20181009-招商证券_香港_-新世界发展-00017.HK-Potential_re-rating_after_rebranding_8页_951kb

New World Development (17 HK) Summary

Core Content

New World Development (17 HK) is a leading Hong Kong developer that has undergone significant rebranding and restructuring under the leadership of Adrian Cheng, marking its transition to the third generation of management. The company has demonstrated strong financial performance and a clear strategy to enhance shareholder value through a combination of property development, rental income, and diversified services. The report highlights the potential for a re-rating of the stock due to improved financials, strong dividend yield, and strategic projects.

Main Points

• Rebranding and Management Transition:
  NWD is among the first major Hong Kong developers to complete the transition to the third generation of management under Adrian Cheng. This rebranding includes:

  • Refreshing the company with a new management philosophy, Artisanal Movement.
  • Disposing of non-performing businesses.
  • Delivering sustainable earnings and DPS growth through improved margins and recurring income.

• Strong Financials and Dividend Yield:

  • Net gearing improved to 29.3% in FY18, with management expecting a moderate increase as more land is acquired, but not exceeding 40%.
  • Average finance cost was 3.7% in FY18.
  • Dividend yield reached 4.6% in FY18, with a guidance for steady DPS growth.

• Performance Highlights (FY18):

  • Core profit increased by 12% YoY to HK$8bn.
  • Gross margin from Hong Kong property sales reached 40%, a record high.
  • Contracted sales in Hong Kong hit HK$24.7bn, exceeding the FY18 target of HK$10bn.
  • Contracted sales in China reached RMB16.3bn, surpassing the FY18 target of RMB16bn.
  • Rental income rose by 29% to HK$3bn, driven by the operation of Victoria Dockside.

• Key Projects and Revenue Streams:

  • Victoria Dockside (formerly New World Centre) is a flagship project offering 3msf of GFA, including:
    • Grade-A office (K11 ATELIER): 435ksf, 70% occupied, with spot rent at HK$110/sf/mth.
    • Shopping mall (K11 MUSEA): 1,156ksf, scheduled to open in 3Q19, with 50% pre-leased.
    • Rosewood Hotel: Expected to open in mid-2019.
    • Service apartments (K11 ARTUS): 380ksf, scheduled to open in 3Q19.
  • Skycity (2023-27) is another major project expected to significantly boost rental income.

• Market Outlook:

  • Management anticipates a mild correction in home prices of around 10% over the next 12 months due to potential rate hikes.
  • However, demand from genuine homebuyers and undersupply are expected to contain further downside.
  • Farmland conversion is a key policy focus to increase land supply, with NWD holding 17msf of farmland and expecting 600ksf to be converted in the next 1-2 years.

• Dividend Growth and Re-rating Potential:

  • FY18 DPS of HK$0.48 implies a dividend yield of 4.6%.
  • NWD is trading at ~60% discount to NAV, potentially leading to a re-rating once the new management and projects deliver on their promises.

Key Information

• Dividend Yield: 4.6% in FY18, with guidance for growth.
• Net gearing: 29.3% in FY18, expected to rise but remain under 40%.
• Gross profit margin: 40% for Hong Kong property sales, 41% for China property sales.
• Contracted sales: HK$24.7bn in Hong Kong, RMB16.3bn in China.
• Rental income: HK$3bn in FY18, with Victoria Dockside expected to generate over HK$2bn after full operation.
• Price Performance:
  • 17 HK: -2.9% in 1m, -8.1% in 6m, -7.8% in 12m.
  • HSI: -4.8% in 1m, -9.8% in 6m, -6.2% in 12m.
• Market Cap: HK$105.567 billion.
• Free Float: 59.62%.
• Shareholding Structure: Chow Tai Fook Enterprises Ltd holds 40.39% of shares.

Investment Ratings

Summary

New World Development is positioned for growth and re-rating due to its rebranding efforts, strong financials, and strategic projects. The company's focus on improving margins, increasing rental income, and expanding its land bank through farmland conversion presents a compelling investment case. With a decent dividend yield and a significant discount to NAV, the stock is seen as a potential value play in the Hong Kong property market.