Front-loaded earnings. 1HFY18 core profit rose 14.5% YoY to HK$4.2bn, 31% ahead of consensus. The positive surprise came from the early booking of its high-margin Guangzhou projects, offsetting the decline in HK property sales booking. Contribution from rental income, hotel and NWS (659 HK) was largely flat. Thanks to the major uplift in investment property value, book value increased to HK$20.3/share as of December 2017 (June 2017: HK$19.0). Net gearing improved to 32.7% (June 2017: 34.8%), even after its landbanking in Hong Kong and Guangzhou. 1HFY18 DPS rose 8% YoY to HK$0.14.
Ample HK development profit in the pipeline. HK property profit dropped 54% YoY, merely due to the early adoption of HKFRS15, where only inventory sales (e.g. PAVILA HILL, Double Cove, etc.) were booked during the period. On the other hand, contracted sales were strong at HK$7bn since July 2017, or 70% of its FY18E target. Total unbooked sales exceeded HK$12bn, of which flagship projects Mount PAVILA and PAVILA Bay will be booked in 2H18 and FY19, respectively. Therefore, we believe FY18 and FY19 earnings are already secured.
Mixed mainland development. China property profit surged 50.5% YoY, thanks to frontloaded booking and outstanding gross margin of 48-73% at its low-cost Guangzhou projects. Management is keen to speed up mainland property development, targeting a 24% YoY increase in FY18E GFA completion. The company has also signed MOU in a Lo Wu redevelopment project, potentially adding 1.3m sq m GFA. Nevertheless, 1HFY18 contracted sales dropped 32% YoY to RMB8.6bn, given the stiff competition. Thus, we believe it is still early to conclude an acceleration in mainland property profit growth, especially when its cheap landbank may gradually run out, in our view.
Strengthening recurring income. Construction of Victoria Dockside has been on track. The office portion (15% of GFA) is 70% pre-leased at spot rent as high as HK$90/sq ft and was handed over to tenants in 4Q17. Hotel and shopping malls (38% and 35% of GFA) are scheduled for opening in late CY18 and mid CY19, respectively. We maintain our estimate that contribution from recurrent income will climb to 25% upon the full opening of Victoria Dockside by FY20E, and further to 30% by FY22E together with the ramp-up at its Cheung Sha Wan cluster
Still looking for new drivers. We believe the results were in line with management’s guidance of steady growth, with faster asset turnover in both HK and mainland, in contrast with bumpy earnings in the past. NAV discount has also narrowed to 34%, in line with peers. Further upside will depend on whether the company can further speed up its property sales, in our view. We maintain our earnings forecast and NAV of HK$17.90. We maintain our Neutral rating and target price of HK$12.50.