Kerry Properties - Research

l Equity Research l
Hong Kong l Real Estate
17 March 2014
Kerry Properties
2013 results review – Inexpensive valuations
 Kerry Properties’ 2013 underlying profit declined 6% to HKD  OUTPERFORM (unchanged)
4.41bn, which is in line with the consensus estimate but
PRICE as of 17 Mar 2014
PRICE TARGET
below our estimate. Final DPS was unchanged at HKD 0.55.
 Kerry raised its 2014 sales target to HKD 12.0bn, which is
near its 2013 target of HKD 11bn. Leasing performance at
Jing An Kerry Centre (JKC) is improving, and management
expects its rentals (office and retail) to reach RMB 700mn.
 We think the stock valuations are inexpensive at a 65%
discount to NAV. We maintain our Outperform rating with a
new price target of HKD 35.70 (previous: HKD 38.10).
2013 results in line with consensus. Kerry’s 2013 underlying
profit declined 6% to HKD 4.41bn, which was in line with the
Bloomberg consensus estimate of HKD 4.46bn but 5% below our
estimate (partly due to lower Hong Kong development margins).
Improved balance sheet. Kerry’s 2013 net gearing was 31.0%
(after the spinoff of KLN in December 2013), which is lower than
36.3% as of end-1H13 and management’s target of 35%. We
expect the gearing ratio to improve further to c.29% in 2014, with
positive cash flow from development and higher rental income.
Sales target for 2014 at HKD 12bn. Kerry’s 2013 contracted sales
of HKD 5.5bn in Hong Kong and HKD 5.2bn in China were near its
2013 target of HKD 11bn. Management guided for a 2014 target of
HKD 12bn. YTD, Kerry has achieved HKD 1.9bn of sales in Hong
Kong (29% of the HKD 6.5bn target) and HKD 0.8bn in China (15%
of the HKD 5.5bn target). Its 2014 target capex is HKD 6-7bn. The
company plans to launch the Ede Road and LaSalle Road projects
by mid-2014 and the Kau To Shan project by end-2014.
JKC’s leasing performance improves. Committed occupancy in
JKC’s retail and office spaces improved to 95% (from over 90% as
of end-1H13) and 72% (from 56%), respectively. Kerry is aiming for
RMB 700mn in rental contributions from the project. Tianjin Kerry
Centre has signed letters of intent for 35% of the spaces.
Inexpensive valuations. We maintain our Outperform rating with
a lower price target of HKD 35.70 (previous: HKD 38.10), which is
based on an unchanged 45% discount to NAV. We lower our NAV
estimate to HKD 64.80 (from 69.30), mainly on higher debt
assumptions and lower market value of Kerry Logistics Network
(KLN). We have left our 2014E/15E earnings largely unchanged.
Paul Yau, CFA
Esther Liu
[email protected]
+852 3983 8534
[email protected]
+852 3983 8514
HKD 22.75
HKD 35.70
Bloomberg code
Reuters code
683 HK
0683.HK
Market cap
12-month range
HKD 32,858mn (USD 4,231mn)
HKD 22.55 - 36.60
EPS adj. est. change
2014E
Year-end: December
Turnover (HKD mn)
Prop. inv. EBIT (HKD mn)
Prop. dev. EBIT (HKD mn)
Other EBIT (HKD mn)
EBIT (HKD mn)
Associates and JCEs (HKD mn)
Net profit (HKD mn)
Net profit adj. (HKD mn)
Net profit adj. growth (%)
EPS adj. (HKD)
DPS (HKD)
DPS growth (%)
Div. payout (%)
Net gearing adj. (%)
Net profit margin adj. (%)
ROE (%)
Book value/share (HKD)
PBR (x)
PER adj. (x)
Dividend yield (%)
Net asset value/share (HKD)
Prem./(disc.) to NAV (%)
0.1%
2012
34,513
1,360
4,724
536
6,619
384
4,696
4,668
28.8
3.24
0.95
9.2
29.1
22.4
13.5
7.0
49.19
0.82
10.9
2.7
-
2015E
2013
33,158
1,586
4,483
206
6,275
571
4,413
4,388
-6.0
3.04
0.90
-5.3
29.4
31.0
13.2
6.0
52.45
0.51
11.1
2.7
71.23
-52.4
-0.4%
2014E
9,876
2,388
1,924
78
4,390
1,233
3,696
3,696
-15.8
2.56
0.90
0.0
35.1
28.5
37.4
4.7
56.41
0.40
8.9
4.0
64.82
-64.9
2015E
13,143
2,755
2,566
131
5,452
1,061
3,827
3,827
3.5
2.65
0.90
0.0
33.9
27.3
29.1
4.6
58.16
0.39
8.6
4.0
-
Source: Company, Standard Chartered Research estimates
Share price performance
Kerry Properties
HANG SENG INDEX (rebased)
40
31
22
Mar-13
Jun-13
Share price (%)
Ordinary shares
Relative to index
Relative to sector
Major shareholder
Free float
Average turnover (USD)
Sep-13
Dec-13
Mar-14
-1 mth
-3 mth -12 mth
-13
-17
-36
-9
-11
-32
Kerry Group Limited (56.0%)
39%
6,071,841
Source: Company, FactSet
Important disclosures can be found in the Disclosures Appendix
683 HK
All rights reserved. Standard Chartered Bank 2014
HKD 22.7 5
HKD 35.7 0
http://research.standardchartered.com
Equity Research l Kerry Properties
Inexpensive valuations
Kerry’s 2013 underlying profit declined 6% to HKD 4.41bn, which is in line with the
Bloomberg consensus estimate of HKD 4.46bn but 5% below our estimate (partly
due to lower Hong Kong development margins).
Figure 1: Kerry Properties – A summary of 2013 results
2012
Hong Kong property sales
2013 Change,%
2013E Act/Est Comment
11,563
7,194
-38%
6,800
845
936
11%
760
Total Hong Kong Property division
12,408
8,130
-34%
7,560
Total Logistics division
19,295 19,188
Hong Kong gross rental income
-1% 20,176
5.8% Recognised sales of Bayview, SOHO 189, Lions
Rise and The Altitude
23.2% Contributions from Enterprise Square
Five/MegaBox
7.5%
-4.9% Discontinued operations post KLN spinoff
Estate management
0
0
NM
China property sales
1,541
4,071
164%
3,868
China gross rental income
989
1,211
22%
1,400
China hotel revenue
280
558
99%
322
2,810
5,840
108%
5,591
4.5%
-4% 33,494
-1.0%
Total China Property division
Total turnover
Hong Kong property sales profit
34,513 33,158
168 -100.0% Reclassification
5.2% Mainly from the sales of Parkview Residence
phase II in Hangzhou and Metropolis-Arcadia
Court phase I in Chengdu
-13.5% Growth from the opening of Jing An Kerry Centre
(c.HKD 100mn contribution) and Shenzhen Kerry
Plaza
73.1% Growth from Jing An Shangri La Hotel and
Shangri La Hotel, Shenyang
4,317
2,836
-34%
2,932
673
745
11%
608
Total profit from Hong Kong Property
division
4,990
3,581
-28%
3,540
Total Logistics division profit
2,686
2,897
8%
China property sales profit
407
1,647
305%
1,270
China net rental income
687
841
22%
700
20
(12)
-161%
1,113
2,476
122%
0
0
NM
0
0
NM
80
88
9%
(2,251) (2,767)
23%
(201) 1277.0% Reclassification
-5%
6,829
Hong Kong net rental income
China hotel profit
Total profit from China Property division
Project and property management
Infrastructure
Dividend income
Overheads
Operating profit
Gross interest expenses
Less capitalised
Interest income
6,619
6,275
(1,165) (1,358)
614
25%
1.2%
1,287 125.1% Logistics contribution was largely in line after
overheads
29.7% Over 40% gross profit margin at Parkview
Residence Phase II in Hangzhou
20.1% Reclassification
13 -190.3% Loss from over HKD 100mn opening expenses
at Jing An Shangri La Hotel
1,983
24.9%
135 -100.0% Reclassification
1 -100.0%
84
17% (1,248)
767
-3.3% Lower-than-expected development margins
22.6% Reclassification
658
4.1%
-8.1%
8.9%
16.5%
293
326
12%
293
11.5%
Net interest
(258)
(266)
3%
(297)
-10.6%
Profit after interest
6,361
6,010
-6%
6,532
-8.0%
28
25
-10%
0
384
571
48%
529
8.0%
6,774
6,605
-2%
7,060
-6.4%
26% (1,960)
-13.8%
Property provision/write-back
Profit from associates/JCE
Profit before taxation
Taxation
(1,344) (1,689)
Minority interests
(733)
(503)
-31%
(471)
6.7%
Net profit
4,696
4,413
-6%
4,629
-4.7%
Source: Company, Standard Chartered Research
17 March 2014
2
Equity Research l Kerry Properties
Inexpensive valuations
We lower our NAV estimate to HKD 64.80 (from 69.30), mainly due to higher debt
assumptions and lower market value of KLN. We have left our 2014E/15E earnings
largely unchanged.
Figure 2: NAV breakdown
HKD mn
HKD/sh
% of GAV
Luxury residential
22,378
15.54
19.1%
Mass residential
1,370
0.95
1.2%
23,748
16.49
20.3%
Luxury residential
8,734
6.07
7.5%
Office
4,420
3.07
3.8%
Retail
8,431
5.86
7.2%
Retail (under development)
1,187
0.82
1.0%
186
0.13
0.2%
22,958
15.94
19.6%
Hong Kong & Macau properties
Properties under development
Property investment
Car parking
Hotels
HKD mn/rm 3.9
324
0.22
0.3%
47,030
32.66
40.2%
17,441
12.11
14.9%
466
0.32
0.4%
17,907
12.44
15.3%
Existing
26,514
18.41
22.6%
Under development
12,221
8.49
10.4%
38,735
26.90
33.1%
1,520
1.06
1.3%
58,162
40.39
49.7%
1,926
1.34
1.6%
107,117
74.39
91.5%
Hong Kong properties – total
China properties
Properties under development
Residential
Office
Property investments
Existing hotel
HKD mn/rm 2.5
China properties – total
Overseas properties – total
Total properties
HKD/share at market
value
Kerry Logistics Network
8,045
5.59
6.9%
Warehouse
11.20
400
0.28
0.3%
Western Harbour Crossing (15%)
865
0.60
0.7%
0.5%
Champion REIT
3.51
606
0.42
Soho China
5.56
80
0.06
0.1%
117,113
81.33
100.0%
Gross asset value
Net debt
(23,496)
NAV
93,618
Number of shares (mn)
1,444
NAV per share
64.8
Source: Company, Bloomberg, Standard Chartered Research estimates
We believe the stock’s valuation is inexpensive at a 65% discount to NAV. We
maintain our Outperform rating with a lower price target of HKD 35.70 (previous: HKD
38.10), based on an unchanged 45% discount to NAV.
17 March 2014
3
Equity Research l Kerry Properties
Figure 3: Historical discount to NAV
KERRY
20
Average disc of 39%
+1sd
-1sd
Premium/(Discount) to NAV (%)
10
0
-10
-20
-30
-40
-50
-60
-70
-80
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: Bloomberg, Standard Chartered Research
17 March 2014
4
Equity Research l Kerry Properties
Income statement (HKD mn)
Cash flow statement (HKD mn)
Year-end: Dec
Property investment
Property development
Hotel/hospitality
Other turnover
Turnover
Property investment EBIT
Property development EBIT
Hotel EBIT
Other EBIT
EBIT
2011
1,541
2,711
226
16,182
20,660
902
1,295
(79)
1,130
3,248
2012
1,834
13,104
280
19,295
34,513
1,360
4,724
20
516
6,619
2013
2,147
11,265
558
19,188
33,158
1,586
4,483
(12)
218
6,275
2014E
3,268
6,126
465
17
9,876
2,388
1,924
77
1
4,390
2015E
3,781
8,789
555
18
13,143
2,755
2,566
162
(31)
5,452
Net interest
Associates
JCEs
Property reval. gain/(loss)
Other exceptional items
Pre-tax profit
Taxation
Minority interests
(609)
1,967
0
503
5,109
(1,075)
(377)
(872)
384
0
642
6,774
(1,344)
(733)
(1,032)
571
0
792
6,605
(1,689)
(503)
(1,028)
1,233
0
764
5,359
(1,031)
(631)
(991)
1,061
0
743
6,265
(1,301)
(1,137)
Net profit
3,657
4,696
4,413
3,696
3,827
Net profit adj.
3,625
4,668
4,388
3,696
3,827
Year-end: Dec
EBIT
Depreciation & amortisation
Net interest
Tax paid
Changes in working capital
Others
Cash flow from operations
2011
3,248
(353)
(433)
(1,214)
252
2,156
4,360
2012
6,619
(429)
(735)
(928)
6,185
266
11,837
2013
6,275
(472)
(1,032)
(845)
2,908
285
8,064
2014E
4,390
(519)
(1,028)
(516)
(3,191)
617
791
2015E
5,452
(571)
(991)
(651)
325
530
5,238
Capex
Acquisitions & Investments
Disposals
Others
Cash flow from investing
(5,202) (15,220)
(1,519)
(54)
1,190
305
(1,319)
(422)
(6,850) (15,391)
(7,488)
0
0
0
(7,488)
(2,294)
0
0
0
(2,294)
(2,570)
0
0
0
(2,570)
Dividends
Issue of shares
Change in debt
Other financing cash flow
Cash flow from financing
(1,461)
41
6,408
2,913
7,901
(1,490)
14
469
2,490
1,483
(1,298)
0
361
0
(937)
(1,298)
0
(7,010)
4,533
(3,774)
(1,298)
0
(685)
0
(1,983)
5,412
247
(842)
(2,071)
93
(3,383)
(361)
0
576
(5,277)
0
(1,502)
685
0
2,668
2011
2012
2013
2014E
2015E
58.5
47.8
15.7
17.5
-2.7
7.4
7.1
12.8
0.0
34.2
74.1
36.0
19.2
13.5
67.0
28.4
28.3
28.7
9.2
29.1
73.9
39.8
18.9
13.2
-3.9
-6.0
-6.2
-6.2
-5.3
29.4
73.1
31.4
44.4
37.4
-70.2
-16.2
-16.2
-15.8
0.0
35.1
72.9
29.2
41.5
29.1
33.1
3.5
3.5
3.5
0.0
33.9
6.0
3.3
3.2
7.0
5.8
3.6
6.0
5.0
3.2
4.7
3.4
2.6
4.6
4.1
2.6
18.7
27.9
3.9
2.1
22.4
26.4
5.7
2.2
31.0
27.4
4.6
1.7
28.5
24.4
3.2
1.8
27.3
24.1
4.1
1.9
2.54
2.52
0.87
44.44
3.26
3.24
0.95
49.19
3.06
3.04
0.90
52.45
2.56
2.56
0.90
56.41
2.65
2.65
0.90
58.16
18.8
13.7
0.58
2.5
9.8
10.9
0.82
2.7
10.9
11.1
0.51
2.7
12.8
8.9
0.40
4.0
10.2
8.6
0.39
4.0
Change in cash
Exchange rate effect
Free cash flow
Balance sheet (HKD mn)
Financial ratios and other
Year-end: Dec
2011
2012
2013
2014E
2015E
Investment properties
42,330 47,484 53,671 53,671 53,671
Hotel properties
965
965
4,924
4,924
4,924
PP&E
28,001 36,750 37,548 39,188 41,038
Associates and JCEs
11,717 12,423 18,294 18,294 18,294
Other non-current assets
3,255
4,284
2,633
2,633
2,633
Total non-current assets
86,267 101,906 117,070 118,710 120,560
Cash & equivalents
17,545 16,060 11,480
8,487
9,172
Short-term investments
Prop. under dev./held for sale 12,209 10,537 10,539 11,193 11,912
Inventory
Trade and other receivables
6,836
8,074
2,669
5,860
5,535
Other current assets
512
553
631
631
631
Total current assets
37,102 35,224 25,319 26,170 27,249
Total assets
123,369 137,130 142,389 144,880 147,810
Year-end: Dec
Operating ratios
Prop investment margin (%)
Prop dev. margin (%)
EBIT margin (%)
Net margin adj. (%)
Sales growth (%)
Net income growth (%)
EPS growth (%)
EPS growth adj. (%)
DPS growth (%)
Div. payout (%)
Short-term debt
Pre-sale deposits
Trade and other payables
Income taxes payable
Other current liabilities
Total current liabilities
Long-term debt
Deferred tax
Other long-term liabilities
Total long-term liabilities
Total liabilities
Shareholders' funds
Minority interests
Total equity
Total liabilities and equity
Gross debt
Net debt (cash)
YE fully diluted shares (mn)
5,378
2,565
3,965
3,965
3,965
10,444 11,324
7,765
7,765
7,765
1,935
2,312
2,871
2,871
2,871
0
0
0
0
0
17,757 16,201 14,601 14,601 14,601
21,383 29,367 31,011 27,782 28,182
7,046
7,208
7,903
7,903
7,903
2,734
92
0
0
0
31,163 36,667 38,913 35,684 36,084
48,920 52,868 53,514 50,285 50,685
63,922 70,792 75,755 81,475 84,004
10,527 13,470 13,120 13,120 13,120
74,449 84,262 88,875 94,595 97,125
123,369 137,130 142,389 144,880 147,810
29,495
11,950
1,487
31,932
15,873
1,449
34,976
23,496
1,447
31,747
23,260
1,447
32,147
22,975
1,447
Efficiency ratios
ROE (%)
ROCE (%)
ROA (%)
Leverage ratios
Net gearing adj. (%)
Debt/capital (%)
Interest cover (x)
Current ratio (x)
Per share
EPS (HKD)
EPS adj. (HKD)
DPS (HKD)
Book value/share (HKD)
Valuation
EV/EBIT (x)
PER (x)
PBR (x)
Dividend yield (%)
Source: Company, Standard Chartered Research estimates
17 March 2014
5
Equity Research l Kerry Properties
Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, ”SCB”)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.
Recommendation and price target history for Kerry Properties
HKD
44.00
1
39.75
2
3
35.50
31.25
27.00
22.75
Apr-11
Date
Jul-11
Oct-11
Recommendation
Jan-12
Price target
Apr-12
Date
Jul-12
Oct-12
Recommendation
1 26 Apr 13 OUTPERFORM
44.00 2 21 Aug 13 OUTPERFORM
Source: FactSet prices, SCB recommendations and price targets
Jan-13
Apr-13
Price target
43.00
Jul-13
Date
3 14 Jan 14
Oct-13
Recommendation
OUTPERFORM
Jan-14
Apr-14
Price target
38.10
Recommendation Distribution and Investment Banking Relationships
% of covered companies
currently assigned this rating
% of companies assigned this rating with which SCB has provided
investment banking services over the past 12 months
OUTPERFORM
53.2%
14.5%
IN-LINE
35.2%
12.8%
UNDERPERFORM
As of 31 December 2013
11.6%
8.3%
Research Recommendation
Terminology
OUTPERFORM (OP)
IN-LINE (IL)
UNDERPERFORM (UP)
Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months
SCB uses an investment horizon of 12 months for its price targets.
Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent to
[email protected].
Global Disclaimer: Standard Chartered Bank and/or its affiliates ("SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding
this document or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does not
constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it
constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration.
The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price.
While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein.
The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation
of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the
appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements
regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections, and price target(s), if any, contained in
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Equity Research l Kerry Properties
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