Reiterating Buy on attractive valuation; dividend yield at 6.7%; 39% upside
Factoring in price and rental declines for the full down-cycle in the HK propertymarket in the next three years, we trim our FY16-18 earnings by 16-33% andNAV by 33%. Yet, as NWD is still trading at an attractive 53% discount to NAV,9x P/E, 0.3x P/B, and a dividend yield of 6.7%, we believe current valuation hasalready reflected this bearish outlook. While current valuation is still markedlyabove historical trough, we believe historical trough is irrelevant since thestrong management team led by Executive Chairman/Joint General ManagerMr. Adrian Cheng was appointed in 2012, which has driven a markedimprovement in execution capability, product quality, and transparency.
High 6.7% dividend yield should provide good downside support
NWD has historically traded at an average discount to NAV of 49% (rangingbetween a peak of 2% discount in 2007 to a trough of 85% discount in 2003),P/E of 15x (ranging between a peak of 46x in 1999 to a trough of 5x in 2003),and P/B of 0.6x (ranging between a peak of 1.87x in 1997 to a trough of 0.1x in2003). While current valuation is still markedly higher than the historicaltrough, we believe using the historical trough as a reference may not beappropriate, as there has been a marked operational improvement since 2012.Moreover, we believe the high dividend yield of 6.7% (highest in 20 years)should provide good downside support to the current share price.
NWCL privatization will boost net gearing but will gradually come down
On January 6, NWD announced a privatization proposal on NWCL by way ofcash offer at HK$7.8/shr, putting the value of the offer at HK$21.45bn. AsNWD has obtained a credit facility to fund the proposal in full, there will belittle impact to NWD’s ability to acquire new projects in HK. While net gearingwill surge to 37% (from 24%) immediately upon completion of the transaction,we believe net gearing will improve gradually on: 1) strong contracted sales inHK on ample launches; 2) perpetual coupons from Evergrande; and 3) potentialfurther China assets sales (NWCL still has 11mn sqm GFA of land bank).
Target price based on 35% discount to revised NAV estimate of HK$13.34/shr
Our target price is based on a 35% discount to our revised NAV estimate ofHK$13.34/share, which implies a 2016 P/E of 13x. Our target discount issmaller than the historical average of 49%, which we believe is appropriate, asit reflects the marked improvement in execution capability, good launchpipeline, and prospects for further NAV growth. Key risks: economic slowdown,interest rate changes, and government measures.