Cheung Kong Holdings (1)

Transcription

1 Cheung Kong Holdings (1) Results Update Buy Mar 30, 2009 First setback since profit tumbled 44% to HK$15.5bn Top line of Cheung Kong (CK) fell 3% to HK$12,856m and bottom line sank 44% to HK$15,518m because of the shrinking profit contribution from Hutchison Whampoa (13, Not rated), securities income and revaluation gain in investment properties. Income from properties development tumbled 8% to HK$10,309m. Rental income gained 19% to HK$935m due to positive rental reversion in the early of 08. Hotel business also raised 30% to HK$1,383m mainly reflected from the strong demand of 2 new serviced apartments in Hung Hom. Hutch was lack of assets sales. Hutch had the gain from assets sales of HK$6.6bn in 08, compared with HK$24.6bn in 07. Thus, net profit of Hutch declined by 42% to HK$17.7bn in 08. Although revenue of 3 Group gained 1% to HK$60.4bn but LBIT was narrowed by 39% to HK$10.9bn in 08. Number of customers of 3 Group jumped 17% to 20.7m but ARPU dropped 16% to Hutch aims to have positive EBIT for 3 Group in 09. Hutch adjusted its strategy of its retail operation to face global economy downturn. Income and EBIT of retails business advanced 8% to HK$118.5bn and 18% to HK$1.8bn in 08 respectively. Healthy balance sheet. CK had HK$7.2bn cash on hand and bank borrowing amounted to HK$40.3bn at end-08. Net gearing ratio was 14.6% which was in the healthy level. In addition, HK$5.5bn securities investment could enhance the liquidity and return. Lastly, unutilized bank borrowing of HK$3.4bn can provide the cushion to CK for future investment and operational need. Future earnings depends on Hutch. We cut our earnings forecast downward 2.7% to HK$15.9bn in 09 and 13.8% to HK$16.1bn in 10 due to the downward adjustment of earnings contribution from Hutch, securities income and revaluation gain. Furthermore, we estimate NAV of CK to be HK$94.1 at end-09. Target price is HK$83.15, which is 10% discount to our end-09 GAV. Maintain BUY. Samson Man, CFA (852) samson.man@firstshanghai.com.hk Industry HK Properties Price HK$ 70.5 Target price HK$ Stock code 1 Market cap. O/S shares (+17.9%) HK$163.3 bn 2,316mn 52wk high/low HK$ 131/55.95 NAV per share HK$94.1 Major shareholder K.S. Li (40.24%) Earning Summary Year-end: 31 Dec FY06A FY07A FY08A FY09E FY10E Turnover (HK$ m) 10,951 13,277 12,856 25,629 14,389 Growth (%) (3) 99 (44) Net Profit (HK$ m) 18,075 27,678 15,518 15,928 16,126 Growth (%) (44) 3 1 Core Profit (HK$ m) 16,259 25,937 15,400 15,488 15,246 EPS (HK$) Growth (%) (44) 3 1 PER (x) DPS (HK$) Yield (%) Source: Company information, FSSL Price Performance HK$ /08 4/08 5/08 6/08 7/08 8/08 9/08 10/08 11/08 12/08 1/09 2/09 Source: Bloomberg First Shanghai Securities Limited

2 Bottom line went south in 08 Net profit lost 44% to HK$15.5bn in 09 Cheung Kong Holdings (CK) posted 2008 results last Thursday. Revenue dropped 3% to HK$12,856m and net profit declined 44% to HK$15,518m in Shrinking profit contribution from Hutchison Whampoa, securities income and revaluation gain in investment properties were the major reasons of setback. Profit contribution from Hutch declined to HK$8.8bn in 08 from HK$15.3bn in 07 because of lack of assets disposal. Securities income fell 91.5% to HK$4.7bn in 08 from HK$5.5bn in 07 because of volatile investment environment. Meanwhile, contribution from revaluation gain in investment properties tumbled 92.6% to HK$134m in 08 from HK$1.8bn in 07 (or to HK$601m in 08 from HK$2.4bn in 07 if it included JV and associated companies) following to the consolidation of property market. Thus, a total of HK$13.2bn was erased arising from above three issues. Excluding the impact of revaluation gain (difference in HK$1,266m) and securities income (difference in HK$1,034m), 2008 results were closed to our expectation. Income from properties sales fell 8% in 08 Revenue from properties development declined 8.3% to HK$10.3bn in 08. The sales from inventories (including The Legend, Central Park Towers Phase 1, Le Point and Sausalito) and the projects completed in 08 (including CASA 880, The Capitol and Seasons Monarch in HK as well as several properties in China) were the major contributors in 08 results. In the coming months, The Capitol will be delivered to the buyers. Since current market price is lower than the purchasing price, some default cases may break out. CK adopt a prudent accounting method. The company only books the income if the buyers apply the mortgage and pay all the monies. According to the company, CK only booked 50% of income from The Capitol in 08 even it sold majority of the project in March 08. But rental jumped 19% Rental income rose 19.3% to HK$945m in 08. CK renewed the leasing contracts with tenants in 1H08 so that effect of financial tsunami is reduced to the company s rental portfolio. In some case, rental in The Center was revised upwards by 40%. A new investment property, 1881 Heritage, was completed in February A small boutique hotel and a high-end shopping mall are located in 1881 Heritage. Total leasable GFA of 1881 Heritage is 13,023 sqm. Since it is renovated from a historical monument (former Marine Police Headquarters in Tsim Sha Tsui), it will be a landmark in this tourist area and becomes a major rental income source in the future. Hotel business also gained 30% Income from hotels and serviced suites increased 30.1% to HK$1.38bn in new serviced apartments in Hung Hom (Harbourview Horizon All-Suite Hotel and Harbourfront Horizon All-Suite Hotel) started to have full year contribution in 08 and their occupancy rates were above 90%. CK s hotel portfolio will continue to expand. The Apex Horizon in Kwai Chung has commenced operation recently. Harbour Grand Hong Kong was completed at end-08 and commenced to operate in 09. Furthermore, a boutique hotel with around 20 rooms in 1881 Heritage will open in mid-09. Another hotel in HK, Harbour Plaza 8 Degrees, is expected to complete in China is more important Land bank of China amounted to 111m sq ft in China. In 08, profit from China and HK accounted for 30%/70% in the pre-tax profit. We are looking at more income generated from China in the future and their profit margin is higher than the projects in HK. As more income generated from China, we see that effective tax rate of CK increased to 12.0% in 08 from 4.1% in 07 because of the higher corporate tax and LAT tax in China

3 Figure 1: 2008 Final Results 2007A 2008A 2008E YE: 31/12 (HK$m) (HK$m) Change (HK$m) Difference Revenue 13,277 12,856-3% 12,866 0% Property sales % % Rental income % 967-2% Hotel operation % % Other business % % Gross profit 6,756 6,821 1% 6,639 3% Investment income 5, % 1,500-69% SGA expense (1,282) (1,442) 12% (1,570) -8% Operating profit 10,959 5,845-47% 6,569-11% Finance cost (984) (454) -54% (770) -41% Associates & JV 17,379 11,053-36% 11,714-6% Exceptional 1, % 1,400-90% Pre-tax profit 29,169 16,578-43% 18,913-12% Taxation (1,197) (859) -28% (864) -1% Minorities (294) (201) -32% (250) -20% Net profit 27,678 15,518-44% 17,799-13% Underlying profit 25,937 15,400-41% 16,567-7% EPS (HK$) % % Source: Company, FSSL Figure 2: 1881 Heritage Source: HK Government - 3 -

4 Disappointing 3G results Hutch s profit shrank 42% CK owns 50% stake of Hutchison Whampao that is the major contributor or a swing factor to CK s profit. Hutch reported a 42.3% decline in net profit to HK$17.7bn in 08 because gain from the sales of assets or investment shrank to HK$6.6bn in 08 from HK$24.6bn in 07. Hutch disposed some telecom assets and gained HK$36.9bn in 07. Figure 3: Hutch 08 Results Highlights (HK$ m) Change Total Revenue 308, ,365 13% EBIT from established businesses (excluding 45,811 53,515 17% profits on disposal equity investments) LBIT of the 3 Group (17,938) (10,857) -39% Total EBIT (excluding property revaluation and 37,627 44,742 19% disposal of investments) Net profit 30,600 17,664-42% Source: Company LBIT of 3 Group improved Except 3 Italia, all 3 Group operations showed the improvement in 08. 3G customer base advanced 17% to 20.75m in 08. However, ARPU declined by 16% to Euro 33.5 in 08 because of the reductions in regulated mobile termination and roaming rates in certain markets. Although ARPU was declining, 3 Group s revenue gained 1% to HK$60.4bn and LBIT was narrowed by 39% to HK$10.9bn in 08. In February 09, 3 Group s operation in Australia would merge with Vodafone s businesses in Australia. It is estimated the cost saving will be HK$2.8bn every year. Lastly, Hutch is still looking for a full year breakeven in EBIT in 09. Figure 4: Business Indicators of 3 Group Customer Base at 25 March 09 (m) 12-m Trailing ARPU to 12/08 Prepaid Postpaid Total Prepaid Postpaid Blended UK & Ireland Italy Australia A$37.04 A$69.67 A$66.54 Sweden & Denmark SEK 122 SEK 397 SEK 379 Austria Group Total HK & Macau Israel Total Source: Company Satisfactory performance of retail business Retail business showed promising results even global economy had been sluggish since 3Q08. Except in the UK and France, all significant retail operations in Western and Eastern Europe, Asia and China improved in 08. Revenue from retail section gained by 8% to HK$118.5 bn and EBIT advanced by 18% to HK$4.4bn in 08. There are over 8,300 outlets in 34 markets worldwide. Hutch will focus on organic growth primarily in China, and has strict cost controls to maintain margins in a volatile economic environment

5 Robust properties sales Contracted sales of HK$28bn in 08 CK completed the contracted sales amount of HK$28bn in 08 and we estimate that 70% of properties development income was locked-in. In 09, income from properties development is mainly came from Celestial Heights Phases 1 and 2, MTR Tai Wai Station, LOHAS Park Phase IIA. Pre-sales of Celestial Heights Ph 1 CK commenced the pre-sales of Celestial Heights Phase 1 in mid-08. Results were encouraging. Majority of units in Celestial Heights Phase 1 were pre-sold with ASP of around HK$14,000 per sq ft. The company will launch Central Park Towers Phase 2 in the Easter Holiday. Other units in Tai Wai Station, LOHAS Park Phase IIA are pending to pre-sale for the rest of time in m sq ft agricultural land CK owns about 12m sq ft agricultural land in HK. Negotiation with government for land usage conversion is in progress but the response is unsatisfactory. We see that CK would prefer to expand land bank through the investment in MTR projects or in China. CK acquired land bank of total GFA 1.27m sq ft in HK and 6.9m sq ft in China in 08. Furthermore, the company likes to develop a big project because economies of scale would bring down the cost by 30%. In general, return of project CK invested would be 25%. However, return in China projects would be as high as 60% because of lower land cost. Figure 5: Projects completed in 09 Project Location Interest Total GFA (sqm) Celestial Heights Homantin, Kowloon 90% 159,804 LOHAS Park Phase IIA Tseung Kwan O JV 125,668 MTR Tai Wai Station Ph 1 Sha Tin JV 100, Heritage Tsim Sha Tsui 100% 13,023 Harobur Plaza 8 Degrees Kowloon 100% 21,420 Subtotal 420,287 Regency Park Phase 1 Jingyuetan, Changchun 50% 61,277 Regency Residence Phase 1A Nanguan, Changchun 50% 57,819 Nobile Hills Phases 1A and 1B Changsha 50% 101,474 Le Parc Phase 1 Chengdu 50% 192,106 Cape Coral Phases 1A and 1B Nanan, Chongqing 47.5% 223,690 The Riverside and Metropolitan Plaza Ph 1 and 3 Guangzhou 50% 241,809 Seasons Villas Phase 4A Pudong Huamu, Shanghai 50% 1,500 Regency Park Various Phases Pudong Huamu, Shanghai 50% 12,502 Maqiao Project Phases 1A and 1B Maqiao, Shanghai 42.5% 19,945 Regency Park Phases 1 and 2 Guanlian, Shenzhen 50% 97,275 Le Sommet Phase 1 Shenzhen 50% 63,282 The Greenwich Ph 1A & 1B Xian 50% 257,082 Kerry Everbright City Phase IIB Zhabei, Shanghai 24.75% 55,150 Subtotal 1,384,911 Total 1,805,198 Source: Company - 5 -

6 Financial Analysis Trim down earnings Revenue is projected to be HK$26bn in 09 We project revenue of CK to increase by 99.4% to HK$25.6bn in 09, of which properties sales contributes HK$22.8bn, rental income HK$1.1bn, hotel operation HK$1.5bn and other HK$200m. The rise in revenue in 09 is mainly contributed by the sales of Celestial Heights. Revenue from properties sales is expected to grow by 121.6% to HK$22.8bn in 09. Rental income and hotel operation income are projected to grow by 11.0% and 11.4%. Revenue is forecasted to be HK$14bn in 10 Revenue is forecasted to tumble by 43.9% to HK$14.4bn in 10, of which properties sales contributes HK$11.1bn, rental income HK$1.2bn, hotel operation HK$1.8bn and other HK$240m. The drop in revenue in 10 is mainly lacked of luxury properties sales in the period. Revenue from properties sales is expected to sink 51.2% in 10. However, new investment properties and hotel boost rental income and revenue from hotel operation to grow by 14.5% and 16.9% in 10, respectively. Figure 6: Revenue 30,000 25,000 20,000 (HK$m) 15,000 10,000 5, A 07A 08A 09E 10E Property Sales Rental Income Hotel Other Source: Company, FSSL Net profits are estimated to be HK$15.9bn in 09 and HK$16.1bn in 10 We have changed our assumption of profit contribution from Hutch and securities income next two years. We project Hutchison would earn HK$9,531m and HK$15,616m in 09 and 10 respectively based on market consensus. Furthermore, securities income is revised downward to HK$1bn each both in 09 and 10 from HK$1.5bn. Finally, our earning forecasts are trimmed down by 2.7% to HK$15.9bn in 09 and by 13.8% to HK$16.1bn in 10. Risk on our earning forecasts would be volatility of Hutch s income, global economic outlook and local properties market

7 Figure 7: Earnings Revision Fiscal Net Profit (HK$ m) (%) EPS (HK$) (%) Year Old New Change Old New Change 2009E 16,374 15, % % 2010E 18,714 16, % % Source: FSSL Healthy balance Sheet Net gearing of 14.6% At end-08, cash on hand was HK$7.2bn and bank borrowing amounted to HK$40.3bn. The maturity profile is spread over a period of ten years, with HK$9bn repayable within one year. Net gearing ratio was 14.6%, which was in the comfortable level. Financial status was healthy. In addition, CK had HK$5.5bn securities investment in balance sheet and majority were the low risk treasury. Figure 8: Gearing Ratio 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 06A 07A 08A 09F 10F Source: Company, FSSL - 7 -

8 Valuation NAV is HK$94.1 We estimate NAV per share of CK to be HK$94.1 per share based on 9.74% WACC, 4-8% cap rate and market value of listed associates. The counter is trading at 10.3x 09E PE, 10.1x 10E PE or 25.1% discount to our estimated NAV. Being a leading property developer in HK and with sound balance sheet, we believe valuation of CK is undemanding. HK$83.2 target price Our target price is HK$83.2, which is 10% discount to our FY09 GAV. Upside potential is 16.5%. Maintain BUY. Figure 9: FY 09 NAV estimation (HK$ m) NAV per share % of NAV Remark Properties for sales 104, % DCF with 9.74% WACC -HK 53, % -China 48, % -Singapore 2, % IP under development 3, % -HK % -China 3, % Completed IP 30, % -HK 23, % 4-8% cap rate -China 6, % 5-8% cap rate Hotel 12, % HK$ m average room value Agricultural land 2, % 12m sq ft@hk$200 per sq ft Hutchison (13) 90, % Market Value CK Life (775) 4, % Market Value Securities Investment 5, % Gross Amount 253, % Less: Net debt (35,644) (15.39) -16% End-FY09 NAV 218, % Source: FSSL - 8 -

9 Financial Summary Income statement Key statistics and ratios Year end Dec 31 (HK$ m) E 2010E Year end Dec E 2010E Turnover 10,951 13,277 12,856 25,629 14,389 Growth (%) -Property development 9,401 11,241 10,309 22,840 11,148 Turnover (3) 99 (44) -Rental income ,049 1,201 Operating profit (47) 57 (53) -Hotel 729 1,063 1,383 1,540 1,800 Net profit (44) 3 1 -Property Management EPS (44) 3 1 COSG (4,908) (6,521) (6,035) (15,779) (9,196) Gross profit 6,043 6,756 6,821 9,850 5,193 Margins (%) Other income 1,306 5, ,000 1,000 Gross profit SGA (1,088) (1,282) (1,442) (1,660) (1,850) Operating profit Operating profit 6,261 10,959 5,845 9,190 4,343 Net Profit Interest expenses (589) (984) (454) (523) (578) Associated 11,884 17,379 11,053 8,496 12,286 Others (%) Exceptional items 1,936 1, ,000 Effective tax rate Pre-tax profit 19,492 29,169 16,578 17,663 17,052 Payout ratio Tax (1,213) (1,197) (859) (1,100) (572) ROE Minority interest (204) (294) (201) (635) (354) ROA Net profit 18,075 27,678 15,518 15,928 16,126 Current ratio Dividend (5,096) (5,675) (5,675) (5,675) (5,675) Underlying earnings 16,259 25,937 15,400 15,488 15,246 Valuation PE (x) EPS (HK$) P/B (x) Underlying EPS (HK$) P/Cash flow (x) N.A DPS (HK$) Dividend yield (%) Balance sheet Cash flow statement Year end Dec 31 (HK$ m) E 2010E Year end Dec 31 (HK$ m) E 2009E 2010E Cash & deposits 3,782 5,609 7,173 7,856 7,885 Operating Profit 6,261 10,959 5,845 9,190 4,343 Trade debtors 6,634 4,066 3,904 4,000 4,500 Depreciation Inventories 45,857 58,418 61,211 63,000 65,000 Change in wc (22,858) (4,234) (3,642) (1,763) (1,700) Other current assets 1,385 1, ,700 1,700 Taxation (136) (1,222) (892) (947) (352) Intangible assets Others 813 (5,037) 1,945 8,581 13,922 Other LT assets 8,925 11,016 5,771 6,200 7,200 CF from Operation (15,748) 723 3,540 15,352 16,508 Associated 158, , , , ,000 Fixed assets 24,730 26,057 27,294 30,300 32,200 Capex (1,436) (509) (953) (2,715) (1,605) Total assets 249, , , , ,485 Associated investments (2,067) 3,368 (10,676) (7,601) (8,000) Others (109) 3,315 6,670 (1,787) (2,000) ST debt 6,872 8,872 8,991 9,000 10,000 CF from Investing (3,612) 6,174 (4,959) (12,103) (11,605) Trade creditors 2,998 6,889 5,878 6,000 6,800 Other current liabilities 1,721 1,297 1,640 1,300 1,400 Equity raised LT borrowings 27,609 23,655 31,258 34,500 34,000 Change of Debts 11,846 (2,677) 7,722 3, Deferred taxation 920 1,300 1,359 1,480 1,600 Dividend paid (1,335) (1,771) (5,675) (5,675) (5,675) Other LT liabilities 4,000 4,000 2,000 2,000 2,000 Others 4,321 (622) 936 (142) 300 Total liabilities 44,120 46,013 51,126 54,280 55,800 CF from Financing 14,832 (5,070) 2,983 (2,566) (4,875) S'holders' funds 200, , , , ,185 Change in Cash (4,528) 1,827 1, Minorities 5,259 3,406 4,342 4,200 4,500 FX Change Total 249, , , , ,485 Cash at the beginning 8,310 3,782 5,609 7,173 7,856 Cash at the end 3,782 5,609 7,173 7,856 7,885 Net gearing Adj: OD or others 0 0 (0) (0) 0 BVPS (HK$) Cash at BS 3,782 5,609 7,173 7,856 7,885 Source: Company information, FSSL - 9 -

10 First Shanghai Securities Limited 19/F Wing On House 71 Des Voeux Road Central Hong Kong Tel: (852) Fax (852) This publication is prepared by First Shanghai Securities Limited ( FSSL ) and is intended for private circulation only. Any unauthorized use or disclosure is prohibited. This report is solely for information purposes only and does not constitute an offer, solicitation, representation or warranty with respect to the purchase or sale of any security. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. Neither this report nor anything contained in it shall form the basis of or relied upon in connection with any contract or commitment whatsoever. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, FSSL makes no representation as to its accuracy or completeness. Opinions expressed herein are subject to change without notice and may differ or be contrary to opinions expressed by other subsidiaries or affiliates of FSSL as a result of using different assumptions and criteria. Neither FSSL nor any officer or employee of FSSL accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. FSSL and/or its affiliates may from time to time, perform investment, advisory or other services for companies mentioned herein. Copyright 2009 First Shanghai Securities Limited. All rights reserved