AMTD Research has published the report of NWD (17.HK). We reiterate Buy rating with a target price of HK$14.13/sh. We expect NWD to remain as an outperformer among the HK Property developers despite the near term macroeconomic challenges. New World China Land (NWCL) is taking an increasingly important role as the company’s key growth driver with a 20% CAGR target, while 1HFY20 Dev Margins reached 60%. We believe NWD’s valuations should re-rate to reflect such execution improvement. Reiterate Buy.
China business underappreciated by market, valuations should re-rate
We believe the recent pull-back in share price to valuations of 61% disc. to NAV and 5.2% div yield, offers investors an attractive entry point into NWD for its upcoming growth potential. Management maintained their RMB20bn China contracted sales target for FY20E and is set for a 20% medium term CAGR. We believe that such a growth target is all the more impressive when taking into account the 1HFY20 60% China Dev Margins (vs industry average ~25%). We expect the stock’s valuations to re-rate to a narrower disc. to NAV to reflect such execution improvement. We reiterate our Buy rating with a TP of HK$14.13/sh, based on a 45% target disc. to NAV.
1HFY20 results in-line despite challenges from HK social unrest
NWD achieved a 1HFY20 underlying net profit of HK$3,929m (44% of FY20E), down 27% YoY, mainly due to lack of project completions in HK during 1HFY20 (Dev Prop revenues declined 60% YoY during the period). 1HFY20 rental revenues from Inv Prop grew 23% YoY, while segment rental profits still grew 13% YoY, despite the HK social unrest during the period. Net Margins improved to 12% (1HFY19: 11%) underpinned by a 6% YoY decline in SG&A as a result of successful cost saving measures.
China Property: A new lease of life under a new management structure
We expect to see an improvement in operational efficiency within New World China Land (NWCL) on the back of the recent internal organisational restructuring. In Feb 2020, Dr. Adrian Cheng has been appointed as Executive Chairman of NWCL, while Mr. Choy Hon-Ping and Ms. Echo Huang have been promoted to Vice Executive Chairman and CEO of NWCL, respectively. We believe these are important changes and lays the foundation to achieve management’s 20% contracted sales CAGR target.
HK Property: All eyes on ~HK$30bn Tai Wai Station Development
Tai Wai Station development project is the key sales driver of the year, with the project offering 3,090 units across 3 phases, with an expected GDV of ~HK$30bn. Phase 1 is expected to be launched in 2Q20 and we estimate to achieve ~HK$10bn of sales proceeds (~65% of our FY20E HK Property Sales). Despite the recent softening in the HK property market (CCI Index down 1.57% MoM), we expect the project to fetch an ASP of ~HK$20,000/sqft. Other key sales drivers incl. the office project in Cheung Sha Wan and Mount Pavilia in Sai Kung, which recently (Feb 2020) achieved a record high ASP of HK$43,012/sqft for the sale of a special unit.
Stock is currently trading at 61% Disc. to NAV and 11.3x FY20E P/E
NWD is currently trading at deeply discount valuations of 61% Disc. to NAV compared to its historical average of 55% Disc. to NAV. In terms of PE, the stock is trading at 11.3x FY20E P/E.
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