CK Asset Holdings - Dragged by lower development earnings
- 1H23 net earnings fell 20% to HK$10.3bn, ahead of our forecast, thanks to stronger-than-expected development earnings
- Interim DPS was flat at HK$0.43
- Attractive pricing of The Coast Line II to lure homebuyers
- Well positioned to capture value accretive acquisition opportunities, maintain BUY despite lower TP of HK$56.4
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Including joint ventures, development profit tumbled 56% to HK$3.53bn of which HK$1.67bn were from Hong Kong and HK$1.68bn from China. Key projects booked included El Futuro in Hong Kong, Laguna Verona, Hupan Mingdi and La Grande Ville in China.
Since Jan-23, CKAH has achieved contracted sales of c.HK$9bn. The sales at Grand Jete Ph 2 in Tuen Mun were well received by the market. Since its initial launch in Mar-23, about 93% of a total 400 units have been sold thanks to attractive pricing.
CKAH has recently offered The Coast Line II (658 units) in Yau Tong for pre-sale. The first batch of 132 units is priced at an average of HK$14,997psf. Such competitive pricing should draw strong market attention. Despite the project’s attractive selling price, we believe that this waterfront project could still offer pre-tax margins of c.20%.
As of Jun-23, CKAH’s net order book was HK$14.82bn, comprising HK$7.06bn from Hong Kong and HK$3.78bn from China. About HK$4.42bn is scheduled to be recognised in 2H23.
Rental earnings fell 5% to HK$2.32bn partly driven by the shortfall arising from the sale of 5 Broadgate in London in 1H22. Office rental reversion remained in negative territory, thus dragging the rental earnings. The rental earnings shortfall, however, was more than offset by a recovery in hotel earnings. Profit from hotel and serviced suite operations more than doubled to HK$637m in 1H23 thanks to gradual tourism recovery following lifting of border restrictions in early 2023. In 1H23, occupancy for hotel operations rose 17ppts to 75% while serviced suites, which target mainly long-stay guests, continued to register firm occupancy of 91%.
In May-23, CKAH made an all-cash offer to acquire Civitas Social Housing PLC (Civitas), a listed real estate investment trust which invests in social care housing and health care facilities in the UK, at 80 pence (or c.HK$7.94 per share) for a total consideration of GBP485m (or c.HK$4.8bn). As of end of Jul-23, >96% of the total issued shares has been acquired. Civitas should start to contribute to rental earnings in 2H23.
Pub operations registered 7% revenue growth, thanks to price hikes. Excluding the impact of GBP depreciation, this segment would have seen 11% growth in topline. Profit contribution, however, plunged 32%, or 28% excluding the impact from exchange rate, to HK$586m, as operating margin fell to 5.2% in 1H23 from 1H22’s 8.2% due to high inflation. While margin outlook should gradually improve with easing inflation in 2H23, it takes time to return to the pre-pandemic levels as utility cost is still high.
Earnings contributions from infrastructure and utility asset operations fell modestly by 3% to HK$4bn mainly due to adverse foreign exchange movement and disposal of a 9% interest in Northumbrian Water.
In Jul-23, CKAH terminated the disposal of Borrett Road Project as the buyer, Sino Suisse Capital, failed to make the first payment along with accrued interest. The forfeited deposit of HK$2.08bn will be recognized as profit in 2H23. Since Feb-21, CKAH has sold 38 units for c.HK$7.6bn or c.HK$83,207psf on average. It is likely to take longer to crystalize the value of this upmarket development given the prolonged interest rate upcycle.
In 1H23, CKAH repurchased 31.1m shares for HK$1.36bn or HK$43.67/sh on average. The share buyback program signals the company's strong embedded value and also provides support for the share price.
In Jun-23, CKAH had net debt of c.HK$5.6bn (Dec-22: net cash of HK$12.6bn) following the payment of land premium for development sites acquired in late 2022. The net gearing ratio as a percentage of shareholders’ funds was c.1%. Including off-balance sheet debt, gearing would be 12.8%. With a strong balance sheet, CKAH is well positioned to pursue accretive acquisitions for long-term growth.
In the past six months, CKAH’s share price has dropped 14%, underperforming the broad market by 5ppts. Meanwhile, the stock is trading at a 64% discount to our assessed current NAV, c.1.5SD below its long-term average discount of 50%. Valuation is attractive from a historical perspective. Share buyback should lend support to its share price, limiting further downside risk. Its key investment appeal lies in its balance sheet strength which enables the company to explore value accretive investment to bolster long-term earnings growth. The purchase of Civitas Social Housing demonstrates this capability. Based on a target discount of 55% to our Jun-24 NAV estimate, we set our TP at HK$56.4, and maintain our BUY call.
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