Reiterating Buy on attractive valuation; current PB hovering at historical low
In our view, the highlight of the 1HFY16 results is the marked dividendincrease, highlighting mgmt. confidence on its prospects and strong financialposition despite a soft market outlook. While the share price saw a sizeablerebound in the past two weeks, SHKP trades at an attractive 33% discount toNAV and at 13x PE, 0.6x PB (hovering at historical low) and dividend yield of3.8%. At such valuation, we believe it already prices in the three-year bearishoutlook on the HK property market. By referencing the trading pattern in pastdown-cycles, we believe there are still opportunities to buy into the stock, evenin a downturn, and see the current price as a good entry point.
Core net profit +10% YoY to HK$9,298m on strong contribution from IP
SHKP reported 1HFY16 revenue was up 9% YoY to HK$34,902m, mainlydriven by the strong contribution from rental revenue and thetelecommunication arm. Nevertheless, hotel revenue was down 5% YoY on theoverall weakness in the tourism sector in Hong Kong. Reported net profit wasdown 6% YoY on lower associates contribution and fair value gains. Excludingfair value gains and one-offs, underlying profit rose 10% YoY to HK$9,298m.An interim dividend of HK$1.05/share was declared (up by 11% YoY).
Discount to NAV/PE/PB ranged between +1SD/-1SD four times in last cycle
In the last down-cycle in the HK property market from 1997 to 2003, from peakto trough, residential prices plunged 67%, and retail and office rents fell 41%and 82%, respectively. During this six-year period, SHKP was range-boundbetween +1SD and -1SD four times in its discount to NAV, PE and PB. Inparticular, the discount to NAV ranged between a 53% discount to a 14%premium, PE ranged between 7x to 30x and PE ranged between 0.53x and2.02x. While the discount to NAV (currently 38% versus 53%) and PE (currentlyat 12x versus 7x) is still higher than the trough seen in the previous downcycle,PB is already at a fresh new low of 0.5x versus the last trough of 0.53x.
Target price based on a 25% discount to our NAV of HK$132.3/shareOur target price is based on a 25% discount to our NAV estimate of
HK$132.3/share, which implies a 2016 PE of 14x. Our target discount is in linewith SHKP’s historical NAV discount (implied PE is lower than its historicalaverage PE of 16x), which we believe is appropriate given the strong salesexecution track record regardless of market conditions. Key risks: externaleconomic shocks, liquidity outflow, rate hike and government measures.