20140301-美银美林-Issue_bonus_warrants_to_raise_HK_22bn_for_land_banking_25页_1mb

Summary of SHKP Bonus Warrant Issue to Raise HK$22bn

Core Content

Sun Hung Kai Properties (SHKP) proposed to issue bonus warrants to raise HK$22.2bn, with a subscription price of HK$98.6 per warrant. This represents 8.3% of the existing share capital. The warrants are set to expire in April 2016 and are currently in the money, estimated to be worth HK$8.8 per warrant share. The last day of dealings on a cum-entitlement basis is 7 April 2014.

Main Points

• Purpose of Bonus Warrants: SHKP aims to raise capital to fund land purchases, particularly in Hong Kong, where it has a vested interest in several major sites. The warrants provide flexibility for the Kwok family to inject capital as and when needed, without immediate dilution of their stake.

• Capital Raise Impact: If all warrants are exercised, SHKP's net gearing will decrease from 18% to 12%, and there will be a mild dilution of 2.6% on book value and 3.5% on NAV. Fully diluted EPS is expected to decrease by 7.7% in FY14 and FY15.

• Valuation: The stock is currently trading at a 46% discount to NAV and at 0.67x P/BV. The price objective is set at HK$106, reflecting a slight reduction in the previous target due to the dilution impact.

• Investment Thesis: The research analysts from Bank of America Merrill Lynch maintain a "Buy" rating, citing attractive valuations, potential support from the Kwok family, and strong rental income growth.

Key Information

• Warrant Terms:

  • 1 warrant for every 12 shares
  • Subscription price: HK$98.6
  • Maturity date: April 2016
  • Estimated value of warrants: HK$8.8/share

• Land Sale Schedule: The Hong Kong SAR Government plans to sell five major land sites in the 2014/15 fiscal year, each valued between HK$5-10bn. SHKP is interested in the Kwun Tong and Tai Wai sites due to its existing interests.

• Rental Income Growth:

  • Gross rental income rose 16% YoY to HK$9.1bn in 1H FY14
  • Achieved 11% CAGR in rental income over the past 10 years
  • Rental income from China increased 56% YoY to HK$1.537bn, representing 17% of total gross rental income

• Financial Position:

  • Net gearing is close to the tolerance level of 20%
  • SHKP has a strong cash flow from operations, with HK$30.3bn in development sales and HK$5bn in free cash for investment
  • The group has a solid investment property portfolio, including the IFC and ICC, and is expanding in mainland China and Singapore

• Shareholder Considerations:

  • Bonus warrants offer a fair method for raising equity without immediate dilution
  • Shareholders can choose to sell the warrants if they do not wish to subscribe
  • The Kwok family may support the share price through buybacks before the warrant exercise period

Key Changes and Performance

• Earnings Estimates:

  • 2014E EPS: 7.99 (up from 7.57)
  • 2015E EPS: 7.15 (up from 6.82)
  • 2016E EPS: 7.35 (up from 6.96)

• Valuation Metrics:

  • P/E ratio: 12.4x (2014E)
  • Dividend Yield: 3.4%
  • Price/Book Value: 0.7x
  • Discount to NAV: -43.8% (2014E)

• Historical Fund Raising:

  • SHKP has a history of issuing bonus warrants, with the last one in 1991
  • Previous share placements were at prices above the current share price, maintaining equity value

Major Upcoming Projects

Hong Kong

• Residential: The Wings IIIA & IIIB (1,280 units), Tung Chung Ph 1 (1,400 units), Mount One (144 units)
• Commercial: Hoi Bun Road (199k sqf), Wong Chuk Hang Road (120k sqf)

China

• Residential: Oriental Bund (1.25mn sqf), Sirius Ph 1B & 1C (422k sqf), Forest Hills offices (254k sqf)
• Commercial: Xujiahui Center (HK$27.6bn land premium paid), Xinzhuang metro station (35‰ owned), Hong Cheng retail project (50% owned), Tianhui Plaza (33% owned)

Investment Highlights

• Valuation Discount: The stock is at a significant discount to NAV, with a 46% discount
• Downside Support: Potential family buybacks could support the share price
• Rental Growth: Strong rental income growth and a good pipeline of new projects
• Capital Structure: SHKP has a solid balance sheet and a strategy to maintain net gearing below 20%

Conclusion

The proposed bonus warrants are a strategic move by SHKP to raise capital for land purchases without immediate dilution. The warrants are in the money and provide flexibility for the Kwok family to inject funds as needed. Despite a slight drop in underlying net profit, SHKP's strong rental income growth and solid investment portfolio support the "Buy" rating. The stock is undervalued, and the potential for family support and rental income growth makes it an attractive investment opportunity.