Maintaining Hold; current price already reflected farmland conversion potential
We maintain our Hold on NWD as we see the current share price as close to itsfair value. In our view, the 13% share price rally in the past month has alreadyreflected optimism on the government speeding up farmland conversion in theupcoming Policy Address. While NWD has the second-largest farmland reserveamong Hong Kong developers, we believe it will continue to implement abalanced approach in landbank replenishment from diversified channels, so asto ensure a variety of product offerings. Thus the pace of conversion is likely toremain gradual going forward. In FY17, NWD has replenished more landbankfrom the redevelopment of old buildings than farmland conversion.
FY17 underlying profit +3.5% YoY to HK$7,133mn; in line with expectation
NWD reported FY17 consolidated revenue -5% YoY to HK$56,629mn, draggedmostly by a 9% YoY decline in property sales revenue. Nevertheless, blendedgross margin expanded by 1.1 percentage points to 32.2%, boosted by highera property development margin. In the absence of disposal gains, headlineprofit dropped by 11% YoY to HK$7,676mn. Excluding revaluation gains andone-off gains, core profit rose +3.5% YoY to HK$7,133mn, slightly ahead ofour HK$7,101mn estimate. A final dividend of HK$0.33/sh （+6.5% YoY） wasdeclared in FY17, bringing the full-year dividend to HK$0.46/sh （+4.6% YoY）。
Expected to continue with a balanced approach in landbanking ahead
NWD has the second-largest farmland reserve among Hong Kong developersat 17.4mn sf. However, given the concentration in geography （close to 70% inYuen Long）， we believe NWD is likely to continue with its balanced approachin landbank replenishment via government land sales, redevelopment of oldbuildings and farmland conversion. Indeed, NWD has successfully concludedone farmland conversion in Yuen Long with 121,100 sf GFA in FY17 （FY16: twosuccessful conversions with 40,413 sf attributable GFA）。 Over the same period,NWD has acquired three projects via government tenders （1.9mn sf GFA） andseven via redevelopment of old buildings （attributable GFA of 774,794 sf）。
Target price of HK$11.1 is based on the sum-of-the-parts approach
Our target price is based on the sum-of-the-parts approach, which implies a2018 PE of 14x. We believe applying a 5-7x PE to HK property developmentand a 34% target discount to our estimated value on the respective investmentproperty portfolio is appropriate in an ex-growth market. Risks: governmentpolicy, sales momentum and interest rate trend.