Sun Hung Kai Properties Sacrifices Margins to Sell More Units

  • Bocom’s Lau says Sun Hung Kai margins fell by half to 20%
  • Steep discounts, 120 percent mortgages hurt profit margins

Sun Hung Kai Properties Ltd., Hong Kong’s biggest developer by market value, beat its residential sales target for the first half of the year, while sacrificing profit margins as it offered sweeteners to entice buyers.

Alfred Lau, a Hong Kong-based property analyst at Bocom International Holdings Co. who has a sell rating on the stock, estimates that the developer’s Hong Kong residential margins fell to about 20 percent in the first half of the year, from an average of 40 percent. Margins are a measure of profitability, typically showing what percentage of a company’s overall sales are retained in earnings.

"Sun Hung Kai’s strong sales came at the expense of lower margins," Lau said.

Sun Hung Kai sold 1,438 units worth HK$18.7 billion ($2.4 billion) compared with its projection of HK$15.7 billion in the first six months, according to figures compiled by Bloomberg Intelligence, thanks to steep discounts, tax rebates and mortgages as high as 120 percent.

Offering Discounts

The company, along with other major developers including Henderson Land Development Co., Cheung Kong Property Holdings Ltd. and Sino Land Co., have been offering discounts and promotions, reducing costs to buyers by as much as 20 percent, to compete for sales as overall volumes declined 35 percent in the six months ended June from a year earlier, according to realtor Midland Holdings Ltd.

The shares have gained 18 percent this year, compared with an 11 percent increase in the Hang Seng Property Index. They rose 1 percent to HK$110.90 as of 1:25 p.m. in Hong Kong.

The Hong Kong Economic Times reported earlier on Tuesday that Sun Hung Kai generated HK$20 billion in sales, citing transaction records. Bloomberg Intelligence said its figures were lower because some previously reported transactions may have been canceled. The company declined to confirm the sales figures ahead of the release of its earnings in September.