Did Sun Hung Kai go overboard in its recent acquisition spree?

Analysts fear for the firm's profitability.

According to a report by Jefferies, SHKP reported an underlying net profit of HK$19.8bn, down 7.4% yoy mainly due to 40% decline in HK property sales profit given completion delay. Overall rental profit climbed 7.6% on stable business operation. Net gearing fell 2.6 ppts to 11.2%.

Despite the exercise of the bonus warrants, total DPS maintained at HK$3.35. A low GFA completion (residential) of around 1m sf in HK during FY15 is the root cause of booking decline, and company targets to commit 3m sf annual completion for the next three years. 

Here's more from Jefferies:

Company showed clarity of its FY16 earnings since over half of HK residential completion has already been sold. In addition to ~HK$5bn contracted sales achieved in HK since July, future sales will come from King's Hill, Park Vista Phase 1, Grand YOHO Phase 1, etc. Due to completion shift, we revised our FY16 core earnings by +9.2% and introduced our FY17F forecast.

With c50% of its GAV attributed to HK/China retail and hotels, sustained industry weakness will affect its share value, especially if cap rates are under pressure for decompression. Solid office market foundation and relatively healthy occupancy cost of 10-12% for its HK retail portfolio suggests limited risk of a negative reversion in near term.

Future growth for rental may need to rely on new openings in both HK (e.g. YOHO Mall) and China (e.g. IGC and Parc Central in Guangzhou). 

Since July 2014, we estimate SHKP spent over HK$20bn, about 30% of total HK public land auction amount during the period.

We are concerned about its future margin given its suburban focus and some expensive acquisitions. It stressed that future purchases will need to consider profitability and company leverage. Its current HK land bank can sustain 7 years of development assuming 3m sf completion a year.