Keppel Corporation - UOB Kay Hian 2018-08-24: Lowering RNAV Estimates On China

Keppel Corporation (KEP SP) - UOB Kay Hian Research 2018-08-24: Lowering Rnav Estimates On China KEPPEL CORPORATION LIMITED SGX:BN4

Keppel Corporation - Lowering RNAV Estimates On China

  • China property sales remain resilient for 7M18, with volume/value both up 4%/14% y-o-y respectively. Demand for property is growing increasingly speculative, and appetite for land sales is waning. The data suggests 2H18 property sales should stay resilient, though we are cautious on the outlook for 2019 and beyond.
  • Keppel’s land sales from Sino-Singapore Tianjin Eco-City (SSTEC) are expected to moderate. A higher RNAV discount is applied for this uncertainty. 
  • Downgrade to HOLD. Lower target price to S$7.37. Entry price: S$6.60.


China property sales remain resilient.

  • According to China’s National Bureau of Statistics, national property sales volume saw a 4.2% y-o-y increase for 7M18 (6M18| +3.3% y-o-y), with sales value up 14.4% y-o-y (6M18| +13.2% y-o-y). Sales volume was up 9.9% y-o-y for July.
  • Sell-through rates for July-August remain decent at ~84% per week. This, however, represented a dip against the average sell-through rates seen in 1Q18/2Q18 of 85%/87% respectively.

~ ~ Where SG investors share

Property purchases becoming increasingly speculative.

  • Based on a survey by the Survey and Research Center for China Household Finance, the number of first-time home-buyers has fallen 31% in 1Q18 (2017: 46%). Purchases of new homes have also become increasingly speculative, with 50% of purchases for investment purposes (2017: 38%).

Demand for residential land plots in mainland China tapering.

  • Developers’ appetite for new land sale has fallen to the lowest level since 2014, following government curbs and de-leveraging efforts. According to a Chinese brokerage report, auctions of 258 plots of land failed to find buyers in 7M18, 59% higher than the same period in 2014. In all of 2014, 345 plots failed to sell. Additionally, the average premium above the starting bid for land auctions in first/second-tier city has fallen to 11%/17%, down from 21%/32% respectively.


Steady sales activity to buoy property earnings for 2H18.

  • We expect 2H18 sales volumes for Keppel Corp to remain firm. Sell-through rates for most of Keppel Corp’s projects remained at/above the national average in 1H18 and it appears that this should carry through into 2H18.
  • We do note lower sell-through rates in launches like Hill Crest (Chengdu) and Waterfront Residences (Wuxi). Nonetheless, the statistics should bode well for other key lauches in Chengdu and Wuxi, which are needed to drive earnings for 2H18.

Higher discount for China required given future demand uncertainty.

  • Looking beyond 2018, earnings visibility has become uncertain. The continued price increase despite cooling measures, fuelled by increasing speculative demand will likely spur further measures.
  • Other China property developers are also accelerating their sales in order to improve cash flow and ease their liquidity crunch. The increased supply pipline and declining real housing demand could see current demand evaporate.
  • Launch schedules for Keppel Corp’s China developments in 2019/20 have not been revised for now, but could easily change. While Keppel Corp has the luxury of time to sell its inventory, it does translate into longer gestation periods. As such, it would seem proper to raise the RNAV discount for China at least, putting it in line with other Chinese developers.

Land sales from SSTEC likely to be more tepid.

  • De-leveraging efforts and government curbs are already impacting land sales. An earlier tender in March saw no bids, and the tender in July saw ~79,000 sqm of land sold at a lower unit price of Rmb10,500 psm. This compares against the 361,000 sqm of land sold at Rmb13,800 psm the same time last year.
  • Another plot adjacent to the July tender was put up for sale on 3 Aug 18 at a higher implied price. Its sale will provide an indication as to whether:
    1. higher prices are still applicable, and
    2. if a larger discount for SSTEC is warranted.
  • Land sales have historically taken 30-40 days from the date of tender to materialise.


Revising SSTEC land sales assumptions.

  • We have nudged our assumption of land sales ASP to Rmb10,000 psm to reflect the latest transaction and tender price (previously: Rmb8,400 psm).

Lowering 2018-20 earnings estimates for property by 7-21%.

  • The lower earnings estimates stem from a revision of the sell-through rate and ASP growth assumption. The bulk of cuts stem from China, where we have reduced our earnings assumption by 3- 22%. As of 1H18, Keppel Corp’s core property earnings made up ~30% of our revised estimates.
  • Strong sales from launches in Wuxi (Waterfront Residences, Park Avenue Heights) and Chengdu (V-City) in 2H18 are key to reaching these estimates.

Adjusting group net profit by -10% to 4%.

  • Overall, our 2018-20 core net profit estimates have been revised to S$526m (+4%), S$792m (-2%) and S$985m (-10%) respectively. These figures exclude the impact from en-bloc land sales as well as other one-off gains/losses.


Lowering RNAV estimates for property and SSTEC.

  • Our RNAV discount has been adjusted upwards to a blended 35% % (previous: 20%) on:
    1. 40% discount for China, and
    2. 20% discount for Singapore, Vietnam and others.
  • The RNAV discount for SSTEC has also been similarly revised from 30% to 40%. Our discount for China is in line with the historical mean of 39% for property developers in China. At present, listed Chinese property developers are trading at an RNAV discount of 43-48%.

Downgrade to HOLD, target price lowered to S$7.37.

  • Our RNAV downgrade for property and SSTEC results in our target price falling to S$7.37. Valuation multiples for the O&M (1.0x 2019F PB), infrastructure (1.0x 2019F PB), and investment (19x 2019F PE) business remain unchanged.
  • Further earnings downside from property could exist, although share price downside could be protected with a higher-than-expected final dividend.
  • Given the limited upside, downgrade to HOLD.

Foo Zhi Wei UOB Kay Hian Research | 2018-08-24
SGX Stock Analyst Report HOLD Downgrade BUY 7.37 Down 9.000