Company background: Shun Tak Group is listed on the main board of Shun Tak Group (0242.HK; unrated) in 1973. It is an integrated enterprise whose businesses include real estate, transportation, hotel and investment. Most of the company's revenue comes from Macau and Hong Kong. The Ho family owns a total of 58.2% of the company.
Summary of the company's transaction with the Abu Dhabi Investment Authority (ADIA). Last Wednesday, Shun Tak Group announced that it would sell a 50 per cent stake in Macau's Haoting Metropolis Phase 5 shopping mall (under development) to ADIA for a total consideration of HK $3.2 billion. The shopping center is located in Huan Tsai, Macau, with a total floor area of 655000 square feet. Shun Tak Group's net income is about HK $3 billion and will record a pre-tax profit of HK $1.3 billion (equivalent to 17.8 per cent of market capitalization).
It is expected to have more cooperation with ADIA. During our discussion with Shun Tak Group, we learned that one of the company's objectives for the sale of Macau's Haoting Metropolis Phase 5 Shopping Center is to form a strategic partnership with ADIA. The sale is not just an one-off transaction to earn short-term gains. As ADIA has investment experience in many areas and regions, Sindh believes that there will be more opportunities to cooperate with ADIA. However, the company did not provide details.
No decision has been made on whether to pay a special dividend. As ADIA's payment will be paid in installments and the final payment is expected to be completed in the fourth quarter of 2018, the company has not yet made a decision on whether to pay a special dividend. When the transaction is fully completed, the company will record a pre-tax sale profit of about HK $1.3 billion.
Real estate profits will recover strongly in 2018. Revenue from the company's real estate business fell 85 per cent year-on-year to HK $869 million in 2015, mainly due to low confirmed property sales. The company expects the confirmed sales this year to remain low because this year's sales mainly come from a relatively small luxury project, the Chung Hom Kok project, which has a saleable area of about 26000 square feet (a total of five houses). The company plans to sell two units this year; as far as we understand, the market price of nearby housing is about HK $50000 to HK $80000 per square foot. The company's real estate business revenue should recover in 2017, mainly driven by sales of 100 units in Phase 4 of Haoting City (the average selling price is about HK $11500 / sq ft, and the average area of the unit is more than 1000 sq ft). In 2018, the company's recognized revenue is expected to increase significantly, mainly due to the sales of Haoting Metropolis Phase 5 (under development), which has a gross floor area of 2.3 million square feet.
At present, the average price of nearby projects is about HK $8000 / sq ft. This means that the total revenue of the project is likely to reach about HK $18 billion (Shun Tak's attributable interest is 71 per cent), and we estimate that Shun Tak's share of pre-tax profit is about HK $6.5 billion (89 per cent of current market capitalization).
The company has more high-quality projects, but it takes time to realize value. Xinde owns the first phase of Beijing Tongzhou comprehensive development project (residential, office buildings and serviced apartments) (total floor area:
24% of the equity of 334000 square meters, and 19.35% of the second phase (with a total floor area of 300000 square meters). These projects are expected to be completed in 2018 and are expected to benefit as Tongzhou is upgraded to a "sub-urban center" in Beijing. According to media reports, the average price of residential buildings in Tongzhou reached 35000 yuan per square meter in May. Another key project is the Hengqin mixed-use development project (office, serviced apartment, hotel, commercial) (floor area: 131000 square meters), which is 70% owned by the company and located near Macau. The project is expected to be completed in 2019 and about 75 per cent of the area will be reserved for leasing purposes. In the medium term, the company intends to increase the contribution of rental income.
