Sun Hung Kai Properties' development margins dropped to 28%

That's for the full-year.

There was good news and bad news in Sun Hung Kai Properties' (SHKP) FY14 results, with the good news was that SHKP's rental portfolio performed strongly with y/y growth of 17%.

According to a research note from Barclays, however, the bad news was that its Hong Kong development margins continued to contract, falling to 28% for the full year (47% in 1H and 22% in 2H).

The report noted that tt is hard to say whether investors would take a glass half empty or glass half full perspective on the results, but if one were to simply focus on net bottom line, although rental income should grow, it would be insufficient to offset the impact from development margin contraction, especially in the near term.

Overall, with SHKP being one of the biggest buyers of land in 2014, Barclays sees it as a proxy for the Hong Kong housing market. Given its cautious view on Hong Kong home prices, there is no change to Barclays' UW rating.

Here's more from Barclays:

Rentals good but development margins not so good: SHKP's reported FY14 underlying net profit of HK$21.4bn, up 15% y/y. This was in line with consensus but 4% ahead of our forecast.

At the operating level, SHKP's rental operations performed strongly with a 17% y/y increase. But on the flipside, its Hong Kong development margins were much weaker than we expected.

While the booking of projects like Riva, Century Gateway II and the Wings II helped lift full-year Hong Kong development revenue to HK$27bn, the realized margin of 28% was down 11ppts y/y.

Price target raised by 5.2% to HK$90.50; no change to UW rating: Largely on account of stronger contributions from SHKP's China rental operations, we raise our forward NAV by 5.7% y/y to HK$164.46.

On earnings, we moved up the pace of the leftover sale of Cullinan II to FY15. Overall, this results in a 10% uplift in our FY15E earnings but a 4% cut in FY16E earnings.

Keeping our target discount unchanged at 45%, we raise our price target up by 5.2% to HK$90.50. With potential downside of 23%, there is no change to our UW rating.

Key upside risks include: (1) lower for longer US interest rates outlook and (2) pre-emptive policy easing by the Hong Kong Government.