Maintaining Hold as valuation close to our assessed fair value
In our view, while 1H18 results beat our expectation and interim dividend increased, we see a lack of near-term positive catalysts in the Hong Kong property sector in light of the rate hike cycle ahead on top of rising new supply. Nevertheless, absolute valuation is not stretched by trading at a 41% discount to NAV (versus historical discount to NAV at 49%). We are maintaining our Hold rating on NWD as we see the current share price close to its fair value.
1H18 underlying profit up 14.5% YoY to HK$4,199m, beating our expectation
NWD reported 1H18 underlying profit of HK$4,199m, implying a 16% YoY decline from HK$5,001m in 1H17. However, after stripping out the one-off disposal gain of HK$1,334m in 1H17, underlying profit rose 14.5% YoY, beating our expectation for HK$3,019m on better-than-expected margins (actual gross margin of 36.5% versus our expectation of 33.4%). An interim dividend of HK$0.14/share was declared (up from HK$0.13/share in 1H17). Development margins improved despite revenue decline on less bookings While development sales revenue declined markedly, development margins improved significantly. In particular, operating profit margin for the property development arm rose 15 percentage points to 47% (32% in 1H17), and Hong Kong margins stood at 57% (28% in 1H17) and 46% in China (35%). However, operating margins for investment properties contracted to 70% (77% in 1H17).
Hong Kong landbank increased 4.6% to 10.66m sf in past six months
As of end-17, NWD had total attributable landbank of 10.66m sf (of which 4.8m sf was residential), implying 4.6% growth in the past six months. In terms of geographic split, 56% of the landbank was located in Kowloon, 26% in Shatin and Sai Kung. The company successfully converted a plot of farmland in Yuen Long in Aug-17, amounting to 121,100 sf in total GFA. As of end-17, NWD had approximately 16.98m sf of attributable farmland reserve, of which 68% was located in Yuen Long (down slightly from 17.4m sf as of mid-17).
Completes 51% of Hong Kong contracted sales target in 1H18
In 1H18, NWD achieved contracted sales of HK$5.1bn (51% of the HK$10bn sales target and implied a 8% YoY growth), mainly contributed by the Mount Pavilia project in Clear Water Bay, Artisan House project in Sai Ying Pun, The Parkville in Tuen Mun, Park Hillcrest in Yuen Long and The Pavilia Bay in Tsuen Wan. As of mid-Feb 2018, attributable contracted sales in Hong Kong surpassed HK$7bn.
Target price of HK$12 is based on sum-of-the-parts approach
Our target price is based on the sum-of-the-parts approach, which implies a 2018 PE of 17x. We believe that applying a 5-7x PE to HK property development and a 34% target discount to our estimated value on the respective investment property portfolio is appropriate in an ex-growth market. Risks: A softening/stronger outlook in the Hong Kong economy, which could lead to lower/stronger housing demand. Adverse or favorable changes to Government policies and interest rate trends.