Maintaining Hold on valuation and a lack of near-term catalyst; TP HK$14.2
In our view, Sino-Land is well-positioned (financially strong even after the recent acquisitions) to make more NAV-accretive acquisitions at a time where competition from Mainland developers is less intense, so there are better chances to acquire projects at more reasonable prices. However, the Hong Kong property sector is facing macro headwinds in light of the upcoming rate hike cycle and rising supply, and the current valuation is close to our assessed fair value. Hence, we maintain our Hold rating, with a target price of HK$14.2.
1H18 underlying profit +12% YoY to HK$3,083m; beating our expectations
Sino-Land reported 1H18 underlying profit of HK$3,083m (exclusive of a oneoff disposal gain from the sale of 80% interest in The Palazzo in Chengdu), implying a 12.3% YoY growth, beating our expectations on lower taxation. While interim dividend remained flat at HK$0.13/share in 1H18, the company announced a special dividend of HK$0.45/share in view of the disposal gain.
Stable growth in investment property portfolio
The investment property portfolio registered stable growth in 1H18, with gross rental revenue (including associates and JVs) rising 2.1% YoY to HK$2,000m. Meanwhile, net rental income rose 1.8% YoY to HK$1,747m. Overall occupancy for the portfolio stood at 96% (97% in 1H17). As of end-17, SinoLand had approximately 11.9m sf attributable GFA of investment properties and hotels in Hong Kong, China, Singapore and Sydney, of which the largest segment exposure is commercial (retail and office) at 62%.
Total landbank stood at 22.3m sf post disposal of The Palazzo in Chengdu
As of end-17, Sino-Land had total attributable landbank of 22.3m sf in HK, China and Sydney (down from 32.8m sf as of mid-17 prior to the disposal), of which 38% is residential, 39% is commercial, 11% industrial, 7% being carpark and the rest being hotels, with 9.7m sf currently under development. Following the disposal of The Palazzo in Chengdu, Sino-Land has three projects in China with a total GFA of 4.5m sf. In 1H18, Sino-Land acquired five residential projects in HK totaling approximately 1m sf in attributable GFA.
Strong financial position even after numerous acquisitions recently
As of end-17, Sino-Land had net cash of HK$21,090m (comprising cash balance of HK$23,031m and total borrowings of HK$1,941m), markedly below net cash of HK$27,221m as of mid-17 due to the many acquisitions made over the period. In our view, Sino-Land’s financial position remains strong even after the acquisitions, and it is still well-positioned to undertake more projects ahead. Moreover, the company is due to receive 20% of the sales proceeds of The Palazzo Chengdu disposal, amounting to Rmb1.7bn, in Feb-18.
Target price of HK$14.2 is based on sum-of-the parts approach
Our target price is based on a sum-of-the-parts, which implies a 2018 core PE of 20x. We believe 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: government policy, sales momentum and interest rate trend.