DOWNGRADE Company Note Property Devt & Invt │ Hong Kong │ January 30, 2020 Insert Insert Hong Kong Kerry Properties REDUCE (previously HOLD) Consensus ratings*: Buy 3 Hold 10 Sell 1 Low earnings and dividends visibility Current price: HK$22.00 ■ We believe Kerry Prop’s sales could slow further in 2020 after a disappointing Target price: HK$20.10 2019, given its weak launch pipeline and poor luxury market sentiment. Previous target: HK$32.40 ■ It may cut its dividend payout once again, following the slowdown in Up/downside: -8.6% contracted sales and rising net gearing. CGS-CIMB / Consensus: -27.5% ■ Hence, we downgrade Kerry Prop from Hold to Reduce with a TP of Reuters: 0683.HK HK$20.1, based on a 70% discount to NAV. Bloomberg: 683 HK Market cap: US$4,123m HK$32,043m Sales to slow further in 2020 after a tough 2019 Average daily turnover: US$5.76m Kerry Prop’s contracted sales in 2019 were disappointing, dragged by weak luxury HK$44.94m market sentiment. We estimate full-year sales of HK$9bn (HK: HK$7bn, China: HK$2bn), Current shares o/s: 1,447m falling short of management’s target of HK$12bn by ~22%. We believe that sales should Free float: 42.0% slow further in 2020, given a weak launch pipeline. In HK, inventories of Mantin Heights *Source: Bloomberg (28 units left) and Bloomsway (47 units left) are nearly sold out while Mont Rouge (Beacon Hill project) is super-luxury focused, which is extremely hard to sell in the near Key changes in this note term. In China, its Qianhai project is unlikely to be launched unless the price cap is lifted. FY19-21F EPS decreased by 9-29%. Mont Rouge: extremely difficult to sell in the near term Price Close Relative to HSI (RHS) Kerry Prop launched Mont Rouge in Apr 2019 and set a record-high ASP for Kowloon district for the three units it sold (house: HK$83k/sf, apartments: HK$102k/sf). However, it 35.0 100.3 did not sell any units since 2H19, as the luxury market sentiment was dampened by HK’s 30.0 89.2 social unrest. Management looks unlikely to cut prices in order to sell this project. We 25.0 78.1 20.0 67.0 believe that sales should progress very slowly in FY20F, especially with social unrest and 10 Wuhan coronavirus. 5 Vol m Vol Dividends may not be sustainable Jan-19 May-19 Aug-19 Nov-19 We believe it may be difficult for Kerry Prop to maintain a stable or consistently rising Source: Bloomberg absolute DPS, although management strives to do so, given its stretched cash flow Price performance 1M 3M 12M following slower-than-expected sales. We estimate its net gearing could rise to 30% by Absolute (%) -12.5 -12.4 -30.6 FY21F (FY18: 19%). We recall that Kerry Prop did not honour its dividend policy of a Relative (%) -8.7 -13.8 -29.2 stable absolute DPS in 2018, which triggered a sell-off. Major shareholders % held Kerry Group Limited 58.0 Downgrade to Reduce; TP lowered to HK$20.1 We cut our FY19-21F EPS by 9-29% and NAV by 7% after factoring in much slower contracted sales in HK and China. Given its weak sales, earnings and dividend outlook, Insert we lower our TP to HK$20.1, now based on 70% discount to NAV (from 55% previously). We downgrade Kerry Prop from Hold to Reduce. Upside risks: stabilisation in HK’s social unrest and policy loosening in China’s property markets. De-rating catalysts include weaker-than-expected earnings profile, unsustainable dividends. Analyst(s) Financial Summary Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F Total Net Revenues (HK$m) 35,548 21,433 20,459 17,120 17,014 Operating EBITDA (HK$m) 9,014 7,789 8,394 7,362 8,041 Net Profit (HK$m) 8,957 7,063 5,328 4,444 4,887 Core EPS (HK$) 4.61 2.32 3.69 3.08 3.38 Core EPS Growth 81.1% (49.7%) 59.3% (16.6%) 10.0% Raymond CHENG, CFA FD Core P/E (x) 4.78 9.51 5.97 7.16 6.51 T (852) 2539 1324 DPS (HK$) 1.50 1.35 1.35 1.30 1.30 E [email protected] Dividend Yield 6.82% 6.14% 6.14% 5.91% 5.91% EV/EBITDA (x) 5.36 5.59 5.74 7.39 7.43 Jeffrey MAK P/FCFE (x) NA 8.82 NA NA NA T (852) 2539 1328 Net Gearing 22.6% 17.1% 19.6% 23.2% 25.9% E [email protected] P/BV (x) 0.34 0.33 0.32 0.31 0.30 Will CHU ROE 7.51% 3.49% 5.37% 4.35% 4.65% T (852) 2539 1327 % Change In Core EPS Estimates (8.9%) (29.0%) (23.2%) CGS-CIMB/Consensus EPS (x) 1.00 0.85 0.87 E [email protected] SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN Powered by the THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFA Platform Property Devt & Invt │ Hong Kong Kerry Properties │ January 30, 2020 Figure 1: Earnings revisions HK$ m 2019F 2020F 2021F Old New % chg Old New % chg Old New % chg Revenue 22,828 20,459 -10% 22,611 17,120 -24% 20,358 17,014 -16% Net profit 5,846 5,328 -9% 6,260 4,444 -29% 6,364 4,885 -23% EPS (HK$) 4.05 3.69 -9% 4.34 3.08 -29% 4.41 3.38 -23% SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS Figure 2: NAV and TP changes Old New Chg NAV (HK$) 72.0 67.1 -7% Target discount 55% 70% 15% pts Target price (HK$) 32.4 20.1 -38% SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS Figure 3: Kerry Prop’s NAV breakdown HK$m HK$/sh HK development property 27,788 19.2 HK investment property 25,887 17.9 China development property 15,668 10.9 China investment property 44,994 31.2 Kerry Logistics Network 9,070 6.3 Other investments 1,038 0.7 Gross Asset Value (GAV) 124,445 86.2 Net debt -27,612 -19.1 Net Asset Value (NAV) 96,832 67.1 Target discount to NAV (%) 70% Target Price 20.1 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS Figure 4: Peers comparison Share Disc. to price TP Mkt cap NAV/sh NAV Upside P/E (x) P/BV(x) Yield (%) Net Gearing (%) Short Name Ticker (HK$) (HK$) Rating (US$ m) (HK$) (%) (%) 2018 2019F 2020F 2021F 2018 2019F 2020F 2018 2019F 2020F 2018 2019F 2020F CK Asset 1113 HK 51.60 62.00 HOLD 24,519 124.0 58 20 7.5 6.2 8.0 7.8 0.6 0.5 0.5 3.7 4.1 4.5 4 2 (2) HLD 12 HK 36.05 50.00 ADD 22,454 84.0 57 39 8.5 9.4 9.7 9.4 0.6 0.6 0.6 5.0 5.1 5.3 22 23 23 Kerry Prop 683 HK 22.00 20.10 REDUCE 4,123 67.1 67 (9) 9.6 6.0 7.3 6.6 0.3 0.3 0.3 6.1 6.1 5.9 17 20 23 NWD 17 HK 10.20 12.50 ADD 13,420 20.9 51 23 13.1 11.8 13.0 11.1 0.5 0.5 0.5 4.7 5.0 5.1 32 34 33 SHKP 16 HK 112.10 140.00 ADD 41,793 245.0 54 25 10.7 10.0 9.6 9.0 0.6 0.6 0.6 4.1 4.4 4.6 13 13 11 Sino 83 HK 10.96 12.30 HOLD 9,813 25.4 57 12 6.9 16.3 16.4 7.4 0.5 0.5 0.5 4.8 5.0 5.1 (19) (20) (19) Wharf Holdings 4 HK 20.00 20.40 HOLD 7,847 51.1 61 2 9.3 9.5 8.8 8.2 0.4 0.4 0.4 3.3 3.3 3.4 18 19 17 Wheelock 20 HK 48.60 57.80 ADD 12,811 115.5 58 19 7.5 7.3 6.8 6.3 0.4 0.4 0.4 3.2 3.3 3.4 24 23 26 HLP 101 HK 16.78 15.00 REDUCE 9,710 33.3 50 (11) 18.4 16.9 15.6 14.7 0.5 0.5 0.5 4.5 4.5 4.5 10 18 20 HKL* HKL SP 5.49 6.90 ADD 12,917 12.6 56 26 1.6 1.6 1.4 1.4 0.3 0.4 0.4 4.0 4.2 4.6 9 12 13 Hysan 14 HK 29.70 35.50 HOLD 3,989 78.9 62 20 12.3 11.9 11.6 11.3 0.4 0.4 0.4 4.9 5.0 5.2 4 4 3 Swire Prop 1972 HK 25.65 29.70 HOLD 19,305 45.8 44 16 20.0 18.8 18.5 17.2 0.5 0.5 0.5 3.3 3.5 3.7 11 7 7 Wharf REIC 1997 HK 42.60 46.30 HOLD 16,641 77.2 45 9 12.9 13.1 13.0 12.8 0.6 0.6 0.6 4.9 5.0 5.0 18 14 13 Champion REIT 2778 HK 4.87 5.60 HOLD 3,680 9.5 49 15 17.8 16.7 16.2 15.8 0.4 0.4 0.4 5.4 5.6 5.8 20 19 18 Link REIT 823 HK 80.00 79.00 REDUCE 21,412 86.0 7 (1) 30.6 30.1 28.4 26.2 1.0 0.9 0.9 3.1 3.3 3.7 12 14 14 Midland 1200 HK 1.01 1.19 HOLD 93 NA NA 18 12.4 141.5 10.5 4.8 0.5 0.5 0.5 3.2 1.0 3.4 (47) (48) (52) Developers 58 16 9.1 9.6 10.0 8.2 0.5 0.5 0.5 4.4 4.5 4.7 14 14 14 Landlords & REITs 45 10 16.2 15.6 14.9 14.2 0.5 0.5 0.5 4.3 4.4 4.6 12 12 12 Simple average 52 14 12.4 12.4 12.3 11.0 0.5 0.5 0.5 4.3 4.5 4.7 13 13 13 Email: [email protected] Share price data as of 29 Jan 2020; * HKL data stated in US$ SOURCES: CGS-CIMB RESEARCH, BLOOMBERG, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS 2 Property Devt & Invt │ Hong Kong Kerry Properties │ January 30, 2020 BY THE NUMBERS P/BV vs ROE 12-mth Fwd FD Core P/E vs FD Core EPS 0.680 8.00% 17.4 Growth 90% 0.630 7.38% 15.4 67% 0.580 6.75% 13.4 44% 0.530 6.13% 11.4 21% 0.480 5.50% 9.4 -1% 0.430 4.88% 0.380 4.25% 7.4 -24% 0.330 3.63% 5.4 -47% 0.280 3.00% 3.4 -70% Jan-15A Jan-16A Jan-17A Jan-18A Jan-19F Jan-20F Jan-15A Jan-16A Jan-17A Jan-18A Jan-19F Jan-20F Rolling P/BV (x) (lhs) ROE (rhs) 12-mth Fwd Rolling FD Core P/E (x) (lhs) FD Core EPS Growth (rhs) Profit & Loss (HK$m) Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F Total Net Revenues 35,548 21,433 20,459 17,120 17,014 Gross Profit 9,746 9,003 9,493 7,974 8,533 Operating EBITDA 9,014 7,789 8,394 7,362 8,041 Depreciation And Amortisation 0 0 0 0 0 Operating EBIT 9,014 7,789 8,394 7,362 8,041 Financial Income/(Expense) (295) (1,736) (385) (516) (654) Pretax Income/(Loss) from Assoc.