Idea of the Week: Trust in HK Luxury Properties? You may Consider CSI Properties

Focus on Tailor-made Luxury Apartments, which might be Priced More Aggressively

The company focuses on tailor-made luxury apartments which are unique in the high-end market. Its brand philosophy is “Full of Wonders”. With a brand premium and high construction quality, it allows the company to be more aggressive when acquiring high-quality land banks, and then the cost is transferred to luxury property buyers, who are more willing to pay more for quality products. We think that this business model could build a differentiation advantage in the niche market.

It is highlighted that Hong Kong's luxury apartments outperformed the market in recent years. According to Knight Frank’s Prime Global Cities Index, the luxury apartments only dropped by 1.3% YoY at the end of the first quarter, much lower than the overall performance reflected by the Centa-City Leading Index of around -6.2% during the same period. This may be due to the scarcity of prime locations (e.g. Jardine's Lookout, Peak Road, etc.) and the limited supply of luxury properties for sale at a discount, while the rich are less affected by COVID-19. Thus, luxury apartments are more resilient in terms of prices.

The policies implemented by Hong Kong Government, such as Northern Metropolis and the Lantau Tomorrow Vision, focus on increasing the supply of private apartments but lack measures to raise the supply of luxury apartments. We believe the luxury apartment prices will continue to be resilient, allowing the company to price luxury apartments more aggressively and achieve a higher profit margin.

Conservative Approach to Maintain Sufficient Liquidity; Good Margin of Safety for the Bond

Against the backdrop of the interest rate hike cycle and the crisis in the Chinese real estate sector, the company indicated that it would adopt a conservative approach in land purchases and new investments, and not make any new acquisitions in the foreseeable future in order to maintain sufficient liquidity.

As shown in Table 2, as of the end of March 2023, the company’s total debt was HKD 11.2 billion, with a net gearing ratio of 55%. Adjusting for unrealised revaluation surplus, the adjusted net gearing ratio was further down to 39%. The leverage level was decent.

The debt structure is quite simple, with 79% of bank loans and 21% of its USD bonds due in 2025. The bank loans are secured so refinancing them is not difficult. The company had cash and short-term investments of HKD 3.7 billion, sufficient to repay about USD 2.96 million (equivalent to HKD 2.3 billion) of the bond. The bond has a good margin of safety.

Table 2: CSI Properties’ Credit Indicators

Therefore, the 2025 USD bond, “CSIPRO 5.450% 21Jul2025 Corp (USD)”, has a yield to maturity of 12.9% (see Table 3), which is worth investors' attention.

Despite the scale of CSI Properties not being comparable to that of other developers, given the company's stable outlook and sufficient liquidity to repay the bond, we believe that its higher yield can compensate for the lack of scale and the slightly higher risk.

Table 3: CSI Properties’ USD Bond

Related Risks

The concentration of the company’s property pipeline is high. If there are lower-than-expected property sales or pricing issues or delays for a single project, the company’s liquidity might be affected.

Although the company has fewer projects in Mainland China, its sales plans could still be affected by the downturn in Chinese property sales. For the rich who relied on real estate to get rich, there might be a bigger drop in their wealth due to the Chinese real estate crisis. The demand for luxury apartments in Hong Kong or the Mainland could be affected. This impacts the sell-through rate of the company's projects.

Conclusion

CSI Properties mainly engage in property development and investment. Its features are the sale of luxury apartments and the purchase, sale and investment of commercial real estate. The company’s operating performance was fair. Many of the company's projects entered the pre-sale or sale stages, which would provide strong support to its liquidity and debt repayment.

The company would adopt a conservative approach to maintain sufficient liquidity. The leverage level is decent, with a simple debt structure.  Its cash and short-term investments are sufficient to repay the bond. The bond has a good margin of safety.

The company’s 2025 USD bond has a yield to maturity of 12.9%, which is worth investors' attention.