We expect 1HFY16e underlying earnings to grow 9% y-o-ywith more property sales contributions expected in 2H
Investors will focus on contracted sales progress and salesstrategies for upcoming launches in HK
Revise down target price to HKD147 (from HKD160)
1HFY16 earnings preview. SHKP will report 1HFY16 results on 26 February. We expect1HFY16e underlying earnings of HKD9,189m, up 9% y-o-y. This y-o-y increase reflectshigher property sales recognized and 6% y-o-y growth in net rental, offset by lowercontributions from the hotel division. With the completions of HK residential projects inFY16 skewed towards 2H, we expect property sales contributions in 1HFY16 mainly fromUltima Phase 1 (c43% sold as of end-2015) as well as leftover sales in Hong Kong andChina projects, e.g. Shanghai Arch. We forecast an interim DPS of HKD0.95, flat y-o-y.We expect property sales contributions in 2HFY16 from Century Link I & II, The WingsIIIA and Imperial Kennedy in HK, of which sales are well locked-in (99% sold on aweighted average basis).
Key investors’ points of focus during results briefing, in our view, will likely include: 1)progress of contracted sales against the company’s FY16 targets of HKD33bn in HongKong and HKD5bn in China; especially given uncertainties in the HK primary residentialmarket which may affect the company’s project launch plans, 2) the company’s residentialsales strategy in HK given the slow down in primary sales since December 2015, 3)dividend payout (consensus FY16e DPS implies 4.2% yield), 4) performance of HK retailrental portfolio, and 5) book NAV growth from HKD156.8 as of June 2015, which willprovide share price support (the stock trades at 0.55x P/B, 50% below the average of1.1x since 1997 and close to the historical low of 0.51x).
Maintain Buy and a lower target price of HKD147 (from HKD160). We revisedown our FY16e-18e earnings by 5-7% and our NAV by 6% after assuming slowerHK residential sales, e.g. for Park Vista and Ultima, updated RMB assumptions,slower HK retail rental growth (to reflect the narrowing in outperformance over themarket), offset by higher contributions from the telecom division in accordance withour telco team’s estimates. We lower our fair value target price from HKD160 toHKD147 after applying an updated target discount of 25% (from 23%) or 0.5 SD belowaverage (unchanged) to our NAV estimate of HKD196 (from HKD208). We believe SHKPis well-positioned against sector headwinds given a solid primary sales track record, aquality and growing rental portfolio and prudent capital management. With the stocktrading at 56% NAV discount (or 52% after assuming 10% fall in HK asset prices), widerthan levels from the Euro crisis in 2011 and global financial crisis in 2008 (c42% NAVdiscount), we see attractive risk-reward profile for SHKP, making it one of our preferredpicks. Potential catalysts include sustainable primary sales momentum. Key downsiderisks include delays in primary launches, lower-than-expected ASP in property salesand/or rising HK commercial cap rates.