20130905-美银美林-SHKP_won_Shanghai_Xujiahui_land_at_RMB21.7bn_14页_929kb

SHKP Summary: Shanghai Xujiahui Land Acquisition

Core Content

Sun Hung Kai Properties (SHKP) has successfully acquired a prime large-scale land site in Shanghai Xujiahui for RMB21.7bn, which is 24% higher than the starting bid of RMB17.5bn. This is the largest single investment in SHKP's history, reflecting the company's confidence in Shanghai's real estate market and its strategy to increase recurrent rental income.

Key Details of the Acquisition

• Location: Adjacent to Hang Lung's Grand Gateway in Xujiahui, Shanghai.
• Site Area: 99.2k sqm, with a total GFA of 700k sqm (including 120k sqm underground GFA).
• Land Cost: RMB32k/sqm.
• Construction Cost: RMB15k/sqm.
• Total Cost per sqm: RMB47k/sqm.
• Estimated Yield on Cost: 10%.
• Project Timeline:
  • Construction must start within 12 months of land transfer.
  • 70% of GFA must be completed within five years.
  • Full completion expected within 7 years of construction start.

Financial Implications

• Estimated Total Investment: RMB33bn.
• Annual Rental Income: RMB3.5bn upon completion by 2020.
• Net Gearing:
  • Immediate increase to 20.2% after 50% land payment.
  • Increase to 23.9% within a year if no other cash inflows.
• NAV Accretion: Limited in the short term but long-term positive due to enhanced brand image and rental income base.

Strategic Significance

• Expansion in China: The acquisition increases SHKP's China assets to 25% of total assets, up from 19%.
• Rental Income Growth: SHKP expects to derive HK$4-5bn in gross rental income from Shanghai alone.
• Focus on Investment Properties: Investment properties represent 66% of total gross NAV, highlighting SHKP's focus on this segment.

Market Position and Valuation

• Valuation: SHKP is trading at a 42% discount to 2014E NAV and at 0.74X price to book value.
• Investment Thesis: Buy rating due to attractive valuation and strong execution, despite concerns over interest rates and lack of primary project launches.
• Price Objective: HK$115 (US$14.8/ADR), based on a 35% discount to NAV.

Risk Factors

• Overpayment for land.
• Slow progress in converting agricultural land to residential use.
• Sudden drop in property prices.
• Low occupancy levels or spot rents for new investment properties.

Property Portfolio and Market Trends

• China Portfolio: SHKP's China portfolio is growing, with peers like Hang Lung Properties and Kerry Properties having 34-53% of assets in China.
• HK Property Market: Limited investment opportunities in Hong Kong due to lack of land supply and a matured market, prompting SHKP to expand in China.
• Property Sales Strategy: SHKP may accelerate property sales in FY14 or sell more investment properties in Hong Kong to fund the Xujiahui project.

Analysts and Contact Information

• Analysts: Raymond Ngai, CFA and Ronald Leung, CFA.
• Contact:
  • Raymond Ngai: +852 2536 3987, raymond.ngai@baml.com
  • Ronald Leung: +852 2536 3728, ronald.leung@baml.com

Historical Fund Raising

• SHKP has not raised equity at a price below the previous one since 1992.
• The group is unlikely to make large land purchases in Hong Kong in FY14 due to the current low share price and the Family's 43% holding.

Key Financial Metrics

• Net Income (Adjusted): Ranges from HK$22,594mn (2011A) to HK$18,989mn (2015E).
• EPS: Ranges from HK$8.79 (2011A) to HK$7.11 (2015E).
• Dividend per Share: Consistently HK$3.35.
• Book Value per Share: Rises from HK$119.44 (2011A) to HK$163.49 (2015E).
• NAV per Share: Rises from HK$185.77 (2013E) to HK$177.71 (2014E).
• P/E Ratio: Ranges from 11.7x (2011A) to 14.4x (2015E).
• Dividend Yield: Maintains at 3.3%.
• Price/Book Value: Ranges from 0.9x (2011A) to 0.6x (2015E).
• Discount to NAV: Ranges from -44.8% (2013E) to -42.3% (2014E).

Conclusion

The acquisition of the Shanghai Xujiahui site is a significant move for SHKP, reflecting its strategic focus on expanding its presence in China and enhancing its rental income base. Despite the immediate impact on net gearing, the long-term benefits are expected to outweigh the risks. The current valuation is seen as attractive, and the company is likely to continue its expansion strategy in China while managing its Hong Kong property portfolio.