Midland Holdings net profit climbed 87% to HKD250m

Management now eyes cost-cutting measures.

According to Maybank Kim Eng, Midland Holdings reported net profit rose 87% YoY to HKD250m (HKD233m excluding FVG at its investment properties), mainly due to revenue growth of 15% YoY to a record HKD3.91b. FY12A net profit came in 2% above Maybank's estimates. 

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The group’s share of revenue from commercial property jumped from 12.9% to 20.5%. Thanks to strong operating leverage, MH’s operating margin rose 3.3ppts from 5.4% to 8.7% in FY12A.

Among the major cost items, rebate incentives and rent rose at a faster pace than revenue, by 18% YoY, accounting for 11.0/12.2% of FY12A revenue (FY11A: 10.7/11.9%).

MH posted revenue growth stronger than that of the market, thanks to its duopoly status (with unlisted Centaline) in the primary market. The growth in primary commission rates to a record 2.71% (FY11A/FY10A: 2.43/2.24%) was due to a greater reliance on sales of primary properties by developers. Meanwhile, secondary market commission rates are expected to stabilise at the 1.5% level (FY11A/FY10A: 1.50/1.49%).

We expect that the ratio of primary:secondary contribution will change from 48:52 in FY12A to 54:46 in FY13F, with developers focusing more on smaller-sized units targeted at first-time buyers.

Management revealed plans for MH to adopt mobilised sales teams and branchless expansion in selected  districts in HK. We believe that the benefits from such cost-cutting initiatives will not accrue to MH significantly until 2H13.

We keep our HOLD rating on MH, as the anticipated growth in primary market revenue (commission rate and market share) will be offset by a shrinking secondary market and rising operating costs. 

We cut our FY13F EPS estimate by 9% to HKD0.31, with a new TP of HKD3.48 pegged to 11x PER (13x previously). Forward yields of 6.2/7.0% and cash of
HKD1.74/share provides good share price support.