Summary of results for fiscal year 17: net profit rose 52 per cent year-on-year to HK $1.12 billion. Excluding one-time items, recurrent net profit rose 36 per cent year-on-year to HK $749 million. The gross profit margin of the real estate development business fell slightly from 50.9% to 43.4%, mainly due to the increase in the income contribution of Australian projects (the gross profit margin of Australian projects is lower than elsewhere). Sales and marketing expenses and financing costs fell 56 per cent and 24 per cent respectively from a year earlier, driving core net profit growth.
It is expected that the real estate development business in fiscal year 18 will recognize more revenue and sufficient available resources. For properties completed and accounted for in FY18, the company has recorded a presale amount of HK $3.343 billion, which is higher than the revenue of the division in FY17 (HK $2.937 billion). In addition to HK $3.343 billion in presale revenue, far East also has the opportunity to record HK $43.86 billion in sales (more than 14 times its annual real estate development revenue in fiscal 17), and the company has rich land reserves. Other businesses are expected to maintain stable or moderate growth.
Constantly changing, in order to release the value of its hotel. Far East began selling non-core hotels in 2011 (especially those with about 100 rooms), and the company has completed four of these deals. In addition to the Silk Hotel in West Kowloon, which was sold in May this year (the deal has been completed), three other hotels, the Liyatt Hotel, the Emperor Regal Hotel, the Scarlett Hotel and serviced apartments also have the opportunity to become targets for sale.
To develop multinational business, the future revenue will be concentrated in Australia. In Australia, the company is launching / is about to launch / is planning a number of large-scale projects, which will be the main source of revenue in the coming years. Management predicts that next year, 1Comp3 will come from Australia, 3 from Chinese mainland and 3 from other regions.
Sustainable growth in dividends. The dividend recommended by the company for fiscal year 17 represents a dividend yield of 36%. Management aims to maintain or gradually increase the absolute amount of dividends each year, and the dividend ratio will be 30-40%. Far East Development has been committed to providing reliable returns to shareholders in recent years.
Continue to take a positive view on the development of the far East. As the company has diversified operations around the world, the company has an advantage in risk management and helps the company replenish its land reserve at a better time. This eventually enables the company to acquire the project at a reasonable land price. We take a positive view of the company's performance in FY18 and expect the company to enter the harvest period in FY18 and recognize more revenue. According to the market consensus forecast, the company's net asset value per share is about HK $10.50, representing a 60% discount to the net asset value per share.
Company background: far East Development is an integrated enterprise engaged in property development, hotel and parking business in mainland China, Hong Kong, Malaysia, Singapore, Australia, New Zealand and the United Kingdom. Figure 1 shows the ownership structure of the company. In 2008, its traditional family management brought in professional managers to expand its business. In addition to the defensive businesses of Hong Kong and Chinese mainland (hotels, parking and leasing), they have also expanded into more dynamic property markets around the world (Singapore, Malaysia, Australia, New Zealand and the UK). Due to the project cycle of the business, the harvest season has just begun.
Risk factors: (1) exchange rate risk; (2) fluctuations in real estate prices in different regions; and (3) uncertainty in hotel occupancy rate, hotel room rates and parking fees.
