Kerry Properties sets eyes on HK$1bn Bloomsway as its 'next catalyst'

It could pull gearing down.

Helped by its strong recurring income base, Kerry Properties' 1H FY2015 earnings grew 21% y/y amidst weak China property sales.

According to a research note from Barclays, over the next four months, with no new completions expected in Hong Kong, the next catalyst will be Bloomsway, a large-scale 1,100-unit project in Tuen Mun.

Worth HK$10bn in sales, Barclays sees this project as a significant factor in alleviating gearing concerns, as net debt to shareholders' equity ratio now stands at 30.4%.

Here's more from Barclays:

HK$10bn Bloomsway is the next catalyst: We see the Bloomsway project in Tuen Mun as a key catalyst for Kerry Properties. With a HK$10bn sales value according to Kerry Properties, the project can lower gearing from the Jun 2015 level of 30.4% if it ear-marks some of the proceeds for de-gearing, and if no significant site acquisitions are made in 2H15. Kerry Properties expects to launch the 1,100-unit project in November and hopes to sell about 30-40% of it in the first stage.

Recurring income base building up: Helped by improving occupancy across its key China investment properties, China net rentals were up by 39% y/y to HK$1.1bn with a 7ppt margin improvement. Hong Kong net rentals were little changed at HK$336mn with a flat 77% margin.

As a whole, rentals from China and Hong Kong rose 10% y/y to HK$1,466mn. Despite a 75% y/y decline in China property sales, Kerry Properties continued to build up a recurring income base and started to book Dragons Range in 1H15. As a result, its underlying earnings rose 21% y/y in 1H FY2015. Kerry Properties declared an interim dividend of HK$0.03/sh, the same as last year. .

Revising down earnings and target price: We estimate that 42% of Kerry's assets are development properties and investment properties in China. After factoring in our in-house USDCNY assumption and slower China property bookings, we revise down FY15-17E earnings by 0.6%-2.0%.

Our forward NAV is cut by 4.0% to HK$53.77. We continue to apply 40% target NAV discount on Kerry Properties, which results in 3.9% cut in our target price to HK$32.30. Downside Risks: Downside risks include potential increase in gearing and macro concerns related to China.