Maintaining Hold on a lack of positive share-price catalysts ahead; TP HK$32.1
We maintain our Hold rating on Kerry Properties. While peers enjoyed a good share price rally over the past few months on the back of a positive market response to their respective project launches, we do not think Kerry will benefit despite its having scheduled for several new launches ahead. The slow-down in primary sales towards the end of July reaffirms our view that the strong primary market since June was a short-lived rebound rather than a turning point of the cycle. With a focus on the luxury segment, we believe sales pace of Kerry’s upcoming new projects may well be dragged by the overall market. At the current share price, we believe the stock is trading close to its fair value.
Core profit -21% YoY to HK$1,804m, slightly missing our expectation
1H14 reported core net profit was down 21% YoY to HK$1,804m while 1H14 revenue actually fell by 20% YoY to RMB6,173m. In particular, revenue property sales declined on the back of fewer bookings in China where revenue-74% YoY to HK$703m (1H13: HK$2,710m). Meanwhile, rental revenue surged by 51% to HK$1,473m, boosted by higher contributions from newly completed projects. Overall gross margin increased to 49.1% in 1H14 (1H13: 37.8%) on a higher margin from Hong Kong at 54% (1H13: 40%). Excluding contribution from Kerry Logistics and revaluation gain, net profit -13% YoY to HK$1,596m. An interim dividend of HK$0.3/share was declared, down 14% from 1H13.
Short-lived upswing set to slow down the sales pace in 2H14
Following a very strong primary market since the beginning of June, primary sales volume saw a material slow-down towards the end of July. In July, total primary sales volume was -32% MoM, reaffirming our view that the upswing was a short-lived one rather than a turning point of the cycle (timing of this short-lived upswing in line with the previous cycles). In our view, while Kerry has scheduled for several new launches ahead, the sales pace may well be dragged by a slow-down in the overall market, attributed to pent-up demand being exhausted in the buying spree witnessed in the past two months.
Target price at 45% discount to our NAV estimate of HK$58.3/share
We base our HK$32.1 target price on a 45% NAV discount to our estimated NAV of HK$58.3/share, which implies 2014E PER of 11x. Our target discount is based on its historical “-1SD” discount to NAV, which reflects the soft outlook in the Hong Kong residential market in light of the QE tapering and potential rising bond yields. Risks: further slowdown of HK economy, interest rate hike and unexpected fluctuations in the Chinese economy