China / Hong Kong Company Guide
Lai Sun Development Version 2 | Bloomberg: 488 HK Equity | Reuters: 0488.HK
Refer to important disclosures at the end of this report
DBS Group Research . Equity
24 March 2016
BUY
Steady climb
Last Traded Price: HK$0.118 (HSI : 20,615) Price Target : HK$0.148 (25% upside) Potential Cataly st: Growing rental income and new acquisitions Where we differ: n.a.
Steep NAV discount. We maintain our BUY rating on Lai Sun Development (LSD) given its enhanced recurring income base and growing residential landbank. Co mpleted in Feb-16, rights issue should further improve LSD’s financial position for future acquisitions. The stock is trading at steep discount of 79% to our appraised current NAV.
Analy st Allen CHAN +852 2971 1932
[email protected] ickers.com J eff YAU CFA, +852 2820 4912 jeff_y
[email protected] ickers.com
Expanding recurrent income base. Rental earnings are set to improve in years to come, aided by continued positive rental reversions and contributions from newly added investment properties. Contribution from newly completed 8 Observatory Road in Tsim Sha Tsui should kick in starting from FY16. Under-construction Ocean Hotel should provide a further boost to recurrent income in the medium-term upon completion in FY18. These should gradually improve LSD’s earnings quality.
What’s New •
Underlying earnings ahead of our estimate on higherthan-expected property sales
•
Growing rental income stream
•
BUY with HK$0.148 TP
Price Relative HK$
Relative Index
0.4
Property sales to spearhead medium-term earnings growth. Planned presales of Tseung Kwan O and Ma Tau Kok projects are scheduled in 2016-17. These two projects should give an earnings boost to LSD upon scheduled completion in FY18.
272
0.4 222
0.3 0.3
172
0.2 122 0.2 0.1 Mar-12
Mar-13
Mar-14
Lai Sun Development (LHS)
Forecasts and Valuation FY Jul (HK$ m) Turnov er EBITDA Pre-tax Profit Underly ing Profit Net Profit Underly ing Profit Gth (%) Net Profit Gth (%) EPS (HK cts) EPS Gth (%) PE (X) P/Cash F low (X) EV /EBITDA (X) DPS (HK cts) Div Yield (%) Net Gearing (%) ROE (%) Est. NAV (HK$) Disc. to NAV (%)
Mar-15
72 Mar-16
Valuation: Our TP for LSD is based on a target discount of 75% to our Dec-16 NAV estimate.
Relative HSI INDEX (RHS)
2014A 2,110 703 1,602 333 1,479
2015A 1,542 615 2,128 291 2,018
N/A
(12.8)
2.1
14.4
N/A 1.66 N/A 7.1 5.3 12.7 0.25 2.1 17 1.7
(12.8) 1.45 (12.9) 8.2 6.0 14.5 0.25 2.1 25 1.3
2.1 0.98 (32.0) 12.0 nm 14.1 0.25 2.1 24 1.3 0.54 (78)
14.4 1.13 14.4 10.5 nm 12.6 0.25 2.1 27 1.4 0.59 (80)
18
12
Earnings Rev (%):
2016F 1,798 630 387 297 297
2017F 1,787 705 436 339 339
Key Risks to Our View: Any weakness in residential demand led by interest rate hikes and local economic slowdown could impact LSD's development earnings. Any slowdown in global or local economic recovery may lower leasing demand for office and commercial/retail properties, and in turn impact LSD's rental earnings. At A Glance Issued Capital (m shrs) Mkt. Cap (HK$m/US$m) Major Shareholders Lai Sun Garment (%) F ree F loat (%) 3m Av g. Daily V al. (US$m) ICB Industry : F inancials / Real Estate (HK)
20,095 2,371 / 306 61.9 38.1 0.4
Source of all data: Company, DBSV , Thomson Reuters, HKEX
ASIAN INSIGHTS ed-TH/ sa- CW
VICKERS SECURITIES
Company Guide Lai Sun Development
CRITICAL DATA POINTS TO WATCH Earnings Drivers: Recurrent income set to grow in years. Three wholly owned investment properties, namely Cheung Sha Wan Plaza, Causeway Bay Plaza 2 and Lai Sun Commercial Centre, posted a 5% rental revenue growth in 1HFY16. Its 50%owned CCB Tower, a Grade A office at the heart of Central, is almost fully-let. Elsewhere the Occupation permit for 8 Observatory Road, equally owned by LSD and Henderson Land, was issued in Jun-15. About 78% of floor area has been committed with another 13% under negotiation. The first full-period contribution from 100 Leadenhall Street will expand LSD’s rental base further in FY16. Total attributable rental income is set to grow at with a 2-year CAGR of 8% to HK$894m during FY15-17. This should help improve its earnings quality. Slated for completion in FY18, the Ocean Hotel project, to be operated by Marriot group, will provide total GFA o f 366,000sf with 471 guestrooms. Located at the doorstep of Ocean Park and under-construction Ocean Park station, the hotel should serve as the medium-term driver for recurrent income base. Property sales to spearhead medium-term earnings growth. LSD has sold 5 apartments at 339 Tai Hang Road, out of total 9, since initial launch in Aug-14. Inventory sales of this luxury project should be the mainstay of development earnings in the near-term. Construction works for its 50%-owned Tseung Kwan O project as well as Ma Tau Kok project are underway. Slated for completed in 2017/2018, these massmarket projects are expected to be offered for presales in 2016-2017. These two developments should give an earnings boost upon scheduled completion in FY18.
KEY ASSUMPTION Residential price - HK (%)
-10% -10% -10%
-10%
-10%
2016F
2017F
-10% -10% -11% -11% -11%
Office rental - HK (%)
5%
5%
5%
2016F
2017F
4% 4% 3% 3% 2% 1% 1% 0%
Retail rental (High street shops) - HK (%)
-10% -10%
-11% -12% -13% -14% -15% -16%
-15%
-17% 2016F
2017F
Retail rental (Shopping centre) - HK
Won the tender for UR A’s Sai Wan Ho Street redevelopment project. In Sep-15, LSD defeated 15 other developers to secure URA’s Sai Wan Ho Street project in Shau Kei Wan. Scheduled for completion in 2020, the company plans to offer the project for presale in 2017-18. Including construction and interest costs, total development cost is estimated at HK$1bn, Total GFA is 64,153sf, o f which 57,695sf is earmarked for residential use with the balance for commercial purposes. Located within a c.10-minute walk fro m both Sai Wan Ho and Shau Kei Wan MTR stations, the project reportedly offers 144 units with saleable area ranging fro m 280 to 410sf. About 60% of them are studio units, while 20-30% are one-bedroom flats.
(%)
0%
0%
0%
2016F
2017F
-10% -20% -30% -40% -50% -60% -70% -80% -90% -100%
Source: Company, DBS V ickers
Redevelopment potential within London investment portfolio. In Dec-15, LSD bought 106 Leadenhall Street for GBP21.5m. Despite the low initial yield of 1.9%, this multi-tenanted office building could be redeveloped in conjunction with two adjacent wholly-owned properties, namely 100 Leadenhall Street and 107 Leadenhall Street. This value-unlocking initiative is seen to be a LSD’s potential long-term growth driver, in our view.
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VICKERS SECURITIES
Company Guide Lai Sun Development
Gearing
Balance Sheet: Manageable financial risk. Following the acquisition of UR A’s Sai Wan Ho Street project in Sep-15 and 106 Leadenhall Street in Dec-16, net gearing was at 25.8% as of Jan-16 (Jul-15: 25.3%) and should improve following the completion of rights issue in Feb-16.
30%
20%
24%
17%
15%
13%
10% 5% 0%
2013A
Share Price Drivers: The planned launch of the Tseung Kwan O and Ma Tau Kok projects, if greeted with positive response, should narrow its steep discount to NAV, providing upside on stock.
27%
25%
25%
2014A
2015A
2016F
2017F
Net gearing ratio
Net Capital Expenditure HK$m 3,500.0 3,000.0 2,500.0 2,000.0
Key Risks: Market risk. Any weakness in residential demand led by interest rate hikes and local economic slowdown could impact LSD's development earnings. Any slowdown in global or local economic recovery may lower leasing demand for office and commercial/retail properties, and in turn impact LSD's rental earnings.
1,500.0 1,000.0 500.0 0.0 2013A
2014A
2015A
2016F
2017F
Capital Expenditure (-)
ROE 14.0%
Interest rate risk. Any interest rate risk would lead to capitalization rate expansion and in turn adversely affect its valuation.
12.0% 10.0% 8.0% 6.0%
Company Background: Lai Sun Development is principally engaged in property development and investment in Hong Kong, hotel operations and management. It also has a 41.92% stake in eSun Holdings (571 HK) which is engaged in the media and entertainment business, directly and indirectly through Media Asia Group (8075 HK), and property business in China through Lai Fung Holdings (1125 HK).
4.0% 2.0% 0.0% 2013A
2014A
2015A
2016F
2017F
Discount to NAV % (65) (70)
+2SD: -75%
(75)
+1SD: -78%
(80)
Average: -80% -1SD: -83%
(85)
-2SD: -86%
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
(90)
Discount to NAV Band HK$ 0.22 0.20
-75%
0.18
-78%
0.16
-80%
0.14
-83%
0.12
-86%
Mar-16
Jan-16
Feb-16
Dec-15
Oct-15
Nov-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
0.10
Source: Company, DBS V ickers
ASIAN INSIGHTS
VICKERS SECURITIES Page 3
Company Guide Lai Sun Development
Key Assumptions (%) FY Jul Residential price - HK Office rental - HK Retail rental (High s treet s hops) - HK Retail rental (Shopping centre) - HK
2016F
2017F
(10) 5 (15) 0
(10) 5 (10) 0
Source: DBS Vickers
Segmental Breakdown (HK$ m) FY Jul Revenues (HK$ m) Property Dev & Sales Property Inves tment Hotel & Res t. operations Others Total
2013A
2014A
2015A
2016F
2017F
100 434 410 19 964
1,047 502 539 21 2,110
278 655 586 23 1,542
469 712 593 24 1,798
431 731 601 24 1,787
2013A 964 275 (30) 245 609 (149) 1,943 2,648 (46) (38) 2,564 (201)
2014A 2,110 703 (36) 667 217 (222) 940 1,602 (90) (33) 1,479 333
2015A 1,542 615 (50) 565 444 (171) 1,289 2,128 (79) (30) 2,018 291
2016F 1,798 630 (52) 578 29 (220) 0 387 (58) (32) 297 297
2017F 1,787 705 (55) 651 41 (255) 0 436 (64) (33) 339 339
10 12 29 25 2
119 (42) 33 32 6
(27) 36 40 37 4
17 (85) 35 32 15
(1) 14 39 36 15
Source: DBS Vickers
Income Statement (HK$ m) FY Jul Turnover EBITDA Depr / Amort EBIT Associates Inc Interes t (Exp)/Inc Exceptionals Pre-tax Profit Tax Minority Interes t Net Profit Underlying Profit Sales Gth (%) Net Profit Gth (%) EBITDA Margins (%) EBIT Margin (%) Tax Rate (%)
Source: DBS Vickers
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VICKERS SECURITIES
Company Guide Lai Sun Development
Balance Sheet (HK$ m) FY Jul Fixed Assets Other LT Assets Cash & ST Invts Other Current Assets Total Assets ST Debt Creditors Other Curre nt Liab LT Debt Other LT Liabilities Minority Interes ts Shareholder’s Equity Total Cap. & Liab. Share Capital (m) Net Cas h/(Debt) Working Capital Net Gearing (%)
2013A 11,271 11,202 3,132 902 26,506 417 336 78 5,357 789 402 19,128 26,506 20,063 (2,516) 3,203 13
2014A 13,247 12,068 1,671 977 27,963 417 300 133 4,973 916 450 20,775 27,963 20,063 (3,580) 1,799 17
2015A 17,639 11,879 1,254 835 31,607 1,013 409 171 5,974 937 441 22,663 31,607 20,079 (5,733) 496 25
2016F 18,554 13,048 2,167 483 34,252 1,331 409 171 6,655 937 473 24,276 34,252 30,142 (5,820) 738 24
2017F 19,596 13,821 2,303 241 35,961 646 409 171 8,340 937 506 24,951 35,961 30,142 (6,684) 1,318 27
Source: DBS Vickers
Cash Flow Statement (HK$ m) FY Jul
2013A
2014A
2015A
2016F
2017F
EBIT Tax Paid Depr/Amort Chg in Wkg.Cap Other Non-Cash Operating CF Net Capex Assoc, MI, Invsmt Inves ting CF Net Chg in Debt New Capital Dividend Other Financing CF Financing CF Chg in Cash
245 (25) 30 (86) (118) 46 (280) (1,199) (1,479) 3,016 0 0 (23) 2,993 1,560
667 (30) 36 22 (249) 446 (1,025) (462) (1,487) (422) 0 0 10 (412) (1,453)
565 (32) 50 137 (322) 397 (2,996) 456 (2,540) 1,659 0 (45) (70) 1,545 (598)
578 (58) 52 (638) (260) (326) (663) 40 (623) 1,000 912 (50) 0 1,862 913
651 (64) 55 (390) (295) (44) (785) 40 (745) 1,000 0 (75) 0 925 136
Source: DBS Vickers
ASIAN INSIGHTS
VICKERS SECURITIES Page 5
Company Guide Lai Sun Development
Target Price & Ratings History S.No. Dat e
HK$ 0.4 1
2
3 45
6
8
7
0.4 0.3 0.3 0.2 0.2 0.1
1: 2: 3: 4: 5: 6: 7: 8:
26-Mar-15 14-J ul-15 23-Sep-15 5-Oct-15 16-Oct-15 18-Nov -15 25-J an-16 16-Mar-16
Closing Pric e HK$0.17 HK$0.15 HK$0.13 HK$0.12 HK$0.15 HK$0.14 HK$0.094 HK$0.114
T arget Pric e HK$0.25 HK$0.26 HK$0.26 HK$0.22 HK$0.22 HK$0.22 HK$0.119 HK$0.148
Rat ing Buy Buy Buy Buy Buy Buy Buy Buy
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
0.0
Mar-15
0.1
Source: DBS V ickers
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VICKERS SECURITIES
Company Guide Lai Sun Development
DBSV recommendations are based an Absolute Total Return* Rating sy stem, defined as follows: STRONG BUY (>20% total return ov er the next 3 months, wit h identifiable share price cataly sts within this time frame) BUY (>15% total return ov er the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return ov er the next 12 months for small caps, -10% to +10% for large caps) F ULLY VALUED (negativ e total return i.e. > -10% ov er the next 12 months) SELL (negativ e total return of > -20% ov er the next 3 months, with identifiable cataly sts within this time frame)
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Company Guide Lai Sun Development
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