Kerry Properties - Distorted by timing of recognition of development profits
- Excluding property provisions, 1H24’s underlying profit fell 19% y/y to HKD1.4bn, ahead of our expectations
- Interim DPS unchanged at HKD0.40
- Mont Verra sees improving sales momentum
- Maintain BUY with TP at HKD20.35
Substantial decline in development profit from Hong Kong. Gross profit from Hong Kong’s property development division sank 71% to HKD147m, as development profit booking is skewed towards 2H24. In 1H24, development profit stemmed from the sales of The Aster, The Bloomsway and Mont Verra in Hong Kong. Gross profit margin contracted to 16% in 1H24 from 1H23’s 26% due to a different product mix. In China, gross profit from property development increased significantly to HKD216bn, mainly from Qinhuangdao Habitat Ph2 with gross margins improving slightly to 25% (1H23: 22%).
Mixed sales performance in Hong Kong and China. In 1H24, Kerry Properties recorded contracted sales of c.HKD5.8bn in Hong Kong. The bulk came from Mont Verra in Beacon Hill (HKD4.8bn), with the balance primarily from inventory sales of The Aster in Happy Valley (HKD515m), and La Marina in Wong Chuk Hang (HKD482m). Elsewhere, sales launches in China were relatively smaller in scale in 1H24, mainly from second and third-tier cities. The company achieved HKD1.2bn of contracted sales in China, mainly from River Mansion in Wuhan (HKD422m) and The Arcadia in Shenyang (HKD415m).
Revival in luxury sales following the removal of property curbs. YTD, Kerry Properties sold 18 luxury residential units at Mont Verra, including two mansions and three penthouses, for c.HKD6.7bn or c.HKD64,500psf. This brought the total number of units sold to 23 since its initial launch in Oct-22, representing 36% of a total of 64 units. This luxury project should bring in decent profit and be the mainstay of development earnings in the years ahead.
Strong net order book implies higher visibility of development profit. As of Jun-24, net order book stood at HKD17.2bn, with c.HKD7.2bn from Hong Kong and c.HKD10bn from China. The bulk will be recognised in 2H24 and 2025.
Rental income disrupted by AEIs at MegaBox and Branksome Crest. Including associates and joint ventures, total property rental revenue fell 3% to HKD2.65bn, on lower rental income from both Hong Kong and China. In Hong Kong, rental income was 7% lower at HKD596m, mainly due to a shortfall from the closure of two floors at MegaBox in Kowloon Bay and a tower at Branksome Crest in Mid-levels for refurbishment, and strata-titled sales of The Aster. On a like-for-like basis, rental revenue posted a slight decline of 1% due to negative office rental reversion. In Jun-24, occupancy of MegaBox fell from Dec-23’s 95% to Jun-24’s 89%, mainly due to ongoing refurbishment work on two floors of the mall, which affects c.14% of net leasable area. Excluding Branksome Crest which is under renovation, occupancy of its Mid-Levels portfolio performed steadily with occupancy of 95% as of Jun-24 (Dec-23: 93%).
RMB depreciation dragged rental income from China. Rental income from China declined slightly by 2% to HKD2.05bn, dragged by RMB depreciation. In RMB terms, rental revenue improved by 3%, led by higher retail income from the retail portfolio. Retail portfolio occupancy also increased to 87% in Jun-24 from Dec-23’s 85%. Occupancy of its office and apartment portfolio remains stable at c.90% and c.92% respectively as of Jun-24.
Hotel business normalising. Gross profit from hotel operations declined by 10% y/y to HKD285m, following normalisation after a strong rebound in 2023.
Financial risk is manageable despite higher gearing. In Jun-24, total debt stood at HKD60.8bn, up 10% from Dec-23’s HKD55.1bn. Average debt maturity is 2.7 years. Cash and bank deposits reached HKD12.4bn, more than sufficient to cover the short-term debt of HKD7.92bn to be matured within a year. Net debt stood at HKD48.5bn, up 17% from Dec-23’s HKD41.3bn, mainly due to the land payment of the last batch of Huangpu project in Shanghai in Jun-24. This represented 46% of its shareholders’ fund. (Dec-23: 38%) With continued sales of Mont Verra on one hand and planned residential launch of Huangpu project in Shanghai in 2H25 on the other hand, gearing should improve gradually from 2025 onwards. Despite increased gearing, financial risk should not be overly concerned.
Increased RMB loan exposure to minimize interest cost. The company increased its RMB loan exposure to 30% in Jun-24 from 22% as of Dec-23. This also acts as a natural hedge for projects in Mainland China. Interest costs for 44% of gross debt (or 55% on net debt level) are on fixed rate basis.
Low valuation to support share price. The stock is trading at an 82% discount to our assessed current NAV. Such a low current valuation should lend support to the share price. Based on target discount of 75% to our Jun-25 NAV estimate, we set our TP at HKD20.35 TP. Maintain BUY.
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