We expect 1H15 earnings to be supported by Hong Kongresidential sales and China rental income
Investors will likely focus on the contracted sales updateand upcoming Hong Kong primary launches, which couldserve as potential catalysts to narrow the 66% NAV discount
We have a Buy rating with a fair value target price of HKD43
1H15 underlying earnings expected to grow 8% y-o-y. Kerry Properties is scheduled toreport 1H15 results on 20 August. We forecast 1H15 underlying earnings (excludingrevaluation gains) of HKD1,950m, up 8% y-o-y. In 1H15, we expect higher rental income,mainly from China, reflecting contributions from Jing An Kerry Centre in Shanghai afterramp-up (with Phase II occupancy of 90% as of end-2014, up from 76% as of June 2014and 53% as of end-2013). In 1H15, we also expect property sales contributions mainlyfrom Hong Kong, i.e., the 40%-owned Dragons Range (c82% of the 973 units in total sold,of which we assume booking of sales related to c700 units in 1H15), as well as leftoversales from 1&3 Ede Road and 8 LaSalle. In China, property sales contributions areexpected from projects in Shenyang, Chengdu and Changsha. We forecast an interim DPSof HKD0.30, flat y-o-y and implying a 22% pay-out (vs. 24% in 1H14).
Key investors’ focus areas during the results briefing, in our view, will include: 1)contracted sales achieved YTD against the FY15 target of HKD12bn (HKD6bn from HongKong); 2) upcoming primary launch plans in Hong Kong, e.g., The Bloomsway (1,100units) in So Kwun Wat in 2H15 and the Ho Man Tin project; 3) land bank replenishmentplans in Hong Kong, where c95% of the projects under development (by area) are expectedto be completed by 2Q17, according to our estimates; and 4) updates of mall and officepre-leasing of Kerry Central, Hangzhou, scheduled for completion in 2016.
We have a Buy rating with a fair value target price of HKD43. Our fair value targetprice is based on a 40% discount (0.5 standard deviations below the historical average) toour NAV estimate. We view Kerry Properties as a semi-China property stock, with 52%of the GAV contributed by China assets, which we expect to benefit from the improvedoutlook in China’s property market. In Hong Kong, the improved sentiment in the luxuryresidential market should benefit Kerry Properties, a high-end Hong Kong developer. Thestock trades at a 66% NAV discount, the steepest among the Hong Kong property stockswe cover. Key downside risks: slower-than-expected residential sales momentum inHong Kong and China, and/or delays in China investment property projects.