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Morningstar | Interim Results Lower on Accounting Change, Improving HK Property Market Bodes Well for Company

Sun Hung Kai Properties announced its interim result for fiscal year 2018/2019. Underlying profit was HKD 13.7 billion, down 31% year on year. Underlying EPS was HKD 4.74, compared with HKD 6.90 for the same period last year. Earnings were lower due to accounting changes related to the booking of Hong Kong development properties. Under the previous accounting standard, underlying earnings would be 2% higher. The management stated delayed booking will occur during the second half of the fiscal year. Despite lower booking, the Hong Kong development property margin was better than expected. We adjusted our full-year margin assumptions and revised our projected earnings up by 2% and 5% for fiscal year 2019 and fiscal year 2020, respectively. We maintain our narrow moat rating and increase our fair value estimate to HKD 158 from HKD 153.

For the property development business, revenue including associates and joint ventures was HKD 15 billion, down from 35 billion a year ago. Operating profit was HKD 6.7 billion, down 52% year on year. Revenue at Hong Kong totaled HKD 12 billion, compared with HKD 31 billion a year ago. Using the previous accounting standard, the booking in Hong Kong would be HKD 29 billion. Booked projects in Hong Kong achieved a higher operating margin at 45%, compared with 40% a year ago. GFA completion totaled 1.6 million square feet during first half of the fiscal year, with an equal amount of completion expected for the second half.

Through February 2019, contracted sales in Hong Kong were strong at HKD 43 billion, exceeding the fiscal year target of HKD 42.5 billion. The sales were mainly based on units sold at Cullinan West II and Ultima. As the primary market has rebounded recently, the company guided near-term annual contracted sales estimate of HKD 40 billion. Unrecognized contract sales in Hong Kong increased to a record high of HKD 56 billion at end of first half.

In China, revenue from the property development business, including associates and joint ventures was HKD 2.6 billion, down slightly from a year ago. Operating profit was HKD 1.2 billion, unchanged from a year ago, as margin was slightly better.

The rental portfolio performed as expected. Total turnover and net rental income were HKD 12 billion and HKD 9.5 billion, both up near 7% year on year. The increase was attributed to roughly even top line growth of Hong Kong and China portfolios with steady margins. Hong Kong portfolio saw midteen rental reversion for both office and retail assets. The China portfolio actually saw 12% growth in local currency. The overall results are in line, at roughly 46% with our full-year projections.

Net gearing was slightly lower at 12%, steady compared with the end of the last fiscal year. Management stated it is comfortable with gearing moving up to 20% before it may consider rights issuance. Interim dividend was higher by 4%. We expect the company to maintain the existing dividend payout ratio of 40%-50% and not embark on significant capital management activities, as it has become more active in landbanking recently. Since the beginning of the year, the pause in the Fed rate hike and increasing liquidity in the Hong Kong banking system have bolstered the city’s stock market and will likely do the same for the property market in the near term. The company has returned to the land auction market, acquiring two lots totaling 1.5 million square feet. The company is also eyeing the large upcoming tender for the highspeed railway commercial site.