We summarize our first take on two recent announcements by NWD, the proposedacquisition of FTLife and a contract win related to the Kai Tak Sports Park.
FTLife Insurance Company
On Dec 27, 2018, NWD announced that its 61%-owned listed subsidiary NWSHoldings （0659.HK, Not Covered） had entered into an agreement to acquireFTLife Insurance Company for HK$21.5bn. According to the HKEJ dated Dec 28,2018, FTLife was acquired by the current vendor, Jiuding, for HK$10.8bn back in2015.
According to the announcement, FTLife is a life insurance company in HongKong, providing a broad range of insurance products to both individual andinstitutional clients, and was ranked as the 11th largest Hong Kong life insurancecompany by new business annual premium equivalent for the six months endedJune 30, 2018. NWD management stated it sees this deal serving as a newgrowth driver for NWS amid slower contributions from the services segmentand aircraft leasing.
The transaction is subject to the approval of NWS shareholders （with a detailedcircular to be dispatched by Apr 11, 2019） and also relevant regulatory approval,which for the latter may take up to 18 months per the announcement.
According to management, while the deal completion could be another 1 to 1.5years away, based on its pro forma estimates, NWD’s consolidated gearing （netdebt to total equity） will rise from 29% （as of Jun 2018） to about 38%, givenNWD fully consolidates the NWS financials.
While we wait for further details regarding the financials in the upcomingcircular, and do not take a view on the likelihood of the deal closing, we makethe following observations based on the proposed transaction:
According to HKET dated Dec 28, NWD is acquiring FTLife at c.1.4Xprice-to-book. On historical precedent transactions, we note that ThaihotGroup’s acquisition of Dah Sing Life was at 5.7X price-to-book （completedin 2017） and Jeneration Holdings Limited’s acquisition of AXA WealthManagement （HK） was at 1.4X price-to-embedded value （announced inDec 2017）。
While the overall gearing for NWD would still be below its internal ceiling of40%, we think this acquisition may lower the company’s appetite for furthersubstantial land banking across HK and China, unless it is able to increase theasset turn and cash cycling through faster property sales in coming quarters.
Given: 1） initial capital outlay is limited due to the aforementioned dealcompletion timeline and 2） management expects NWS to be able to securesufficient financial resources （i.e., requiring no funding support from NWD），we would not expect any near-term impact to NWD’s dividend distribution.
Strategically, the proposed deal is inline with the stated NWS plan to enhanceportfolio diversification toward generating recurring income and sustainablegrowth to shareholders （its main business is currently infrastructure）。
However, if completed, we believe the proposed deal could increase thevolatility and complexity of NWD’s future earnings stream given its limitedcurrent exposure to the life insurance business, and potentially impact its NAVdiscount （via an additional holdco discount） which is currently already widerthan peers.
Kai Tak Sports Park
On Dec 28, 2018, NWD announced that its JV ‘Kai Tak Sports Park Limited’ （75%NWD and 25% NWS） had won the contract for the design, construction andoperation of a 28-hectare complex at Kai Tak Sports Park.
Kai Tak Sports Park is planned to be developed into a large complex covering sports,leisure, entertainment, retail and dining facilities, per the announcement. Majorfacilities to include a 50,000-seat main stadium and an indoor sports centre with a10,000-seat main arena.
The Government will own the facilities and venues to be constructed, and NWD willhave a 25-year contract period （including design, construction and operation） plusanother 10-years of potential extension. During the 25-year contract period, NWDwill bear the costs in operating and managing the facilities and venues, and will alsopay 3% of the gross annual income and an extra HK$1.7bn to the government.
We think the difference between this sports park contract as announced vs. that ofNWD’s previous SKYCITY deal （note on SKYCITY, published May 2018） is that theformer’s entire construction cost would be borne by the government （c.HK$30bn），while NWD has to fund the c.HK$20bn capex for the c.3.8mn sq ft GFA project ofthe latter. At the moment, the maximum funding commitment for NWD at Kai TakSports Park is c.HK$1.5bn.
Based on the announced structure of the contract, we expect the initial financialimpact to NWD will be limited given the government will bear the construction cost,while potential upside will rest on how much operational profit can be realised fromthe sports complex operations and associated commercial rentals.
What to do with the stock
Looking ahead, we see near term relatively weak Hong Kong primary physicalmarket sentiment may limit the appetite of NWD for launching new projects, whilemore of its developments will come from Victoria Dockside and China.
We see Victoria Dockside’s ramp-up as continuing to add to its recurring rentalstream, with the office component already moved in, and the retail portion nowunder active pre-leasing and a target for opening in 3Q2019.
Trading at 60% discount to NAV vs its 5-year historical average and -1SD of 53/60%post QE, we keep our Neutral rating on NWD. We maintain our 12-month targetprice at HK$12.00 （based on a 55% discount to FY19E NAV）。 Key risks:
Better-than-expected China sales, abrupt change in government policies.
Among developers, our top pick is SHKP （0016.HK; HK$112.00 as of Jan 3, 2018;Buy （on CL）， FY18 results note, published on Sep 14, 2018） and we also have a Buyon Sino Land （0083.HK; HK$13.74; Launch of Grand Central, published on Dec 10,2018）。