Maintaining Hold on lack of positive near-term catalysts; target price HK$29
Following the sizeable correction in its share price in the past two months, webelieve the valuation is undemanding at the current level. However, on anaccelerated deterioration in the Hong Kong/China economies recently, weremain cautious on the outlook ahead. Moreover, while we believe developersare in a better position to generate favorable sales performance in Hong Kong,Kerry has fewer new launches in the pipeline as compared with peers. Hence,we see a lack of near-term catalysts ahead. We maintain Hold.
1H15 core net profit +21% YoY to HK$2,182m, in line with expectation
Kerry reported 1H15 revenue dropped 32% YoY to HK$4,204m on the back ofa 58% YoY decline in property sale revenue. Nevertheless, the investmentproperty portfolio and hotel registered strong performance on improvingoccupancy in the China portfolio, with total rental income +19% YoY and hotelrevenue +27% YoY. Gross margin remained largely steady at 51% (versus 52%in 1H14). Headline profit grew 17% YoY to HK$2,789m, boosted by a 111%YoY increase in contribution from associates to HK$1,197m on delivery of theDragons Range project in Hong Kong. Excluding revaluation gains, core netprofit rose by 21% YoY to HK$2,182m. An interim dividend of HK$0.3/sharewas declared in 2015 (unchanged YoY).
Primary market expected to dominate over secondary in Hong Kong
In 2014, a total of 66,360 residential sales transactions took place in HongKong, of which 16,822 were primary sales and 49,538 were recorded in thesecondary market. This implies the primary market has a 25% share in the totalmarket
the highest level in 10 years. Following the latest round of mortgagetightening on 27 February, we expect the share of the primary market to groweven further as developers’ competiveness over the secondary marketincreases correspondingly with the ability to provide second mortgages.Hence, developers are in a better position in the current market, in our view.
Target price at 45% discount to our estimated NAV of HK$52.7/share
Our target price of HK$29 is based on a 45% NAV discount to our estimatedNAV of HK$52.7/share, which implies 2015E PER of 12x. Our target discount isbased on its historical “-1SD” discount to NAV, which reflects the softeningoutlook in HK/China economies, where demand could be adversely affected.Risks: interest rate hike and unexpected fluctuations in HK/China economies.