DBS Weiguoda published a report saying that far East Development (00035-HK) was rated as a "buy" because of its attractive valuation and bright revenue prospects, with a target price of HK $3.70.
The net profit of far East Development jumped 159 per cent to HK $681 million in the first half of fiscal year 17, mainly due to growing development income. Excluding other gains and losses such as investment property revaluation surplus, the company's core earnings are in line with the bank's expectations. The increase in interim dividend per share by 17% to HK $0.035 also brought a pleasant surprise.
Driven by stronger development income, gross profit in the first half of fiscal year 17 rose 76% to HK $1.1 billion. The gross profit of HK $766 million recorded by far East Development in real estate development projects mainly comes from the Melbourne Upper West Side Phase IV project and the Shanghai far East Junyueting project.
Gross profit from the hotel business fell 3 per cent to HK $233 million. In the first half of the 17th fiscal year, the revenue per saleable house in Hong Kong fell by 5% due to the decline in house prices, indicating that the hotel market has shown signs of recovery in recent months. Despite the devaluation of the RMB, the average revenue per room of domestic hotels still increased by 8.1%, mainly due to a sharp increase in the business of Di Sheng Hotel in Shanghai, while Di Sheng Regal Hotel in Chengdu and Di Sheng Hotel in Wuhan increased their business operations.
In the first half of fiscal year 17, Shanghai Yushang II and Melbourne West Side Place (blocks 1 and 2) projects received enthusiastic response, with pre-sales reaching HK $806 million and HK $3.4 billion respectively. Together with these two projects, the total cumulative advance sales of far East Development reached HK $9.8 billion in September 2016. Indicates that the development of the company continues to lock in revenue, indicating a high visibility of future earnings.
In October 2016, the Queensland Government granted a new casino licence to the Queen's Wharf Brisbane project for a lease term of 1999, including a 25-year exclusive operation of the casino in the Brisbane central business district. The casino can operate up to 2500 electronic gaming machines and an unlimited number of gaming tables.
In November 2016, far East Development announced that it had been selected as the winning bidder for the Xiangxue City Hall reconstruction project in London, England. The site will be converted into a mixed development featuring residential parts, hotels and city halls with public spaces.
The net debt of far East Development fell from HK $7.92 billion in March 2016 to HK $6.68 billion in September 2016, mainly due to the receipt of sales payments from Upper West Side (Phase IV) and far East Junyueting, while reducing the net asset-liability ratio to 32 per cent from 38 per cent in March 2016. Far East Development also issued a US $300 million US $3.75 per cent five-year note in September 2016, which helped to extend the company's debt maturity. Therefore, the bank believes that the financial risk of the development of the far East is manageable.
In the past six months, the share price of far East Development has risen 41%, outperforming the market by 27%. Although the share price has rebounded, it still offers a 69 per cent discount to the bank's current net asset value and a dividend yield of 5.2 per cent. Its valuation remains unreasonably low. Far East Development has been looking for new long-term investment projects that can drive the growth of its net asset value.