New World Development （NWD） reported 1H FY17 earnings （pre-exceptionals） that were up 13% Y/Y. InterimDPS stayed flat at HK$0.13. Despite the recent run in the share price, the stock is still trading at a 48% discountto NAV, compared to the peer average of 42%. We believe the stock will continue to be re-rated given thatmanagement has shown a clear direction for the company and its efforts in improving shareholder returns.
　　Underlying earnings （pre-exceptional） up 13% Y/Y. NWD reported 1H FY17 underlying earnings ofHK$5.0bn, which includes a HK$1.3bn disposal gain and pertaining fair value gain related to NWS KwaiChung Logistics Center. On a pre-exceptional basis, NWD’s underlying earnings were up 13% Y/Y. Thecompany has maintained DPS at HK$0.13, implying a payout ratio of 33% against pre-exceptional underlyingearnings （vs. 36% for 1H FY16）。 The contributions from development properties from HK/China were-42%/+107% Y/Y respectively. Management decided to keep 1H FY17 DPS flat on the back of an uncertainmacro outlook for 2017 and the upcoming land tenders.
　　HK and China property sales accelerated. NWD has achieved contract sales of HK$10.35bn andRmb12.8bn in HK and China, reaching 104% and 80% of the respective FY17 sales targets. NWD is keepingthe HK sales target unchanged but Mount Pavilia （680 units） in Sai Kung could be the next new launch. Forthe China operations, the gross margin improved to 36% as there were more bookings in Guangzhou andShenzhen in 1H FY17 and management is confident it can maintain the margin at above 30%. That said, salesgrowth going forward will likely hinge on overall housing policies in China. The overall propertydevelopment margin saw an improvement from 23% in 1H FY16 to 32% in 1H FY17.
　　New World Centre retail pre-leasing progressing as expected. Management commented that thecompletion and pre-leasing of the 1mn sf mall is progressing as expected. Given the successful track record ofK11 and D PARK, we believe the leasing strategy is likely to be different from the traditional malls, and themall will also provide ample parking space for families and tourists in Tsim Sha Tsui. That said, we think anynoticeable improvement and enhanced transparency in its China business would be more imminent catalystsfor the stock.
　　Net gearing down 4pps to 34.4%: Net debt to total equity was down 4pps to 34.4%, on the back of lower netdebt across NWD and its listed subsidiaries, as well as a 6% increase in total equity. NWD projects its netcash flow for FY17 to be HK$1bn of outflow/inflow for HK/China, and we expect the net gearing level to bekept stable.
　　Investment Thesis
　　Despite the stock’s outperformance YTD, we believe NWD remains undervalued given the still steep stub discount. Anupcoming catalyst for the stock is the value extraction from potential disposals from NWCL’s portfolio post privatization.
　　Also, high dividend yield will continue to provide support to share price, in our view. The opening of New World Centre isexpected to start contributing from FY18 onwards. We maintain OW on the stock.
　　Valuation
　　Our Dec-17 price target of HK$10.20 is based on a 46% discount to its Dec-17E NAV, which is 0.4 S.D. below thehistorical average. The target discount is derived from the EVA valuation methodology.