HK developers starting to reap mainland rewards
Interim results show profits growing up to 40pc as sales are solid across the board
Hong Kong developers' earnings from their mainland projects have started taking off, and the profit contribution from these sources will continue to grow, according to analysts.
In the half-year reporting season just ended, local developers reported solid interim earnings, with some posting profit growth of up to 40 per cent.
The results were boosted by high average selling prices across the board, with the revenue finally rolling into the developers' bottom line.
"Hong Kong property companies have scaled up their China investments since about 2004, and we believe one clear message from their latest results is that their China earnings have finally started to come through," said Jonas Kan, a senior vice-president who tracks property plays for Daiwa Capital Markets in Hong Kong, in his latest property report.
Among the major local developers, Hang Lung Properties still has the largest proportion of its earnings coming from the mainland, with 50 per cent of its gross rental income coming from across the border.
But Cheung Kong and Wharf were the "stars" of the latest reporting season, posting strong mainland earnings in the first half, said Alfred Lau, a property analyst at Bocom International.
"The China property earnings of Cheung Kong and Wharf took off in the first half of 2012 and are comparable to other mid-cap Chinese developers," said Lau.
Although Cheung Kong disappointed shareholders with an interim net profit that plunged 54 per cent to HK$15.45 billion, a silver lining to the result was pre-tax property sales profit of HK$2.6 billion from the mainland, up 114 per cent from the first half of 2011.
Wharf also posted strong growth in income from its mainland sales, which were up by more than 300 per cent to HK$2.42 billion in the first half. Rental income from its mainland investments was up 51 per cent to HK$479 million.
Sun Hung Kai Properties reported a jump of 38.4 per cent in net rental income to HK$1.1 billion on the back of a larger portfolio on the mainland, but property sales dropped 58.4 per cent to HK$411 million, according to Daiwa.
'China is real," said Paul Louie, the head of regional property research (Asia ex-Japan) at Nomura Hong Kong.
"For those Hong Kong property companies with strong execution and a focused market niche, China earnings are starting to come through and were frequently the source of positive surprise. As more investment properties come on line in the coming year, China earnings will only become bigger."
Kan said Hong Kong companies had finally started to harvest their mainland earnings and he believed commercial properties would be their strongest contributors. "Hong Kong companies are likely to be major players in China's commercial property sector," he said. "Hang Lung's gross rental income from China continues to grow and is now the highest among the listed companies."