In contrast to the strong sales of about HK$6bn at the Long Beach and Harbourside last year, HLP has sold only a handful of its inventory at Aquamarine during 1H09, leading to a significant drop in gross profit from property sales. We forecast a gross profit of only HK$4m from property sales for 1H FY09, compared with the gross profit of over HK$3.3bn for the same period last year.
We forecast rental at Plaza 66 and The Grand Gateway to have continued to record strong double-digit growth for 1H09, increasing by 28% YoY to HK$862m, of which about 9% will have come from appreciation of the Renminbi. While such momentum is likely to slow down in 2H09, given that the malls are getting more mature and we think Renminbi appreciation will slow, we expect rental income from mainland China to pick up again when new projects start contributing towards FY10 earnings.
However, given the company’s low gearing and large cash surplus, we believe HLP can go on increasing its dividend in absolute terms.Valuation
With its shares trading at a PBR of 1.15x on our FY09 BVPS forecast, we believe HLP’s current valuation represents a significant premium to that of its peers, most of whom are trading in a PBR range of 0.3-0.6x, which suggests that the market has already factored in a premium on HLP for its strong financial position and the potential for China growth. We maintain our 3 (Hold) rating with a six-month target price of HK$18.4, based on a 15% discount to our FY09 NAV forecast of HK$21.6.Catalysts and action
While both the execution of HLP’s new projects in mainland China and the timing of inventory disposal hold the key to crystallising the value of the company’s assets, we do not think either will reach fruition in the near term.
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