SHKP Earnings: Transferring Coverage; Strong Sales Despite Weak Hong Kong Residential Market

We transfer and resume coverage of Sun Hung Kai Properties 00016, or SHKP, with a no-moat rating and fair value estimate of HKD 128 per share. This implies a price/book ratio of 0.6 times, in line with its average 10-year trading range. Although we expect the Hong Kong residential market to remain soft in the near term given the high interest-rate environment, we think the negatives have been priced in, with a 19% year-to-date decline in the company’s share price. We expect SHKP’s property leasing business, hotel operations, and data center operations to drive the bulk of its earnings growth for fiscal 2024 (ending June) and fiscal 2025. We also anticipate residential property demand in Hong Kong to rebound from the second half of 2024 following a pivot in the interest rate. This would positively drive SHKP’s fiscal 2026 earnings when the presold properties are completed and we expect three-year net profit CAGR of 18.3%.

SHKP’s fiscal 2023 net profit fell 6.5% year on year due to lower contribution from its property sales and property rental segment. This was offset by its other businesses such as its transport infrastructure, logistics, and hotel operations that recovered well from the end of the pandemic-related restrictions. Notably, SHKP’s hotel segment broke even amid the full reopening of the border and the return of tourists. The final dividend was unchanged against the same period last year at HKD 3.70 per share with the full-year dividend also steady at HKD 4.95 per share. This represents a payout ratio of 60% of its underlying profit (profit after excluding fair value changes of its investment properties). However, going forward, management expects to revert to its dividend policy of paying out between 40% and 50% of its underlying profit. Based on our forecast, we think this might result in a 9.5% dividend cut from fiscal 2023, as we do not expect fiscal 2024 earnings to grow sufficiently for the company to maintain the current level of dividends.