What surprised us
Due to less property completions in HK and to a smaller extent an unexpectedHK$400mn impairment on select development projects in China, Kerry Prop’ssaw its 2015 underlying profit go down 20.6% yoy to HK$3,481mn(HK$2.41/share), in line with our estimate (HK$2.48/share). Operating profitsfrom HK/China property sales fell by 79%/21% yoy. Lower-than-expected HKrental income was more than compensated by better-than-expected Chinarental income. Except for HK residential, major office/retail premises inHK/China generally saw higher occupancy. Rental EBIT was up 18.6% yoy toHK$2,947mn thanks to a 24.7% yoy rise in China rental profit, while HK rentalincome was flat. 2H DPS was unchanged at HK$0.60. We revise our FY17-FY18EPS estimates by -4.3% to +4.6% after adjusting our projections for its majorproperty sales schedule (FY16E is unchanged).
What to do with the stock
The results showed continued strengthening of the group’s recurrentincome, especially China rental. With another major project Kerry Centralin Hangzhou due for completion, its rental income growth is set toaccelerate this year, in our view. On property sales, management said theyhave budgeted HK$6bn/HK$7bn contracted sales for HK/China for 2016 vs.HK$6.0bn/HK$6.0bn budgeted (or HK$5.8bn/HK$6.8bn achieved) for 2015.While we expect HK property sale should remain stable, the recentimprovement in China housing market sentiment should bode well for itsChina property sales. Maintain Buy and 12-month 2016E NAV-based TP ofHK$27.35 (set at 50% NAV discount). Risks: Abrupt economic downturn;slower-than-expected property sales.