New World Development: Positive Long-Run Property Market Outlook Should Offset Near-Term Weakness
No-moat New World Development gave a brief business update for fiscal 2024 (ending June), saying that its net gearing ratio may not see material improvement in the near term amid weak home demand and consumption behavior in mainland China and Hong Kong. Nonetheless, it is more optimistic about the property market’s secular trend, given lower interest rates and a revival in homebuyer sentiment prospects in both regions, which should enhance NWD's financial strength. Despite respective downward tweaks of 14% and 7% for NWD’s fiscal 2024 contracted sales in Hong Kong and mainland China, we incorporate a more constructive outlook for sales in fiscal 2025-26, leading to minor changes in our three-year property development revenue compound annual growth rate forecast. Management also remains confident about achieving the HKD 8 billion asset disposal plan for fiscal 2024 as more deals may be closed by June. While this will mildly weigh on NWD’s top line, we expect new commercial projects to contribute to recurring income from fiscal 2025 onward. As such, we keep our HKD 10 per share fair value estimate and view shares as underpriced. However, we see limited short-run share price drivers for the firm as its property businesses will likely need a longer time to stabilize.