Reiterating Buy on steep stub NAV discount; special dividend yield at 5.7%
Cheung Kong announced that Temasek would take up a 24.95% equity interest in A.S. Watson Holdings, the retail business arm of its 49.97%-owned Hutchison Whampoa, for a total cash consideration of HK$44bn. After Hutch’s special dividend payout, Cheung Kong also announced it would pay a special dividend of HK$7/shr, a sizeable windfall with a yield of 5.7%. While it needs to top up the special dividend payout by HK$1.3bn, it is an irrelevant amount to Cheung Kong which has net gearing of just 2% as of end-13. The valuation is attractive, trading at a stub NAV discount of 68% (historical average of 47%), making Cheung Kong a cheap proxy to buy into Hutchison in particular.
Special dividend of HK$7/shr; still financially sound for new acquisitions ahead
Net proceeds from the Watson stake sale amount to approximately HK$43bn and Hutch will subsequently pay out a special dividend of HK$7/shr, of which Cheung Kong would receive about HK$14.9bn. Based on Cheung Kong’s proposed special dividend payout of HK$7/shr, the total payout would amount to HK$16.2bn, implying that it needs to make a top-up of HK$1.3bn. With one of the strongest balance sheets among peers with net gearing of just 2% as of end-13, it is an irrelevant amount to the company and would not impair its ability to make new acquisitions. Cheung Kong is well positioned at a time the government is proactively ramping up land supply. We believe this presents more opportunities for potential NAV/earnings upside ahead.
Currently trading at 68% discount to stub NAV vs. historical average of 47%
In line with the underperformance in Hong Kong developers since Nov-10 – following the government’s introduction of the Special Stamp Duty (SSD), the share price of Cheung Kong has dipped by 1% while Hutchison has rallied by 30%. Consequently, Cheung Kong’s discount to stub NAV has largely followed a widening trend, currently trading at a steep discount to stub NAV of 68% (historical average of 47%). Meanwhile, it is trading at a 30% discount to our estimated NAV of HK$176.5/share (below “-1SD” of the historical average) and 9x 2014 earnings (well below the historical PE of 14x).
Target price at 15% discount to our NAV estimate of HK$176.5
Our target price is based on a 15% discount to our revised NAV estimate of HK$176.5, which implies 2014E PER of 11x. Our target discount is based on the historical average discount of 15%, which we believe is appropriate and adequate to reflect the current point of the market cycle. Risks: performance from Hutch, government policy, sales performance of new project launches.