EUR 850.00 For Business Accounts Only

Morningstar | Sino Land Full-Year Results a Small Miss on Lagging Performance of Rental Assets

Sino Land’s full-year result for fiscal 2018 came in slightly below our estimates. Excluding the gain on disposal and revaluation gains, underlying attributable profit was HKD 5.4 billion, down 2% year on year. This is slightly below our projection of HKD 5.7 billion. Underlying EPS including the disposal gain was HKD 1.72 per share, about double the amount seen a year ago. The company declared a final dividend of HKD 0.40 per share, bringing full-year dividend to HKD 0.53 per share, unchanged year on year. There was also a special dividend of 0.45 per share on account of a project disposal. The balance sheet has plenty of capacity and is still at a net cash position. The resulting negative net gearing is lower than our mid-single-digit projection on account of frequent land acquisitions in Hong Kong. Overall, the company performed slightly below expectations, considering a recovery retail environment and a residential market that is still holding up, albeit with increasing risks. We rolled our model forward with no changes to our HKD 13 fair value estimate or the company’s no-moat rating.

Top-line revenue was down 40% year on year, on account of lower booking of property sales in Hong Kong. Revenue from the property development business, including attributable associates, was HKD 8.9 billion, down 41% from a year ago. Gross profit was down 51%, as margin was lower. For the rental business, gross rental income, including attributable share from associates, totaled HKD 4.1 billion, up 3.3% year on year. Net rental income totaled HKD 3.6 billion, up 2.4%. The performance is lagging the citywide retail recovery seen recently. Retail sales for Hong Kong increased 13% during first-half 2018, reaching HKD 248 billion. Assuming the same run rate, the city’s full-year retail sales should slightly exceed the previous peak set in 2013.

Over the past year and a half, Sino Land was the most active developer in Hong Kong in terms of land acquisitions. Since the beginning of 2017, it has acquired seven sites totaling more than HKD 20 billion, adding 1.2 million square feet of residential development projects. This is significant, as the residential development projects totaled 3.5 million square feet at the end of the last fiscal year, with sales slowing. The sold but unbooked amount declined to HKD 1.3 billion at fiscal year-end, compared with HKD 8 billion a year ago. Given the city’s property cycle, the firm is undertaking considerable market risk when units from these projects become available for sale. Reflecting that risk, most acquisitions, especially large ones, are structured as consortia with other developers. In China, after the disposal of the Palazzo project in Chengdu, the company’s main exposure is the Dynasty Park in Zhangzhou and a commercial project in Qianhai, Shenzhen.

Despite the active land acquisitions during the period, the balance sheet remained in a net cash position, with debt of HKD 2.4 billion offset by cash of HKD 3.4 billion and time deposits of HKD 18.5 billion. This is perhaps reflective of the fact that the Hong Kong real estate sector is in an era of diminishing development opportunities. Dividend payout ratio was at 72% of underlying earnings, excluding the special dividend, in line with the historical average. Going forward, the company seems to lack a significant earnings driver beyond Hong Kong development properties, a sector that is facing increasing headwinds. However, there is significant scope for capital recycling or special dividends, given the company’s portfolio of investment properties available for disposal and its strong balance sheet.