CK Asset Holdings - New infrastructure investments to enhance recurring earnings
- 1H24 profit before investment property valuation dropped 11% to HKD6.7bn, in line with our estimate
- Interim DPS fell 9% to HKD0.39
- More overseas infrastructure investments to diversify and strengthen recurrent income base
- Continued share buybacks to support share price; BUY with HKD37.8 TP
Development earnings dwindled. Including joint ventures, property development profit almost halved to HKD1.8bn, of which HKD1.04bn came from Hong Kong and HKD710m from China. Major projects booked included Grand Jete Ph 1, #LYOS and 90 Repulse Bay Road in Hong Kong, Laguna Verona in Dongguan and Upper West in Shanghai.
Blue Coast constituted the bulk of contracted sales. In 1H24, CKAH achieved contracted sales of >HKD11bn in Hong Kong which stemmed mainly from Blue Coast Ph 1 in Wong Chuk Hang. In Apr-24, CKAH offered Blue Coast Ph 1 for pre-sales. Given attractive pricing, market response has been overwhelming, with c.570 units sold for HKD10.8bn or c.HKD24,000psf. This represented 89% of total units at Blue Coast Ph 1. However, given the high development costs, Blue Coast is less likely to be profitable. As of Jun-24, CKAH had a net order book of HKD28.4bn, including HKD21.2bn from Hong Kong (mainly from The Coast Line and Blue Coast), HKD3bn from China and HKD4.2bn from overseas. About HKD5.4bn is scheduled to be booked in 2H24.
Civitas social housing portfolio lifted rental earnings. Rental earnings rose 9% to HKD3.1bn. This was primarily due to significant growth in contributions from social infrastructure portfolio resulting from the acquisition of Civitas Social Housing in Jul-23. The growth, however, was partly offset by lower office and retail income. Negative reversionary growth filtered through its office portfolio in Hong Kong given the challenging operating landscape.
Post-pandemic hotel earnings recovery well underway. Profit from hotel and serviced suite operations was 29% higher at HKD823bn, aided by continuing post-pandemic recovery of inbound tourism. In 1H24, occupancy for hotel operations headed 6ppts higher to 81% while serviced suites recorded high average occupancy rate of 88%. (1H23: 91%) Hotel operations of China hotels improved with narrower losses.
Lingering challenges for Greene King. Pub operations recorded modest revenue growth of 5% to HKD11.8bn thanks to price increase. Profit contributions were 2% higher at HKD597m with operating margins maintained at 5% (1H23: 5.2%). Overall, trading environment of the pub business remains challenging, impacted by the high cost of living.
New infrastructure investments to enhance recurring earnings. Earnings contributions from infrastructure and utility asset operations went up 2% to HKD4.1bn. In Apr-24, CK William (40% held by CKAH) completed the acquisition of Phoenix Energy, a gas distribution network operator in Northern Ireland, for GBP312m. In May-24, UK Power Network (20% owned by CKAH) also acquired UU Solar, which owns and operates a portfolio of renewable power generation assets in the UK, for GBP88m. In Aug-24, CK William agreed to buy a portfolio of onshore wind farms in the UK for GBP350m. The recent string of infrastructure investments should further strengthen its recurring earnings which amounted to HKD8.1bn and made up 82% total profit contributions in 1H24. In addition to providing steady earnings contributions, these infrastructure assets are structurally liquid. This makes it easier for CKAH to redeploy its capital back to Hong Kong/China when better opportunities avail.
Share buyback to enhance shareholder value. CKAH intends to return capital to shareholders through share buybacks instead of dividends, which also serves to enhance its NAV. In 1H24, CKAH repurchased 48.7m shares for HKD1.5bn or HKD31.61/sh on average. Share repurchase not only signals the stock’s strong hidden value but also provides share price support.
Poised for more acquisitions. In Jun-24, CKAH had total borrowings of HKD56.1bn, of which HKD14.9bn was repayable within one year. Cash and bank balance stood at HKD32.8bn. Net debt amounted to HKD23.3bn, representing 6% of shareholders’ funds. Including off-balance sheet items, gearing would be 17%. its healthy balance sheet should enable the company to pursue more value-accretive acquisitions to bolster its long-term growth.
BUY with HKD 37.8 TP. In the past three months, share price of CKAH fell 10%, in line with the broad market. Trading at 70% discount to our appraised current NAV, the stock is attractively valued from the historical perspective. While the lower dividend could lead to near-term share price volatility, continued share repurchases should support its share price. Moreover, CKAH’s robust balance sheet should allow for more acquisitions to brighten its long-term growth prospects and improve earnings quality. This should lead to better valuations. By assigning a target discount of 65% to our Jun-25 NAV estimate, we derive our TP at HKD37.8. BUY.
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1. | DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, or their subsidiaries and/or other affiliates have a proprietary position in CK Asset Holdings Ltd (1113 HK) recommended in this report as of 13 Aug 2024. |
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