What surprised us
Kerry Prop’s 1H15 underlying profit was up 21.0% yoy to HK$2,182mn (HK$1.51/share). The result was 7% above our estimate, with contributions from HK property sales and China rental coming in better than our forecasts. Rental EBIT was up 19% yoy to HK$1,756mn, thanks to a 38.7% yoy rise (+12.3% hoh) in China rental profit on higher occupancy and rental uplift, while HK rental profit was flat. HK/China development income fell an estimated 30%/70% yoy due to fewer completions in 1H. 1H DPS was unchanged at HK$0.30. We raise our FY15-FY17 EPS estimates by 1.4%-2.0% to reflect higher than expected occupancy at key China rental premises.
What to do with the stock
The results showed continued strengthening of the group’s recurrent income, with the decline in trading profits well covered by a significant jump in China rental income. Rental operating margin improved further to 83.5% from 78.4% in FY14. The lack of a change in dividend payout despite increased rental income is a slight disappointment, however. At the result briefing, management said HK/China contracted sales ytd to early August reached HK$3.4bn/HK$2.7bn vs. its full year targets of HK$6.0bn each. With more projects ready for sale in HK (e.g. The Bloomsway in Tuen Mun) and China (Nanjing’s Bai Xia District, Shanghai’s Kerry Everbright City Ph. 3 offices, etc.) in the coming months, management is confident of meeting its full year target. We maintain our Buy rating and 12-month NAV-based TP of HK$32.50 (set at a 40% discount to NAV). Key risk: abrupt economic downturn.