CK Asset Holdings - Asset recycling to enhance shareholders’ value
- One of the few developers that benefit from falling land prices
- Cash rich for accretive investments post acquisitions
- Share buyback signals strong embedded value
- BUY with HK$64.6 TP
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In Sep-22, Cheung Kong Asset Holdings sold the remaining 152 units at 21 Borrett Road in Mid-levels to Singapore-based Sino Suisse Capital for HK$20.8bn. The luxury apartment is valued at HK$62,000psf. Located in Mid-levels, this super-luxury development comprises 181 apartments overlooking the Victoria Harbour. Since Feb-21, Cheung Kong Asset Holdings has sold 33 units for c.HK$6.8b3n or c.HK$85,400psf on average. We see this en bloc disposal as positive as this allows the company to lock in a handsome after-tax profit of c.HK$6.3bn with capital generated to be recycled into other new investments with better return prospects. Otherwise, it would take some time to crystallise the value of this upmarket development even after allowing for the return of affluent Mainland buyers after the border re-opens.
Following the en bloc disposal of the remaining units at 21 Borrett Road, Cheung Kong Asset Holdings is back in acquisition mode. In 4Q22, the company acquired three lots via public tender for residential developments with the winning bid below market estimates.
Based on the current selling prices in respective areas, we estimate these residential developments offer pre-tax margins of 30-40%. If fully sold, they should altogether produce total development profit of c.HK$17bn. This makes these low-cost land sites a key earnings growth catalyst in the medium term.
In Oct-22, the company outbid four other developers to secure the Tuen Mun residential site through government tender for HK$4.6bn or HK$3,522psf. Located in Siu Lam near OMA by the Sea, this project will provide 2,020 units with GFA of 1.31msf. Including construction and financing costs, total development cost is estimated at HK$9,600psf. Currently, new projects in the neighborhood such as Grand Jete Ph 1 are selling for HK$15,000psf on average. This suggests >30% pre-tax margins if current prices are maintained.
In mid-Dec, the company won the tender of URA’s Queen’s Road West/In Ku Lane redevelopment project in Sai Ying Pun after defeating six other developers. The winning bid of HK$1.16bn translated into land cost of HK$9,554psf which is 27% lower than URA’s nearby Shun Hing Lane/Kwai Heung Street project awarded to Far East Consortium in Aug-22. Upon completion, this redevelopment project provides 189 units with total GFA of 121,525sf. This project should offer strong transportation connectivity. It is just a three-minute walk from Sai Ying Pun MTR Station from which it takes 4 minutes to Central by subway. Adding construction and interest costs, we estimate all-in cost at HK$18,000psf on saleable area basis. Comparable projects in the area are currently trading at >HK$25,000psf. Hence, this redevelopment should be lucrative. If total sales proceeds exceed HK$3.5bn, URA will take a 40% share of the surplus revenue.
Shortly after the award of the URA’s redevelopment project in Sai Ying Pun, Cheung Kong Asset Holdings outbid five developers or developing consortiums to clinch the residential site in Kai Tak via government tender for HK$8.7bn. This translated into an accommodation value of HK$6,138psf. This was not only below market consensus but also the lowest for Tai Tak residential sites sold through government tender since May-14.
The lot is situated next to Sung Wong Toi MTR
Station and takes 21 minutes to Central by subway. It is rezoned into residential use from commercial after the tender was withdrawn in May-20. When completed, this project will offer 1,750 residential units with 1.41msf GFA. With our estimated all-in cost of HK$13,000psf (on saleable area basis), we forecast fat pre-tax margins of 40% based on the current selling prices in Kai Tak. A complete sale of this sizeable project should bring in c.HK$9bn pre-tax earnings to Cheung Kong Asset Holdings.
Including URA’s combined redevelopment secured in 1Q22, Cheung Kong Asset Holdings has spent HK$20.5bn on restocking its land bank in Hong Kong in 2022. This makes it the biggest spender in the land market in 2022. The company had acquired four residential sites with total GFA of 3.37msf. Total number of residential units to be built is estimated at 4,849. Three sites are conveniently located in close proximity to MTR stations in the urban area which should ensure strong marketability when ready for sale.
Following the HK$8.7bn purchase of the Kai Tak site, we estimate Cheung Kong Asset Holdings still sits on net cash holding of c.HK$5bn. With a solid balance sheet, the company remains well positioned for more value-accretive land acquisitions to bolster the long-term growth prospects. Should the company gear up to 20%, it would have HK$80bn for new investments.
In 2023, Cheung Kong Asset Holdings plans to launch Wong Chuk Hang Station Package 3, Yau Tong redevelopment project and Grand Jete Ph 2. Pre-sale consent for Grand Jete Ph 2 has been obtained while those for the other two are pending government approval. The Wong Chuk Hang Station Package 3 sits adjacent to the MTR station and above a 0.5msf retail mall. The Yau Tong redevelopment offers panoramic views of Victoria Harbour. Sales of these residential projects should strengthen the company’s financial musicale for further land banking
in 2H22, Cheung Kong Asset Holdings repurchased 42.5m shares for HK$2.09bn or HK$49.04/sh on average. For the full year of 2022, the company bought back 49.1m shares for HK$2.43bn.
The stock is now trading at a 61% discount to our appraised current NAV, against its 10-year average of 49%. Valuation is by no means expensive. Its strong financial muscle puts it into an advantageous position to pursue accretive acquisitions to boost shareholders’ value. Planned project launches, if greeted with favourable response, should help unlock its NAV, providing upside on the stock price while continued share buybacks not only signals its embedded value but lends support to its share price. Based on a target discount of 50% to our Dec-23 NAV estimate, we set our TP at HK$64.60. This suggests 33% upside potential and hence our BUY rating.
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