HK property sales to face headwinds
We reinstate Kerry Properties with a Hold and a target price of HK$35.00. Although Kerry’s China property sales ha ve gained weight in the company’s revenue mix, we expect Kerry’s luxury residential portfolio in HK to face headwinds. While the recurring income from its IPs and logistic operations protect Kerry’s earnings downside, its growth mome ntum is weakening, as reflected in the 21% YoY drop in 1H13 co re profit and the cut in dividend per share. Nonetheless, a potential catalyst could come from the proposed spin-off of Kerry Logistics, but this is still in prog ress. With this report, we also transfer primary coverage of Kerry Properties from Tony Tsang to Albert Tam.
Contracted sales on track to achieve FY13 target
Kerry’s contracted sales performance is on track, with 8M13 sales of HK$6.6bn and 60% of the FY13 target completed. The previous launches of Bayview have received a good response. With the potential contribution from the Hing Hon projects and decent sales from Lion Rises and The Altitude, Kerry’s contracted sales are in a good position to complete the company’s FY target.
Expect FY13 net gearing to remain high
Kerry acquired a luxury residential site in Ho Man Tin for HK$11.7bn in March 2013, which was equivalent to 73% of its cash position at end-12. The acquisition partly boosted Kerry’s net ge aring ratio, by 13.9ppt HoH, to 36.3%, in Jun-13. While HK developers kick-start ed the current round of price cuts in the primary market in October, which sh ould improve their financial positions in general, we believe the rise in ne t gearing puts Kerry in a comparatively defensive position. It now has one of the highest FY13E net gearing levels among the HK developers under our coverage. Kerry has cut its interim dividend by 12.5% YoY, to DPS of HK$0.35. Assuming the same payout ratio as last year, we expect our FY13E DPS to drop by 7.9%.
Target price at 45% discount to our NAV estimate of HK$63.60/share; risks
Our HK$35.00 target price is based on a 45% discount to our NAV estimate of HK$63.60/share. The counter is trading at a 44% discount to NAV, and we believe deserves a wider discount than our top picks SHKP, Wharf and Hang Lung (which trade at 39-45% discounts). Key risks: external economic shocks; liquidity outflow; interest rate hike; government measures.