11 October 2017 New World Development (17 HK) EQUITIES REMD Initiate at Buy: Returning to triumph Hong Kong We expect NWD to transform itself into a developer with a INITIATE AT BUY balanced portfolio of income streams Completion of Victoria Dockside not only strengthens its rental TARGET PRICE (HKD) PREVIOUS TARGET (HKD) income but has other positive implications 14.20 - Initiate Buy with target price of HKD14.20, implying 24% upside SHARE PRICE (HKD) UPSIDE/DOWNSIDE and 4.2% FY18e dividend yield; NWD is our conviction pick 11.50 +23.5% (as of 06 Oct 2017) Re-rating process is under way. New World Development (NWD) is a leading MARKET DATA property company in Hong Kong that is transforming itself into an integrated Market cap (HKDm) 113,123 Free float 56% developer with a balanced mix of property sales and rental business. The company Market cap (USDm) 14,492 BBG 17 HK 3m ADTV (USDm) 27 RIC 0017.HK has scaled up its property sales over the past few years, and its rental business will likely be the next segment to see a strong pick-up. Investors’ concerns about its high FINANCIALS AND RATIOS (HKD) Year to 06/2017a 06/2018e 06/2019e 06/2020e gearing vs peers should dissipate; we view this risk as manageable given higher HSBC EPS 0.75 0.84 0.94 1.11 expected rental income. We estimate the company can deliver: 1) a FY17-20e HSBC EPS (prev) - - - - Change (%) - - - - earnings CAGR of 14%, to HKD10.6bn, vs a sector average of 5%; 2) a 107% jump Consensus EPS 0.78 0.79 0.86 0.90 in rental income, from HKD2.4bn in FY17 to HKD5.0bn in FY19e; and 3) a 15% PE (x) 15.4 13.6 12.2 10.4 Dividend yield (%) 4.0 4.2 4.6 4.9 dividend rise to HKD0.53/share in FY19e. The stock is trading at an attractive NAV EV/EBITDA (x) 10.7 7.8 7.6 7.0 discount of 53% and 0.59x FY17 PB multiple. ROE (%) 3.9 4.2 4.6 5.4 More than a new landmark in Hong Kong – Victoria Dockside. The completion of 52-WEEK PRICE (HKD) the Victoria Dockside should drive a new re-rating, in our view. This 3m sqft 15.00 commercial complex is scheduled to be completed in phases between end-2017 and 11.20 mid-2019. We believe investors underestimate its contribution and value. It not only 7.40 significantly strengthens NWD’s rental income but also brings: 1) higher dividend 10/16 04/17 10/17 Target price: 14.20 High: 11.50 Low: 8.16 Current: 11.50 payment capacity; 2) lower earnings volatility, given higher recurrent income; and 3) a stronger balance sheet for future acquisitions. Source: Thomson Reuters IBES, HSBC estimates Resilient property sales in Hong Kong and China, and farmland reserves in Hong Raymond Liu* Kong are potential positives. The company’s strategy of faster asset turnover in Hong Analyst Kong and China is bearing fruit, in our view. In Hong Kong, we estimate contracted sales The Hongkong and Shanghai Banking Corporation Limited [email protected] to stay at cHKD12-16bn p.a. in the next 2-3 years, ranking in the top five in terms of +852 2996 6743 sales value. More upside could come from the farmland reserves of over 17m sqft. It Michelle Kwok* may strengthen NWD’s medium-term visibility upon successful conversion to residential Head of Real Estate Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited use. In mainland China, we estimate contracted sales to remain at cRMB16-22bn p.a. [email protected] with an EBIT margin above 30% in coming years. +852 2996 6918 Ganesh Siva* Initiate at Buy with a target price of HKD14.20, based on a 42% target discount Associate (0.25SD above the mean) applied to our NAV estimate of HKD24.30/share. The Bangalore target discount is based on our 8-factor valuation framework, which includes business diversification, strengthening rental income, and policy risks. Key downside * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations risks to our estimates and rating include property regulations in Hong Kong and China, and insufficient land bank replenishment. Our FY18-19e earnings estimates MiFID II – Research: Is your access agreed? CONTACT us today are 10% and 9% above consensus, respectively. Disclaimer & Disclosures Issuer of report: The Hongkong and Shanghai Banking Corporation Limited This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at: https://www.research.hsbc.com EQUITIES ● REMD 11 October 2017 Financials & valuation: New World Development Buy Financial statements New World Development: NAV breakdown Year to 06/2017a 06/2018e 06/2019e 06/2020e Particulars (HKDm) HKD/ % of total Profit & loss summary (HKDm) Share asset Property Development 25,968 36,328 35,324 39,162 HK Development properties 31,862 3.3 11% Property Investment 2,411 3,478 4,994 5,315 HK Investment properties Hotels & Other Business 28,250 30,298 31,704 32,358 Office 40,660 4.3 14% Cost of Sales (38,413) (49,216) (50,953) (54,284) Retail 45,291 4.7 16% Gross Profit 18,216 20,888 21,068 22,550 Residential 7,344 0.8 3% Selling & Admin. Expenses (8,786) (9,049) (9,321) (10,066) Others 2,121 0.2 1% Other Gains 957 726 627 677 China - Development properties 63,724 6.7 22% Net Interest Expense (446) (267) (274) (140) China - Investment properties Share of Profit from Asso. 3,925 3,666 3,963 5,044 Office 5,096 0.5 2% Non-operating Profit/Loss 1,364 10,000 0 0 Retail 14,470 1.5 5% PBT 15,230 25,964 16,064 18,065 Residential and others 1,436 0.2 1% Taxation (4,756) (5,602) (5,572) (6,264) Hotels 28,296 3.0 10% Minority Interests (2,799) (2,285) (1,461) (1,227) Listed sub & asso at market value Net Profit 7,676 18,076 9,031 10,575 NWS Holdings (659 HK)(61%) 37,834 4.0 Core Profit 7,133 8,076 9,031 10,575 New World Dept Store (825 HK)(72%) 1,923 0.2 Financial investments (ex. Investments under NWS) 5,314 0.6 Cash flow summary (HKDm) GAV 285,371 29.8 100% Cash flow from operations 14,449 29,029 9,448 8,821 Net debt (68,114) (7.1) Capex (945) (11,661) (1,317) (1,242) Est. NAV 217,257 22.7 Changes in investments (6,309) (3,666) (3,963) (5,044) Farmland 15,303 1.7 New shares issued 3,634 0 0 0 Est. NAV including Farmland 232,560 24.3 Dividends paid (4,077) (4,399) (4,591) (5,069) Others 5,269 (8,355) 12,804 2,812 Source: HSBC estimates Net change in cash 12,021 948 12,381 278 ESG metrics Cash at beginning 54,965 66,986 67,933 80,314 Cash at end 66,986 67,933 80,314 80,592 Environmental Indicators Governance Indicators Balance sheet summary (HKDm) GHG Intensity (kg/USD) 0.004 No. of board members 14 Shareholders’ funds 186,091 196,102 196,579 197,041 Energy Intensity (kWh/USD) 0.006 Average board experience (years) 15 Long-term liabilities 125,895 126,549 124,332 121,126 CO2 reduction policy Yes Female board members (%) 14 Minority interests 34,853 37,139 38,600 39,827 Board members Independence (%) 0 Deferred tax and others 10,716 10,930 11,149 11,372 Social Indicators Total capital employed 357,556 370,719 370,660 369,365 Employee costs as % of sales n/a Fixed assets 138,283 152,678 156,940 161,068 Employee turnover (%) 22 Other assets 119,792 124,888 130,484 137,385 Diversity policy n/a Current assets 178,850 169,595 175,037 168,899 Source: Company data, HSBC Total assets 436,926 447,161 462,460 467,352 NWD (discount)/premium to NAV Ratio, growth and per share analysis 100% Year to 06/2017a 06/2018e 06/2019e 06/2020e y-o-y % change 60% Revenue -5% 24% 3% 7% 20% Operating profit -36% 21% -2% 6% PBT -19% 70% -38% 12% -20% Reported EPS -15% 135% -50% 17% HSBC EPS 21% 13% 12% 17% -60% Ratios (%) -100% ROIC ex-exceptional 5% 6% 7% 7% Jan-00 Feb-02 Mar-04 Apr-06 May-08 Jun-10 Jul-12 Aug-14 Sep-16 NAV discount Mean +1SD -1SD ROAE ex-exceptional 3% 4% 4% 5% ROAA ex-exceptionals 1% 2% 2% 2% Operating margin 18% 18% 17% 17% Source: Thomson Reuters Datastream, HSBC estimates Core profit margin 13% 12% 13% 14% Interest cover ex-exceptional (x) 2.0 3.8 1.9 2.0 Price relative Net debt/equity 43% 36% 36% 37% Per share data (HKD) Reported EPS (fully diluted) 0.80 1.89 0.94 1.11 12.20 12.20 HSBC EPS (fully diluted) 0.75 0.84 0.94 1.11 DPS 0.46 0.48 0.53 0.56 11.20 11.20 BVPS 19.48 20.50 20.55 20.60 10.20 10.20 9.20 9.20 8.20 8.20 7.20 7.20 6.20 6.20 5.20 5.20 01/15 07/15 12/15 06/16 12/16 06/17 New World Development Co Rel to HANG SENG INDEX Source: HSBC Note: Priced at close of 06 Oct 2017 2 EQUITIES ● REMD 11 October 2017 Contents Investment summary 4 Investment positives 12 Valuation and risks 23 Financial analysis 33 Corporate profile 39 Disclosure appendix 41 Disclaimer 44 3 EQUITIES ● REMD 11 October 2017 Investment summary We believe the re-rating process of NWD is under way, and the next stage will be driven by the company’s Hong Kong rental segment Completion of Victoria Dockside not only significantly strengthens its rental income but also has multiple positive implications We expect New World to be one of the key beneficiaries of farmland conversion as it has reserves of over 17m sqft of farmland Re-rating process is under way – initiate at Buy We initiate coverage of New World Development with a Buy rating and a target price of HKD14.20/share.