1H15 underlying earnings up 21% y-o-y; HK property salesand China rental are major earnings contributors
1H15 results came in ahead of our estimates due to lowerthan-expected administrative and tax expenses
We have a Buy rating and a fair value target price of HKD43
Better-than-expected 1H15 results. Kerry Properties (KPL) reported 1H15 underlyingearnings of HKD2,182m (excluding revaluation gains), up 21% y-o-y. This was 12%ahead of our estimate due mainly to lower-than-expected administrative expenses andeffective taxes. KPL declared an interim DPS of HKD0.30, flat y-o-y, implying a payoutratio of 20% (versus 24% in 1H14). NAV rose 2% h-o-h to HKD56.7 as of June 2015while gearing was also slightly up to 30.4% as of June 2015, from 28.5% as of end-2014,after some land acquisitions in 1H15.
Property sales bookings mostly from Hong Kong. Consolidated property sales declined58% y-o-y in 1H15, as the major contributor, Dragons Range in Hong Kong, is includedin income from associates, which rose 111% y-o-y to HKD1,197m. In 1H15, propertysales (consolidated) were contributed mainly by 1 & 3 Ede Road, 8 LaSalle, The Altitude,and Lions Rise in Hong Kong as well as China property projects in Chengdu, Shenyang,Changsha, and Hangzhou. The 1H15 property sales margin (consolidated) came in at 35%compared with 36% in FY14 and 49% in 1H14.
Solid rental growth driven by China rental. Gross rental income grew 19% y-o-y and4% h-o-h, to HKD1,756m, including 27% y-o-y growth in China rental income (partlyreflecting the contribution of Jing An Kerry Centre in Shanghai after ramp-up) and flaty-o-y Hong Kong rental growth. The reported rental margin improved to 83% in 1H15(from 78% in FY14 and 1H14), higher than our expectation of 79%.
We have a Buy rating with a target price of HKD43. Our target price is based on a40% discount (0.5 standard deviations below the historical average) to our NAV estimate.We view Kerry Properties as a semi-China property stock, with 52% of the GAVcontributed by China assets, which stand to benefit from the improved outlook in China’sproperty market. In Hong Kong, improved sentiment in the luxury residential market isshould benefit Kerry Properties, as a high-end Hong Kong developer. The stock trades at a66% discount to NAV, the steepest among the Hong Kong property stocks we cover.Key downside risks: slower-than-expected residential sales momentum in Hong Kongand China and delays in China investment property projects.