AMTD maintains its far East Development (00035.HK) buy rating with a target price of HK $4.11.
Far East Development achieved strong results in the first half of 2017, creating a bright outlook for the whole year.
17 higher-than-expected net profit in the first half of fiscal year; increase in interim dividend; maintenance of buy rating
Far East Development performed strongly in the first half of the fiscal year, with net profit of HK $681 million (up 169 per cent year-on-year), 50 per cent more than we expected. Revenue reached HK $2.95 billion (up 59 per cent year-on-year), exceeding expectations by 12 per cent. The company also surprised the dividend by raising its interim dividend from 3 cents to 3. 5 cents for the first time since fiscal year 2013. The higher-than-expected profits are attributed to: 1) the Melbourne Upper West Side (Phase IV) project and the Shanghai "far East Junyueting" project are faster than expected; 2) Hong Kong Shangling is higher than expected; and 3) the improvement in cost efficiency. We maintain a "buy" rating on the development of the far East as we are bullish on revenue in fiscal year 2017, high net asset value discounts (67 per cent), a substantial increase in pre-sales of unscheduled properties and the recovery of the hotel industry in Hong Kong. We raised our net profit forecast for the fiscal year 17-18-19 by 16%, by 5%, by 16%.
Target price raised to HK $4.11 (25% increase); high net asset value discount
We have raised the target price from HK $4 to HK $4.11 to reflect the new development projects. Our target price is obtained by summation. The current price of the stock is a 67% discount to our projected net asset value. We believe that the high NAV discount reflects the relatively small market capitalization of the development of the far East. When its market value crosses the line of $1 billion the discount on net asset value will shrink significantly. We expect far East Development to be included in the Shenzhen-Hong Kong Stock Connect, which has the potential to stimulate its market performance.
Unscheduled advance sales worth HK $9.8 billion guarantee revenue growth over the next five to six years
Far East Development currently has HK $9.8 billion in residential development projects, which means strong growth in development business revenue. The project launched in the first half of fiscal year 17 has received a strong reaction from the market: 98% of the units in Shanghai Jinqiu Garden-Yushang II have been pre-sold (released in April 2016), while 60% of the properties in Melbourne West Side Place (blocks 1 and 2) have been pre-sold (released in June 2016).
Actively buy land with financial discipline
As of September 16, the net debt ratio of far East development was 32%, slightly lower than the 38% on March 16. Despite the issuance of new $300m of bonds, strong cash recovery from property sales, coupled with the repayment of some bank loans, reduced the company's net debt by 16 per cent in half a year compared with the same period a year earlier. We expect the net debt ratio to remain stable at 37-39% over the next 2 to 3 years. In the first half of fiscal year 17, far East Development continued to acquire quality sites, including Manchester in the United Kingdom, Sha Tin Ridge in Hong Kong and Perth in Australia. Memorandums of understanding were also signed for the development of two casinos on the Gold Coast and Sydney.
There are early signs that the hotel business is stabilizing.
The revenue of the hotel business declined slightly according to youth, mainly due to the adverse impact of foreign exchange. The occupancy rate of hotels in Hong Kong recorded an improvement of 1.5 percentage points, which is consistent with the hotel industry data of the Hong Kong Tourism Board, indicating that the occupancy rate and room rates tend to be stable in the third quarter of 16 years. In particular, the performance of 3-to 4-star hotels is better than that of 5-star hotels, while the far East develops and operates a 3-to 4-star hotel business.
