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Research Report: Stock code:
  27-04-2017 (嚙罵)    K. Wah International (173.HK) - Strong Sales is expected to Continue
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K. Wah International(0173)
27-04-17
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Recommendation on   27-04-17 
Recommendation Accumulate
Price on Recommendation Date $ 5.060
Suggested purchase price N/A
Target Price $ 5.800
Weekly Special - 3380 Logan Property
Written by: John Wong( Research Analyst )
Tel:
+852 2277 6527

Email:
johnycwong@phillip.com.hk

K. Wah International (173.HK) - Strong Sales is expected to Continue

Investment Summary

- Several key development projects are expected to be completed in both FY2017 and FY2018

- Expansion in investment property portfolio to generate stable recurring income

Business Overview

Outstanding FY2016 result: K. Wah International achieved high growth in the FY2016 result. Revenue grew 104% to HK$9,620Mn and net profit grew 123% to HK$3,226Mn in FY2016. In fact, including the revenue of joint venture and associate companies, the attributable revenue to the group amounted to HK$12,570Mn, a growth of 95% in comparison with FY2015. Benefiting from the outstanding result, earning per share grew 124% to HK$1.0762. Despite the high growth in earning per share, K. Wah International declared a final dividend of HK$0.13 per share, an 8% growth or one cent more than that of in FY2015, giving a total annual dividend of HK$0.18 per share, which is also one cent more than that of in FY2015.

Strong sales is expected to continue in FY2017: K. Wah International has made strong progress in FY2016 in the sales of properties and the strong sales is expected to continue in FY2017. In fact, in FY2016 K. Wah International has a large reserve of attributable contracted sales amounted to about HK$13Bn, of which HK$6.3Bn of the sales have been booked in FY2016 and the remaining HK$6.7Bn of sales will be booked in FY2017 and FY2018. The large reserve of contracted sales is expected to provide some assurance to the future revenue of the company. Some projects with contracted sales to be recognised, as at 31/12/2016, are as follow:

Apart from the attributable contracted sales reserve, the company is actively launching new projects, which are expected to be completed in the next few years. The total attributable GFA of the new projects being launched in FY2017 is more than 300,000 square metres and is expected to bring sizable revenue to the company:

Expanding investment property portfolio: In FY2017, K. Wah International will have several large investment properties launched and the company targets to increase the total GFA of the investment property portfolio to about 200,000 square metres, thus providing stable and recurring revenue and cash flow to the company and decreasing the volatility of revenue. Moreover, the new investment properties especially those in Shanghai are located in prime locations and will allow the company to charge sizable rent. The new investment property projects include:

Large and valuable future projects: The Company has a number of large and valuable projects in Hong Kong, Pearl River Delta and Yangtze River Delta. In December 2016, the company obtained Kai Tak Area 1K Site 2, which has a GFA of about 53,000 square metres. The land is expected to bring sizable revenue to the company especially when K City, the other project acquired by the company in the early years, had very strong sales. Until 18/3/2017, more than 600 units, out of the 900 total available units, were sold, allowing the company to generate pre-sales revenue of HK$6Bn in aggregate. Moreover, the company also has projects in the traditional high end residential district such as Tai Po and the low density residential area such as Grampian Road. These projects are expected to launch in 2018 or later:

Investment Thesis, Valuation and Risk

Our valuation model suggests a target price of HK$5.80: K. Wah International has achieved outstanding result in FY2016 and projects such as The Spectra, Tai Po project and K City are expected to bring large revenue to the company. Moreover, the company has obtained another land in Kai Tak as well as a new land in Nanjing, which are projects with large potential. Therefore, a target price of HK$5.80, corresponding to a P/E and P/B of 4.73x and 0.57x, has been assigned, with an `Accumulate rating assigned. (Closing price as at 25 Apr 2017)

Financials

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