What's changed
According to HKEJ dated Oct 8th, CKP outbid 5 competitors and won theLOHAS Park Ph. 8 site tender by MTRC (0066.HK) – a 1.04mn sq ft GFAresidential project in Tseung Kwan O producing up to 1,430 flats.
Implications
With reference to neighboring projects’ secondary ASP of c.HK$9.5kpsf,and as the current project will enjoy a full seaview and be adjacent to afuture shopping mall, we think the project could fetch about c.HK$12kpsf,and well cover our estimate of the development cost of c.HK$7,500psf (onSFA). However, we think the key to eventual profitability hinges very muchon the profit sharing level/ mechanism with MTRC (not disclosed), and perHKET, this involves (1) upfront payment and (2) no less than 15% profitsharing. If we were to assume a 50% sharing, we estimate this project’sgross profit margin at c.19% at prevailing price levels.
Amid limited land banking progress in the past 3 years, we estimate thatCKP has a residential pipeline of only c.6,500 unsold units in Hong Kong,which we consider to be relatively tight when compared to its c.3,000 unitsp.a. sales over the past few years. We see this acquisition as a timelyreplenishment to its pipeline to maintain its asset turn. We also think it is likely to increase investors’ confidence in CKP’s commitment and ability toutilize its balance sheet capacity (only 11% gearing as of Jun-15), after astrong HK$21bn contracted sales in 1H15 in HK, for NAV-accretive M&As.
Valuation
We lower our 2015E-17E EPS by less than 1% on related finance costs, butkeeping our 12-mo NAV-based TP of HK$81 unchanged. The stock istrading at a 42% discount to FY15E NAV, versus HK developers’average of34%. Reiterate Buy.
Key risks
Worse-than-expected market conditions for asset monetization or M&A.
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