AMTD Research - 24 November 2016

【AMTD Research】 FEC (35.HK, Buy) - 1H17 strong beat; good visibility for FY17


FEC (35.HK) announced 1H17 results on 23 Nov 2016.

1H17 net profit a strong beat; interim DPS raised; maintain Buy

FEC reported a strong set of results for 1H17. 1H17 net profit was HK$681 million (+169% yoy), c50% higher than our forecast and consensus forecast. Revenue was HK$ 2.95bn (+59% yoy), beating our forecast by 12%. The dividend is also a surprise as the company raised interim dividend to 3.5 cents from 3 cents, first time since FY13. The earnings beat was attributable to 1) a faster-than-expected property development booking from UWS(Stage 4) in Melbourne and King’s Manor in Shanghai; 2) better-than-expected profit from Evissa Crest in HK; 3) an improvement in cost efficiency. We maintain Buy on the stock as we see high visibility for FY17 earnings, a deep NAV discount (67%), a strong growth in unbooked property presales, and a recovery in Hong Kong hotel segment. We revised up our net profit forecast for FY17/18/19 by 16%/5%/16%, respectively.

Price target upgrade to HK$4.11 (25% upside); deep NAV discount

We upgrade our PT to HK$4.11 from HK$4.00 to reflect newly added development projects. Our PT is derived by using sum-of-the-parts method. Current share price implies a 67% discount to our estimated Mar-17 Net Asset Value (NAV). We believe the deep discount to NAV reflects FEC’s relatively small market capitalization. Should its market cap cross the US$1bn hurdle, the NAV discount could significant narrow. We expect FEC to be eligible for the upcoming HK-SZ connect, a potential catalyst for the stock to outperform.

HK$9.8bn unbooked presales secure strong growth in next 5-6 years

FEC currently has HK$9.8bn residential development pipeline would imply strong growth in development revenue. The projects launched in 1H17 received very strong market response: 98% of The Royal Crest II in Shanghai were presold (launched in Apr-16); 60% of West Side Place (Tower 1&2) in Melbourne were presold (launched in Jun-16).

Active land acquisition with financial discipline

As of Sep-16, its net gearing ratio was 32%, a small drop from 38% at MAR-16. Net debt dropped by 16% hoh due to strong cash recycle from property sales and the company repaid some bank loans, despite the new USD 300m bond being issued. We expect net gearing to remain stable at 37-39% in the next 2-3 years. During 1H17, FEC continued to acquire quality lands including one in Manchester UK, one at Shatin Heights in HK, and one site in Perth, Australia and signed MOU to develop two casino sites in Gold Coast and Sydney.

Hotel segment showed some early sign of stabilization

Hotel segment revenue slightly declined yoy mostly due to adverse FX impact. Hong Kong hotels recorded a 1.5ppt improvement in occupancy rate. This echoes Hong Kong Tourism board’s hotel industry data which shows stabilization of occupancy rate and room rate in 3Q16, especially for the 3-4 star segment FEC operates in, outperforming the 5-star segment. Hotels in China also reported strong improvement in RevPar.

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