Keppel Corporation - UOB Kay Hian 2018-09-21: Makes First Foray Into The Nanjing Property Market

KEPPEL CORPORATION LIMITED (SGX:BN4) | SGinvestors.io KEPPEL CORPORATION LIMITED SGX:BN4

Keppel Corporation - Makes First Foray Into The Nanjing Property Market

  • Keppel acquires a 40% stake in an 8.8ha site in Nanjing, China, for S$283m. The acquisition provides a project that Keppel can quickly monetise.
  • While the deal has its positive attributes, we refrain from being overly positive, given the weak fundamentals in the Nanjing property market. The earliest earnings impact from the deal is expected in late-19 or 2020, and we raise our 2020 net profit forecast by 1%.
  • Our RNAV rises < 1% on the acquisition. Maintain HOLD and target price of S$7.37. Entry price: S$6.60.



WHAT’S NEW


Makes first foray into Nanjing.

  • Keppel Corporation (Keppel) has entered into a JV with Gemdale (Group) Co Ltd (600383 CH) to jointly develop an 8.8ha prime residential site in Nanjing. The site is located at the core of the Nanjing Jiangbei New Area, which is the only national-level new area in Jiangsu Province.


~ SGinvestors.io ~ Where SG investors share

Launching 787 units in 4Q18.

  • The proposed development will comprise 1,728 high-rise apartments and 50 street-front shops. Permissible gross floor area (GFA) is 193,139sqm (plot ratio of 2.2). Phase 1 comprises 787 units with launch targeted in 4Q18. The entire project is expected to be completed by 2Q22.
  • ~SGinvestors.io ~ Where SG investors share

Breakeven price of Rmb26,900psm.

  • Acquisition cost for the 40% stake is Rmb1,414m (S$283m), payable in tranches with final payment expected in 4Q18. Total development cost on a 100% basis is Rmb5.2b (S$1,040m), translating into a breakeven cost of Rmb26,900psm.  ~SGinvestors.io ~ Where SG investors share
  • We understand that surrounding projects are transacting at Rmb30,000psm, as compared to the market average of Rmb24,200psm as of Aug 18.


STOCK IMPACT


High speed-to-market for first foray in Nanjing.

  • The deal gives Keppel a project with high speed to the Nanjing property market, monetising it within months of acquisition. This is different from past acquisitions in China, which tend to have a longer gestation period. 
  • Due to the accounting treatment, earnings from the initial launch will likely manifest earliest in late-19 or 2020.

Acquisition price high relative to recent transactions.

  • While Keppel has been selective with the project location, we are cautious on being overly positive. The disposal by Gemdale reflects its need to de-risk, given the weakening property market sentiment and its net gearing of 69%. 
  • Keppel bought the land at an implied Rmb18,300psm, reflecting a premium for the site location and high speed-to-market. This price was markedly higher than recent land sales in Sep 18, such as Longfor Properties’ winning bid b13,993psm.

Property demand in Nanjing is weakening.

  • Recent newsflow points to the Nanjing property market slowing as government cooling measures take hold. Property demand is waning, and data from China Real Estate Information Corp (CRIC) showed that only 5,211 new homes were sold in Aug18, a decline of 40% m-o-m.  ~SGinvestors.io ~ Where SG investors share
  • Recent land purchases also saw lower bids from developers. Buyers are reportedly taking a wait and see approach following the cheaper land sales as they anticipate home prices to decline.

Market survey sales data shows slowing trend.

  • According to CRIC data, home sales for Keppel Land China is slowing in 3Q18. The tracking is imperfect (relative to actual Keppel figures), but shows a strong correlation trend-wise. Property was supposed to represent the main earnings driver for Keppel for 2018.
  • The slowing sales data, coupled with the late earnings recognition from this acquisition, does little to lift the weak earnings outlook for 2018.


EARNINGS REVISION/RISK


Tweak 2020 earnings estimate to reflect latest acquisition.

  • We have assumed that earnings from this project will kick in only from 2020. Our 2018-19 core earnings forecasts remain unchanged at S$526m and S$792m respectively. Earnings estimate for 2020 has been revised upwards to S$999m (+1.4%).


VALUATION/RECOMMENDATION


Maintain HOLD and target price of S$7.37.

  • The new Nanjing project nudges our property RNAV by < 1%, so our target price remains largely unchanged.
  • Keppel continues to face weak earnings for its offshore and marine business, and the weakening earnings outlook for its property business gives us pause. Land sales from Tianjin Eco City have also been lacklustre. Despite this, a higher-than-expected final dividend payout as part of its 50th anniversary could provide short-term uplift for share price. Given these maintain HOLD.
  • Entry price is S$6.60.





Foo Zhi Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-09-21
SGX Stock Analyst Report HOLD Maintain HOLD 7.370 Same 7.370



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