YTD contracted sales tracking slightly ahead thanks to China. Kerry Properties(KPL) has been a beneficiary of the strong momentum in the China residential salesmarket, achieving better-than-expected China contracted sales of HKD5.7bn YTD (asof May 22) or 81% of full-year target. Major sales contributions have been noted fromprojects in Hangzhou, Nanjing, Putian and Chengdu. The strong China salesmomentum also put total contracted sales (HKD7.4bn YTD) slightly ahead of thefull-year target of HKD13bn (57% achieved). We expect China residential sales,together with the company’s steady rental income, to mitigate risks to earnings andcash flows from KPL’s slower residential sales in HK.
　　Slower residential sales in HK. YTD KPL has achieved HK contracted sales ofHKD1.7bn, albeit 28% of full-year target. Since launch in March 2016, Mantin Heightsin Homantin (1,429 units) has sold c79 units (27% of launched and 6% of total units)at an ASP of approximately HKD20,628psf (before rebates) on our estimates. KPLrecently shifted marketing efforts back to The Bloomsway (1,100 units) in Tuen Mun,first launched in 4Q15. On 19 May 2016, KPL introduced the “1838 First MortgagePlan” for the project, involving loans of up to 80% of purchase prices with a tenure ofup to 1,838 days and interest rebates upon full mortgage repayment within 36months. The Bloomsway sold c50 units after the introduction of this mortgage plan(according to Hong Kong Economic Times), bringing accumulated sales to c496 unitsor 45% of the total on our estimates. Based on current ASP, we estimatedevelopment margins for both projects in the low teens, leaving little room for majorprice reduction to boost sales volume. Without other primary launches planned for2016, we expect KPL to see slower residential sales in Hong Kong than in China.
　　Maintain Buy with a revised target price of HKD35 (from HKD37). We tweak ourFY16-17e earnings by 0-1% and our NAV estimate by -4% to HKD64, partly reflectingslower residential sales in Hong Kong offset by faster sales in China.Our target NAVdiscount of 44% (unchanged) is benchmarked against 0.5SD below KPL’s historicalaverage discount. As a semi-China property stock, with c52% of the GAV contributed byChina assets, we think KPL is well-positioned for the improved sentiment in the Chinaproperty market, although the company’s Hong Kong residential launches will likely faceheadwinds from falling HK home prices. The stock trades at a 70% NAV discount or0.34x PB, close to historical low of 0.32x since 2003, which we believe is yet to reflect theimproved China sales momentum. Key downside risks: slower-than-expectedresidential sales momentum in Hong Kong and China and delays in China investmentproperty projects.