Solidly positioned for residential sales earnings and rental growth despite uncertainties in the macro environment
Trading at an attractive valuation of 52% NAV discount (wider than crisis levels) and 0.63x PB (42% below average)
Maintain Buy rating with a target price of HKD160
Solid operations despite FY15 earnings decline. Despite the 7% y-o-y decline in FY15 underlying earnings owing to lower residential GFA completion (which is expected to rebound in FY16e), we see three positives from SHKP’s FY15 results, including 1) solid net rental growth of 8% y-o-y (including associates), providing steady income and cash flow streams; 2) strong contracted sales in HK of HKD32bn achieved or 28% above target, demonstrating the company’s solid track record in residential sales; and 3) a strong balance sheet with gearing down 2.6pp h-o-h to 11.2% as of June 2015. We believe these attributes would well position SHKP amid an uncertain macro environment although they appear to be underappreciated by the market given SHKP’s steep NAV discount of52%, wider than c42% traded during past economic crises in 2008 and 2011.
Well-positioned for future earnings growth. We expect FY16-18e earnings to see support from higher completion of residential GFA scheduled in HK, up to 3.3m sf/year in FY16-18e from 1.4m sf /year in FY13-15. Meanwhile rental growth should be supported by the company’s diversified portfolios (for both HK retail and office) as well as new project completions, such as YOHO mall in Yuen Long (c1.1m sf GFA opening in phases from 2015) and Xujiahui Centre project in Shanghai, for which all GFA will now be kept for long-term investment.
In-line FY15 results.SHKP reported FY15 underlying earnings of HKD19,825m, down 7% y-o-y. FY15 DPS remained flat y-o-y at HKD3.35, implying a payout ratio of 47% (vs. 42% in FY14). Book NAV rose +2% h-o-h to HKD157 as of June 2015, implying 0.63x P/B or 47% below historical average. (Details can be found in our note FY15 results in-line, 10 September 2015.)
Maintain Buy rating with a target price of HKD160.We revise down our FY16-17e earnings (largely in line with Bloomberg consensus) by 1-2% reflecting the latest completion and launch schedules and revised sales assumptions. Our fair value target price of HKD160 (unchanged) is based on a 23% discount to our NAV estimate of HKD208. We believe SHKP is well-positioned against sector headwinds given a solid primary sales track record and a quality and growing rental. Potential catalysts include sustainable primary sales momentum. Key downside risks include delays in primary launches, lower-than-expected ASP in property sales and/or rising HK commercial cap rates.