New World Development （NWD） reported a set of in-line Jun-FY18results. Key highlights:
Underlying profits （excluding non-recurring items） n at HK$8bn, up12% yoy, in line with our forecasts.
Property development segment profit was up 26% to HK$9.5bn,helped by higher margins across HK and China on bookings,which also include some non-core asset sales.
Property rental profit up 9% to HK$1.9bn, driven partly by highercontributions from China on new openings （Wuhan K11） andconsolidation of stakes in Shanghai project.
Full year DPS at HK$ 48 cents, up 4.3% yoy, implying a 4.6%yield to last close.
Gearing ratio （net debt to total equity） improved by 5.5pp yoy to29%, driven partly by higher book value （BVPS up 11.5% yoy toHK$21.17） as a result of HK$15bn investment propertyrevaluation related to Victoria Dockside and office properties, astheir net debt was down by only 3% yoy.
Key takeaways from analyst briefing
HK development sales: They achieved HK$25bn contracted salesin Hong Kong during the June-ended fiscal year, vs their originaltarget of HK$10bn, as they were tapping the market window inearly CY2018. As such they see a high-level of developmentsales profit being locked-in into FY19E.
HK land banking
Going forward, they remain keen to increase their landbank in HK, citing that they are still much below theirinternal gearing ceiling of 40% （net debt to total equity），and if the potential government tenders are sizable, they are willing to do JVswith peers.
They were awarded the contract for the design, construction, o financing andmanagement of the commercial development located in the “SKYCITY” atHong Kong International Airport （HKIA） back in May （Awarded contract ofcommercial development in SKYCITY, dated May 3, 2018）。 Its a mixed-usedevelopment with 3.77mn sq ft GFA, and would be the largest retail offering inHK upon completion （about 2+mn sq GFA would be in retail, rest inentertainment and office）。 As they are still early stage of design, they do notenvision high capex in the near term, and would expect a completion window from 2023 to 2027.
On farm land conversion, out of the 17mn sq ft of farm land sites, they have3mn sq ft of sites in various stages of land exchanges and negotiations, whichthey are hopeful to achieve at least 0.6mn sq ft GFA conversion by late nextcalendar year.
China land banking
Back in in January 2018, NWD signed a strategic cooperation agreement withthe Shenzhen Lo Wu government to gain access to a c.840k sq m land parcelin the prime district for future urban renewal development.
NWD guides for a further HK$15 bn land banking capex target in China inFY19E.
Victoria Dockside update
Overall management expect HK$2 to 2.5bn rental revenue from this 3mn sq ftGFA mixed use project upon full operation （including hotels）。
The office component has already started revenue contributions with over70% leased.
Retail portion in under active pre-leasing, and expect to announce their anchortenants in next two months, and target for opening in 3Q2019.
What to do with the stock
Management have communicated their focus on shareholders return and have beenactive on the capital management front:
The company spent HK$244mn in open market for share buyback at anaverage price of HK$11.14/share （21.91mn shares being bought） during theyear.
They raised DPS by 4.3% yoy to HK$ 48 cents in FY18, and achieved a 5%CAGR for past three years. While the dividend payout ratio incresaed to 63%,management guided that they are focusing on progressive growth in absoluteDPS terms, rather than purely fixating on the payout, and remain hopeful toreach 50% recurring earnings mix by FY21E with more rental projects on line.
We revise up our FY19E and FY20E underlying profits by 0.7/3% and introduceFY21E earnings forecasts post results, and revise up our 12-month NAV-based target price by 1.7% to HK$11.95 （from HK$11.75）。 We see higher confidence in theearnings growth path in the next two years amid improved HK sales profit lock-inand also further updates on Victoria Dockside’s ramp-up. Maintain Neutral.
Key risks: Better-than-expected China sales; abrupt change in government n policies.