Cheung Kong Property Holdings:Above expectations,Balancing act to attain higher recurring income

What surprised us.

CKP reported 2016 underlying profit of HK$18bn, up 16% yoy (vs 2015’sstub), and 6% above GSe. Property sales EBIT was up 14% yoy toHK$17.7bn, and CKP achieved contracted sales of HK$70bn during 2016,with a net order book of c.HK$38bn, which it said will be substantiallyrecognized in 2017. Recurring EBIT, including rentals, hotels/servicedapartments and REITs, was up 37% to c.HK$9bn. DPS rose by 9.3% toHK$1.53/share (vs GSe HK$1.55/shr), implying c.33% payout ratio (-2 ppyoy). BVPS at HK$70.66, up 2.3% hoh.

What to do with the stock.

Overall, CKP continues its balancing act to attain a higher recurring income- while they see limited land banking opportunities amid high prices, in theinterim they pursue global investment opportunities to enhance recurringrevenue and mitigate the cyclicality of property sales. On capitalmanagement, CKP said (1) aside from dividends (c.HK$5.9bn), thecompany has bought c.HK$3bn of shares since Mar 2016 (at averagec.HK$50/shr, or 1.6% of shares), making a total return of capital ofc.HK$9bn; (2) In the medium-term, it sees a growing recurring incomedriving higher payout - Chairman Li at the press conference commentedthat the aim is to grow its recurring EBIT by 50% over the next few years,which we believe will come through new IP completions, addition ofaircraft leasing and potentially Duet Group (DUE.AX, for which it has a bidoutstanding), plus other potential M&A. We revise our 2017-19E by8.6%/5.7%/8.0% partly due to completion of the aircraft leasing businessacquisition. Our model does not factor in the Duet transaction or theCentury Link disposal pending completions. Reiterate Buy with a new 12-mo NAV-based TP of HK$74.00 (from HK$73.20). Risks: Worse-thanexpectedconditions for asset monetization.