Reiterating Buy on strong cash position, well positioned for acquisitions
Following the recent sell-off, CK Property now trades at an attractive 38%discount to NAV, 11x PE and 0.7x PB, which we believe prices in the three-yearbearish outlook in the HK property market. With HK$46bn cash on-hand or17% of net assets, we believe this strong cash position will greatly enhance itsability to make more acquisitions when land prices fall in HK and lead to betterNAV/earnings growth ahead. Meanwhile, following the reorganization of theCK Group in 2015, with CKP almost doubling the size of its IP portfolio, weexpect the dividend payout to rise under the new structure. At the currentshare price, CKP is trading at a dividend yield of 3.6%/4% 2015/16.
Strong cash position enhances its ability to acquire NAV-accretive projects
As of mid-15, CK Property had gross debt amounting to HK$74.5bn and cashbalance of HK$46.1bn, equivalent to 17% of its net assets and net gearing of11%. On the back of a strong sales performance in 2H15 (achieved attributablesales of HK$9.1bn, according to Centaline), we expect CKP’s cash balance toexceed HK$50bn by end-15. In our view, this strong cash position makes CKPstand out from peers and should greatly enhance its ability to make NAVaccretiveacquisitions when land prices in Hong Kong fall. Consequently, theseacquisitions should lead to better NAV and earnings growth ahead.
Dividend payout to increase following reorganization/higher revenue from IP
Dividend payout for the former CK Holdings used to be markedly below peers’as a sizeable portion of its earnings were non-distributable. Following thereorganization in 2015, we expect CKP to increase its dividend payout underthe new structure. Moreover, as CKP has almost doubled its IP portfolio(second largest in terms of GFA and rental revenue), higher contribution frominvestment properties/other recurring income sources (from 16% before thereorganization to 28% thereafter) will also help to boost dividend payout. Inparticular, we expect DPS to rise to HK$1.6 in FY16 (HK$1.44 in FY15) anddividend yield to rise to 3.8% correspondingly (from 3.5%).
Target price at 25% discount to our revised NAV estimate of HK$66.7/share
Our target price is based on a 25% discount to our revised NAV estimate ofHK$66.7/share, which implies a 2015 PE of 13x. Our target discount is belowthe historical NAV discount of the former CK Holdings and is in line with otherindustry leaders such as SHKP (also at 25%), which we believe is appropriate.Risks: government policy, sales momentum and interest rate trend.