EUR 850.00 For Business Accounts Only

Morningstar | Kerry's Interim Earnings Miss Due to Project Impairment, but Major Segments in Line

For the first half of 2018, Kerry Properties reported core earnings of HKD 1.6 billion, down 45% year on year. The company attributed the decline to an impairment loss of HKD 1.2 billion on a Macau project. Excluding the impairment loss, we estimate core earnings of HKD 2.5 billion, or 51% of our full-year estimate. The company declared an interim dividend of HKD 0.40 per share, down 11% from a year ago. All segments’ results were in line. The impairment resulted from a land rights dispute with the Macau government. The case is still pending. We factor in a 50% chance of a favorable outcome from the dispute, resulting in a 10% reduction to our 2018 earnings estimate and limited impact to our valuation. We maintain our fair value estimate of HKD 33 and our no-moat rating.

Property development revenue was not comparable with a year ago because of the adoption of HKFRS 15, which resulted in a portion of revenue being deferred to later years. In Hong Kong, the company booked HKD 1.7 billion. As the city’s residential market saw brisk activity during 2017 with strong prices, the gross margin rebounded to 30%, driven by the higher prices achieved for later phases of the company’s two major projects, Mantin Heights and Bloomsway. The order book for Hong Kong grew to HKD 4.1 billion, based on sales from these two already completed projects. Hence, property development revenue should be stronger in Hong Kong for the second half of the year. In China, property development revenue came to HKD 5.4 billion, with slightly higher margin than a year ago. The order book declined to HKD 5.6 billion, with less booking expected during the second half of the year.

During the period, the company achieved contracted sales of HKD 5.2 billion in Hong Kong and HKD 1.9 billion in China, slightly less than half of the full-year target of HKD 16 billion.

The two aforementioned major projects in Hong Kong achieved still-higher contracted average selling prices than those seen in 2017. In China, average selling prices rose another 20% year on year. Hence, the margin expansion seen during the period is likely to continue for the full year.

Rental properties held firm in Hong Kong, with top-line growth 5% and margin holding steady at 80%. Rental properties in China saw top-line growth of 11% with comparable margin. In aggregate, recurrent earnings were up 10% year on year based on positive rental reversions. The hotel segment continued to perform well, with revenue up 17%. Gross margin expanded slightly to 19%, with steady occupancy rates across the board.

Net gearing was 17%, compared with 23% at year-end. The downward trend was expected, given the company’s very limited land banking effort during the period. From the end of 2017 to the end of interim 2018, the land bank remained flat in Hong Kong and decreased from 29 million to 27 million square meters in China. Going forward, we expect the company to focus more on capital management by engaging in higher dividend payouts and share buybacks. The interim dividend was 11% lower than a year ago, despite a higher payout ratio of 37%. Excluding the impairment, the interim dividend amount corresponded to a payout ratio of 23%, same as before.