High Speed Rail West Kowloon And Sai Sha Projects Will Strengthen Market Presence

Key Takeaways

• Expanding the rental portfolio and loyalty programs is expected to boost recurring rental income and customer engagement, driving revenue growth.
  
• Prudent financial management and strategic land acquisitions suggest strengthened interest coverage, net margins, and increased earnings potential.
  
• Decreased property development profit and high gearing pose risks to financial health, impacting margins, liquidity, and future revenue confidence.

Catalysts

Develops and invests in properties for sale and rent in Hong Kong, Mainland China, and internationally.

• The group's strategy to enhance and expand its rental portfolio, including new major projects such as the High Speed Rail West Kowloon terminus development, is expected to increase recurring rental income in the next 1 to 2 years, positively impacting revenue.
  
• Expansion and diversification of the group's loyalty programs, such as integrating the hotel loyalty program with shopping malls, is poised to increase customer engagement and sales, thereby boosting revenue.
  
• With significant contracted sales not yet recognized in Hong Kong amounting to around $25 billion, a portion expected to be recognized in the next financial year suggests anticipated revenue growth.
  
• Prudent financial management focusing on reducing net gearing ratio with over $28 billion expected to be received by June next year could improve interest coverage and net margins as financial health strengthens.
  
• Strategic land acquisitions and developments, such as Sai Sha, tied to lifestyle amenities, suggest potential for high-margin sales that could lead to an increase in earnings as market conditions improve.

Sun Hung Kai Properties Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sun Hung Kai Properties's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.6% today to 31.3% in 3 years time.
• Analysts expect earnings to reach HK$27.1 billion (and earnings per share of HK$9.39) by about February 2028, up from HK$19.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting HK$39.2 billion in earnings, and the most bearish expecting HK$22.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from 10.7x today. This future PE is greater than the current PE for the HK Real Estate industry at 7.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.46%, as per the Simply Wall St company report.

Sun Hung Kai Properties Future Earnings Per Share Growth

Risks

• The group's underlying profit decreased by 9% primarily due to lower property development profit in Hong Kong and the Mainland, impacting net margins and earnings.
  
• The reported profit was down 20% year-on-year after a revaluation loss on investment properties, showing potential risks to revenue and profit stability.
  
• Interest coverage fell from 6.8x to 4.6x due to higher interest expenses, indicating potential strain on financial health and affecting net margins.
  
• The decrease in property development profit by 31% due to lower margins and sales volume could impact future revenue and profitability confidence.
  
• High gearing and significant net debt of $111 billion may pose risks to financial flexibility, potentially affecting liquidity and future earnings.

Valuation

• The analysts have a consensus price target of HK$92.587 for Sun Hung Kai Properties based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$116.0, and the most bearish reporting a price target of just HK$63.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$86.5 billion, earnings will come to HK$27.1 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of HK$70.1, the analyst price target of HK$92.59 is 24.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.