What surprised us
Kerry Prop reported a 6% yoy decline in FY13 underlying profit, excluding the revaluation surplus (HK$4,416mn) and one-off gain (HK$4,325mn) from the Kerry Logistics Network spin-off, to HK$4,413mn (HK$3.06/share) which was 7% above our forecast. China property sales profit was up 306% yoy to HK$1,647mn, mitigating the drag from a 34% decline in HK property sales profits (HK$2,836mn), which came in slightly above our forecast. Rental operating profit was in line with our estimates, with HK/China up 10.7%/22.4% yoy. Hotel division saw a HK$12mn operating loss, dragged by pre-opening expenses at new hotels. Final DPS was kept at HK$0.55, sending the full year DPS to HK$0.90 (vs. HK$0.95 in FY2012). BVPS rose 7.2% yoy to HK$52.45. Net gearing improved to 31% from 36% hoh.
What to do with the stock
Looking ahead, we believe that whether Kerry can bridge the earnings gap from diminishing HK property sales with stronger China property sales is key to its near-term growth. Given it has less property completions in HK this year, we expect its net profit to decline 16%. But we expect net profit to return to a steady uptrend from FY15 onwards, underpinned by steady rental income growth and a rebound in development profits with more property presales in the coming months. Management targets to achieve HK$12bn of contracted sales (HK$6.5bn/ HK$5.5bn for HK/China) in FY14, of which HK$2.7bn have been secured YTD. At HK$22.75, the stock stands at a 62% discount to our Dec-2014 NAV estimate of HK$59.64 and 0.43x its last reported BVPS. Maintain Buy rating and HK$38.75 12m NAV-based TP (on EPS negligible changes). Key risk: abrupt economic downturn.