AMTD Research - 14 June 2017

【AMTD Research】 FEC (35.HK) FY17 Earnings Review


Many years of steady growth to come

FY17 net profit at HK$1.1bn (+52% yoy); DPS raised to 18.5 HK cents

Total revenue growing by 25% yoy to HK$ 5.0bn. We estimate that presales in FY17 reached HK$6.8bn vs HK$3.6bn in FY16 and HK$2.6bn in FY15. Property development revenue booking is on track with development revenue at HK$2.9bn, +49% yoy. Unbooked property sales reached HK$10.7bn, up from HK$7.5bn at Mar-16. FEC has a strong and well diversified presales pipeline in Hong Kong, Australia, UK, Singapore and China with gross sales value of around HK$33bn for the next five years. Hong Kong’s hotel segment is bottoming out with RevPar in 2HFY17 growing by 3.1%. Overall gross margin slightly dropped to 40% in FY17 but we expect gross margin to recover in FY18/19 as higher margin projects in China contribute more. We estimate a revenue CAGR of 26% and earnings CAGR of 22% in next 3 years. The stock is trading at 60% discount to NAV. We maintain Buy.

High visibility for FY18; unbooked property sales reached HK$10.7bn

FY17 property presales were contributed by West Side Place in Melbourne, The Royal Crest II in Shanghai and Royal Riverside in Guangzhou; completion include three projects namely UWS Stage 4 in Melbourne, King’s Manor in Shanghai and Eivissa Crest in Hong Kong (booked in other gains). FEC has achieved HK$3.3bn presales for projects scheduled for completion in FY18 (FY17 development revenue HK$2.9bn), which represents 86% of our development revenue forecast for FY18. Other presold projects will be completed through 2019-2021.

Hotel performance on recovery track

FEC saw solid recovery in hotel segment in FY17 (Figure 5). Overall HK$ RevPAR was +0.2% yoy. The recovery was particularly strong in 2HFY17. In Hong Kong, the occupancy rate rose by 4.1pp while average room rate declined 4.9% yoy due to new hotel opening. We expect RevPAR to further recover in FY18 as the company improves average room rate while keeping high occupancy rate. FEC disposed Silka West Kowloon in May 2017 for a consideration of HK$450m and a gain of HK$316m. FEC will continue seek opportunities to dispose of its non-core hotel portfolio such as the Ritz-Carltons in Perth and Melbourne.

Active land acquisition with financial discipline

As of Mar-17, net gearing ratio dropped to 31% from 38% at Mar-16 with strong cash collection from property sales. In FY17, FEC further replenished its land bank in major cities, including Northern Gateway in Manchester (a very large scale projects involving 10,000 new homes, to be developed in phases over next 10 years), Angel Meadow in Manchester (750 apartments) and Perth City Link in Perth (270 hotel rooms and 350 apartments).

Price target upgrade to HK$4.89 (16% upside); deep NAV discount

We upgrade our PT to HK$4.89 from HK$4.11 as we roll over to Mar-18 and to reflect newly added land bank. Our PT is derived by using sum-of-the-parts method, Current share price implies a 62% discount to our estimated Mar-18 Net Asset Value (NAV).

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