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Hong Kong developer outperforming rivals amid market slump

Hong Kong's Central district appears in the foreground, with Kowloon on the other side of Victoria Harbor. The Hong Kong property market is experiencing a downturn but Sun Hung Kai Properties' results beat expectations on Feb. 26.

HONG KONG -- Sun Hung Kai Properties is navigating its way through the property downturn better than most of its peers, with the Hong Kong developer on Friday raising its interim dividend for the first time in five years after a nearly 10% jump in core earnings.

     Net profit fell 6.2% on the year to 14.72 billion Hong Kong dollars ($1.89 billion) for the six months ended December. However, its underlying profits -- a performance indicator typically used by analysts to exclude the impact of property revaluation -- rose 9.9% to HK$9.3 billion on increased property sales and rental growth of about 7%.

     The company announced an interim dividend of HK$1.05 per share, up 10.5% on the year. Chairman Raymond Kwok Ping-luen told reporters Friday the increase was due to the group's "confidence" in full-year earnings, adding that it hopes to maintain a payout ratio of 40-50%.

Sun Hung Kai Properties Chairman Raymond Kwok Ping-luen, left, and his brother and then co-Chairman Thomas Kwok Ping-kwong, who is now in jail for bribery.

     Said Victor Lui, the group's deputy managing director: "It's a buyer's market now and speculators are gone. Hong Kong's property market is a healthy one."

     Sun Hung Kai's better-than-expected earnings come as many Hong Kong developers feel the pinch of a market slump amid a rising supply and the possibility of further U.S. interest rate hikes that would hurt purchasing power.

     In February, home prices have slumped nearly 11% since the peak in September. Despite the price correction, the government announced Thursday it would roll out 29 residential sites for fiscal 2016 to provide a record 19,200 apartments, the most since 2010, to fulfill its promise of increasing land supply in the city.

     Rival New World Development on Tuesday posted a 44% drop in first-half net profit, with underlying profit sliding 0.3% due to greater exposure in China. Also struggling is Hang Lung Properties, whose full-year net profit tumbled 56% on a sharp fall in property sales.

     Bank of America Merrill Lynch gave Sun Hung Kai a "neutral" rating, citing concerns over the fact that the developer has reached only about a third of its HK$32 billion full-year target for contracted sales in Hong Kong. Reaching that target would be "difficult" given the weak market sentiment, analysts at the bank wrote in a note on Feb. 18.

     The developer said it would slash its sales target by 10-15% amid signs that transactions of new residential apartments would slow down in the second half. It plans to launch eight projects in Hong Kong in the next nine months, most of them in the New Territories, and two projects in Shanghai and Guangzhou, with a sales target of HK$5 billion in mainland China.

     Sun Hung Kai is one of Hong Kong's largest developers. It was controlled by brothers Raymond and Thomas Kwok, but Raymond took the reins after his brother was sentenced to five years in jail in 2014 for bribing an official. Raymond was acquitted of all charges against him.

     Standard and Poor's maintained an A+ stable credit rating for Sun Hung Kai as of Feb. 15, the highest among its peers, citing its low leverage and income diversity. Cheung Kong Property Holdings received an A- stable rating; Kerry Properties and Nan Fung were both rated BBB- stable.

     Sun Hung Kai reported a net gearing ratio of 11% for fiscal 2014, lower than Cheung Kong's 34% and Kerry's 25%, according to the rating agency.

     "Sun Hung Kai would have the strongest buffer in case of a downturn," said Standard & Poor's credit analyst Esther Liu. "Our base case is given a further 50% drop in [property] prices, it will have enough buffer against a downgrade action."

     Sun Hung Kai's shares closed 2.86% higher at HK$88.05 on Friday, slightly outperforming the Hang Seng Index's 2.52% rise.

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