Asia Pacific Equity Research 21 November 2010 HK Property 2011 Outlook Policy intervention getting intensified; stick to landlords Hong Kong Property Lucia Kwong, CFA AC (852) 2800-8526 [email protected]Amy Luk, CFA AC (852) 2800 8524 [email protected]Benjamin Lo, CFA (852) 2800-8598 [email protected]Ryan Li (852) 2800-8529 [email protected]J.P. Morgan Securities (Asia Pacific) Limited See page 60 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Hong Kong developers vs investors 50 70 90 110 130 150 170 190 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Property developers Property investors Index: 1/1/2007 = 100 Source: Bloomberg, J.P. Morgan • HK residential property to be the battlefield between policy interventions and liquidity: The HK government finally appears to be determined to curb housing prices with an unprecedented heavy stamp duty levied on speculators. We believe this is a strong dose to calm down the housing market, which has remained heated despite earlier measures and we expect 5% downside in the near-term. Although we see a 15% upside in 2011, policy measures could carry on. • Landlords a strong preference to ride on solid economic growth and prevailing low cap-rates: Given the new measures, we expect slower property sales that drive down development NAV. In contrast, commercial properties are less vulnerable to policy interventions, and are buoyed by the resilient demand without significant cap rate expansion. We upgrade our NAV estimates of landlords by 9-27% while those of developers range from +3 to -10%. We expect landlords to trade at narrower than LT average NAV discounts given the lower resistance to commercial rental growth and abundant liquidity, while most developers will trade at LT average discounts or slightly below. As a result, we upgrade Hongkong Land (proxy to HK office) to OW from N and downgrade Sino Land (largest exposure to HK residential) to N from OW. • Prefer Wharf, HKL and Hysan: Overall we are neutral on HK Property as it offers only 12% upside. Our top picks are Wharf, HKL and Hysan. Positive catalysts would include high earnings which can reflect in higher dividends or increase in book value and revaluation gains. Risks to our PT are cap rate expansion due to interest rate hikes, change in liquidity and fund raising risks. Hong Kong property – Summary of price target and net asset value changes Last Price Potential (HK$) New Old Dec-2011 Price Targets upside/ NAV Company Ticker 10-Nov-10 Ratings Ratings New Old % Change (downside) New Old % Chg Cheung Kong 0001.HK 123.80 OW OW 141.4 115.0 23% 17% 169.8 151.3 12% Sun Hung Kai 0016.HK 135.50 OW OW 155.0 138.0 12% 15% 180.4 174.5 3% Henderson Land 0012.HK 57.80 OW OW 63.0 55.0 15% 11% 78.9 87.5 -10% Sino Land 0083.HK 16.56 N OW 14.9 16.5 -10% -9% 21.3 20.9 2% New World Dev 0017.HK 16.28 OW OW 19.1 19.1 0% 20% 29.0 29.7 -2% Kerry Properties 0683.HK 42.65 OW OW 51.5 45.0 14% 23% 73.8 64.5 14% Hang Lung Pty 0101.HK 36.40 N N 35.0 33.0 6% -3% 34.8 33.8 3% Hang Lung Group 0010.HK 50.70 N N 46.5 43.0 8% -7% 62.8 62.8 0% Great Eagle 0041.HK 24.60 OW OW 27.8 24.9 12% 14% 50.6 46.6 9% Hysan 0014.HK 32.50 OW OW 38.1 38.1 0% 17% 50.2 50.2 0% Hongkong Land HKL.SP 7.05 OW N 8.8 5.5 60% 28% 9.9 7.8 27% Swire Pacific 0019.HK 120.90 OW OW 128.2 128.2 0% 5% 183.0 183.0 0% Wharf 0004.HK 54.80 OW NC 65.5 NA NA 20% 76.1 NA NA Fortune REIT FRT.SP 4.01 OW OW 4.9 4.9 0% 22% 4.9 4.9 0% Link REIT 0823.HK 24.35 N N 27.0 27.0 0% 13% 27.0 27.0 0% Champion REIT 2778.HK 4.50 N N 4.1 3.7 10% -10% 4.1 NA NA Average 9% 12% 3.9% Sources: Company data, Bloomberg, J.P. Morgan estimates
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Asia Pacific Equity Research 21 November 2010
HK Property 2011 Outlook
Policy intervention getting intensified; stick to landlords
See page 60 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
• HK residential property to be the battlefield between policy interventions and liquidity: The HK government finally appears to be determined to curb housing prices with an unprecedented heavy stamp duty levied on speculators. We believe this is a strong dose to calm down the housing market, which has remained heated despite earlier measures and we expect 5% downside in the near-term. Although we see a 15% upside in 2011, policy measures could carry on.
• Landlords a strong preference to ride on solid economic growth and prevailing low cap-rates: Given the new measures, we expect slower property sales that drive down development NAV. In contrast, commercial properties are less vulnerable to policy interventions, and are buoyed by the resilient demand without significant cap rate expansion. We upgrade our NAV estimates of landlords by 9-27% while those of developers range from +3 to -10%. We expect landlords to trade at narrower than LT average NAV discounts given the lower resistance to commercial rental growth and abundant liquidity, while most developers will trade at LT average discounts or slightly below. As a result, we upgrade Hongkong Land (proxy to HK office) to OW from N and downgrade Sino Land (largest exposure to HK residential) to N from OW.
• Prefer Wharf, HKL and Hysan: Overall we are neutral on HK Property as it offers only 12% upside. Our top picks are Wharf, HKL and Hysan. Positive catalysts would include high earnings which can reflect in higher dividends or increase in book value and revaluation gains. Risks to our PT are cap rate expansion due to interest rate hikes, change in liquidity and fund raising risks.
Hong Kong property – Summary of price target and net asset value changes
Last Price Potential (HK$) New Old Dec-2011 Price Targets upside/ NAV Company Ticker 10-Nov-10 Ratings Ratings New Old % Change (downside) New Old % Chg Cheung Kong 0001.HK 123.80 OW OW 141.4 115.0 23% 17% 169.8 151.3 12% Sun Hung Kai 0016.HK 135.50 OW OW 155.0 138.0 12% 15% 180.4 174.5 3% Henderson Land 0012.HK 57.80 OW OW 63.0 55.0 15% 11% 78.9 87.5 -10% Sino Land 0083.HK 16.56 N OW 14.9 16.5 -10% -9% 21.3 20.9 2% New World Dev 0017.HK 16.28 OW OW 19.1 19.1 0% 20% 29.0 29.7 -2% Kerry Properties 0683.HK 42.65 OW OW 51.5 45.0 14% 23% 73.8 64.5 14% Hang Lung Pty 0101.HK 36.40 N N 35.0 33.0 6% -3% 34.8 33.8 3% Hang Lung Group 0010.HK 50.70 N N 46.5 43.0 8% -7% 62.8 62.8 0% Great Eagle 0041.HK 24.60 OW OW 27.8 24.9 12% 14% 50.6 46.6 9% Hysan 0014.HK 32.50 OW OW 38.1 38.1 0% 17% 50.2 50.2 0% Hongkong Land HKL.SP 7.05 OW N 8.8 5.5 60% 28% 9.9 7.8 27% Swire Pacific 0019.HK 120.90 OW OW 128.2 128.2 0% 5% 183.0 183.0 0% Wharf 0004.HK 54.80 OW NC 65.5 NA NA 20% 76.1 NA NA Fortune REIT FRT.SP 4.01 OW OW 4.9 4.9 0% 22% 4.9 4.9 0% Link REIT 0823.HK 24.35 N N 27.0 27.0 0% 13% 27.0 27.0 0% Champion REIT 2778.HK 4.50 N N 4.1 3.7 10% -10% 4.1 NA NA Average 9% 12% 3.9%
Sources: Company data, Bloomberg, J.P. Morgan estimates
Table of Contents Hong Kong Property 2011 Outlook .........................................3 Key theme: Increasing resistance on housing price growth; go commercial ...............3 Impact of latest round of restrictive policies................................................................3 Sector strategy..............................................................................................................5 Stock picks...................................................................................................................6 Key risks to our investment case..................................................................................9 Residential market outlook....................................................11 Are we in a property bubble?.....................................................................................12 Commercial property outlook ...............................................16 Company earnings and NAV outlook ...................................20 Earnings downgrade, NAV maintained .....................................................................20 Summary of NAV breakdown ................................................28 Summary of financials: Cheung Kong Holdings .................40 Summary of financials: Sun Hung Kai Properties ...............41 Summary of financials: Henderson Land Development .....42 Summary of financials: Sino Land Company Ltd. ...............43 Summary of financials: New World Development ...............44 Summary of financials: Kerry Properties .............................45 Summary of financials: Hang Lung Properties....................46 Summary of financials: Hang Lung Group...........................47 Summary of financials: Great Eagle Holdings.....................48 Summary of financials: Hysan Development.......................49 Summary of financials: Hongkong Land Holdings..............50 Summary of financials: Swire Pacific ...................................51 Summary of financials: Wharf Holdings...............................52 Summary of financials: Link REIT.........................................54 Summary of financials: Champion REIT ..............................55 Valuations: NAV and P/BV bands .........................................56
Hong Kong Property 2011 Outlook Key theme: Increasing resistance on housing price growth; go commercial Real estate will be the battlefield between liquidity and policy interventions Consensus view is beginning to be that QE2 would pump excess liquidity into the Hong Kong economy. Contrary to the Asian emerging markets where there could be incremental currency appreciation or capital controls, the HKD/USD peg offers no flexibility and liquidity can be easily be transferred into asset inflation, the most prominent being real estate. The eventual implementation of QE2 would fuel asset price growth in the next 6-9 months. The battle between policies and liquidity would continue in the next 9-12 months, in our view.
Restrictive measures may be partly effective, finally The government has announced various rounds of tightening policy every few months starting Feb 2010, but the original belief is that the measures are reactive and ineffective to curb speculative demand on residential. The announcement of the new round of measures on Nov 19 (Friday) caught us by surprise especially on imposing the heavy Special Stamp Duty (SSD). Although the government stepped up in the strength and depth of its restrictive policy, we think the impact may be short-term and may only impact projects which attract a lot of speculative demands.
But required return is coming down sharply in a low-rate environment With the inflation hedge becoming imminent and real estate increasingly commoditized, the required returns (cap rates) would stay low if not compressed further, given the low funding costs and returns from alternative means of investments. For long-term investors who do not intend to flip the property in 1-2 years and have high cash balance for downpayment, the policies will not affect their home purchase plan at all. The commercial properties are even less affected by the policies which mainly target residential properties.
Impact of latest round of restrictive policies Special Stamp Duty (SSD) – curbing speculative demand According to the latest announcement by the Government on the SSD, all home buyers with the official Sales and Purchase Agreement signed on or after Nov 20 will be subject to an ad valorem SSD on top of original stamp duty. Such SSD is charged on people who resell their property within 24 months after purchases, and is set at a rate of 5% to 15% (regressive with respect to length of ownership) calculated based on the sales price (refer to Table 3 for details). As a result, investors who flipped their property within 24 month, their transaction costs would become 5% to 15% (on transacted value) more expensive. We believe this SSD will lead to a one-off adjustment on housing prices and should drive away most of the speculators demand which aim at a shorter investment time-frame, and this may also increase their duration and force them to take into consideration the impact of interest rate changes for a longer time frame when making such investment decision. Net-net, sales volume in the short term will shrink significantly and put pressure on price. Given that year-to-date property price rose 20%, we expect property price to fall by 5% and expect full year 2010 price change to be +15%.
Residential rents may cease its uptrend In the residential rental market, we expect the implementation of SSD will lengthen the average holding period of properties, so property owners will be more inclined to lease out their residential properties. This may create a supply influx in the rental market and may cease the uptrend in residential rents (which was up 13% till 3Q2010). Overall speaking, we believe supply of property for lease will increase and this will put pressure on rent, but the impact may not be as direct compared to property price and rent should stay stagnant for some time.
Further lowering loan-to-value (LTV) ratio – limited impact Apart from the introduction of SSD, the HKMA also further lowered the LTV for residential property valued HK$8 mn or above, home not for self-occupation, home held via registered company and all commercial property (Refer to Table 1 for details). In our view, the lowering of LTV will not have much impact on the transaction volume in the high-end segment, as a lot of buyers in that segment are wealthier and can fund the increased down payment by varying their assets allocations. Especially for Mainland buyers, who account for one-third of the luxury market (according to Centaline), plenty of them are cash-rich and do not take up any mortgage (i.e. all equity) upon purchases. Long-term investors, we believe, will trade down to more mass-end segments with smaller lump sum, and more people may bridge the funding gap by using mortgage insurance at HKMC. Impact on the primary market in particular may not be big too as there are a lot of ways developers could adopt to help the buyers. Some developers (e.g Cheung Kong via AMTD) offer second mortgage to bridge the buyers’ funding gap, or some offer more flexible payment methods which decrease the initial lump sum buyers have to pay.
Table 1: New restrictive policies announced on Nov 19, 2010 Measures JPM view on potential impact Increasing land supply (1) Target to make available enough land for 20,000 private residential units annually over the next 10 years (2) Making sure the Land Application List for the next Financial Year will have more than 9,000 units
Takes time to realize; current Land Sales by Application system does not favor a big increase in land supply
Curbing speculative demand (1) Introduction of a special stamp duty (SSD), which will be charged equally to buyers and sellers on property resold within 24 months (2) Deferred payment of stamp duty (including the special stamp duty) is disallowed for all property (vs >HK$12 mn property value before)
Effective in driving speculators away from the housing market, but long-term investors are not affected; expect lower transaction volume; part of the costs could be borne by vendor which are reflected in the transacted prices
Further restrictions in mortgages Hong Kong Monetary Authority (HKMA) (1) For residential valued at $12 mn or more, the LTV ratio is capped at 50% (vs 60% previously) (2) For residential valued at $8 to $12 mn, the LTV ratio is capped at 60% (vs 70% previously), maximum loan amount is HK$6.0 mn (new) (3) For residential valued at below $8 mn, the LTV ratio will maintain at 70%, but maximum loan amount is HK$4.8 mn (new) (4) For residential not intended to be self-occupied, the LTV ratio is capped at 50% (vs 60% previously) (5) For residential bought under registered Company, the LTV ratio is capped at 50% (vs 70% previously)
Long-term investors may trade down to mass-end segments; more reliance on mortgage insurance. Some developers may offer second mortgage to bridge the funding gap
(6) For industrial and commercial properties, the LTV ratio is capped at 50% regardless the property value (vs 70% previously)
Minimal impact on office and retail transactions given already low LTV
Hong Kong Mortgage Corporation (HKMC) (1) Mortgage loan with 90% LTV ratio, the max. mortgage size will be lowered to HK$6.12 mn ( vsHK$7.2 mn previously)
Table 2: New stamp duty schedule (including Special Stamp Duty) Criteria Stamp duty to buyers Stamp duty to both buyers
and sellers Property held 6 months or less Normal stamp duty 15% on transaction value Property held for 6-12 months Normal stamp duty 10% on transaction value Property held for 12-24 months Normal stamp duty 5% on transaction value Property held for more than 24 months Normal stamp duty None Source: HKSAR Government, J.P. Morgan.
Sector strategy Housing prices still risk on the upside We were bullish on HK property for 15 months given the liquidity, increasing Mainland Chinese participation (though now accounting for only 5-10% of transactions), economic fundamentals remaining intact etc. The differences between now and a year ago are:
1) the scale of liquidity (US$600B add-on for QE2) and prolonged low-interest rate environment, which raises risk appetite massively
2) stronger asset price cushion backed by resilient economic growth, so although housing price rally exceeded expectations in YTD10 this can be explained by fundamentals and not liquidity yet
3) land supply remains contained vs. our anticipation of influx of supply
4) residential rents are getting less affordable – which induces even more forced / buying by end-users
5) Hong Kong property market may be increasingly "Chinalized" - More funds from affluent Mainland Chinese households may flow to Hong Kong property assets and treat properties as commodities despite the ultra-low yields.
Housing prices may ease off by end-10 due to policies but have 15% upside in 2011 With the government getting more determined to squeeze the housing bubble, the residential prices are under pressure in the near-term. Nevertheless, housing prices are still supported by limited housing supply together with prevailing low borrowing costs, and could have a 15% upside before affordability hits 50% (the maximum mortgage-loan-to-income ratio allowed by the HKMA), especially if buyers take lower loan-to-value ratio.
Prefer commercial to residential as commercial rent revisions could have less resistance Obviously, landlords are far less vulnerable to policy interventions and rents are on upward pressure. We see better rental upside for office (+15% to +30%) than residential (+10%), while we believe retail properties can still fetch steady growth in 2011 and beyond in an inflationary environment. We expect other properties (industrial properties and car park etc) to continue to see significant cap rate squeeze.
Our rental affordability study shows that housing rental levels are barely affordable by domestic households and hence the upside from here is capped. In contrast, office rental demand is set to be fueled by companies' expansion in Asia and/or China, and would likely tolerate higher operating costs and office rents in the region.
Table 3: Summary of 2011E estimates Old New New 2010E 2011E 2010E 2011E 2012EResidential Price growth +15% +10% +15% +15% 0%Office Rental growth +5% to +25% +10% to +15% +12% to +37% +15% to +30% +5% Cap rate (by Dec) 4.50% to 5.00% 5.00% to 5.50% 4.50 to 4.75% 4.50 to 4.75% 4.75 to 5.00% Capital value +5 to +25% 0% to +5% +12% to +40% +15 to +30% +5%Retail Rental growth +10% to +12% +8% to +10% +10% to +12% +8% to +10% +5% Cap rate (by Dec) 5.00% to 5.50% 5.25 to 5.50% 5.00% to 5.50% 5.25 to 5.50% 5.25 to 5.50% Capital value +10% to +12% +6% to +10% +10% to +12% +8% to +10% +5%Source: Company data, J.P. Morgan estimates.
Stock picks Property developers could continue to trade at valuation discounts to landlords Since May-10, share price performance of developers has lagged landlords. Developers on average trade at long-term average NAV discount or 1 s.d. below the average. In contrast, property landlords have been trading at par to and up to 1 s.d. above the long-term average NAV discounts. Such valuation gap is not common throughout the past cycles but did happen in 1H08 when office rents peaked while residential prices edged up. This could be the opposite of 1H08 as office and retail rents and capital values have better upside than residential, in our view.
Figure 1: Year-to-date performance of major Hong Kong developers and investors
-5%-3%
-1%6%
8%8%9%
10%12%
15%17%
20%21%21%
22%25%
28%29%29%
38%38%
47%
-10% 0% 10% 20% 30% 40% 50%
Kowloon DevHenderson
NWDKerry Properties
Hang Seng IndexSino Land
K Wah InternationalHang Seng PropertyProperty Developers
SHKPHang Lung Properties
Cheung KongGreat Eagle
Link REITWharf
Property InvestorsFortune REIT
Hang Lung GroupSwire
HK LandChampion REIT
Hysan
*Until Nov 19, 2010 Source: Bloomberg
Dec-11 PTs based on long-term discounts to NAV for developers, 1 s.d. above long-term NAV discounts for landlords We remain overweight on Hong Kong property as a whole but the preference is heavily skewed towards landlords while we believe the upside of developers is capped by anticipated cooling off of the residential property market in the next 6 months.
We roll over our price targets of the Hong Kong property companies to Dec-11 and derive our PTs based on long-term NAV discount for most developers (except Henderson Land which we apply 0.5 s.d. below LT average). For landlords we apply 1 s.d. above LT average as we believe they are more defensive. The narrower NAV discounts mainly factor in the possibility of rents and capital values overshooting our forecasts due to liquidity.
Beware of the “Winner's Curse” for developers when replenishing land Another concern is that residential developers may incur higher risks if they continue to replenish landbank at high prices. Developers' landbank are still below the late 1990s peak and would run low again after the launches in 2010/11. Developers may not necessarily be re-rated if they buy land now or can be even de-rated if they buy at record prices.
Decentralized landlords could be re-rated With Hongkong Land, the prime landlord running strongly in 2010, we believe there could be a catch-up in valuations of the decentralized landlords in 2011. Our target NAV discounts are 1s.d. above long-term average across all landlords.
Top picks: Wharf, Hongkong Land, Hysan Wharf (0004.HK) The two core assets, Harbour City (HC) and Times Square, are located in prime retail but non-CBD areas. Since the introduction of the Individual Visit Scheme in 2003, average retail sales in HC have been reaching record highs in the December month each year. It is a major destination for mainland visitors. Its offices should be attractive locations for decentralized tenants, who do not necessarily need to be in Central but prefer to have an office in convenient districts with good amenities. Besides, income contribution from China properties would gradually increase as core projects are completed and booked.
Hongkong Land (HKLD.SI) With the highest exposure in Central office (lettable area 4 million sq ft) accounting for 68% of GAV, Hongkong Land is a key beneficiary of the office rental up-cycle. We expect Central to continue to lead the other districts in rental growth in 2011 given the tight supply in Central and robust demand from Chinese companies and financial institutions. Our cap rate assumption of 4.5% for Central in a low interest rate environment compares with the long-term average of 4.8%.
Hysan (0014.HK) As the largest commercial landlord in Causeway Bay, Hysan will not only be benefited from the office rental uptrend and decentralization of tenants from CBD but also stable growth in retail rental thanks to high-end retailers. The company is turning more active in asset enhancement in adding value to the investment properties portfolio. We believe the stock will get re-rated on Hysan Place completion (former Hennessy Centre). We expect the core earnings to increase by 18% largely driven by the completion of this major property.
Table 4: Summary of ratings and price target changes Last Price Potential
(HK$) Ratings Dec-2011 Price Targets upside/
Company Ticker 19-Nov-10 New
Old New Old % Chg (downside) Cheung Kong 0001.HK 120.60 OW OW 141.4 115.0 23% 17% Sun Hung Kai 0016.HK 134.20 OW OW 155.0 138.0 12% 15% Henderson Land 0012.HK 56.75 OW OW 63.0 55.0 15% 11% Sino Land 0083.HK 16.32 N OW 14.9 16.5 -10% -9% New World Dev 0017.HK 15.88 OW OW 19.1 19.1 0% 20% Kerry Properties 0683.HK 41.90 OW OW 51.5 45.0 14% 23% Hang Lung Pty 0101.HK 35.90 N N 35.0 33.0 6% -3% Hang Lung Group 0010.HK 49.75 N N 46.5 43.0 8% -7% Great Eagle 0041.HK 24.40 OW OW 27.8 24.9 12% 14% Hysan 0014.HK 32.50 OW OW 38.1 38.1 0% 17% Hongkong Land* HKLD.SI 6.85 OW N 8.8 5.5 60% 28% Swire Pacific 0019.HK 121.60 OW OW 128.2 128.2 0% 5% Wharf 0004.HK 54.75 OW OW 65.5 NA NA 20% Fortune REIT FORT.SI 4.02 OW OW 4.9 4.9 0% 22% Link REIT 0823.HK 24.00 N N 27.0 27.0 0% 13% Champion REIT 2778.HK 4.57 N N 4.1 3.7 10% -10% Average 9% 12% * in US$ Source: Bloomberg, J.P. Morgan estimates
Stock catalysts We expect the sector could be buoyed (or at least supported) by accelerating inflation in Hong Kong and the urge for inflation hedge. More catalysts starting from 2011 would include:
1) Record earnings or past-cycle high: On the landlord front, we expect spot rents to grow moderately towards end 2010 but could gather pace again in 1Q11. Hence passing rents to edge up instead of flat or decline in our earlier assumptions. These together could lead to a strong lift in earnings growth in FY11/12 to record highs or post previous highs in the 1990s, and could be reflected in either higher dividends or increase in equity.
2) Revaluation gains: We also anticipate further revaluation of investment properties which push up book value further.
3) Sales launches of some companies could be better received if second mortgage is offered: As the maximum LTV is restricted by HKMA, some developers may bridge the gap by providing secondary mortgage especially for investors who are not eligible to apply for mortgage insurance. Cheung Kong, for instance, offer secondary mortgage and buyers can effectively obtain 90% leverage. Developers’ creative payment schemes may draw more buyers from the sideline and successful launches could bring positive surprise.
Peak valuations unlikely repeated Contrary to 2008 when HK property developers traded at peak valuations (e.g. 1.9x forward P/BV for SHKP), there is limited China growth angle for the Hong Kong developers and thus the only share price catalyst is asset price inflation. Moreover, stock investors would tend to adopt a higher risk premium on developers as we are counting down for the peak of housing prices after a 7-year bull-run since 2003. Finally, unlike in the mid-1990s when there were few restrictions on mortgage lending, the HKMA put a cap on the mortgage payment to income ratio in July 1997.
Hence it is unlikely to see affordability overshooting to 80-100% levels even if the participation of non-local households (mainly Mainlanders) increases significantly.
Key risks to our investment case Ad-hoc changes in interest rate and liquidity We expect cap rates for both commercial and residential properties to remain unchanged in the next 12 months as we expect USD to put rate hikes on hold. Both asset classes are vulnerable to the sudden exit of liquidity out of the region and rising interest rates.
Credit tightening in China could spillover to Hong Kong but impact could be contained We expect credit tightening in China may reduce the liquidity channeled to Hong Kong as a whole but their participation is so far contained at 5% of primary and secondary market transactions. Besides, this could be partly offset by the home purchase by the high-income /net worth Mainlanders, and the population of the high income class have been increasing rapidly in recent years.
Fund raising risks Most property developers are much more prudent than in 1997, with smaller landbank and lower gearing. However, the low gearing is largely due to revaluation of their investment properties; in case of property devaluations the gearing will increase. Also, companies may want to offload their risks of replenishing landbank at high prices and one way is to raise equity. That said, we believe companies may not be interested to place new shares at current price levels, especially after the correction on Friday (Nov 19).
Table 5: Valuation summary for Hong Kong developers and investors Price NAV Dis. to FY11E PER Div. Yield P/B Stock 19-Nov-10 Dec-11 Dec-11 Net FY10E FY11E FY10E FY11E FY10E FY11E Rating code (HK$) (HK$) NAV (%) Gearing (X) (X) (%) (%) (X) (X) Cheung Kong OW 0001.HK 128.5 169.8 -24% 13% 15.1 13.8 2.3 2.3 1.2 1.2 Henderson Land OW 0012.HK 60.6 78.9 -23% 24% 27.0 24.7 1.3 1.7 0.9 0.8 New World Development OW 0017.HK 17.3 29.0 -40% 14% 10.8 13.5 2.2 2.2 0.8 0.7 Sun Hung Kai Properties OW 0016.HK 142.2 180.4 -21% 11% 26.3 18.5 1.9 2.1 1.5 1.4 Sino Land N 0083.HK 17.1 21.3 -20% 15% 23.7 15.6 2.3 2.6 1.1 1.2 Great Eagle OW 0041.HK 25.7 50.6 -49% 4% 11.9 12.3 2.1 2.1 0.7 0.7 Hang Lung Group N 0010.HK 50.7 62.8 -19% -1% 18.3 17.3 1.5 1.5 1.3 1.3 Hang Lung Properties N 0101.HK 36.1 34.8 4% Net cash 22.4 21.4 2.0 2.1 1.7 1.8 Hong Kong Land (US$) OW HKLD.SI 7.2 9.9 -27% 17% 20.3 21.0 2.5 2.5 1.2 1.1 Hysan Development OW 0014.HK 34.1 50.2 -32% 8% 30.2 29.1 2.0 2.0 1.0 1.0 Kerry Properties OW 0683.HK 43.3 73.8 -41% 15% 14.9 14.6 2.3 2.8 1.2 1.1 Swire Pacific OW 0019.HK 122.3 183.2 -33% 24% 9.3 15.6 2.7 3.2 1.1 1.1 Wharf Holdings OW 0004.HK 56.3 76.1 -26% 17% 20.1 18.6 1.4 1.6 1.3 1.2 Link REIT* N 0823.HK 24.9 27.0 -8% 19% 24.9 22.7 3.9 4.4 1.4 1.3 Champion REIT* N 2778.HK 4.5 4.1 10% 31% 40.8 35.4 4.7 4.6 0.8 0.7 Fortune REIT* OW FORT.SI 4.1 5.9 -31% 22% 20.5 17.1 5.9 6.4 0.8 0.7 Developers' Average -23% 14% 21.5 17.2 2.0 2.2 1.2 1.2 Investors' Average -25% 15% 16.3 18.2 2.2 2.5 1.3 1.2 REITs' Average -5% 22% 28.7 25.5 4.3 4.6 1.2 1.1 * NPV for REITs Source: Bloomberg, J.P. Morgan estimates
Residential market outlook Housing market sets to quiet down amid more measures In the Financial Secretary's announcement on Friday (Nov 19), the restrictive measures have stepped up effective Nov 22 (Monday). The main points include 1) lowering LTV by 10% for residential transactions of HK$8 million or above, and 50% LTV for all commercial property transactions; 2) introducing special stamp duty for residential properties that change hands within 24 months.
With the new policies, we expect buyers may either accept lower leverage or rely more on mortgage insurance so that the LTV can be as higher as 90% (subject to conditions). Some developers may also offer second-mortgage so that buyers need to pay only 10% as downpayment. Hence we do not expect the LTV to have substantial impact on homebuying demand. However, the special stamp duty could have a profound impact on transaction volume as buyers have to hold on to the units for two years to avoid the special stamp duty. The decline in transaction volume can easily lead to price decline as well.
Mass –end housing may out-perform luxury end in the near-term Luxury residential properties have significantly out-performed mass-end properties so far, largely due to the increase of high-income households and purchase by non-locals including high net worth Mainlanders. That said, as the transaction costs are way higher on high-end housing with less leverage allowed, liquidity could be funneled into the mass-end sub-segments where higher leverage is available.
Figure 4: Hong Kong nominal residential price index (luxury vs mass)*
104
153
137
200
40
60
80
100
120
140
160
180
200
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Mass resdiential Luxury residential
*Mass residential defined as properties with unit size smaller than 100 sqm; luxury residential defined as properties with unit size equal or larger than 100 sqm Source: Rate and Valuation Department
Are we in a property bubble? Not yet given positive carry Theoretically, properties are the best inflation hedge in a negative real interest rate environment, particularly in case of positive carry (rental income more than enough to service mortgage payments). This intrinsically means that buyers can enjoy both appreciation gains and rental income net of interest payments, and this could induce further home buying for preservation of wealth.
Figure 5: Rental yield/mortgage rate differential vs rental yield
Figure 6: Hong Kong 10 year bond yield vs inflation
2.4
-0.2
-6.0-4.0-2.00.02.04.06.08.0
10.012.014.016.0
90 92 94 96 98 00 02 04 06 08 10
%
HK$ 10Yr bond yield HK$ 10Yr bond yield - inflation
Source: HKMA,
The government may continue to lower the loan-to-value ratio to curb speculation, so higher downpayment is required. That said, given the high savings balance, Hong Kong households can afford paying higher downpayments from de-savings. Compared to mid-1997, the deposit base as of end Oct-10 increased 2.5x times. Moreover, the median age of Hong Kong population is 39 and hence the population could have accumulated wealth in other assets. In fact, the mortgage loan growth has lagged behind the property price appreciation and hence is not driven by aggressive lending by banks.
Average outstanding mortgage to property value = 16%
Source: Rating and Value Department, HKMA, J.P. Morgan estimates
Land supply still lagging behind private housing demand Moreover, land supply has been staying low throughout this cycle due to 1) the inflexible land trigger system (limited sites are put into the land application list and government has set a floor price on land) and 2) slow progress of farmland conversion. The so-called scheduled land auction has a minimal impact on the overall land supply. During 2005-1H2010 155,105 units (private and public) were
completed, of which only 62,455 private units are private. Meanwhile 147,800 households were formed during 2005-1H-2010. Although the housing completion seems to match the household formation, close to 70% of completions in 2007-8 was public rental housing. It turns out that housing completions continue to lag behind household growth.
Figure 9: The government's land sale record MM sq ft in site area
Net increase in domestic household Residential Flats Completed TotalFlat competion - net increase in household
Source: CEIC, Rate and Valuation Department
The average population growth in the past 5 years was 0.8% p.a. Assuming no change in net migration in the next 3-5 years, we expect the growth to remain similar. This would mean 19,000-20,000 households to be formed yearly. Although the government pledges stable land supply of at least 20,000 units per year, this is not sufficient to fill the shortfall of housing completions in the past few years and the expected upcoming household growth in the next few years.
So far, the measures remain focused on driving away speculative demand. However, these measures are not effective to curb housing price growth, in our view, if there is no corresponding increase in land supply.
We may be entering a bubble though We may be entering a bubble now if we consider the affordability. At a mortgage rate of 1% and average housing price of HK$5,900psf, the housing affordability stands at 45% which is still below the 50% mark. However, 42% estates of the major estates (86 estates) tracked by Centaline are transacting at HK$6,000psf or below, and most of them are in the NT. More importantly, the affordability index will surpass 50% if prices are 10% higher from now even if interest rate stays low. Also, if mortgage rate reverts to 5% (though chances are slim), affordability index will be 80%.
Property values to GDP way surpassed historical high Looking at the residential property values to GDP, the ratio has exceeded 1997 peak of 3.13 times and could overshoot to 3.5x by 2011 if our forecast of 20% housing price growth is realized in 2011. This implies that economic growth cannot catch up with the asset price growth or the liquidity is likely to channel mostly into properties and little to other segments.
Source: Rate and Value Department, Hong Kong Statistics Department, J.P. Morgan estimates
Rental affordability suggests only 10% upside from here Based on the median monthly household income of HK$25,000 and territory wide average rental of HK$21.8psf, on average a private household needs to fork out 48% of their income to pay the rents of a 500sqft apartment unit. Given the single-digit household income growth, we estimate housing rents have a mere 10% upside if rental affordability index remains at 50% levels.
Commercial property outlook Commercial rents and capital values in decentralized areas may also catch up Office rents in decentralized areas, particularly Tsim Sha Tsui and Island East, have been stagnant so far in 2010 largely because of the new supply in Kowloon East. As the supply territory wide is taken up and vacancy coming off, the leasing demand by expansion of business service companies can spillover to the decentralized office areas. We thus expect the rents in those areas to regain momentum in 2011. Moreover, we previously expected a big cap rate differential between core and decentralized areas, while we now expect only marginal gap of 25bps between two categories. Similarly, in the midst of broad-based inflation and domestic consumption growth gathering pace, retail landlords may also have stronger pricing power and we expect stable growth in retail rents in 2011.
3Q10 Avg (HK$/sqft) Q/Q % chg YTD % Chg From 08 Peak Cap rate in 3Q
Overall Office Rental 49.8 7.6% 22% -23% 4.0% Capital Value 15,028 7.0% 20% -4%
Central Office Rental 87.0 8.6% 28% -25% 4.4% Capital Value 23,890 8.7% 26% New high
Wanchai/CWB Office Rental 41.8 9.9% 24% -22% 3.8% Capital Value 13,074 7.5% 19% -5%
TST Office Rental 32.5 2.3% 9% -25% 3.5% Capital Value 11,035 2.7% 7% -8%
HK East Office Rental 28.0 4.1% 9% -17% 4.5% Capital Value 7,403 3.5% 10% New high
Kln East Office Rental 18.9 4.0% 11% -26% 4.0% Capital Value 5,648 3.9% 10% -12%
Retail Rental 97.2 0.2% 6% -7% 5.2% Capital Value 22,648 0.2% 11% New high
Source: Jones Lang LaSalle - Real Estate Intelligence Services.
Limited supply in Central New office supply in Central will remain tight in the next two years. Majority of the new supply in Central is expected to complete in 2011 with total net floor area of around 1.2 million sf. However, most of the CBD supply will be self-occupied, such as Tamar development project for government use and Ritz Carlton hotel redevelopment to be largely taken up by China Construction. The only en-bloc buildings available for leasing will be the development of Luk Hoi Tong Building and Crocodile Houses, providing net floor area of 233,500 sf or about 1% of total existing Grade A office stock in Central.
The vacancy of Central has come down from 5.5% in 3Q09 to 3.6% in 3Q10 due to quick rental recovery. The hot IPO market has not only increased demand from newly listed companies for setting up an office in Hong Kong but also raising demand from IPO related businesses such as printing companies and professional firms, including law firms and accounting firms. Some new entries to Hong Kong
prefer to have an address in the CBD area to receive easier recognition by others. Hence the Central district is a top choice for them.
Table 7: Hong Kong office supply
Project Location Developer NFA (sf) Grade A Grade B 2010 Supply International Commerce Center Ph 3 Kowloon Station SHKP 481,000 481,000 Former HK Tobacco Co Ltd redevelopment (863-865 King's Rd) Quarry Bay Kerry Properties 375,000 375,000 7 Shing Yip Street Kwun Tong Billion Development 222,800 222,800 Po Hing Center redevelopment, 18 Wang Chiu Road Kowloon Bay Sino Land 261,680 261,680 Decentralized - sub-total 1,340,480 1,340,480 Total 1,340,480 1,340,480 2011 Supply Ritz-Carlton Hotel Redevelopment Central Lai Sun/China Construction Bank 168,750 168,750 Luk Hoi Tong Building Redevelopment, Queen's Road Central Central Luk Hoi Tong 105,000 105,000 Crocodile Houses 1 & 2 and Ananda Tower Redevelopment Central Citigroup Prop Investors 128,500 128,500 Tamar Development Project Central HK Government 844,200 844,200 Core central sub-total 1,246,450 1,246,450 0 Tseung Kwan O Area 56 project TKO Station SHKP/MTRC 40,400 40,400 Piazza Industrial Building Redevelopment, 133 Hoi Bun Road Kwun Tong Billion Development 351,000 351,000 Decentralized - sub-total 391,400 351,000 40,400 Total 1,637,850 1,597,450 40,400 2012 Supply Hysan Place Causeway Bay Hysan 319,500 319,500 Tai Sang Commercial Building Redevelopment Wanchai Swire 99,000 99,000 Kowloon Commerce Centre(Kwai Chung Town Lot 215 Ph2) Kwai Chung SHKP 447,720 447,720 Prime Area sub-total 866,220 Total 866,220 Source: CBRE, HKET, Colliers, JLL, J.P. Morgan estimates.
Office decentralization Due to the limited supply in Central, we believe that cost-cautious tenants will be gradually squeezed out to decentralized areas. Causeway Bay, Tsimshatsui and Island East should be the attractive locations for decentralized tenants, such as multinational corporations that prefer to have an office in convenient districts with good amenities. As such, we expect the rental growth rate in Causeway Bay and Tsimshatsui to follow Central growth rate closely according to the demand from decentralization and business expansion of tenants in a growing economy. Island East would also be a beneficiary of office decentralization trend. Overall we expect Central office rent to exceed the 2008 peak whereas rents in other districts to raise close to 2008 peak.
Table 8: Grade-A office rental gap compared with Central
LT average Peak 3Q10 Causeway Bay/Wanchai 19.6 62.6 45.2 Tsimshatsui 25.9 73.8 54.5 Island East 32.9 82.3 58.9 Kowloon East 60.9 91.8 68.1
Source: Jones Lang LaSalle - Real Estate Intelligence, J.P. Morgan estimates.
Source: Real Estate Intelligence Services – Jones Lang Lasalle, J.P. Morgan estimates.
Figure 16: Office rental gap - Central vs Island East HK$psf per month
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
00 01 02 03 04 05 06 07 08 09 10Central Island East
peak gap HK$82psf
Source: Real Estate Intelligence Services – Jones Lang Lasalle, J.P. Morgan estimates.
Figure 17: Office rental gap - Central vs Kowloon East HK$psf per month
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
06 07 08 09 10Central Kow loon East
peak gap HK$92psf
Source: Real Estate Intelligence Services – Jones Lang Lasalle, J.P. Morgan estimates.
Two-factor office rental forecast model We derive our office rental forecasts from a two-factor regression model based on historical relationship between key factors affecting rental growth. The two factors we apply in the model are GDP growth and change in office vacancy. Historically overall rental growth has a high correlation of 0.8 and -0.75 with GDP growth and change in vacancy, respectively. We have back tested the model and found it reasonably fair in predicting the rental growth. For 2011, with the assumptions of 4.1% GDP growth and vacancy drop of 1 percentage point, our model suggests that office rent will grow 24.5% in 2011.
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -0.12 0.07 -1.77 0.09 -0.26 0.02 -0.26 0.02 X Variable 1 4.58 1.40 3.27 0.00 1.62 7.53 1.62 7.53 X Variable 2 -5.82 2.14 -2.72 0.01 -10.34 -1.31 -10.34 -1.31 Source: J.P. Morgan estimates.
Forecast by districts We use the model as a guideline in forecasting our office rental assumptions in 2011 and forecast growth rate according to the characteristics of each district. In Central where demand is expected to remain robust, we forecast growth rate will be higher than other districts. The growth is expected to follow closely by Causeway Bay/Wanchai and Tsimshatsui, then Hong Kong East and Kowloon East.
Table 10: Office rental forecast by districts HK$psf per month
Central CWB/WC TST HK East Kln East 2008 Peak 116.1 53.7 43.2 33.7 25.7 3Q09 87.0 41.8 32.5 28.0 18.9 2011E 116.8 52.7 41.6 33.3 22.6 2011E % change +25-30% +25% +25% +15% +15% Source: Jones Lang LaSalle - Real Estate Intelligence, J.P. Morgan estimates.
Mainland consumption supporting stable retail growth Some of the major retail landlords, such as Wharf (0004.HK), recorded strong growth in retail revenue in 1H10. We expect that the positive economic outlook will continue to favor both mainland visitors spending and domestic consumption. Anecdotal evidence showed that mainland visitors are not limited to high-end consumptions. Cross-border limousine buses running between Hong Kong and Shenzhen have pick-up and drop-off stops at Wharf's Harbour City and Times Square, which indicates these are important shopping stops. Moreover, their consumption types extend into daily necessities such as milk powder, shampoo and tissue paper, partly due to inflation in China and partly due to consumer confidence in buying quality products in Hong Kong.
Company earnings and NAV outlook Earnings downgrade, NAV maintained Earnings forecasts reduced by 7% on average We incorporate the announcement of special stamp duty and cut our earnings forecasts by 6.2%/6.8% for FY11/12E (for companies with financial year ending June; FY10/11E for those with financial year ending December) on average. We take into account the following:
1) Market sentiment may cool down for 6 months and hence upcoming project launches are likely pushed back or put on hold, thus affecting FY11 development earnings. Companies may smooth out earnings as well if they have high lock-in for the upcoming financial year and plans to launch FY12 completions, and could push back some completions from FY11 to FY12.
2) For companies with strong rental income stream, we have factored into higher office rental reversion particularly in Central, Tsim Sha Tsui and Causeway Bay. We also factor in steady passing rental growth for retail properties.
3) Some companies may see upward cost pressure on hotel and retail operations
4) Most companies which entered China in 2007 should report considerable top-line growth from China operations. The residential development projects have been presold and could have delivery of initial phases by FY11/12. Same for developers with completions of mixed-use projects (e.g. SHKP's Shanghai Pudong IFC, Wharf’s Wheelock Square in Shanghai and HLP's Shenyang Palace 66)
NAV mainly lifted by higher office capital value, offsetting residential NAV declines Our NAV estimates for the Hong Kong property stocks under coverage are raised by 4% on average, with considerable NAV growth seen in the landlords or companies with more investment property exposures. In particular, we have raised Hongkong Land's NAV estimates by 27% due to the Central office capital values, where rental growth has been phenomenal YTD10 and cap rate has not shown signs of expansion, contrary to our earlier expectations that cap rates would expand by now.
For developers with high exposure to Hong Kong residential properties, the NAV growth from investment properties could be largely offset by the lower NAV on residential development projects. We have assumed prices to remain intact and even edge up but sales pipeline is pushed back. Besides, for companies that opt-for-volume (e.g. Cheung Kong), we expect the units would be sold and cleared at market or slightly below market prices.
Table 11: Hong Kong property developers - summary of NAV changes Last Price Discount (HK$) Dec-2011 NAV To NAV
Company Ticker 19-Nov-10 New Old % Chg (New) Reason for NAV changes
Cheung Kong 0001.HK 120.60 169.8 151.3 12% -29% Based on Hutch share price at HK$94.8 vs. current market price earlier
SHKP 0016.HK 134.20 180.4 174.5 3% -26% HK office capital value increase offset by lower NAV from HK residential properties
HLD 0012.HK 56.75 78.9 87.5 -10% -28% Lower ASP and slower sales, also only 10% GFA inflation for sites to be acquired from relocation / land conversion
Sino Land 0083.HK 16.32 21.3 20.9 2% -24% HK office capital value increase offset by lower NAV from HK residential properties
NWD 0017.HK 15.88 29.0 29.7 -2% -45% HK office capital value increase offset by lower NAV from HK residential properties
Kerry 0683.HK 41.90 73.8 64.5 14% -43% NAV growth mainly from China investment properties due to cap rate compression in 1st-tier cities; HK investment property value growth comes mainly from luxury
HLP 0101.HK 35.90 34.8 33.8 3% 3% NAV growth mainly from China investment properties due to cap rate compression in Shanghai, more than offsetting the lower value of HK residential properties for sale
HLG 0010.HK 49.75 62.8 62.8 0% -21% No change
Great Eagle 0041.HK 24.40 50.6 46.6 9% -52% Higher share price of Champion REIT
Hysan 0014.HK 32.50 50.2 50.2 0% -35% No change
HKL HKLD.SI 6.85 9.9 7.8 27% -31% NAV growth from HK Central office properties due to rent growth and absence of cap rate expansion
Swire Pacific 0019.HK 121.60 183.0 183.0 0% -34% No change
Wharf 0004.HK 54.75 76.1 NA NA -28% NA
Fortune REIT* FORT.SI 4.02 4.9 4.9 0% -18% NA
Link REIT* 0823.HK 24.00 27.0 27.0 0% -11% NA
Champion REIT* 2778.HK 4.57 4.1 NA NA 11% NA
Source: J.P. Morgan estimates.
High earnings lock-in by now but risks of default do exist At present, most of the major developers with June year-end have locked in 66-80% of the FY11E development profit, while those with December year-end have achieved our full-year development earnings estimates. Only NWD achieved 30% of FY11E development earnings and hence poses earnings risks. For most others they are actually not under pressure to launch the units to achieve development sales. This also echoes to our expectations that primary prices may hold up but developers may simply hold back the launches until after the Chinese New Year, as March to May is the traditional high season for property launches.
Table 12: Major Hong Kong property developers – Development profit lock-in Ticker Year FY Dev't profit FY Dev't profit end lock-in lock-in
Cheung Kong 0001.HK Dec 10E 100% 11E 43% Sun Hung Kai 0016.HK Jun 11E 72% 12E 18% Henderson Land 0012.HK Dec 10E 80% 11E 0% Sino Land 0083.HK Jun 11E 66% 12E 0% New World Dev 0017.HK Jun 11E 30% 12E 0% Kerry Properties 0683.HK Dec 10E 88% 11E 0% Hang Lung Pty 0101.HK Jun 11E 0% 12E 0% Source: J.P. Morgan estimates.
While the earnings risks are low, we do not rule out the possibility of default in the near-term especially buyers who only paid the initial deposits and opt for the deferred payment schemes. That said, most developers have offered high incentives for buyers who take immediate mortgages and hence the default rate is supposed to be lower than 2008, in our view
* 2010E/2011E/2012E core EPS for companies year-ending March and June, 2011E/2012E/2013E core EPS for companies year-ending December * DPU for REITs Source: J.P. Morgan estimates.
Year 2010E/11E core EPS* 2011E/12E core EPS* 2012E/13E core EPS*
Company end New Old % Chg New Old % Chg New Old % Chg Key reasons for earnings changes
Cheung Kong Dec 4.96 5.10 -3% 5.02 5.39 -7% 4.05 NA NA1) No change in FY10 as most residential properties are presold and locked in 2) Higher earnings contribution from Hutch is offset by expected lower dev't earnings in FY11
Sun Hung Kai Jun 7.70 6.47 19% 7.94 7.16 11% 8.43 NA NA Upgrade due to faster-than-expected presale in 2H10 which will be reflected in FY10/11 earnings
Henderson Land Dec 2.25 2.41 -7% 2.45 2.65 -8% 3.80 NA NA1) FY10 earnings estimate cut to reflect additional provisions on 39 Conduit Road 2) Factor in slower sales of inventories and Hill Paramount in 2011 due to competition from nearby projects
Sino Land Jun 0.69 1.10 -37% 0.80 1.32 -40% 0.94 NA NA EPS dilution effect from share placement and slower sales of HK properties
New World Dev Jun 1.28 1.50 -14% 1.35 1.57 -14% NA NA NA Slower property sales in Hong Kong and China after tightening
Kerry Properties Dec 2.91 2.83 3% 2.96 3.22 -8% 3.50 NA NA Earnings cut for FY11 to factor in slower sales at Wong Tai Sin project
Hang Lung Pty Jun 1.31 1.68 -22% 1.57 1.78 -12% 2.19 NA NA EPS dilution from share placement, expect offloading of inventories (Long Beach, Harbour Side) to be deferred again
Hang Lung Group Jun 2.31 2.93 -21% 2.73 3.09 -12% 3.45 NA NA Holding of HLP drops from 52.4% to 49.59% post placement so lower earnings contribution from HLP; also reflect HLP earnings revisions
Great Eagle Dec 2.16 2.15 0% 2.08 2.08 0% 2.20 NA NA No change
Hysan Dec 1.13 1.13 0% 1.17 1.17 0% NA NA NA No change
Hongkong Land Dec 0.32 0.31 2% 0.33 0.32 3% 0.31 NA NA Revising up forecast on Central rental growth
Swire Pacific Dec 6.67 6.67 0% 7.83 7.83 0% 9.71 9.71 0% No change
Wharf Dec 2.61 NA NA 3.03 NA NA 3.37 NA NA Initiate coverage on 19 Nov
Fortune REIT Dec 0.24 0.24 0% 0.26 0.26 0% 0.26 0.26 0% No change
Link REIT Mar 1.08 1.08 0% 1.18 1.18 0% NA NA NA No change
Champion REIT Dec 0.21 0.21 3% 0.21 0.20 3% 0.21 0.20 5% Revising up forecast on Central rental growth
Based on long-term average stub disc with Hutch at HK$94.8. Less perceived as proxy to HK property market. Inline with developers, for which we generally apply LT avg NAV dis.
Sun Hung Kai 0016.HK OW OW 155.00 14% disc to NAV
20% disc to NAV
Based on long-term average discount. Despite high proportion of GAV and earnings are from investment properties, stock is perceived as proxy to HK residential play. We also apply LT avg NAV dis.
Henderson Land 0012.HK OW OW 63.00 20% disc to NAV
35% disc to NAV
20% is based on 0.5 std dev below long-term average discount of 15% due to expected slow inventory sales and concern on upcoming selling prices of 39 Conduit Road (earlier transactions were cancelled). GFA inflation cap at 10% might affect the profit margin and progress of old buildings redevelopment.
Sino Land 0083.HK N OW 14.90 30% disc to NAV
20% disc to NAV
30% is based on long-term average discount. Highest exposure to HK residential market (32% of GAV), more vulnerable to policy measures.
New World Dev 0017.HK OW OW 19.10 34% disc to NAV
34% disc to NAV 34% is based on long-term average discount.
Kerry Properties 0683.HK OW OW 51.50 30% disc to NAV
30% disc to NAV
30% is based on average discount since 2004. Diversified properties portfolio, less vulnerable to HK residential policy risk. Further NAV growth potential comes from further cap rate compression
Hang Lung Pty 0101.HK N N 35.00 Par to NAV Par to NAV Stock has been re-rated from a 30% discount to NAV before 2006 to eventually parity to NAV as investors
expected new projects and strong rental growth.
Hang Lung Group 0010.HK N N 46.50 26% disc to NAV
26% disc to NAV
26% is based on average discount since 2005. An alternative to get exposure in the China expansion story.
Great Eagle 0041.HK OW OW 27.80 45%
discount to NAV
45% discount to
NAV45% is based on long-term average discount. Global hotel portfolio accounting for over half of GAV, unlikely to drive significant growth in near-term.
Hysan 0014.HK OW OW 38.10 24% disc to NAV
24% disc to NAV
1 standard deviation above long-term average of 38%. Potential stock re-rating and earnings growth generated from Hysan Place completion should narrow NAV discount. Upgraded on Nov 3, 2010
Hongkong Land HKLD.SI OW N 8.80 10% disc to NAV
27% disc to NAV
1 standard deviation above long-term average of 27%. Positive office rental outlook. Central office rent should continue to lead other districts in office rental growth. Major proxy as HK property landlord.
Swire Pacific 0019.HK OW OW 128.20 30% disc to NAV
30% disc to NAV No change
Wharf 0004.HK OW Not
covered
65.50 14% disc to NAV NA 1 standard deviation above long-term average of 29%. Beneficiary of office decentralization and stable
retail consumption growth. Minimal HK residential exposure (1%).
Fortune REIT FORT.SI OW OW 4.90 Par to NPV Par to NPV PT implies 5.3% FY11E yield. Wider yield spread than Link REIT as Fortune has smaller market cap and
lower liquidity.
Link REIT 0823.HK N N 27.00 Par to NPV Par to NPV PT implies 4% FY11E yield, lowest yield spread among the REITs under our coverage given its size, stock
liquidity and steady rental income growth. Rating downgrade on Nov 11, 2010
Champion REIT 2778.HK N N 4.10 Par to NPV Par to NPV PT implies 5% FY11E yield. Wider yield spread required as an office REIT vs. Link REIT. Also Champion
Cheung Kong depends on share price performance of Hutchison; investors may prefer direct exposure to Hutch rather than positions in CK ; housing market stays quiet for a longer period due to restrictive measures; default of presale transactions, further restrictive measures
Sun Hung Kai Interest rate hike, slow market prevails for over 6 months which would be worse than our expectations; default of presale transactions, further restrictive measures. Fund raising risks.
Henderson Land Further cancellation of S&P contracts at 39 Conduit Road after announcement of new restrictive measures; slower-than-expected volume if pricing is too aggressive for both its HK & China projects. Bonus warrant may be exercised if share price well exceeds HK$57 and could put a cap on share price.
Sino Land Default of presale transactions, further restrictive measures on housing sector. Slowdown of launches in early 2011 poses earnings risks. Upside risksBetter-than-expected sales, e.g. if company offers flexible payment schemes to buyers, share buy-back
New World Dev Delay in the negotiation process with Urban Renewal Authority on the sale of its minority stake in K11 mall back to NWD; Further slowdown of development progress of NWCL, Kai Yuen Lane acquisition may become NAV dilutive if property comes down significantly
Kerry Properties Interest rate hike, sustainability of economic recovery in Hong Kong and China, construction slippage of its mixed-use projects in China, sales progress of China projects may slow down due to prolonged tightening
Hang Lung Pty Lower-than-expected rental achieved on its upcoming malls, construction slippage and construction cost hikes. Inventory sales may be at lower price than expectations. Upside risks announcement of new projects in China that bring bigger NAV accretion than our expectations; Chairman adding stake
Hang Lung Group Downside risks include share price decline of HLP; upside risks Better-than-expected dividend payment; Chairman increasing stake.
Great Eagle shocks from epidemics, acquisitions at a high cost and slower than expected rental growth
Hysan Slower-than-expected rental growth, delay in completion of assets enhancement activities and Hysan Place
Hongkong Land Lower-than-expected rental growth, rise in interest rate
Swire Pacific Key downside risks are: (1) weaker-than-expected office leasing demand; (2) earlier-than-expected expansion of cap rates which would reduce NAV.
Wharf Lower-than-expected rental growth, Ocean Terminal lease not getting renewal, delay in China properties completion
Fortune REIT Lower-than-expected rental reversions, and delays in completion of City One Shatin asset enhancement
Link REIT Downside risks include rise in interest rates and delay in Assets Enhancement Initiatives completion. Key upside risk is better-than-expected rental growth
Champion REIT Downside risks include rise in interest rates, upside risks are higher than expected occupancy rates and sudden resumption of 100% payout ratio
Table 16: Policy measures announced YTD10 Time Key policy changes Feb-10 Financial Secretary announced series of restrictive measures:
1. Stamp duty for property worth >HK$20 mn raised to 4.25% from 3.75% 2. Government implemented series of measure aiming to increase land supply: i. introduce government initiated land auction; ii. put up a site in Yuen Long for tender, iii. speed up tender launch process for MTRC and URA's projects
Mar-10 HKMA imposed a reference mortgage rate floor at HIBOR+70 b.p. At that time some banks are offering mortgage at HIBOR+65 b.p.
Apr-10 Government announced more restrictions on pre-sale: i. require developers to launch price list three days before sale ii. developers are required to have at least one sample unit at the show flat displaying the exact handover standards; iii. for small developments, a minimum number of units to be launched in the first batch will be the higher of 30 flats or 30% of the total units available-for-sale; iv. for larger developments the minimum number of units to be included will be the higher of 50 flats or 50% of the total units available-for-sale.
Aug-10 1. Initiate three land auctions (540 units), two held in Sept and one unspecified 2. Speed up redevelopment of former Kai Tak Airport, land conversion and new land supply; expand land application list 3. Buyers who cancel transactions will have to forfeit at least 10% of total purchase price (vs a minimum of 5% under sale & purchase agreements) 4. Confirmor transactions banned for primary presale 5. For residential units valued at HK$12 million or more, the LTV ratio is capped at 60% (vs HK$20 million previously) 6. Impose 60% LTV cap on mortgage of residential units NOT intended to be self-occupied
Oct-10 (Policy Address)
1. Introduce My Home Purchase Plan : HK Housing Society to build "no-frills" small and medium flats for lease; tenants can buy the flat they rent or another flat with 50% of the rent payments as downpayment 2. Government pledges annual land supply will reach at least 20,000 units 3. Propose to rezone 30 hectares of non-residential land into residential use 4. Impose a cap on “GFA inflation” to 10% 5. Monitor primary sales through proposed legislation 6. temporary removal of real estate from the investment asset classes under the Capital Investment Entrant Scheme (CIES) effective on 14-Oct-10
Nov-10 1. Special Stamp Duty imposed for trading of properties within 6-24 months 2. LTV lowered further
Source: HKMA, HKMC, HKSAR Government and J.P. Morgan.
Projects Developer Location Plot Ratio (X)Residential GFA
(sqf)Saleable res GFA
(sqf)Unit size
(sqf)Est. No. of
unitsExpected
sales datePrice
(HK$mn)Price
(HK$psf)Year-to-date transactionsGovernment tender / auctionTseung Kwan O Area 66B SHKP Tseung Kwan O 5.50 728,178 837,405 900 930 Feb-10 3,370 4,628Tung Chung Area 55B Nam Fung Tung Chung 5.00 1,410,071 1,621,582 900 1,802 May-10 3,420 2,425Area 19, Sha Tau Kok Road HK Ferry Fanling 5.88 385,700 443,555 900 493 May-10 1,330 3,448Ex-Valley Road Estate Ph 2 SHKP Homantin 5.00 869,239 999,625 1,000 1,000 Jun-10 10,900 12,540103 Mt. Nicholson Road, The Peak Nan Fung / Wharf The Peak 1.30 324,859 363,842 2,000 182 Jul-10 10,400 32,014Hung Hom Bay Reclamation Site D1 Cheung Kong Hung Hom 4.50 365,747 438,896 750 585 Aug-10 3,510 9,597Ex-CAS Training Centre, 204 Argyle Street Cheung Kong Kowloon City 5.00 394,282 473,138 1,000 473 Aug-10 4,100 10,3991 Ede Road, Kowloon Tong Kerry Properties Kowloon Tong 3.00 77,468 89,088 2,500 36 Aug-10 1,285 16,588Luen Wo Hui SHKP Fanling 5.40 125,452 140,506 650 216 Sep-10 459 3,6593-5 Ede Road, Kowloon Tong Chinachem Kowloon Tong 3.00 90,675 104,276 2,200 48 Oct-10 1,630 17,976Inverness Road, Kowloon Tong Chinachem Kowloon Tong 3.00 227,527 250,280 1,500 160 Nov-10 2170 9,537
4,999,197 5,762,192 5,925 42,574 8,516MTRC ProjectsSites C and D, Austin Station NWD / Wharf Tsim Sha Tsui 5.67 1,280,000 1,472,000 1,338 1,100 Mar-10 11,700 9,141
1,280,000 1,472,000 1,100URA ProjectsYee Kuk Street Project Cheung Kong Sham Shui Po 7.36 264,824 317,789 828 384 Jan-10 NA NAYu Lok Lane / Centre Street Project China Overseas Western 7.43 171,953 206,344 764 270 Sep-10 NA NA
436,778 524,133 654Land exchange / conversionNo. 146, Argyle Street Swire Prince Edward NA 88,555 101,838 750 136 Jan-10 161.77 1,827Lo Wo Sha Site (STTL 502) Henderson/NWD Yuen Long 2.83 2,950,000 3,392,500 750 4,523 Mar-10 9,597 3,253YOHO Town Ph3 (YLTL 507) SHKP Yuen Long 5.50 1,848,000 2,125,200 750 2,834 Mar-10 7,103 3,844Tai Tong Road Project (Lot 5369 in DD 116) Henderson / NWD Yuen Long 3.50 1,175,418 1,351,731 750 1,802 May-10 2,335 1,986Ting Kau site (Lot495 in DD 399) SHKP Tsuen Wan 0.78 78,000 89,700 1,000 90 May-10 255 3,268Yuk Yat Street (KIL 11196) Kerry To Kwa Wan 7.70 148,968 171,313 600 286 May-10 450 3,022Cheung Sha Wan Site (KCTL 157) Cheung Kong Cheung Sha Wan 5.21 260,368 312,442 750 417 May-10 580 2,226Ha Yau Tin (Lot 5371 in DD 116) SHKP Yuen Long 3.49 233,000 267,950 750 357 Aug-10 564 2,42277 Peak Road (RBL 836) Wharf The Peak 0.55 42,000 63,000 6,000 11 Aug-10 283 6,73344-50 Chung Hom Kok Road (RBL 811) Shun Tak Stanley 0.75 23,928 35,892 6,000 6 Sep-10 134 5,61150 Island Road (RBL 1182) Kwok's family Repulse Bay 0.75 41,318 61,976 6,000 10 Sep-10 825 19,967
6,889,554 7,973,541 10,471
Sub-total 13,605,528 15,731,866 18,150Estimated for the remainder of 2010Government tender / auctionEx-Ko Shan Road Customs & Excise Service Married Quarters NA Hung Hom 7.50 153,515 176,542 650 272 Dec-10
153,515 176,542 272URA ProjectsFuk Tsuen Street / Pine Street Project NA Tai Kok Tsui 7.50 43,271 51,925 721 72 Nov-10
799,047 958,857 1,096Land conversionWo Shang Wai Site Henderson Yuen Long 0.39 890,000 1,023,500 3,000 341 4Q2010
890,000 1,023,500 341
Sub-total 1,842,562 2,158,899 1,709
Grand Total 15,448,090 17,890,765 19,858 Source: Lands Department, Urban Renewal Council, MTR Corp, HKET, HKEJ, Sing Tao Daily, J.P. Morgan
Summary of NAV breakdown Table 18: Cheung Kong Holdings – detailed net asset value estimates Property Dec-11 Value HK$MM HK$/sh Property Development Hong Kong Luxury residential 1,254 0.5 0.3% Mass residential 45,482 19.6 11.0% HK Dev 46,736 20.2 11.3% China 0.0 Residential 23,842 10.3 5.8% Office 0 0.0 0.0% Retail 689 0.3 0.2% Res/Com 13,763 5.9 3.3% China Dev (sqm) 38,294 16.5 9.3% Other overseas Dev 8,787 3.8 2.1% Total Property Development 93,818 40.5 22.8% Investment Property Hong Kong Office 15,402 6.6 3.7% Retail 15,234 6.6 3.7% Industrial/others 1,782 0.8 0.4% HK Inv pty 32,419 14.0 China 0.0 Residential 4,742 2.0 1.2% Office 6,396 2.8 1.6% Retail 17,020 7.3 4.1% China Inv pty 28,159 12.2 6.8% Singapore Office 3,556 1.5 0.9% Retail Singapore inv pty 3,556 1.5 0.9% Total Investment Property 64,134 27.7 15.6% Hotel Hong Kong Existing 34,703 15.0 8.4% HK hotel total 34,703 15.0 8.4% China Existing 4,443 1.9 1.1% Total Hotel 39,146 16.9 9.5% Agricultural Landbank 2,492 1.1 0.6% Investments Hutchison Whampoa Ltd (0013.HK) 201,943 87.2 49.0% Total other investments 212,627 91.8 51.6% Gross Asset Value 412,216 178.0 100.0% Est Gross Interest Bearing Debt (35,433) -15.3 Less Cash & Short Term Deposits 18,413 7.9 Est Net Interest Bearing Debt (17,020) -7.3 0.0 Associated debt (1,836) -0.8 Total Net Asset Value, Cheung Kong Ltd 393,360 169.8 Source: Company data, J.P. Morgan estimates
Table 20: Henderson Land – detailed net asset value estimates % of Division Dec-11 total (HK$m) (HK$/sh) GAV Hong Kong Property Development Lux Res 24,698 11.4 12% Mass Res 1,134 0.5 1% Office/industrial 43 0.0 0% Less Forward sales proceeds received 0 0.0 0% Total Property Development 25,875 11.9 12% Hong Kong Investment Property Office 35,782 16.5 17% Commercial/Retail 37,209 17.2 18% Industrial 2,209 1.0 1% Residential 10,721 5.0 5% Carparks 2,047 0.9 1% Hotels 2,363 1.1 1% Total Investment Property 90,331 41.7 43% Agricultural land 6,100 2.8 3% China development property 6,989 3.2 3% China investment property 23,559 10.9 11% China Property 30,548 14.1 14% Investments Hong Kong & China Gas (0003.HK) 54,301 25.1 26% Hong Kong Ferry (0050.HK) 836 0.4 0% Miramar Hotel (0071.HK) 2,343 1.1 1% Henderson Investment (0097.HK) 1,636 0.8 1% Sunlight REIT (0435.HK) 187 0.1 0% Total Investments/Other 59,302 27.4 28% Total Gross Value, Henderson Land Development Ltd 212,156 98.0 100% Est Gross Interest Bearing Debt (52,121) Less Cash & Short Term Deposits 19,895 Est Net Interest Bearing Debt (32,226) (14.9) Total Net Asset Value, Henderson Land Development Ltd 179,930 83.1 Source: Company data, J.P. Morgan estimates. Henderson Land: fully diluted NAV: HK$78.9
Table 22: New World Development – detailed net asset value estimates Dec-11 HK$MM HK$MM HK$ps % Hong Kong Development Properties: Luxury Residential 11,398 2.91 8% Mass Residential 11,512 2.94 8% Retail 222 0.06 0% 23,131 5.90 17% Hong Kong Investment Properties: Luxury Residential 11,115 0 2.84 8% Office 22,500 0 5.74 16% Retail 25,720 0 6.56 18% Industrial and others 1,251 0 0.32 1% 60,585 15.46 44% Agricultural land 4,797 1.22 3% Hotels 17,881 4.56 13% PRC development properties 1,288 0.33 1% Total property 107,682 27.48 77% New World China Land (71.27%) (917 HK) 7,927 2.02 6% New World Department Store (75%) (825 HK) 8,435 2.15 6% NWS Holdings (55.88%) (659 HK) 13,537 3.46 10% 29,899 7.63 21% Telecommunication 1,570 0.40 1% 0 0.00 0% Gross asset value 139,151 35.52 100% Potential cash receipts from Prediwave 0 0.00 Net Debt as at end-Jun 09 (ex NWS/NWCL/NWDS) (22,281) -5.69 Off-Balance Sheet Debt (3,056) -0.78 Net asset value 113,813 29.05 Source: Company data, J.P. Morgan estimates
Table 24: Hang Lung Properties– detailed net asset value estimates Fwd NAV Dec-11 HK$MM HK$ps % Hong Kong Development Properties The HarbourSide 8,224 1.85 5% Aqua Marine 79 0.02 0% Carmel-on-the-Hill 5 0.00 0% Long Beach 9,724 2.19 6% Blue Pool Road 4,645 1.05 3% 2 Garden Terrace 125 0.03 0% Car Parks 1,106 0.25 1% Hong Kong Development Properties 23,908 5.38 15% Hong Kong Investment Properties Luxury residential 11,078 2.49 7% Retail 28,189 6.35 18% Office 16,746 3.77 11% Industrial 1,547 0.35 1% Car parks 2,332 0.53 2% 59,894 13.49 China Investment Properties Plaza 66 and Grand Gateway 20,647 4.65 13% Other announced China developments 30,195 6.80 20% China developments to be announced 3,982 0.90 3% 54,824 12.34 35% Total property 138,626 31.21 90% Net cash as at Jun-10 15,977 3.60 10% Total net assets 154,603 34.81 100% Source: Company data, J.P. Morgan estimates
Table 25: Hang Lung Group– detailed net asset value estimates HK$m HK$/sh Hong Kong Development Properties: Completed stcoks at cost Hong Kong Investment Properties: Luxury Residential 1,766 Office 92 Retail 404 Industrial 180 I/O 931 3,373 2.52 PRC property 6,131 4.58 Total property 9,504 7.11 Hang Lung Properties (52%-owned) 78,466 58.68 Gross asset value 87,969 65.79 Core net debt (ex HLP) (4,015) -3.00 Net Asset Value 83,954 62.8 Source: Company data, J.P. Morgan estimates
Table 26: Great Eagle– detailed net asset value estimates Dec-11 NAV HK$MM HK$/sh % total Hong Kong Investment Properties Office 2,270 3.7 7% Retail 888 1.4 3% Residential (Include Eaton House) 826 1.3 3% Car Park 165 0.3 0% 4,149 6.7 Hong Kong hotel properties: Eaton Hotel 1,467 2.4 4% The Langham Hotel, Hong Kong 3,203 5.2 10% Langham Place Hotel, Mongkok 3,558 5.7 11% HK Hotel 8,228 13.2 25% Total Hong Kong properties 12,377 19.9 38% China properties 293 0.5 1% US office 925 1.5 3% Overseas hotel properties The Langham Hotel, London 1,933 3.1 6% The Langham, Melbourne 870 1.4 3% The Langham, Auckland 402 0.6 1% The Langham Hotel, Boston 568 0.9 2% The Langham, Huntington Hotel &Spa 599 1.0 2% Delta Chelsea Hotel, Toronto 726 1.2 2% Overseas Hotel 5,098 8.2 15% Total overseas properties 6,023 9.7 18% Total properties 18,693 30.1 57% Champion REIT (49.5%) 11,222 18.0 34% Champion CB (MM units) 3,083 5.0 9% Gross asset value 32,998 53.1 100% Financial instruments 952 1.5 Net debt/cash (2,470) (3.97) Total NAV 31,480 50.6 Source: Company data, J.P. Morgan estimates
Table 28: Hongkong Land– detailed net asset value estimates Dec-11 Project Location Type HK$m US$m % of GAV US$/sh Lai Sing Court Tai Hang, HK Lux Res 2,847 367 1.5% 0.16 Others Lux Res 86 11 0.0% 0.00 Hong Kong property development 2,933 378 1.5% 0.17 Hong Kong property investment Central office Central, HK Office 133,255 17,184 68.1% 7.64 Central retail Central, HK Retail 25,079 3,234 12.8% 1.44 Mandarin Landmark Hotel 1,051 136 0.5% 0.06 HK investment properties total 159,385 20,554 81.5% 9.14 HK properties total 20,932 9.31 China property development Chongqing Lux Res 1,958 295 1.0% 0.13 Shenyang Lux Res 430 65 0.2% 0.03 Chengdu Lux Res 983 148 0.5% 0.07 China pty dev total 2,388 360 1.2% 0.16 China Investment properties 3,161 408 1.6% 0.18 China properties total 767 0.34 Macau property One Central Macau, China Lux Res 882 114 0.5% 0.05 One Central Macau, China Retail 1,756 226 0.9% 0.10 One Central Macau, China Hotel 488 63 0.2% 0.03 Macau property total 403 0.18 Vietnam Hanoi, Vietnam 125 16 0.1% 0.01 Makati Residential Manila, Philippines 388 50 0.2% 0.02 Singapore properties Residential property Singapore 1,922 248 1.0% 0.11 Commercial property Singapore 17,606 2,270 9.0% 1.01 19,527 2,518 10.0% 1.12 Overseas property total 2,584 1.15 OthersInvestments MCL Land 4,223 541 2.2% 0.24 Longfor 387 50 0.2% 0.02 591 0.26 Gross asset value 195,643 25,278 100% 11.24 Net Debt -18,733 -2,416 -1.07 Net Asset Value 176,910 22,862 10.16 Source: Company data, J.P. Morgan estimates. Fully diluted NAV HK$9.9.
Table 30: Wharf Holdings– detailed net asset value estimates
Dec-11 NAV
NAV valuation Methodology HK$ mn HK$ per share %
GAV Hong Kong Development Properties: Mass Residential Discounted cash flow 0 0.00 0% Luxury Residential Discounted cash flow 386 0.14 0% Residential under planning 907 0.33 0% Office Discounted cash flow 0 0.00 0% Retail Discounted cash flow 0 0.00 0% 1,293 0.47 1% Hong Kong Investment Properties: Luxury Residential Cap rate 16,979 6.17 7% Office Cap rate 67,869 24.64 30% Retail Cap rate 59,914 21.76 26% Industrial/office Cap rate 3,297 1.20 1% Hotel - HK$MM/room 3,040 1.10 1% 151,098 54.87 66% China Development Properties: Residential Discounted cash flow 25,203 9.15 11% 25,203 9.15 11% China Investment Properties: Luxury Residential Cap rate 540 0.20 0% Office Cap rate 11,380 4.13 5% Retail Cap rate 11,715 4.25 5% Hotel Cap rate 476 0.17 0% 24,111 8.76 11% Total property 201,705 73.24 88% Non-property assets MTL 10X forward EV / EBITDA 14,912 5.41 7% Wharf T&T 5X forward EV/EBITDA 3,036 1.10 1% I-Cable (1097 HK) Market Capitalisation 1,514 0.55 1% Harbour Centre (0051 HK) Market Capitalisation 5,153 1.87 2% Investment securities Book Value 2,170 0.89 1% 26,785 9.83 12% Gross Asset Value (GAV) 228,491 82.97 100%
Less: Net debt Book Value (11,887) (4.32) Less: Associated debts Book Value (7,145) (2.59)
Total Net Asset Value (NAV) 209,458 76.06 Number of shares outstanding (mn) 2,754 Net asset value per share (HK$ per share) 76.06 Source: Company data, J.P. Morgan estimates
Summary of financials: Sun Hung Kai Properties Profit and Loss statement Cash flow statement HKD in millions, year-end Jun FY10 FY11E FY12E FY13E HKD in millions, year-end Jun FY10 FY11E FY12E FY13E Revenues 33,211 49,244 47,635 81,755 EBIT 13,842 17,908 22,117 24,851
% change Y/Y -3.0 48.3 -3.3 71.6 Depreciation & amortisation 1,278 1,278 1,278 1,278 EBIT 13,842 17,908 22,117 24,851 Change in working capital 8,400 1,908 -2,046 0
Summary of financials: Sino Land Company Ltd. Profit and Loss statement Cash flow statementHKD in millions, year-end FY10 FY11E FY12E FY13E HKD in millions, year-end FY10 FY11E FY12E FY13E Revenues 7,698 5,709 8,103 10,133 Operating profit 3,734 2,671 3,006 2,960
% change Y/Y -20.6 -25.8 41.9 25.0 Depreciation & amortisation 43 48 52 58 EBIT 3,570 2,671 3,006 2,960 Change in working capital -3,474 69 -3,849 -1,183
Summary of financials: New World Development Profit and Loss statement Cash flow statement HKD in millions, year-end Jun FY09 FY10E FY11E FY12E HKD in millions, year-end Jun FY09 FY10E FY11E FY12E Revenues 24,415 30,219 28,233 29,590 EBIT 4,171 8,918 5,894 6,506
% change Y/Y -17 24 -7 5 Depreciation & amortisation 911 994 1,093 1,202 EBIT 4,171 8,918 5,894 6,506 Change in working capital -9,285 7 -1,224 -1,410
Summary of financials: Hang Lung Group Profit and Loss statement Cash flow statement HKD in millions, year-end Jun FY10 FY11E FY12E FY13E HKD in millions, year-end Jun FY10 FY11E FY12E FY13E Revenues 12,580 10,237 12,893 16,051 EBIT 8,826 7,405 9,188 11,692
% change Y/Y 167.9 -18.6 25.9 24.5 Depreciation & amortisation 24 15 15 15 EBIT 8,826 7,405 9,188 11,692 Change in working capital 1,418 732 1,377 1,037
Summary of financials: Link REIT Profit and Loss statement Cash flow statement HKD in millions, year-end Mar FY09 FY10 FY11E FY12E HKD in millions, year-end Mar FY09 FY10 FY11E FY12E Revenues 4,503 4,990 5,283 5,579 EBIT 2,671 3,208 3,413 3,669
% change Y/Y 7.2 10.8 5.9 5.6 Depreciation & amortisation 16 17 17 17EBIT 2,671 3,208 3,413 3,669 Change in working capital 375 60 -206 79
Companies Recommended in This Report (all prices in this report as of market close on 19 November 2010) Champion REIT (2778.HK/HK$4.57/Neutral), Cheung Kong Holdings (0001.HK/HK$120.60/Overweight), Fortune Real Estate Investment Trust (FORT.SI/HK$4.02/Overweight), Great Eagle (0041.HK/HK$24.40/Overweight), Hang Lung Group (0010.HK/HK$49.75/Neutral), Hang Lung Properties (0101.HK/HK$35.90/Neutral), Henderson Land Development (0012.HK/HK$56.75/Overweight), Hongkong Land (HKLD.SI/$6.85/Neutral), Hysan Development Co (0014.HK/HK$32.50/Overweight), Kerry Properties (0683.HK/HK$41.90/Overweight), Link REIT (0823.HK/HK$24.00/Neutral), New World Development (0017.HK/HK$15.88/Overweight), Sino Land (0083.HK/HK$16.32/Overweight), Sun Hung Kai Properties (0016.HK/HK$134.20/Overweight), Swire Pacific (0019.HK/HK$121.60/Overweight), The Wharf (Holdings) Limited (0004.HK/HK$54.75/Overweight)
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
• Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Hongkong Land, New World Development within the past 12 months.
• Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Sun Hung Kai Properties: Amy Luk.
• Client of the Firm: Cheung Kong Holdings is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service and non-securities-related services. Fortune Real Estate Investment Trust is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services. Great Eagle is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service. Hang Lung Group is or was in the past 12 months a client of JPM. Hang Lung Properties is or was in the past 12 months a client of JPM. Henderson Land Development is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services and non-investment banking securities-related service. Hongkong Land is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services. Kerry Properties is or was in the past 12 months a client of JPM. New World Development is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services. Sun Hung Kai Properties is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service. Swire Pacific is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. The Wharf (Holdings) Limited is or was in the past 12 months a client of JPM.
• Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services from Fortune Real Estate Investment Trust, Henderson Land Development, Hongkong Land, New World Development, Swire Pacific.
• Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Fortune Real Estate Investment Trust, Henderson Land Development, Hongkong Land, New World Development, Swire Pacific.
• Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other than investment banking from Cheung Kong Holdings, Great Eagle, Henderson Land Development, Sun Hung Kai Properties, Swire Pacific. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from Cheung Kong Holdings.
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Nov 26, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Date Rating Share Price (HK$)
Price Target (HK$)
26-Nov-08 UW 1.45 0.85 16-Feb-09 UW 1.90 0.99 07-Aug-09 UW 3.02 2.85 18-Aug-09 N 2.84 2.83 01-Dec-09 N 3.19 3.29 22-Feb-10 N 3.37 3.18 17-Aug-10 N 3.86 3.74
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Price(HK$)
Oct06
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Cheung Kong Holdings (0001.HK) Price Chart
N HK$100
N HK$146 N HK$80 N HK$87
OW HK$114OW HK$125 N HK$123N HK$113 N HK$75N HK$115N HK$110OW HK$117OW HK$115
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Date Rating Share Price (HK$)
Price Target (HK$)
22-Mar-07 OW 94.55 114.00 23-Aug-07 OW 109.50 125.00 07-Nov-07 N 132.80 146.00 27-Mar-08 N 108.40 123.00 22-Aug-08 N 101.10 113.00 17-Nov-08 N 65.45 80.00 27-Mar-09 N 71.40 75.00 26-May-09 N 91.00 87.00 12-Aug-09 N 97.20 100.00 14-Aug-09 N 97.90 115.00 02-Dec-09 N 98.60 110.00 31-Mar-10 OW 100.90 117.00 06-Aug-10 OW 96.60 115.00
Fortune Real Estate Investment Trust (FORT.SI) Price Chart
OW HK$4.9
N HK$6.7 OW HK$4 OW HK$3.6
OW HK$6.7 OW HK$2.7 OW HK$3.4 OW HK$4OW HK$4.
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
OW HK$32OW HK$29 N HK$26.5 N HK$22 UW HK$9.3 OW HK$25 OW HK$24.9
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
N HK$28 OW HK$40 OW HK$40 N HK$30 N HK$32 N HK$40 N HK$43
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Date Rating Share Price (HK$)
Price Target (HK$)
09-Feb-07 N 27.05 28.00 15-Aug-07 OW 33.35 40.00 07-Nov-07 OW 42.15 42.00 20-Feb-08 OW 39.25 40.00 21-Feb-08 N 37.05 40.00 14-Aug-08 N 33.00 30.00 17-Nov-08 N 22.80 21.50 11-Feb-09 N 22.55 20.00 26-May-09 N 32.35 32.00 03-Aug-09 N 40.45 42.00 01-Dec-09 N 38.50 40.00 29-Jul-10 N 45.45 43.00
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Hang Lung Properties (0101.HK) Price Chart
N HK$16 N HK$29
OW HK$35N HK$33 N HK$17 N HK$24.5 N HK$33
N HK$20 OW HK$28.5 OW HK$33 N HK$23.7 N HK$20.7 N HK$31 N HK$32
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Date Rating Share Price (HK$)
Price Target (HK$)
09-Feb-07 N 22.50 20.00 16-Aug-07 OW 25.20 28.50 06-Nov-07 OW 32.75 35.00 20-Feb-08 OW 31.95 33.00 21-Feb-08 N 29.10 33.00 14-Aug-08 N 23.70 23.70 17-Nov-08 N 15.40 17.00 11-Feb-09 N 16.38 16.00 11-May-09 N 22.20 20.70 26-May-09 N 24.15 24.50 03-Aug-09 N 28.30 29.00 28-Jan-10 N 27.40 31.00 21-Jul-10 N 32.40 32.00 29-Jul-10 N 32.60 33.00
UW HK$42 N HK$67 N HK$31 OW HK$46 OW HK$64 OW HK$58
UW HK$41.5UW HK$59 N HK$57 N HK$35 OW HK$36 OW HK$62OW HK$69OW HK$55
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
N $4.8 N $4.7 OW $5 N $4.4 N $2.5OW $2.35 OW $4.6 N $5.2 N $5.5
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Date Rating Share Price ($)
Price Target ($)
07-Mar-07 N 4.18 4.80 08-Aug-07 N 4.10 4.70 07-Nov-07 OW 4.64 5.70 06-Mar-08 OW 4.30 5.00 01-Aug-08 N 4.00 4.40 17-Nov-08 N 2.35 2.50 06-Mar-09 OW 1.84 2.35 18-May-09 OW 2.63 3.20 26-May-09 N 3.34 3.20 06-Aug-09 OW 3.99 4.60 01-Dec-09 N 4.90 5.20 07-Mar-10 N 4.91 5.30 01-Aug-10 N 5.36 5.50
N HK$23.5UW HK$17.5 UW HK$18.7N HK$23.7N HK$12.5N HK$11.6 N HK$24.7 N HK$26
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Date Rating Share Price (HK$)
Price Target (HK$)
06-Mar-07 N 20.80 23.50 15-Aug-07 UW 19.56 17.50 07-Nov-07 UW 22.15 21.00 13-Mar-08 UW 21.45 18.70 06-Aug-08 N 21.60 23.70 17-Nov-08 N 12.54 12.50 11-Mar-09 N 11.76 11.60 26-May-09 N 17.32 16.30 12-Aug-09 N 20.80 22.60 01-Dec-09 N 22.80 24.70 11-Mar-10 N 22.10 25.20 11-Aug-10 N 25.10 26.00 03-Nov-10 OW 31.75 38.10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
N HK$14.5 N HK$19.5 N HK$15.2 N HK$12 N HK$11.7 OW HK$17 OW HK$15.5
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Date Rating Share Price (HK$)
Price Target (HK$)
20-Mar-07 N 16.36 14.50 18-Sep-07 N 20.55 19.50 07-Nov-07 N 25.95 21.00 18-Mar-08 N 16.40 15.20 18-Sep-08 N 9.99 12.00 17-Nov-08 N 6.04 7.50 26-May-09 N 13.94 11.70 12-Aug-09 N 15.38 16.00 10-Sep-09 N 15.26 17.50 02-Dec-09 OW 14.90 17.00 16-Aug-10 OW 13.28 15.50 03-Sep-10 OW 13.58 16.50
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
The Wharf (Holdings) Limited (0004.HK) Price Chart
UW HK$21.6 N HK$36.44
UW HK$19 N HK$30.5 N HK$48.12
N HK$29.3N HK$31OW HK$49N HK$39.16UW HK$34.75 N HK$21.6N HK$37.84 N OW HK$65
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage May 12, 2010 - Nov 19, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; thecurrent analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Date Rating Share Price (HK$)
Price Target (HK$)
20-Mar-07 N 26.30 29.30 16-Aug-07 N 27.89 31.00 29-Nov-07 OW 39.00 49.00 26-Mar-08 N 37.95 39.16 28-Aug-08 UW 28.50 34.75 18-Nov-08 UW 16.30 19.00 15-Dec-08 UW 19.34 21.60 26-Mar-09 N 20.40 21.60 26-May-09 N 28.80 30.50 12-Aug-09 N 34.95 36.44 27-Aug-09 N 35.90 37.84 01-Dec-09 N 42.50 48.12 12-May-10 N 38.70 -- 19-Nov-10 OW 54.75 65.50
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Lucia Kwong, CFA: Agile Property Holdings Ltd (3383.HK), Beijing Capital Land (2868.HK), Cheung Kong Holdings (0001.HK), China Overseas Land & Investment (0688.HK), China Resources Land (1109.HK),
China Vanke Company (200002.SZ), Franshion Properties (China) Ltd. (0817.HK), Glorious Property (0845.HK), Greentown China Holdings (3900.HK), Guangzhou R&F Properties (2777.HK), Henderson Land Development (0012.HK), Shanghai Forte Land (2337.HK), Shimao Property Holdings (0813.HK), Shui On Land Ltd (0272.HK), Sino-Ocean Land (3377.HK), Sun Hung Kai Properties (0016.HK)
J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
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