Maintain Hold on valuation; revising up NAV to HK$203/sh and TP to HK$135.9
Following a strong beat in 1H18, we revise our earnings forecast by 7%-9% for FY18-20E by adopting higher development margin assumptions overall. Correspondingly, we revise our DPS by 3.5-4.8% in FY18-20E (merely reflecting higher earnings but payout remains flat) and target price by 4% to HK$135.9 (HK$130.7). Nevertheless, in light of macro headwinds (upcoming rate hike and supply increase) and management guidance of little scope for imminent share buyback/ flat dividend payout, we see few near-term catalysts. As the current valuation is close to our assessed fair value, we maintain our Hold.
1H18 underlying earnings +37% YoY to HK$19,973mn, a strong beat
SHKP reported 1H18 underlying profit of HK$19,973mn, implying a 37% YoY surge from HK$14,608mn in 1H17, markedly beating our expectation. The strong beat was predominantly driven by property bookings being skewed in 1H (90:10 split between 1H:2H) as well as higher development margins. An interim dividend of HK$1.2/share was declared in 1H18, implying 9% YoY growth, reversing a moderating trend in dividend hikes in since 1H16.
Rental growth in overall portfolio accelerated in 1H18; driven by new projects
In 1H18, gross rental income (inclusive of associates/JV) rose by 6.5% YoY to HK$11,506mn, comprising of HK$9,011mn from HK (+4%), HK$2,140mn from China (+16% in HK$, +13% in Rmb) and HK$355mn from Singapore (+10%). Strong growth in the China portfolio was particularly attributable to new project completion on top of positive rental reversion. Overall growth momentum accelerated (1H18: 6.5%; FY17: 4%; FY16: 7%), with HK registering a slight acceleration to 4.3% in 1H18, vs. 2H17 at 3.2%/1H17 at 4.4%.
Development margins markedly improved by 7.7 percentage points to 40.1%
In addition to the front-loaded booking schedule in 1H18, another key reason for the strong 1H18 was the higher-than-expected development margins. In particular, operating profit margin for the Hong Kong portfolio saw a 5 percentage point expansion to 39.9% and that for the China portfolio saw an expansion by 19 percentage points to 43%.
HK landbank +6% to 55mn sf/China landbank -3% to 65mn sf in past 6 months
As of end-17, SHKP has total HK landbank of 55.1mn sf, of which 21.4mn sf was under development (up from 19.6mn in mid-17), implying 6% growth in the past six months, following three projects totaling 5.2mn sf being added. In particular, land-use conversion of Shap Sz Heung was completed with 4.8mn sf GFA. In China, total landbank fell by 3% to 65mn sf, of which 51mn sf was under development (down from 52.6mn in mid-17).
Target price of HK$135.9 is based on a sum-of-the-parts approach
Our target price is based on a sum-of-the-parts approach and implies a 2018E PE of 14x. We believe applying a 5-7x PE to HK property development and a 34% target discount to our estimated value of the respective investment property portfolio is appropriate in an ex-growth market. Risks: fluctuation in HK/China economies, adverse or favorable changes to interest rate trends and government policies. See page 4.