“Sun Hung Kai Properties 2025 Update: Strong Earnings Growth Amid Margin Pressure”

Sun Hung Kai Properties: Company Update and Analysis

Overview

Sun Hung Kai Properties Limited (Ticker: 0016.HK) is one of Hong Kong’s largest and most influential property companies. The company has built a strong reputation in the local real estate market with a robust portfolio spanning premium residential projects, an extensive network of shopping malls, offices, and a diversified array of non-property businesses including telecommunications, transport infrastructure, and logistics. The company’s dual focus on property development and recurring income-generating investments has helped to set it apart from its peers.

Investment Thesis

The report underscores SHKP’s capacity to generate robust, recurring income despite ongoing macroeconomic headwinds. A key aspect of the company’s strength lies in its sizeable property investment portfolio and the integration of non-property businesses, which offer stability against market fluctuations. The management’s disciplined approach to deleveraging is evident from the reduction of its net gearing ratio to 17.8% (as at 31 December 2024). Moreover, the group’s selective replenishment of its landbank, combined with a focus on enhancing its recurring income base, is expected to support sustainable growth in the medium term.

Financial Performance

The financial results for the first half of the financial year ending 30 June 2025 (1HFY25) are particularly noteworthy:

Core profit after tax and minority interests (PATMI) jumped 17.5% year-on-year (YoY) to HKD10.5 billion.
Revenue surged by 45.0% YoY to HKD39.9 billion, largely driven by a significant boost in the property development segment.
Despite the revenue surge, operating profit margins in the property development segment were pressured; margins declined from 34.0% in 1HFY24 to 14.7% due to a depressing home price trend in Hong Kong and China, as well as oversupply concerns.
The reported PATMI fell 17.7% YoY to HKD7.5 billion, largely attributable to net fair value losses of HKD2.9 billion from investment properties, though excluding these items, core PATMI remained strong at HKD10.5 billion.
The company continues to maintain an interim dividend per share (DPS) of HKD0.95, which remains unchanged YoY.

In the broader financial summary, the company’s revenue and PATMI are projected to increase over the coming years with FY24 revenue at HKD71.5 billion and PATMI steadily rising from HKD19.0 billion in FY24 to HKD23.6 billion in FY26E. Core EPS is estimated to move from HKD7.5 in FY24 to HKD8.1 in FY26E, while dividend per share moves from HKD3.75 to HKD4.05.

Business Segments and Landbank

SHKP’s diversified business model is underscored by its operations across five main segments: property development, property investment, property-related businesses, telecommunications & information technology, and infrastructure & other businesses. As of 30 June 2024, the company held an impressive landbank of 57.8 million square feet in Hong Kong and 66.7 million square feet in Mainland China.

Approximately two-thirds of the landbank in Hong Kong comprises completed properties held for rental income and long-term investment purposes. Additionally, the company is poised to launch six new residential projects covering a total attributable gross floor area of 2.3 million square feet in the coming 10 months. In Mainland China, the landbank is predominantly made up of premium integrated projects strategically located in first-tier and leading second-tier cities.

ESG and Corporate Governance

SHKP’s ESG efforts have been well recognized in the industry with maintained ESG ratings since May 2021. The company is ahead of its industry peers in pursuit of green building targets and is working towards achieving LEED certification for all new investment properties. Operationally, it demonstrates a commitment to quality by conducting regular inspections of suppliers, contractors’ work, and marketing materials. However, the report highlights areas for improvement in corporate governance. Concerns have been raised regarding the board composition, which lacks an independent majority and includes a director concurrently serving as an executive chair at an external company. Additionally, the board’s large size, with 20 directors, could potentially impede effective oversight of management.

Valuation, Risks and Catalysts

The equity research maintains a BUY rating for SHKP, with an expected total return (excluding dividends) in excess of 10% from the current price. The last closing price stands at HKD74.95, and the fair value estimate is HKD93.10.

Key valuation metrics for SHKP include:

P/E Ratio: 10.0 in FY24, 9.6 in FY25E, and 9.2 in FY26E.
P/B Ratio: 0.4 in FY24 and FY25E, declining to 0.3 in FY26E.
Return on Equity (ROE): 3.2% in FY24, expected to rise to 3.7% in FY25E and 3.8% in FY26E.
Dividend Yield: Estimated at 5.0% for FY24, increasing gradually to 5.2% and 5.4% in the subsequent years.
Net Gearing Ratio: Recorded at 18.3% in FY24 with forecast figures of 19.5% in both FY25E and FY26E.

Potential catalysts for share price appreciation include the implementation of property easing measures to boost consumer confidence, faster-than-expected growth in residential property prices along with higher commercial property rentals, share buybacks, and an increase in dividend payouts. On the risk front, a rebound in interest rates, weaker-than-expected economic growth, and a rapidly changing regulatory landscape could adversely impact the outlook.

Income Statement and Financial Ratios

The report provides a detailed historical income statement analysis spanning FY2020 to FY2024. Key observations include:

Total revenue remained resilient, with minor fluctuations over the years.
Operating income and net income figures have experienced pressures partly due to increased interest expenses and fair value losses from investment properties.
Profitability ratios, including operating margins (ranging from 37.41% to 43.68%), and pretax and net income margins reflect the cyclical nature of the real estate industry.
Credit ratios such as Total Debt/EBIT and Net Debt/EBIT indicate a controlled debt profile, despite a gradual increase over the period.

Recommendation

Based on the strong underlying earnings growth, sound financial positioning, and strategic focus on high-quality landbank replenishment and recurring income, the report reiterates a BUY rating for Sun Hung Kai Properties. The current valuation, coupled with the disciplined approach to credit and asset quality, supports the positive recommendation.

Peer Group Analysis: A Deep Dive into Listed Competitors

Henderson Land Development Co Ltd (Ticker: 0012.HK)

Henderson Land Development is another key player in the Hong Kong property market. For the forecast periods, the company exhibits:

Price/Earnings Ratio: 9.6 in FY25E rising to 11.1 in FY26E.
Price/Book Ratio: Steady at 0.3 for both periods.
EV/EBITDA: Observed at 25.5 in FY25E and slightly higher at 27.9 in FY26E.
Dividend Yield: A robust yield of 8.3% maintained across both forecast periods.
Return on Equity (ROE): Moderately trading at 3.2% in FY25E, with a slight decline to 2.9% in FY26E.

The valuation metrics for Henderson Land Development suggest that while earnings growth prospects are adequate, the earnings multiples are trending upward as the market adjusts for future performance. Investors looking for higher dividend yields coupled with stable book values may find this stock appealing.

Sino Land Co Ltd (Ticker: 0083.HK)

Sino Land is recognized for its balance between property development and investment income. Key highlights from the analysis include:

Price/Earnings Ratio: Recorded at 12.9 for FY25E and remaining almost flat at 12.8 for FY26E.
Price/Book Ratio: Consistently at 0.4 across the forecast periods.
EV/EBITDA: Competitively positioned at 8.5 in FY25E, with a slight reduction to 7.9 in FY26E.
Dividend Yield: Approximately 7.3% to 7.4% over the period, suggesting a stable income return for investors.
ROE: Modestly climbing from 3.1% in FY25E to 3.3% in FY26E.

Sino Land’s stable valuation metrics coupled with its solid dividend profile make it attractive for investors seeking balance between growth and income.

CK Asset Holdings Ltd (Ticker: 1113.HK)

CK Asset Holdings provides a blend of attractive valuation and consistent performance. The company’s forecast metrics indicate:

Price/Earnings Ratio: At 8.6 in FY25E, with a slight contraction to 8.0 in FY26E.
Price/Book Ratio: Stable at 0.3 in both forecast periods, reflecting consistent asset valuation.
EV/EBITDA: Positioned at 7.5 in FY25E and 7.0 in FY26E, indicative of efficient earnings generation.
Dividend Yield: Approximately 5.5% in FY25E and marginally higher at 5.6% in FY26E.
ROE: Improving slightly from 3.5% in FY25E to 3.8% in FY26E.

CK Asset Holdings’ robust credit metrics combined with its attractive earnings multiples make it a competitive alternative within the peer set.

New World Development Co Ltd (Ticker: 0017.HK)

New World Development represents a distinct case among its peers with some unique valuation dynamics:

Price/Earnings Ratio: Exhibiting an unusual multiple at 143.7 in FY25E before normalizing to 18.0 in FY26E.
Price/Book Ratio: Very low at 0.1 for both forecast periods.
EV/EBITDA: Recorded at 18.1 in FY25E, declining to 16.7 in FY26E.
Dividend Yield: Starts modestly at 1.1% in FY25E, increasing to 3.3% in FY26E.
ROE: Exceptionally low at 0.1% in FY25E with a slight uptick to 0.6% in FY26E.

The dramatic shift in valuation multiples for New World Development hints at potential market re-rating, but investors should remain cautious due to the low ROE and initial high P/E multiple. Share buybacks, improved operational performance and regulatory changes could be key catalysts for this stock.

Company Financials and Income Statement Overview

The report provides an extensive historical financial review covering FY2020 through FY2024. Highlights include:

Revenue Trends: The revenue figures have seen slight fluctuations, with figures reported at HKD82,653 million in FY2020 and a modest recovery to HKD71,506 million in FY2024.
Cost of Revenue and Gross Profit: Although cost pressures remain, gross profit levels reflect the company’s ability to manage expenses amid fluctuating revenue.
Operating and Net Income: Operating income has shown a gradual decline in recent years, with noticeable pressure from higher interest expenses and fair value losses. Net income margins (ranging from 28.46% in FY2020 to 26.64% in FY2024) indicate the inherent challenges faced by large property businesses in a cyclical market.
Profitability and Credit Ratios: The report details Return on Equity (ROE), Return on Assets (ROA) and other profitability ratios, which are indicative of a stable yet competitive industry environment. Credit ratios such as Total Debt/EBIT, Net Debt/EBIT, and the interest cover ratios remain crucial metrics for assessing the company’s financial health.

Conclusion

This comprehensive equity research report, published by OCBC Investment Research Private Limited on 28 February 2025, presents an engaging and detailed analysis of Sun Hung Kai Properties. The company’s strong recurring income base, strategic landbank management, and prudent deleveraging efforts underpin its BUY recommendation. Furthermore, the comparative analysis of peer companies – Henderson Land Development, Sino Land, CK Asset Holdings, and New World Development – offers investors an insightful perspective on valuation multiples, dividend yields, and growth metrics within the competitive Hong Kong property market.

Investors are encouraged to consider the potential catalysts, including property easing measures and improved operational performance, alongside the inherent risks such as interest rate hikes and regulatory changes, before making investment decisions.