together with the phase I building plan approved back in Dec 2016, the whole project could offer close to 5.1m sq ft of GFA for property development, providing about 4,700 private homes. Given the building plan has already been approved by the government, we believe the farmland site could soon be converted into residential usage once the premium has been agreed between SHKP and the government. Fig 3: Location of T.P.T.L 157 Source: AppleDaily News Strong 2H FY17 sales and project pipeline ahead Based on government data, we estimate SHKP’s contracted sales were the second highest within our coverage during Jan to Jun 2017 (2H FY17) at around HKD22.1b, with key contribution from “Cullinan West 2A” (匯璽) in Nam Cheong Station. Together with ~HKD22.8b of contracted sales recorded in 1H FY17, we forecast contracted sales could have reached HKD44.9b, ~36% above SHKP’s FY17 HKD33b sales target in Hong Kong. Looking ahead, we project a strong project launch pipeline (1,963 units) in the rest of 2017, including “Victoria Harbour 1B” (海璇) in North Point, “St. Barths” (雲海) in Ma On Shan, “St. Mortiz” (雲端) in Kau To Shan, Babington Hill in Mid- Levels and LOHAS Park Package 4 Phase 1 (日出康城) in Tseung Kwan O. In particular, we believe “Victoria Harbour” and “St. Barths” could be near-term catalysts given both projects have obtained pre-sales consent and could be launched at any time. Moreover, we believe there could be some ASP upside for “St. Barths” given it is located adjacent to the Whitehead site that was recently tendered at HKD11,588/sq ft, a record high in the area.