China / Hong Kong Industry Focus
HK Property Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 14 Jul 2017 HSI: 25,341 Residential stalls; office scales new ANALYST height Jeff YAU CFA, +852 2820 4912 [email protected] • Despite further deterioration in housing market Ian CHUI fundamentals, we do not expect a sharp [email protected] correction to home prices in the short term • Central office rents to rise further, with tenant Recommendation and valuation Code Price Mkt 12-m Recom decentralisation to accelerate; retail market is 7-J ul Cap target showing signs of bottoming HK$ HK$bn HK$ • Farmland conversion a key share catalyst for Property Dev elopers selected developers Cheung Kong Property 1113 HK 60.10 223 66.00 BUY Henderson Land 12 HK 43.45 174 49.00 BUY • Prefer Henderson Land, Swire Properties, and K Wah Int'l 173 HK 4.61 14 5.29 BUY Wharf Kerry Properties 683 HK 26.50 38 30.20 BUY MTR Corp 66 HK 43.65 258 40.00 HOLD Successive cooling measures and spiralling home New World Dev 17 HK 9.91 97 11.80 BUY Market view. Sino Land 83 HK 12.74 80 14.88 BUY prices have led to further deterioration of fundamentals in the SHKP 16 HK 115.50 335 131.1 BUY residential market, which should take a breather. But we do Tai Cheung 88 HK 8.30 5 8.58 HOLD not expect a sharp price correction to take place barring Wheelock & Co. 20 HK 57.30 117 65.80 BUY external shocks. Central office rents are edging higher, resulting Wing Tai Properties 369 HK 5.21 7 5.92 BUY in more cost conscious multinational firms expediting to Property Inv estors relocate offices to decentralised areas. Growing new supply Hang Lung Properties 101 HK 19.92 90 19.85 HOLD should continue to exert pressure on office rents in Kowloon Hongkong Land @ HKL SP 7.47 18 8.93 BUY East. Retail market is exhibiting signs of bottoming with luxury Hysan Dev 14 HK 37.00 39 38.50 HOLD Swire Properties 1972 HK 26.80 157 30.60 BUY and community malls to outperform regional shopping centres. Wharf 4 HK 64.65 196 73.00 BUY But pre-leasing of new retail facilities remains challenging. Div ersified Properties Far East Consortium 35 HK 4.28 10 4.94 BUY Stock recommendation. Valuation of residential developers is not as compelling as before. Positive news flow on farmland use Great Eagle 41 HK 40.10 28 39.05 HOLD conversion could provide upside on share prices of Sun Hung REITs Kai Properties and Henderson Land, which is upgraded to BUY Champion REIT 2778 HK 5.29 31 5.38 HOLD from HOLD. We like Swire Properties which benefits from Link REIT 823 HK 58.90 130 59.70 HOLD Sunlight REIT 435 HK 5.01 8 5.00 HOLD quickened office decentralisation. Wharf has potential to trade higher if the spin-off of its investment properties in Hong Kong @ denominated in USD takes place. Yield movement continues to dictate the Source: Thomson Reuters, DBS Vickers performance of REITs.
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China / Hong Kong Industry Focus HK Property Sector
Table of Contents
Investment summary 3 Residential 4 Office 16 Retail 26 Property developers 32 Property investors 41 REITs 46 Diversified properties 49 Appendix: Asset breakdown 51 Appendix: NAV sensitivities 53 Appendix: Share buyback 58 Stock Profiles 61 Cheung Kong Property (1113 HK) 61 Henderson Land (12 HK) 63 K Wah Int'l (173 HK) 65 Kerry Properties (683 HK) 67 MTR Corporation (66 HK) 69 New World Development (17 HK) 71 Sino Land (83 HK) 73 Sun Hung Kai Properties (16 HK) 75 Tai Cheung (88 HK) 77 Wheelock & Co. (20 HK) 79 Wing Tai Properties (369 HK) 81 Hang Lung Properties (101 HK) 83 Hongkong Land (HKL SP) 85 Hysan Development (14 HK) 87 Swire Properties (1972 HK) 89 Wharf (4 HK) 91 Far East Consortium (35 HK) 93 Great Eagle (41 HK) 95 Champion REIT (2778 HK) 97 Link REIT (823 HK) 99 Sunlight REIT (435 HK) 101
Note: Prices used as of 7 Jul 2017
Covered photo (from left):
Ocean Pride / Ocean Supreme (Cheung Kong Property); Grand YOHO Mall (SHKP); Murray Road office site (Henderson Land)
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Investment summary
Residential landmark malls has been mixed. Elsewhere, pre-leasing of upcoming retail arcades is progressing slower than anticipated, Successive cooling measures and spiralling land prices are a reflection that retail tenants have yet to expand actively leading to a further deterioration of fundamentals in the despite signs of market bottoming. residential market. But the local economy remains healthy with a favourable labour market. This, coupled with positive carry, Property developers should support the holding power among existing homeowners. Following the sharp price hikes, the residential Property developers under our coverage are trading at 36% market should take a breather but no major price correction is discount to their respective current NAV estimate on a expected in the coming months, barring external shocks. We weighted average basis. This represents <1SD below mean forecast home prices to fall by a modest 5% in the next twelve valuation, which is not as compelling as six months ago. Within months after rising c.11% in 1H17. China-based developers the sector, we continue to like Sun Hung Kai Properties (SHKP) dominated the land market in 1H17. Usage conversion will due to its strong execution and as it benefits from potential become an important source of landbanking among local positive news flow on farmland conversion. Potential share developers. Small-to-mid sized local developers could possibly buybacks could help support Cheung Kong Property’s share be affected by the tighter construction lending rules. price. We upgraded Henderson Land from HOLD to BUY as the company is rejuvenating its property portfolio and is Office among prime beneficiaries if the pace of farmland land conversion expedites. With current tight vacancy and sustained demand from Chinese financial institutions, we expect rents in the Central Property investors office market to grow by 5-10% in 2017. The widening rental gap between Central and decentralised areas, coupled with Property investors are trading at discounts ranging from 33% increased availability of quality decentralised office space, has to 47% to their respective current NAV estimates or 37% on a quickened the office decentralisation trend among cost weighted average basis. This compares to its 10-year average conscious multinational firms. Nevertheless, there exists of 28%. The sector valuation remains inexpensive from an downward pressure on office rents in Kowloon East where historical viewpoint. We like Hongkong Land for its office new supply is significant. The record-breaking winning bid for exposure in Central, which should lead rental growth backed the Murray Road office site has stimulated buying interest in by sustained demand from Chinese firms. Swire Properties is a the investment sales market in Central. Mandarin Oriental has prime beneficiary of quickened tenant decentralisation and decided to test market interest with the possible sale of The expected improvement in transportation accessibility to Island Excelsior in Causeway Bay given the buoyant office market. If it East. News flow on potential spin-off of investment properties fetches an encouraging price, this would prompt further in Hong Kong would dictate the share price movement of revaluation of office properties on Hong Kong Island. Wharf, which stands to benefit from a recovery in sales of luxury goods retailers. Retail REITs The retail market has displayed signs of bottoming after correcting for almost three years. Due to a low comparison The REITs we cover are trading at prospective distribution yield base, overall retail sales value growth has returned to positive of 4.3% on a weighted average basis, which lies at the low territory since Mar-17 led by recovery in sales of expensive end of its historical range. Sector yield spread stands at 2.7%, jewellery and watches. Domestic consumption on consumer against its average of 3.2%. Overall, sector valuation is by no staples have held steady while fashion, apparels, and electronic means attractive from an historical perspective. We goods continued to be a drag on retail sales recovery. Overall, recommend HOLD on Link REIT and Sunlight REIT on valuation we forecast retail sales value to be largely stable in 2017. grounds. Champion REIT is exploring the possibility of Currency fluctuation remains a swing factor in retail spending unlocking the high value of Langham Place Office Tower recovery in our view. We project rents for high street shops in property. But positives are largely discounted unless the REIT traditional retail hubs to fall 8-10% in 2017. Community malls distributes a special dividend after the sale. Yield movements like those held by Link REIT should fare better with mild rental would continue to dictate the sector’s performance. growth and positive rental reversion. Reversionary growth for
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China / Hong Kong Industry Focus HK Property Sector
Residential Monthly primary market transaction – volume
New stamp duty failed to suppress investment demand No of units initially. Despite the introduction of a new stamp duty Jun-17 6M17 4,000 equivalent to 15% of property value in Nov-16, the primary 81.3% m-o-m 77.7% y-o-y market remained buoyant supported by solid demand from 3,500 51.7% y-o-y local first-time buyers. Since the beginning of 2017, land 3,000 prices in Hong Kong have been spiralling up as a result of 2,500 aggressive bidding by China-based developers which, in turn, 2,000 led to panic buying among home buyers. Moreover, it was 1,500 found that a growing number of local first-time buyers had purchased several primary units in a single transaction in 1,000 1Q17. Although these purchases represent investment 500 demand, the buyers were not required to pay the new 0 stamp duty as they did not own any property at the time of purchase. Between Feb-17 and Mar-17, about 25-30% of r-09 r-10 r-12 r-13 r-14 r-15 r-17 p p p p p p p Jul-09 Jul-10 Jul-12 Jul-13 Jul-14 Jul-15 Jul-11 Jul-16 Jan-09 Jan-10 Jan-11 Jan-13 Jan-14 Jan-15 Jan-16 Jan-12 Jan-17 Oct-09 Oct-10 Oct-12 Oct-13 Oct-14 Oct-15 Oct-11 Oct-16 A A Apr-11 A A A Apr-16 primary units sold went to such buyers. Hence, this new A A stamp duty failed to suppress investment demand as Source: Centaline Property Agency originally expected. The government plugged the legal loophole in Apr-17, and now requires first time buyers who purchase multiple units in a single transaction to pay the 15% stamp duty. This has made it more difficult for local Yearly primary market transaction – volume investors to obtain exemption from the new stamp duty. No. of units 1H 2H Mortgage lending rule tightened further. In May-17, the 35,000 Hong Kong Monetary Authority (HKMA) introduced new rules to tighten mortgage lending. The applicable loan-to- 30,000 value (LTV) ratios for borrowers with other mortgages will 25,000 be cut by 10ppts. The applicable debt-servicing ratio (DSR) 20,000 limits for borrowers whose incomes are mainly derived from 15,000 outside Hong Kong will be lowered by 10ppts. 10,000 These measures are aimed at lowering demand from local 5,000 investors and overseas buyers respectively. Under the new rules, they are required to put down more capital for down 0 payment or resort to other funding alternatives including mortgages offered by the developers. Overall, a group of 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 marginal buyers should have been shaken out of the market. Yet, with solid demand from local end-users including those Source: Centaline Property Agency who received permanent resident status in recent years, Cheung Kong Property was the best selling developer. The developers are able to move the sales, albeit at slightly company released four new developments onto the market slower pace. in 1H17, generating the sales proceeds of >HK$25bn. Primary market sales remain brisk. Against this backdrop, Ocean Pride in Tsuen Wan and Harbour Glory contributed the transaction volume in the primary market surged 78% the bulk of the company's sales revenue with the balance to a 13-year high of 9,761 units in 1H17. The total from Seanorama in Ma On Shan and Crescendo in Yuen transaction value reached HK$136bn, representing 103% y- Long. o-y growth. Cullinan West atop Nam Cheong West Rail Station was the best-selling project in 1H17. Since its initial launch in Mar-17, Sun Hung Kai Properties (SHKP) sold >90% of a total 1050 units at this project for >HK$13bn. ASP reached HK$22,000psf, which was ahead of our expectations, reflecting the company's unrivalled marketing skills. The entire project is developed in three phases with >3300 units
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China / Hong Kong Industry Focus
HK Property Sector in total. The success of Cullinan West should facilitate the In Kai Tak, four projects were released onto the market for future launches of subsequent phases. sale. Among them, K.City (900 units) has been largely taken up with ASP of close to HK$20,000psf. This project will be a In Apr-17, response to the launch of SHKP's Eight Regency, profit bonanza for K. Wah when completed in 2018. K&K a mass-market project in Tuen Mun, was also encouraging. Property sold 614 units at Victoria Skye, representing 75% About 78% of 321 units was sold for HK$13,300psf on of total units. Elsewhere, China Overseas Land's One Kai Tak average, >30% higher than that for Nan Fung's Ori in the (II) and Poly Property (HK)'s Vibe Centro achieved favourable neighbourhood that was launched in 2016. Overall, our sales response. Overall, >2100 units in this new estimate suggests both Cullinan West and Eight Regency development area were sold in 1H17. With spiralling land offer fat pre-tax margins of c.40-45%. prices in the area, the prices achieved for Kai Tak projects has appreciated >20% within a year. Attention were on Tsuen Wan and Kai Tak in the primary market, as expected. A total of c.4,000 primary units were Luxury homes remain in demand. The launch of Cheung snapped up in these two submarkets. Kong Property's Harbour Glory on the North Point Harbourfront was met with enthusiastic response. Elsewhere, In Tsuen Wan, the launch of New World Development's The the consortium equally by Wharf and Nan Fung sold an Pavilia Bay and Cheung Kong Property's Ocean Pride in Jan- additional two houses and six apartments at Mount 17 and May-17 were both greeted with enthusiastic market Nicholson in 1H17. response. They are almost sold out, achieving proceeds of >HK$19bn in total. ASP exceeded c.HK$16,000psf.
Major project launches in in 1H17
Launch Projects Location Developer Total Units % sold ASP Units sold (HK$psf) Jan-17 Grand YOHO II Yuen Long SHKP 826 278 34% 14,400 Jan-17 One Kai Tak (II) Kai Tak COLI 624 311 50% 18,000 Jan-17 The Pavilia Bay Tsuen Wan New World/V anke 983 946 96% 16,500 Feb-17 Crescendo Yuen Long Cheung Kong Property 67 65 97% 14,000 Feb-17 K.City Kai Tak K.Wah 900 815 91% 19,900 Mar-17 Eden Manor Sheung Shui Henderson Land 590 125 21% 16,000 Mar-17 Seanorama Ma On Shan Cheung Kong Property 454 201 44% 14,300 Mar-17 Altamira Mid-Levels Private Developer 38 8 21% 58,800 Mar-17 Monterey Tseung Kwan O Wheelock 926 648 70% 15,000 Mar-17 Cullinan West West Kowloon SHKP 1,050 960 91% 22,000 Mar-17 Park V illa Yuen Long New World Development 51 6 12% 12,000 Mar-17 V ibe Centro Kai Tak Poly Property (HK) 930 417 45% 20,500 Mar-17 28 Aberdeen Street Sheung Wan Private developer 40 18 45% 33,000 Apr-17 Harbour Glory North Point Cheung Kong Property 378 296 78% 32,000 Apr-17 Eight Regency Tuen Mun SHKP 321 249 78% 13,300 Apr-17 Parc Inverness Kowloon Tong Chinachem 134 90 67% 24,000 May-17 Mount Pavilia Sai Kung New World 680 75 11% 19,000 May-17 Marin Point Sha Tau Kok Far East Consortium 261 50 19% 10,200 May-17 Novum West Western District Henderson Land 645 266 41% 26,000 May-17 Ocean Pride Tsuen Wan Cheung Kong Property 970 960 99% 16,500 May-17 V ictoria Skye Kai Tak K&K Property 822 614 75% 20,000 Jun-17 AV A61 Sham Shui Po Private Developer 138 55 40% 20,300 Jun-17 Park YOHO Genova Yuen Long SHKP 683 227 33% 12,000
Source: Companies
Secondary homes out of favour. Compared to the primary purchase. Since other mortgage options are not available in market, the secondary market recovery appears less buoyant. the secondary market, they could only turn to buy in the With tighter mortgage lending rules and home price hikes, a primary market. Overall, transaction volume in the growing number of homebuyers do not have enough capital secondary market rose 58% to 20,601 units or 3,436 units for the down payment, and some took up top-up mortgage on average per month with transaction value up 79% to or first mortgage offered by developers in making a home
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HK$151bn. The secondary market transactions made up of Centa-City Leading Index (2015-17) 68% of total, the lowest in thirteen years.
165 Monthly secondary market transaction – volume 160
155 No of units Jun-17 6M17 150 14,000 -15.3% m-o-m 58.4% y-o-y 145 12,000 24.8% y-o-y 140 10,000 135 8,000 130 6,000 125 4,000 Jul 15 Jul Jul 16 Jul Jan 15 Jan 16 Jan 17 Oct 15 Oct 16 Apr 15 Apr 16 2,000 Apr 17
0 Source: Centaline Property Agency r-09 r-10 r-11 r-12 r-13 r-14 r-15 r-16 r-17
p p p p p p p p p Centa-City Leading Index (Overall) Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-09 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 A A A A A A A A A
Source: Centaline Property Agency Home price growth 185 2017: +11% YTD Yearly secondary market transaction – volume 165 2016 :+7% 2015: +3%
145 2014: +11% No. of units 2013: +3% 1H 2H 125 2012: +21% 160,000 2011: +8% 140,000 105 2010: +19% 2009: +30% 120,000 85 2008: -15% 100,000 65 80,000 60,000 45 40,000 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul
20,000 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17
0 Source: Centaline Property Agency
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Centa-City Leading Index (mass)
Source: Centaline Property Agency 180 Home price growth Led by the panic buying among local home purchasers, 2017: +10% YTD 160 2016 :+8% residential prices climbed further in 1H17. YTD, home prices 2015: +2% rose 11% to new high, according to Centa-City Leading 140 2014: +13% Index. Overall, they have rebounded 26% from the previous 2013: +3% 120 trough in 2016. YTD, prices for mass-market projects grew 2012: +24% 2011: +10% 10%. Prices for large-sized units rose 9%. Small/medium 100 2010: +20% sized units that were sought after by local buyers with 2009: +29% tighter budget fared better with >11% price appreciation 80 2008: -15% seen in the corresponding period. 60
40 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Source: Centaline Property Agency
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Centa-City Leading Index (larger-sized units)
Home price growth 2017: +9% YTD 160 2016: +5% 150 2015: +4% 2014: +6% 140 2013: +1% 130 2012: +11% 120 2011: +8% 110 2010: +22% 2009: +26% 100 2008: -15% 90 80 70 60 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Source: Centaline Property Agency
Centa-City Leading Index (small-/medium-sized units)
180 Home price growth 2017: +11%YTD 160 2016: +8% 2015: +3% 140 2014: +12% 2013: +3% 120 2012: +22% 2011: +10% 100 2010: +20% 2009: +30% 80 2008: -15%
60
40 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Source: Centaline Property Agency
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SHKP has strong and diversified project launch pipeline. In Private residential supply the coming months, SHKP is expected to be the key seller in the primary market. Its project launch pipeline is well No of units diversified in terms of location, positioning and product mix 40,000 which should enable the company to continue tapping 35,000 demand from a wide spectrum of homebuyers. Harbour 30,000 Average completion Victoria and St. Moritz are luxury developments in North (96-16) 25,000 17,827 units Point and Kau To respectively. We expect SHKP to sell these 20,000 two projects at a slower pace to maximize sales revenue. 15,000 Cullinan West Ph 3 and Lohas Park Package 4 are 10,000 conveniently located near the subway stations and should 5,000 attract strong market attention. 0
After selling Ocean Supreme adjacent to the Tsuen Wan 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 West Station, Cheung Kong Property may launch its 185- 2017E 2018E 2019E 2020E 2021E Completion No of primary units sold unit Graham Street project, a JV with URA, in 2H17. Given Average its proximity to CBD, this redevelopment should appeal to those working nearby. Wheelock is applying for pre-sale Source: DBS Vickers consent for its 648-unit project in Kai Tak, which is pending government approval. Wing Tai Properties will offer luxury houses at La Vetta/Le Cap in Kau To for sale to test the market towards the year-end.
On the other hand, New World Development and Kerry Properties will continue to sell inventory units at Mount Pavilia and Mantin Heights/The Bloomsway.
Tsuen Wan continues to steal the market spotlight. In addition to Cheung Kong Property’s Ocean Supreme, unlisted Chinachem is expected to put its neighbouring Parc City onto the market in 2H17.
Nevertheless, major projects available for sale may not be as many as in 1H17, and hence lower transaction volume is expected for 2H17. For the full year of 2017, we project 18,000 primary units to be sold.
We forecast 18300 new homes will be completed in 2017, up 25% from 2016. During 2018-2021, our estimate suggests that new flat completions will reach 19,400 units p.a. on average. Upcoming new residential supply, though higher than in the previous five years, is not considered excessive. Thanks to robust project pre-sales, over 21,000 units have been pre-sold already.
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Expected major project launches in 2H17 & 2018
Project/ Lot no Location Location Stake (%) Total no. Remark of units Cheung Kong Prop Ocean Supreme NT Tsuen Wan 100 1,436 On sale IL 8949 Ph 1 HK Mid-levels 100 115 Presale consent pending approval Graham Street redevelopment HK Central 100 185 Presale consent pending approval SHKP Victoria Harbour Ph 1B HK North Point 100 355 Pre-sale consent obtained in J un-17 Barbington Hill HK Mid-levels 92 79 Old lease Cullinan West (Ph3) Kln Nam Cheong 100 1,188 Presale consent pending approval Park YOHO Genova NT Yuen Long 100 683 On sale LOHAS Park (Ph4A) NT Tsueng Kwan O 100 1,040 Presale consent pending approval LOHAS Park (Ph4B) NT Tsueng Kwan O 100 1,132 Presale consent pending approval St Barths Ph 1 NT Ma On Shan 100 353 Pre-sale consent obtained in Mar-17 St Barths Ph 2 NT Ma On Shan 100 67 Pre-sale consent obtained in Mar-17 New World Dev elopment CPIL 18 & TMTL 99 NT Tuen Mun 100 100 Presale consent pending approval LN 2131 in DD121 NT Yuen Long 100 123 Presale consent pending approval YLTL527 NT Yuen Long 79 63 JV with Henderson Land Artisan House HK Sai Ying Pun 100 250 Old lease Henderson Land Nov um East HK Quarry Bay 100 464 Old lease YLTL527 NT Yuen Long 79 63 J V with New World Development Wheelock NKIL 6541 Kln Kai Tak 100 648 Presale consent pending approval Lohas Park Package 5 NT Tseung Kwan O 100 1,600 Kerry Properties NKIL 6532 Kln Beacon Hill 100 45 Presale consent pending approval Wing Tai Properties La Vetta NT Shatin 35 158 Presale consent pending approval Le Cap NT Shatin 35 69 Presale consent pending approval SIL 854 HK Shau Kei Wan 100 75 Presale consent pending approval Source: Lands Department, DBS Vickers
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Expected major project launches in 2H17 & 2018 (continued)
Project/ Lot no Location Location Stake (%) Total no. Remark of units
Chinachem (unlisted) Parc City NT Tsuen Wan 100 953 Presale consent pending approval Manhattan Realty (unlisted) 1 Tsing Lung Road NT Tuen Mun 100 75 Pre-sale consent obtained in Feb 14 Emperor International 8 Kwun Fat Street NT Tuen Mun 100 14 Presale consent obtained in Dec-16 NKIL 6538 Kln Sham Shui Po 100 136 Presale consent pending approval HKR La Cresta NT Shatin 50 61 J V with Nan F ung Lot 385 RP in DD 352 & Exts NT Discovery Bay 50 196 Presale consent pending approval Nan Fung (unlisted) RBL1190 HK Island South 100 54 Presale consent obtained in Mar-17 La Cresta NT Shatin 50 61 Presale consent obtained in Dec-16 Far East Consortium NKIL 6539 Kln Sham Shui Po 100 87 Presale consent pending approval Chev alier Cit y Hub Kln To Kwa Wan 100 175 Presale consent obtained in Aug-16 Chinese Estates 12 Shiu F ai Terrace HK Mid-levels 100 24 Presale consent pending approval Paliburg/Regal Hotels STTL578 NT Shatin 100 160 Presale consent pending approv al Wang On Group The Met Acapella NT Shatin 100 336 Presale consent pending approval Billion Dev elopment TPTL 213 NT Tai Po 667 Presale consent pending approval Others 45 Tai Tam Road HK Tai Tam 100 7 Pre-sale consent obtained in Jun-17 The Woods NT Sai Kung 100 6 Pre-sale consent obtained in Apr 16 3 Clear Bay Road NT Sai Kung 100 8 Presale consent pending approv al Mount V ienna NT Shatin 100 12 Presale consent obtained in May -17 T Plus NT Tuen Mun 100 356 Presale consent pending approv al COO Residence NT Tuen Mun 100 204 Presale consent pending approv al Edition 178 NT Kwai Chung 100 136 Presale consent pending approv al NT 100 Presale consent pending approv al L'Aquatique Tsing Lung Tau 198 Source: Lands Department, DBS Vickers
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From bad to worse. After the HKMA raised the risk-weight Despite slightly lower mortgage rate YTD, the housing floor used to calculate bank’s capital charges for new affordability has worsened remarkably led by the sharp residential mortgages by 10ppts from 15% to 25% in May- home price hike. Housing affordability ratio deteriorated 17, major banks including HSBC, Bank of China (HK) and from Dec-16’s 52% to 56.8% in Jun-17, the highest since Standard Chartered Bank raised the new mortgage rate by 1999, according to Centaline Property Agency. 10bps to HIBOR+1.38% as the new rule should lead to increased cost for mortgage lending. For a HK$6m flat, LTV ratio of 60%, and 25-year repayment period, we estimate Housing affordability ratio – private households monthly mortgage repayments would increase by 1.2%. 120% Prime base HIBOR base The US Fed raised the Fed fund rate by 25 basis points (bps) Jun-17 59.0 56.8% in each of Mar-17 and Jun-17 respectively to 1.25%. 100% However, the one-month HIBOR edged down to 0.47%. May-17 58.7 56.0% Therefore, the effective mortgage rate fell slightly in 1H17. 80%
60%
Effective mortgage rate 40%
20% % Jun-17: 1.84% 12 0% May-17: 1.76% 10 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 8 Prime base HIBOR base 6 Source: Centaline Property Agency 4 Since the beginning of 2017, the differential between one- 2 month HIBOR and one-month LIBOR has widened 0 remarkably. Given the dollar peg and expected further hikes in US Fed fund rate, HIBOR should resume its uptrend in the coming year and hence effective mortgage rate is expected
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 to rise. Our analysis suggests that housing affordability ratio would rise by c.2.7 ppts to c.59.5%, assuming effective Source: CEIC, DBS Vickers interest rate rises by 50bps. Other things being equal, home 1-Month HIBOR prices have to fall by c.5% for the affordability ratio to return to the current level. % Elsewhere, the ratio of housing prices to household income 1.0 has further deteriorated from Dec-16’s 14.5x to c.16x, just 0.9 shy of its peak in mid-1997. Coupled with tighter mortgage 0.8 lending rules, it is becoming increasingly difficult for 0.7 prospective home purchasers to buy without the subsidy 0.6 Jun-17: 0.47% from parents and top-up mortgages from developers or 0.5 non-bank financial institutions. 0.4 0.3 0.2 0.1 0.0 Jan-17 Jun-17 Oct-16 Feb-17 Sep-16 Apr-17 Dec-16 Nov-16 Mar-17 Aug-16 May-17 Source: Bloomberg Finance L.P., DBS Vickers
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Ratio of home prices to median annual HH income Median household income growth
(X) Yoy, % (YoY,%) 20 15 1Q17: 4.8% 18 16 10 14 5 12 10 0 8 6 (5) 4 2 (10) 0 (15) /03 /05 /06 /07 /08 /09 /10 /11 /12 /13 /14 /16 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 p p p p p p p p p p p p Home price/median annual household income Se Sep/04 Se Se Se Se Se Se Se Se Se Se Sep/15 Se Mar/03 Mar/04 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09 Mar/10 Mar/11 Mar/12 Mar/13 Mar/14 Mar/15 Mar/16 Mar/17
Source: DBS Vickers, CEIC Source: CEIC
Overall, successive cooling measures and spiralling home Hong Kong Unemployment rate prices are leading to a further deterioration of fundamentals in the residential market, which we believe is on its last legs % in the current upcycle. 9 Mar-17 -May-17:3.2% Feb-17 -Apr-17: 3.2% .. but no imminent risk of major price correction. That said, 8 this does not necessarily imply any imminent home price 7 correction. Local economy is healthy with growth momentum accelerating. The Hong Kong GDP grew 4.3% 6 in 1Q17, up from 4Q16’s 3.2% and 3Q16’s 2.1%. Median 5 household income growth reached 4.8% in 1Q17. Unemployment rate stayed low at 3.2% in May-17, pointing 4 to a favourable labour market, and implies strong holding 3 power among existing home owners in general. 2
Hong Kong Real GDP growth Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Source: CEIC % 10 1Q17: 4.3% y-o-y 8 Residential rents have remained on an uptrend. Residential 6 yield, though falling slightly, is still higher than effective 4 mortgage rate which implies positive carry. High transaction 2 costs also discourage the existing home owners from 0 crystallising the value of their properties. All factors (2) considered, we do not see any major selling pressure from (4) existing homeowners over the short term. (6) (8) (10)
1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Source: CEIC
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HK Property Sector
Residential rents (Based on saleable area)
HK$psf May-17 45 Overall: -0.3% m-o-m 40 12.2% y-o-y 35 30 25 20 15 10 5 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-07 Jan-08 HongJan-09 KongJan-10 Jan-11 Jan-12 Jan-13 KowloonJan-14 Jan-15 Jan-16 Jan-17 New Territories East New Territories West Overall
Source: Centaline Property Agency
Barring any external shocks such as financial crisis, we do not expect any major price correction in the coming months despite slower demand ahead led by spiralling home prices. But the rise in residential price should taper off in 2H17. We forecast home prices to fall 5% in the coming 12 months.
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China / Hong Kong Industry Focus HK Property Sector
China developers dominated the land market. In 1H17, the converting an industrial site (adjacent to Beaumont) in government sold five residential sites via public tender for Tsueng Kwan O into residential use. Including site HK$40.2bn. When fully completed, these projects are acquisition cost, total land cost is c.HK$2,592psf, which expected to provide c.3,300 residential units. The bulk stems appears attractive when compared with those acquired from the Kai Tak area. Chinese developers snapped up three through government tender. This project will provide GFA of residential lots in this new development area with high 0.52m sf when completed. Kowloon Development has winning bids ranging from HK$12,563psf to HK$13,500psf. submitted an application to the Town Planning Board for Moreover, a consortium formed by two China-based building 1518 units on the site. Including those from usage developers. KWG and Logan Property secured a residential conversion and redeveloping old buildings, we forecast new site along the Ap Lei Chau waterfront for HK$16.86bn or home supply at 8000 units. In addition, SHKP is in advanced HK$22,118psf. In value terms, this marked the largest stages of land premium negotiation for converting two or residential land transaction ever in Hong Kong. This project three pieces of agricultural land into residential use. These was also the first investment made by KWG Property and should include the sizeable Shap Sze Heung project in our Logan Property in the Hong Kong residential sector. view.
MTRC offered two residential sites along the railway for Among local developers, Sino Land was more proactive in tender in 1H17. In Feb-17, MTRC awarded the development replenishing its development land bank. After securing a rights of the Wong Chuk Hang Station Ph 1 to a China- small redevelopment site in Central via URA tender in Mar- based consortium. This development provides c.800 units 17, the company joined hands with K.Wah and China with GFA of 0.58m sf. In May-17, the company tendered Overseas Land to develop the sizeable Kam Sheung Road out the Kam Sheung Road Station Ph 1 project to a Station Ph 1 project. consortium equally owned by Sino Land, K.Wah International and China Overseas Land. This large Tighter construction financing. In order to better safeguard development will offer not less than 1652 units of which banks’ risk exposure, the HKMAhas tightened construction 40% feature unit sizes of <538sf. Elsewhere, the Urban financing for property developers in May-17. From 1 Jun Renewal Authority (URA) also tendered out two 2017, the banks are required to lower the caps of redevelopment projects in Central and Tai Kok Tsui to Sino construction financing to 40% of the property site value, Land and Chevailer International respectively. These two 80% of the construction cost and 50% of the expected redevelopment projects should provide a combined 212 value of the completed properties from the previous 50%, units upon completion. Overall, we estimate c.6,000 units 100% and 60% respectively. could be built on the sites sold via tenders by the government, MTRC and URA. China-based developers usually opt for high leverage when seeking construction financing. This not only reduces their In general, China-based developers dominated the land equity contribution to the projects but also helps to enhance market in 1H17. In terms of land premium, China based the return on equity. With the introduction of this new rule, developers accounted for >86% of land supplied via tenders. property developers now have to make more use of other debt financing alternatives such as bond issues. Despite this, Local developers resort to land use conversion. To avoid we believe that Chinese developers will continue to buy land directly competing with China-based developers, local in Hong Kong due to potential Rmb depreciation risk. Small developers are seeking other means of acquiring land for local developers could possibly be affected the most by the development. In early 2007, New World Development tightened lending rules. Local major developers generally converted an industrial site in Cheung Sha Wan into have low gearing and should be less affected. residential use with GFA of 233,000sf after payment of land premium of HK$1.12bn. Kowloon Development agreed to pay land premium of HK$1.16bn or HK$2,238psf for
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Land Sales in 1H17
Date Project/Lot No Location Location Usage GFA Land Land Developers Est. Premium Premium no of units (sf) (HK$m) (HK$psf)
Government Tender J an-17 NKIL 6564 Kai Tak NT R 425,357 5,530 13,000 China based conglomerate 550
Feb-17 APIL 136 Ap Lei Chau HK R 762,084 16,856 22,118 KWG/Logan Property 350 Mar-17 NKIL6563 Kai Tak Kln R 551,133 7,441 13,500 China based conglomerate 850
May-17 NKIL6567 Kai Tak Kln R 575,492 7,230 12,563 KWG/Longfor Properties 880 J un-17 TMTL520 Tuen Mun NT R 472,944 3,169 6,700 China based consortium 650
Railway Project Tender Feb-17 Wong Chuk Hang Wong Chuk Hang HK R 576,945 4,684 8,119 China based consortium 800 Station Ph 1 May -17 Kam Sheung Road Yuen Long NT R 1,236,700 8,330 6,736 Sino Land/K.Wah/COLI 1,652 Station Ph 1 consortium URA Tender Mar-17 Peel Street redev elopment Central HK R/C 99,997 Sino Land 116 J un-17 Fuk Chat Street/Li Tak Tai Kok Tsui Kln R/C 61,785 680 11,006 Chevailer International 96 Street redevelopment Source: Lands Department, DBS Vickers
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Office Office Rental Index – Central
Chinese firms to dominate new letting in Central. China- (index pt) based financial institutions remained the major source of 3Q16: 2.2% QoQ 300 4Q16: 2.4% QoQ leasing demand in Central and accounted for about 50% of 1Q17: 2.0% QoQ Central new lettings there. CMB International Capital leased two 250 2Q17: 1.6% QoQ floors on high zone at Three Garden Road to consolidate its 200 operations across different locations. China Industrial Bank 150 (CIB) has also reportedly agreed to take up two more floors at the same building. Following this in-house expansion, CIB 100 will then occupy four floors at Three Garden Road. As a 50 result, the office floors surrendered by Citibank N.A. have been completely re-let at significantly higher rents. 0 Elsewhere, China Development Bank also took up an Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
additional 8,300 square feet (sf) of space at One IFC for in- Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 house expansion. Central Rental Index
Supported by sustained leasing demand from Chinese Source: JLL financial firms, office vacancy at Central remained tight at 1.8%in May-17, according to Jones Lang LaSalle. The vacancy was much lower for top-end office market in Central. For example, IFC is virtually fully leased. Given low Excluding Kowloon East, other key submarkets recorded low vacancy rates, office rents in Central edged higher, rising vacancy rates of 1.8-2.7% in May-2017. As such, the overall 3.6% in 1H17, according to Jones Lang LaSalle. office vacancy improved to 4.3% in May-2017 from Dec- 2017’s 4.5%.
Office vacancy – Central Office vacancy (%) May-17: 1.8% % 6 Apr-17 May-17 11.0 9.7 5 10.0 9.7 9.0 4 8.0 7.0 3 6.0 4.5 5.0 4.3 4.0 3.4 2 2.8 2.7 3.0 1.7 1.8 1.8 2.1 2.1 2.0 1 1.0 0.0 0 Overall Central HK East HK Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Tsimshatsui Bay
Office Vacancy - Central Kowloon East
Source: JLL
Wanchai/ Causeway Source: JLL
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Office vacancy – overall Office vacancy – Tsim Sha Tsui
(%) (%)
6 May-17: 4.3% 7 May-17: 2.1% 5 6 4 5 4 3 3 2 2 1 1 0 0 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Office Vacancy -Overall Office Vacancy-Tsimshatsui
Source: JLL Source: JLL
Office vacancy – Wan Chai/Causeway Bay Office vacancy – HK Island East (%) (%) 5.0 May-17: 2.7% 4.5 May-17: 1.8% 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Office Vacancy-Wanchai/CWB Office Vacancy-HK East
Source: JLL Source: JLL
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Office decentralisation trend led by cost conscious Pre-leasing of Swire Properties’ One Taikoo Place in Quarry multinational firms. A growing number of cost conscious Bay has commenced. Redeveloped from Somerset House, multinational corporates (MNCs) are relocating their One Taikoo Place will have gross floor area (GFA) of 1.02msf operations from Central to decentralised areas given a upon scheduled completion in mid-2018. Swire Properties is widening rental gap. Moreover, more new office supply is targeting mainly those MNCs which intend to relocate from coming on-stream in decentralised locations providing CBD to realise rental savings. Reportedly, some tenants have opportunity for MNCs to relocate. In the past year, a already committed space at One Taikoo Place. Office rents handful of international law firms have already relocated to achieved lie between HK$55 and HK$65 per square foot Island East from Central. (psf), similar to One Island East in the neighbourhood.
Reportedly, a Taiwan-based bank has agreed to lease one floor (17,000sf) at Lee Garden Three in Causeway Bay, One Taikoo Place relocating from Central. Developed by Hysan Development, Lee Garden Three comprises 20 office floors and 6 retail floors, with completion targeted for late 2017.
Lee Garden Three
Source: DBS Vickers
Source: DBS Vickers
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With the completion of more office buildings, Wong Chuk Office pre-leasing of New World Centre redevelopment on Hang has become a destination for corporates seeking more the Tsim Sha Tsui waterfront is making progress. Taiwan- affordable office accommodation. Recently, Mayer Brown based Fubon Bank has agreed to take up one floor. JSM and the Equal Opportunities Commission each leased Including seven floors leased to Mizuho Bank, pre- one floor at newly built 41 Heung Yip Road which is in close committed rate has reached c.60%. proximity to Wong Chuk Hang MTR Station. Valentino has agreed to take up one and a half floors at this newly built In view of limited new supply, tight vacancy and sustained office building. Monthly office rents averaged HK$25 psf, demand from China-based corporates, Central office market much lower than those in CBD and other decentralised should go from strength to strength. We forecast Central locations. Elsewhere, AXA agreed to lease 100,000sf of office rents to rise 5-10% in 2017 after rising 9.7% in 2016. office space, together with naming right, at 38 Southside in On the other hand, office rents in Kowloon East should fall the area for HK$22psf on average. This represents c.60% of by 5% in 2017. Office vacancy stood at 9.7% in May-2017, total GFA of this office building. Given improved transport much higher than other submarkets as the newly built office connectivity after the completion of South Island Line, towers has yet to be filled up. In addition, new office supply offices in Wong Chuk Hang provide an alternative for is expected to be huge in the coming years, and this should housing the back office operations on the Hong Kong Island. exert downward pressure on rents. We project new office supply in Kowloon East comprising Kwun Tong, Kowloon Bay and Kai Tak to have c.1.2msf GFA on average. That said, 41 Heung Yip Road the large supply also provides scope for MNCs to consolidate their operations. Other submarkets on Hong Kong Island should see office rental growth of 2-3% in 2017.
Office vacancy – Kowloon East
(%) 14 May-17: 9.7% 12 10 8 6 4 2 0 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Source: DBS Vickers Kowloon East
With very limited availability of office space in Central Source: JLL before the completion of the Murray Road site redevelopment, tenant decentralisation trend is anticipated to accelerate in the years to come.
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Major New Office Supply in Kowloon East
Project Location GF A (sf) Dev elopers
2017 Mega Cube Kowloon Bay 171,194 Henderson Land NKIL 6311 Kowloon Bay 333,121 Private developer NKIL 6312 Kowloon Bay 550,000 Swire Props KTIL 759 Kwun Tong 479,005 SHKP/Wong's International
2018 KTIL 761 Kwun Tong 660,301 Mapletree Inv estment
2019 NKIL 6313 Kowloon Bay 450,978 Billion Dev/ Sino Land/ CSI Props 8 Bay East Kwun Tong 529,000 Wharf NKIL 6512 Kwun Tong 797,998 Link REIT/ Nan Fung
2021 and after 98 How Ming Street Kwun Tong 1,150,004 SHKP/Transportation International NKIL 6557 Kai Tak 439,167 Lifestyle International NKIL 6556 Kai Tak 1,690,933 Nan Fung Source: DBS Vickers, Lands Department, Various Company reports
Office investment market remained buoyant. In Mar-17, Henderson Land offered to sell Mega Cube, previously Mega Cube known as Big Star Centre, in Kowloon Bay, on strata-title basis. With GFA of 185,301sf, Mega Cube was converted into office use from industrial under the government's revitalisation policy for industrial buildings. Market response has been overwhelming with almost all of the office units sold within a short period of time. The average selling price (ASP) has exceeded HK$10,000psf. This reflects strong demand among local investors. Capitalising on this, Henderson Land launched The Globe in Cheung Sha Wan, which is also an office project converted from industrial property, for strata-titled sale in May-17. Market response was equally encouraging.
Source: DBS Vickers
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In addition to local investors, China-based enterprises have strong appetite to buy office property in Hong Kong. China The Excelsior Shipbuilding Industry Corporation bought two top office floors at 650 Cheung Sha Wan Road together with naming rights for HK$259m. Unlisted First Group offered this office tower in Cheung Sha Wan for strata-titled sale in Apr-17. Market response has been encouraging with over 60% of space snapped up for c.HK$13,600psf. Scheduled for completion in 2018, this office property has GFA of 193,535sf.
650 Cheung Sha Wan Road
Source: DBS Vickers
In recent years, trophy office property assets are well sought after by China-based enterprises. Taking into consideration the current strong commercial property valuations, we believe that The Excelsior, if sold, would be redeveloped into office/retail property, to exploit the value of this waterfront site. It will become an iconic office/retail development with spectacular views of Victoria Harbour, which is an ideal showcase for large Chinese corporates.
If this hotel fetches a good price, this would prompt further revaluation for prime office properties on Hong Kong Island. Source: DBS Vickers
Singapore-listed Mandarin Oriental has decided to test market interest in the possible sale of The Excelsior in Causeway Bay given the buoyant commercial market. Opened for business in 1973, The Excelsior is situated along the waterfront of Causeway Bay with 886 guest rooms. The company has received approval from the Building Department for redevelopment into a commercial building with GFA of 683,508sf.
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China / Hong Kong Industry Focus HK Property Sector
In Jul-17, Champion REIT announced to explore the on lettable floor area basis. Based on our assumed average possibility of disposing the Langham Place Office Tower monthly rents of HK$140psf upon completion and efficiency property. Prior to the property’s injection into Champion ratio of 85%, we estimate the initial yield on cost at 2.4- REIT in 2008, Great Eagle had sold four floors of Langham 2.5%. This deal has boosted sentiment in the office sales Place Office Tower to independent third parties. In other market and prompted the revaluation of office properties in words, the office tower is not entirely owned by Champion Central. After this tender, transaction prices of strata-titled REIT. With GRA of 702,911sf, the property was fully leased office units in Central have increased. as of Dec-16. In FY16, the property generated net property income (NPI) of HK$295m.Given the current strong office property valuations, it makes sense for Champion REIT to Murray Road office site. crystallise the high value of this strata-titled office property via disposal.
Langham Place Office Tower
Source: DBS Vickers
Henderson Land Development has sold c.HK$13bn worth of non-core assets including Golden Centre in Sheung Wan in Hong Kong/China in the past nine months. Disposal of these non-core assets and acquisition of this prime office site should help rejuvenate the company's property portfolio without stretching its balance sheet. We do not rule out the possibility of the company divesting more non-core commercial properties such as FWD Financial Centre in Source: DBS Vickers Sheung Wan and 18 King Wah Road in North Point when opportunities knock. Murray Road office site went to Henderson Land. The government supplied more land for office development in Largest land deal ever. Nan Fung Group purchased the 1H17. It sold four commercial or business sites. Of particular commercial site in Kai Tak through government tender for note, the government offered the Murray Road Car-park HK$24.6bn in May-2017. This marked the largest land deal Building site for tender in 1H17. This marked the first office ever in Hong Kong in terms of land premium. This translates site in Central sold in more than two decades. Finally, into accommodation value of HK$12,863psf, 91% higher Henderson Land Development outbid eight other developers than that of the commercial site acquired by Lifestyle or developer consortiums to secure the Murray Road Car- International in Nov-16. This reflects Nan Fung's optimism park building site in Central via government tender for over the long-term outlook of the Kai Tak office market. HK$23.28bn or HK$50,065psf, which lies at high-end of market consensus. Opposite to Hutchison House and close The project will provide total GFA of 1.91msf. Pursuant to to Central MTR Station, the site will be developed into a the government, Nan Fung is required to build retail space landmark office tower with retail facilities. Total GFA will of >19,127sf. And not more than 161,460sf is allowed for reach 465,000sf with scheduled completion in 2022. hotel development. Nan Fung intends to earmark >50% of Pursuant to the government lease, Henderson Land is total GFA for office development. The balance will be slated required to construct a public car-park which is exempted for retail and hotel use which should yield synergies with the from GFA calculation if built underground. Including office portion. This mixed-use development is directly linked construction and financing costs, we estimate total with the future Kai Tak MTR Station of Shatin-Central Link. development costs of HK$58,000psf. Currently, spot rents This ensures good transportation connectivity, an advantage of prime office properties nearby stand at HK$110-135psf over other office projects in Kwun Tong as well as Kowloon VICKERS SECURITIES
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Bay. When completed, Nan Fung plans to retain this mixed- use project for long term investment.
Kowloon West saw rising land supply for office use. In Feb- Cheung Shun Street site 17 and May-17, New World Development acquired King Lam Street and Cheung Shun Street sites in Cheung Sha Wan via tender for HK$7.8bn and HK$4.03bn respectively. The two sites are close to the Lai Chi Kok MTR Station from where it takes 18 minutes to Central by subway. This points to easy transportation accessibility. New World Development plans to build office towers on the sites, which will provide combined GFA of c.1.5m sf upon completion. These office developments are earmarked for sale. Including construction and financing costs and allowing for GFA inflation, we estimate total development costs at c.HK$11,000psf. Judging from the recent encouraging sales response of 650 Cheung Sha Wan in the area, we are positive on investment sales demand for quality office space in this decentralised location. We expect the office development to deliver pre- tax margin of c.20%. Source: DBS Vickers
King Lam Street site The government is now putting another business site in Cheung Sha Wan for tender which will close on 11 Aug. Located on the junction of Wing Hong Street, Wing Ming Street and Yu Chau West Street, this site is smaller than the previous two with GFA of 0.37m sf. We would monitor if New World Development would purchase this site to further consolidate its office presence in the area.
Overall, we forecast there will be c.2.5m sf of new office supply in Kowloon West between 2018 and 2022. This provides an alternative to Kowloon East for companies to accommodate their back and mid office operations.
Source: DBS Vickers
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China / Hong Kong Industry Focus HK Property Sector
New Office Supply in Kowloon West
Project Location GFA (sf) Developers
2017 The Globe Cheung Sha Wan 172,113 Henderson Land
2018 NKIL 6410 Cheung Sha Wan 193,535 First Group (Unlisted)
2020 and beyond KCTL 495 Kwai Chung 228,033 Hon Kwok Land KCTL 522 Kwai Chung 57,000 SHKP KCTL 517 Kwai Chung 123,505 First Group (Unlisted) NKIL 6505 Cheung Sha Wan 998,201 New World Development NKIL 6582 Cheung Sha Wan 538,755 New World Development NKIL 6572 Cheung Sha Wan 371,096 TBD
Source: DBS Vickers, Lands Department, Various Company reports
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Major New Office Supply
Project Location GFA (sf) Developers 2017 Two Chinachem Central Central 90,000 Chinachem 18 King Wah Road North Point 329,752 Henderson Land Mega Cube Kowloon Bay 185,301 Henderson Land NKIL 6311 Kowloon Bay 333,121 Private developer NKIL 6312 Kowloon Bay 550,000 Swire Props KTIL 759 Kwun Tong 479,005 SHKP/Wong's International The Globe Cheung Sha Wan 172,113 Henderson Land New World Centre Redevelopment Tsim Sha Tsui 500,000 New World Development
2018 33 Des V oeux Road West Sai Ying Pun 140,000 Nan Fung Lee Garden Three Causeway Bay 360,000 Hysan Development One Taikoo Place Quarry Bay 1,020,000 Swire Props 8-10 Wong Chuk Hang Road Wong Chuk Hang 382,500 Swire Props/China Motor Bus 54 Wong Chuk Hang Road Wong Chuk Hang 117,451 Multifield Int'l NKIL 6410 Cheung Sha Wan 193,535 First Group (Unlisted) KTIL 761 Kwun Tong 660,301 Mapletree Investment
2019 Asian House redevelopment Wan Chai 314,000 Chinachem NKIL 6313 Kowloon Bay 450,978 Billion Dev/ Sino Land/ CSI Props 8 Bay East Kwun Tong 529,000 Wharf NKIL 6512 Kwun Tong 797,998 Link REIT/ Nan Fung
2020 and beyond IL9051 Central 465,000 Henderson Land 218 Electric Road North Point 143,993 Henderson Land Kut Cheong Mansion Redevelopment Quarry Bay 487,500 New World Development Two Taikoo Place Quarry Bay 1,000,000 Swire Props 4 Yip Fat Street Wong Chuk Hang 140,000 SHKP AIL 462 Wong Chuk Hang 284,982 Sino Land/Empire Group STTL 617 Shatin 171,000 SHKP YTTL 532 Yuen Long 223,929 Sino Land KCTL 495 Kwai Chung 228,033 Hon Kwok Land KCTL 522 Kwai Chung 57,000 SHKP KCTL 517 Kwai Chung 123,505 First Group (Unlisted) 98 How Ming Street Kwun Tong 1,150,004 SHKP/Transportation International NKIL 6557 Kai Tak 439,167 Lifesty le International NKIL 6556 Kai Tak 1,690,933 Nan Fung NKIL 6505 Cheung Sha Wan 998,201 New World Development NKIL 6582 Cheung Sha Wan 538,755 New World Development NKIL 6572 Cheung Sha Wan 371,096 TBD
Source: DBS Vickers, Lands Department,Various Company reports
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Retail Luxury items leading the recovery. Sales value of jewellery, watches and clocks, and valuable gifts grew 1.2% in 5M17 The Hong Kong retail market exhibited signs of bottoming due to a low comparison base and recovery in inbound after correcting for almost three years. Retail sales value tourism. Following the sharp market consolidation in the growth has returned to positive territory since Mar-17. Total previous three years led by China government's anti- retail sales in value terms in Hong Kong grew 3% in Mar-17, corruption campaign, retail sales value of jewellery, watches 0.1% in Apr-17, and 0.5% in May-17, primarily led by and clocks, and valuable gifts has fallen to levels in 2010/11, recovery in sales of expensive luxury items. Overall, retail just prior to the boost in luxury good sales from the influx of sales value growth in 5M17 was largely flat y-o-y. Mainland Chinese tourists. This implies a very low comparison base.
Monthly growth of total retail sales value Monthly growth of retail sales value – Jewellery & Yoy, % May-17: 0.5% y-o-y watches 40 5M17: -0.7% y-o-y Yoy, % May-17: 1.3% y-o-y 30 80 5M17: 1.2% y-o-y 20 60
10 40
0 20
(10) 0
(20) (20)
(30) (40) -11 -15 -11 -15 -10 -14 r-10 r-14 y y p p g g p p Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-13 Jul-09 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jun-12 Jun-16 Jun-08 Oct-12 Oct-16 Oct-08 A A Se Se Dec-10 Dec-14 Nov-13 Nov-09 Mar-13 Mar-17 Mar-09
Au Au Ma Ma Jan-Feb 12 Jan-Feb 16 Source: CEIC Jan-Feb 08 Source: CEIC
Yearly growth of total retail sales value Inbound tourism on the recovery path. In addition, the inbound tourism also showed signs of recovery in 2017. In Yoy, % 5M17, Hong Kong welcomed 23.6m tourists, up 3.2% y-o-y. 25 This was primarily led by more overnight visitors which rose 20 5.7% y-o-y to 11m during the same period. There were 15 7.1m overnight visitors from China in 5M17, up 6.4% y-o-y. Coupled with 1.5% higher day trippers, the number of 10 Mainland Chinese tourists reached 17.8m in 5M17, up 5 3.4%, amid a stable Rmb (vs HK$), reversing the downtrend 0 in the previous two years. Besides, visitors from short haul markets, excluding China, also posted 3.9% increase in the (5) corresponding period. This led to increased tourist spending (10) which in turn contributed to the recovery in sales of (15) expensive luxury goods such as jewellery and watches. 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
5M17 Source: CEIC
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Visitor arrival growth – overall Visitor arrival growth – China
Yoy, % Yoy, % May-17: 3% y-o-y May-17: 3.8% y-o-y 50 5M17: 3.2% y-o-y 60 5M17: 3.4% y-o-y 40 50 30 40 20 30 20 10 10 0 0 (10) (10) (20) (20) (30) (30) (40) Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Source: CEIC Source: CEIC
Visitor arrival growth – overnight visitors Visitor arrival growth – non China Yoy, % May-17: 6.7% y-o-y 60 5M17: 5.7% y-o-y YoY, % 50 30 May-17: 0.6% y-o-y 40 25 5M17: 2.6% y-o-y 30 20 20 15 10 10 0 5 0 (10) (5) (20) (10) (30) (15) (20) Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16
Source: CEIC Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17
Source: CEIC
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China / Hong Kong Industry Focus HK Property Sector
Key shopping malls are benefitting from sales recovery of Monthly growth of retail sales value – Food, alcoholic luxury goods retailers, given their strong exposure to this drinks & tobacco segment. Wharf’s Harbour City in Tsim Sha Tsui is a case in point. The mall saw the resumption of tenants’ sales growth Yoy, % May-17: 3.1% y-o-y with a 1.4% improvement in 1Q17 after falling for more 25 5M17: 2.3% y-o-y than two years. Elements at Kowloon Station also achieved 20 low-to-mid single digit retail sales growth in the same 15 period. Hysan Development’s Lee Gardens hub in Causeway 10 Bay, which features mainly international luxury brands, 5 posted 8% growth in tenant sales in 4M17. The slowdown 0 in retail sales at The Mall at Pacific Place in Admiralty (5) narrowed to 2.3% in 1Q17. (10) (15)
Quarterly retail sales growth – Harbour City Jul-09 Jul-13 Jun-08 Jun-12 Jun-16 Oct-08 Oct-12 Oct-16 Apr-10 Apr-14 Sep-11 Sep-15 Dec-10 Dec-14 Nov-09 Nov-13 Aug-10 Aug-14 Mar-09 Mar-13 Mar-17 May-11 y-o-y May-15 Jan-Feb 08 Jan-Feb 12 Jan-Feb 16 10% 6.7% 6.8% Source: CEIC 5% 1.4% -1.8% 0% -3.8% Quarterly growth of total restaurant receipts 2.6% -4.9% -6.4% -5% Yoy, % -9.7% -9.6% 1Q17: 4.2% y-o-y -10% 18 -15.1% 16 -15% 14 12 -20% 10 -18.4% -18.9% 8 -25% 6 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 4 2 0 Source: Company (2) Citygate Outlet Mall in Tung Chung, which targets mainly
tourists, was also a beneficiary of a gradual recovery in 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 inbound tourism. In 1Q17, retail sales at this outlet mall fell by marginal 0.7% y-o-y, a noticeable improvement from the 8% fall in 2016. Source: CEIC
Consumer staples recorded steady sales on back of Real GDP in Hong Kong continued local economic growth. Real GDP in Hong Kong expanded 4.3% with median monthly domestic household % income growing 4.8% in 1Q17. Labour market remains 10 1Q17: 4.3% y-o-y favourable with unemployment rate staying low at 3.2% for 8 the three months ended May 2017. All of these should 6 suggest steady demand for non-discretionary items. Retail 4 sales of food, alcoholic drinks and tobacco grew 2.3% in 2 value terms in 5M17, while total restaurant receipts also 0 rose 4.2% in 1Q17. Link REIT’s retail portfolio which serves (2) mainly the daily needs of residents living in nearby public (4) housing estates mirrored this favourable trend. Average (6) monthly retail gross sales of its tenants grew by 4% on a (8) per square foot basis in 1Q17, led by food & beverage (10) trades.
1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Source: CEIC
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Median household income growth Monthly growth of retail sales value – Consumer durable goods Yoy, % (YoY,%) 15 1Q17: 4.8% Yoy, % May-17: -6.0% y-o-y 50 5M17: -10.4% y-o-y 10 40 5 30 20 0 10 (5) 0 (10) (10) (20) (15) (30) -11 -15 -11 -15 -10 -14 /03 /04 /06 /08 /10 /12 /13 /14 /15 /16 r-10 r-14 y y p p g g p p p p p p p p p p p p Jul-09 Jul-13 Jun-08 Jun-12 Jun-16 Oct-08 Oct-12 Oct-16 A A Se Se Dec-10 Dec-14 Nov-09 Nov-13 Au Au Mar-09 Mar-13 Mar-17 Se Sep/05 Se Sep/07 Se Sep/09 Se Sep/11 Se Se Se Se Se Se Ma Ma Mar/04 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09 Mar/10 Mar/11 Mar/12 Mar/13 Mar/14 Mar/15 Mar/16 Mar/17 Mar/03 Jan-Feb 08 Jan-Feb 12 Jan-Feb 16 Source: CEIC Source: CEIC
Unemployment rate in Hong Kong Monthly growth of retail sales value – Clothing & % Footwear 9 Mar-17 -May-17:3.2% Feb-17 -Apr-17: 3.2% Yoy, % May-17: -0.8% y-o-y 8 50 5M17: -2.4% y-o-y 7 40
6 30 20 5 10 4 0 3 (10) 2 (20) -11 -15 -11 -15 -10 -14 r-10 r-14 y y p p g g p p Jul-13 Jul-09
Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jun-12 Jun-16 Jun-08 Oct-12 Oct-16 Oct-08 A A Se Se Dec-10 Dec-14 Nov-13 Nov-09 Mar-13 Mar-17 Mar-09 Au Au Ma Ma Source: CEIC Jan-Feb 12 Jan-Feb 16 Jan-Feb 08 Fashion and electronic goods posted lacklustre sales. Source: CEIC Consumer durable goods, under which smartphones and related products are categorised, remained a drag on retail On the road to gradual recovery. We expect the retail sales recovery. Retail sales value of this category was 10.4% market to stage a gradual recovery in 2017 after correcting lower in 5M17 given a high comparison base. Besides, retail for more than two years, underpinned by improving sales of sales of clothing, footwear & allied products declined 2.4% luxury branded products. On the other hand, sales of in the same period after falling 6.7% and 4.6% in 2015 and clothing, apparels, footwears and electronic goods should 2016 respectively. The lacklustre sales weighed on the remain under pressure. Overall, we forecast total retail sales performance of regional malls. For instance, Cityplaza, a value to be flat in 2017. Currency fluctuations should regional mall in Island East, suffered from 7.7% decline in remain a swing factor on retail spending recovery in our retail sales in 1Q17, which we believe, was partly due to view. If Rmb resumes on a depreciating path, then cross- weaker sales from apparels. Lee Theatre Plaza in Causeway border spending by Mainland Chinese tourists could possibly Bay also recorded flat tenant sales in 4M17, dragged by weaken again. By the same token, local currency strength lacklustre sales of fashion retailers. would induce local shoppers to spend overseas rather than in Hong Kong, which would weigh on domestic consumption.
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China / Hong Kong Industry Focus HK Property Sector
Landmark and community malls to outperform. Against this backdrop, landmark shopping malls, particularly those in Rents in prime shopping centres traditional tourist hubs, should outperform given their strong exposure to luxury brands. Community malls serving YoY, % the local residents in the neighbourhood should continue to 14 perform steadily. However, regional malls catering to 12 domestic spending could face pressure. 10 Rentals for high-street shops fell 6.4% in 1H17 and 41.2% 8 off their peaks in 2014, according to Jones Lang LaSalle. We 6 project their rents to fall 8-10% in 2017 before reaching a bottom. 4 2 0 Rentals for high-street shops (2)
YoY, % 2010 2011 2012 2013 2014 2015 2016 1H17 25 20 Source: Jones Lang LaSalle 15 Reversionary growth is mixed. Despite the retail market 10 bottoming out, the lagged effects of the previous market 5 downturn are filtering through some shopping malls. In 0 1H17, Hysan Development should record a 20% decline in (5) rentals upon lease renewals and new lettings for retail space (10) in Causeway Bay. At Langham Place Mall in Mongkok, (15) average base rents should head marginally lower in 2017. (20) Average retail rents at Pacific Place should face downward (25) pressure following the tenant reshuffling which involves the replacement of luxury retailers with F&B outlets. 2010 2011 2012 2013 2014 2015 2016 1H17 Source: Jones Lang LaSalle Having said that, not all retail malls are suffering from negative reversionary growth. Harbour City and Times Rents in prime shopping centres declined slightly by 0.6% in Square posted single-digit rental reversions in 1Q17. 1H17 and should stay broadly stable for the whole year. Community malls serving the needs of residents living Pre-leasing remains challenging. Despite signs of a retail nearby should fare better with mild rental growth in 2017. market bottom, landlords are facing challenges in pre- We expect reversionary growth to be positive in 2017 for leasing their upcoming retail arcades. Link REIT is still in these community malls. For example, we expect Link REIT’s discussions with potential anchor tenants for the retail retail facilities in Hong Kong to continue to register rental podium of 700 Nathan Road in the heart of Mongkok. Its reversion of c.20% this year. target tenants include Korean & Japanese young & fashion brands, and F&B outlets. This retail arcade is scheduled for open in 1H18 after the completion of extensive renovation works. Hysan Development is securing tenants for Lee Garden Three in Causeway Bay, which will house primarily lifestyle and experience-themed tenants, with targeted opening in 1Q18. Overall, pre-leasing of upcoming malls in traditional retail hubs is progressing slower than expected.
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New retail facilities on the horizon. Wharf’s Ocean Terminal scheduled in Jul-17. This should further improve the Extension in Tsim Sha Tsui is targeted to open for business offerings at Telford Plaza II, enhancing its appeal among in Jul/Aug. Erected along the tip of Ocean Terminal with shoppers. The Maritime Square Extension (GFA: 130,243sf) stunning harbour views, the extension will accommodate is targeted for completion in late 2017. MTRC will relocate mainly 10-12 fine-dining restaurants, with GFA of 45,000sf. the cinema to the extension with the existing area freed up These restaurants, though not high-yielding tenants, should for higher-paying tenants. Overall, pre-leasing is proceeding serve to improve the footfall to Ocean Terminal. satisfactorily.
Ocean Terminal Extension 8/F, Telford Plaza II
Source: DBS Vickers
SHKP will open Grand YOHO Mall in Yuen Long for business Source: DBS Vickers shortly. Directly linked with Yuen Long West Rail Station, Conversion works at 7-8/F of offices above MTRC’s Telford the mall’s anchor tenants include a 1200-seat cinema and a Plaza II into retail use have been completed. These two supermarket. Coupled with YOHO Mall I &II in the floors (GFA: 36,600sf) have been let to a Chinese restaurant neighbourhood, it will form a 1.1m sf regional mall in Yuen and fitness centre respectively, with official opening Long with estimated annual rental income of >HK$500m.
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China / Hong Kong Industry Focus HK Property Sector
Property developers Kong Property’s share price could be supported by potential share buybacks.
SHKP achieved contracted sales of c.HK$45bn in FY6/17, Share price performance exceeding its full-year target of HK$33bn. The response to Performance (%) the launch of Cullinan West was overwhelming with units 1-mth 3-mth 6-mth 2016 YTD almost sold out. This project is a profit bonanza with pre-tax margins estimated at c.40%. SHKP is currently selling Park CK Property (1.7) 12.0 21.4 (5.7) 26.4 YOHO Genova and has strong and diversified project launch Henderson Land (7.1) (2.5) 14.5 (4.5) 15.9 pipeline in the coming nine months. This should enable the K Wah Int'l (11.1) (10.9) 30.7 12.6 31.4 company to tap demand from a wide spectrum of Kerry Properties (4.7) (9.4) 23.0 (0.5) 25.9 homebuyers. Grand YOHO Mall will open for business MTR Corp (1.0) (0.2) 14.1 (1.8) 15.8 shortly, which coupled with YOHO Mall I &II, will form a New World Dev (8.1) 2.3 16.9 7.0 20.9 1.1m sf regional mall in Northwestern New Territories with Sino Land (7.4) (5.8) 6.9 2.3 9.6 expected annual rental income of >HK$500m. The stock is SHKP (5.3) (1.3) 11.7 4.7 17.9 trading at 46% discount to our assessed current NAV. Tai Cheung 2.9 13.9 15.0 9.8 21.7 Positive news flow on farmland conversion could provide Wing Tai Properties (3.9) (5.4) 11.3 4.5 11.3 upside on stock. BUY with HK$131.1 TP. Wheelock and Co. (8.2) (10.0) 26.2 33.7 31.3 Sector av erage (4.6) 0.0 16.3 2.9 20.2 New World Development achieved stellar project sales performance YTD. Pre-sale of The Pavilia Bay in Tsuen Wan HSI Index (2.4) 4.4 12.6 0.4 15.2 met with enthusiastic response, and the 983-unit project HSP Index (4.9) 2.1 14.5 (3.1) 19.9 has been largely sold out since its initial launch in Jan-17. The company is now selling Mount Pavilia which will be a Source: Thomson Reuters key earnings contributor in FY18. In 1H17, New World made forays into the Kowloon West office market with the YTD, share prices of property developers under our coverage purchase of two sites for office development. The stock is increased 20% on a weighted average basis, and trading at 57% discount to our appraised current NAV and outperformed the Hang Seng Index by 5ppts, amidst offers dividend yield of 4.4% for FY17-18. BUY with buoyant primary market activities. This was despite higher HK$11.8 TP. stamp duty and tighter mortgage lending rules. Some small- to-mid cap developers fared better than heavyweight Cheung Kong Property achieved robust contracted sales of counterparts. For example, K.Wah International gained 31% >HK$25bn in Hong Kong in 1H17. The bulk came from two as the launch of K.City was greeted with overwhelming waterfront residential projects, Ocean Pride in Tsuen Wan response. Wheelock & Co’s stock price also rose 31%, lifted and Harbour Glory in North Point. As a result, a majority of by robust share price performance of its listed subsidary, the company’s development earnings from Hong Kong in Wharf. FY17-18 have been locked in. To beef up its recurring income base, Cheung Kong Property has invested in aircraft Property developers we cover are now trading at discounts leasing and Duet, which owns and operates energy utility ranging from 2-69% to their respective NAV estimates. This assets in Australia, US, UK, and Europe. Recently, Cheung translates into a sector discount of 36% on a weighted Kong Property issued US$1.5bn perpetual securities with average basis, which compares with its 10-year average of coupon rate of 4.6%. This strengthens its war chest for 29%. The current sector valuation, though not expensive, is acquisitions. The stock is trading at a 38% discount to our no longer as attractive as six months ago. Going into 2H17, assessed current NAV. BUY with HK$66 TP. Potential share there may not be as many new project launches as in 1H17. buyback could limit downside risk on share price. Instead, the market should focus on the progress of farmland conversion which will become an important route Henderson Land Development secured the superbly located for local developers to replenish their land bank for Murray Road Carpark Building site in Central through development purposes. Within the sector, we continue to government tender for office development. The winning bid favour Sun Hung Kai Properties (SHKP) for its strong of HK$23.3bn made it the most expensive land transaction execution and potential to benefit from farmland conversion ever in Hong Kong. We estimate the initial yield on cost at which is likely to proceed at a faster pace. We upgraded 2.4-2.5%. On the other hand, the company has continued Henderson Land to BUY from HOLD as the company is to divest non-core commercial and hotel properties at expected to crystallise the value of non-core assets via attractive prices. As a result, Henderson Land has optimised disposal by capitalising on buoyant commercial market and its investment property portfolio without overstretching its will benefit from quickened farmland conversion. Cheung balance sheet. The counter is trading at 45% discount to our appraised current NAV. We expect the company to
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HK Property Sector unlock the value of non-core properties via disposal given near-term development earnings from Hong Kong. In China, the favourable commercial market. Any positive news flow the company generated c.HK$3.3bn proceeds from property on agricultural land conversion could provide upside on sales in 5M17 and is on track to meet its full-year target of stock. Upgraded to BUY with HK$49 TP. HK$6bn. The stock is trading at 65% discount to our assessed current NAV. BUY with HK$30.2 TP. Wheelock & Co. has met its FY17 contracted sales target of HK$10bn thanks to strong sales response to the launch of K.Wah international's launch of K.City in Kai Tak received Monterey and continued sales at One Homantin, NAPA and encouraging response. This substantially-sold project is very Mount Nicholson. Aided by robust project pre-sale, lucrative and would be its earnings engine upon scheduled Wheelock's development earnings are well assured. We completion in FY18. Aided by smooth project pre-sales, K. estimate the company has locked in some 65% of our Wah has locked in the bulk of development profit in FY17- projected FY17-18 development earnings. This points to 18, implying high earnings visibility. To replenish its good earnings visibility. The stock is trading at 23% development land bank, K.Wah joined hands with Sino Land discount to our assessed current NAV. Its listed subsidiary, and China Overseas Land to successfully bid for the 1.23m Wharf, is contemplating to seek a separate listing of its sf Kam Sheung Road West Rail Station Ph 1 project in May- investment properties in Hong Kong. Further potential 17. The joint venture arrangement allows K.Wah to invest in group restructuring should benefit Wheelock. BUY with this large-scale residential project without overstretching its HK$65.8 TP. balance sheet. The planned launches of Azure and The Palace Ph 3 in Shanghai in late 2017 should be greeted with Sino Land has returned to acquisition mode, capitalising on satisfactory response. This could improve sentiment towards its impeccable financial strength. The company has secured the stock which is trading at 63% discount to our appraised four development projects, including two joint venture current NAV. BUY with HK$5.29 TP projects, with attributable land costs of >HK$4bn. The joint venture arrangement allows Sino Land to diversify Wing Tai Properties plans to launch Le Cap & La Vetta in investment risk. The land acquired is diversified in terms of Kau To of Shatin towards the year-end. These two luxury usage and locations. Despite a string of land acquisitions, projects will dominate the company's development earnings Sino Land remains cash rich with estimated net cash holding in FY18-19. Occupancy of Landmark East in Kwun Tong has of c.HK$20bn. We believe the company will continue to recovered to c.97%. However, given rising expiring rents, its replenish land bank when the opportunity arises. The stock rent reversion is expected to moderate to 10-15% in 2017 is trading at 48% discount to our assessed current NAV. from 2016's 30%. Other Hong Kong investment properties BUY with HK$14.88 TP. should register neutral reversionary growth. With low gearing of <15%, the company is well positioned to MTRC tendered out the development rights of Wong Chuk undertake accretive investments. The stock is trading 69% Hang Package 1 to a China-based consortium in Feb-17. below our appraised current NAV estimate. BUY with Capitalising on the buoyant land market, MTRC intends to HK$5.92 TP. offer six more development sites for tender in the coming nine months, which should lay down the foundation of Tai Cheung has expedited the strata-titled disposal of earnings growth in the medium term. These include Metropole Square in Shatin which supports its near-term Packages 2 & 3 at Wong Chuk Hang Station and Packages property sales earnings. The Repulse Bay luxury house 10 & 11 at Lohas Park Station. Retail reversionary growth development is near completion. This superbly-located has turned negative. Telford Plaza II 7/8F has opened for project contains eight houses with magnificent seaviews and business after the completion of usage conversion. This thus should hold strong appeal to affluent buyers. We should help draw more foot traffic to the mall. Trading 2% estimate that a complete sale of this super-luxury below our assessed current NAV, the counter is fairly valued. development would yield pre-tax earnings of c.HK$2bn to HOLD with HK$40 TP. Tai Cheung. The stock is trading at 61% discount to our assessed current NAV and dividend yield of 3.9% for FY18. Kerry Properties achieved HK$4bn sales proceeds from Hong Excluding its net cash holding, the remaining stub is trading Kong in 5M17 representing 40% of its FY17 sales target. at 75%. The valuation sounds less compelling after the The bulk came from continued sales at Mantin Heights with recent share rally. HOLD with HK$8.58 TP. the balance from The Bloomsway and Dragons Range. In
2H17, Kerry will focus on clearing inventory at Mantin Heights and The Bloomsway which would dominate its
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Peers valuation
Disc. to Mkt Last 12-m PE PE Jun-18 Jun-18 Yield Yield Company Code FYE Cap Price target Recom FY17 FY18 NAV NAV FY17 FY18 HK$bn HK$ HK$ x x HK$ % % % Cheung Kong Property 1113 HK Dec 223 60.10 66.00 BUY 11.7 9.2 101.6 (41) 2.7 2.9 Henderson Land 12 HK Dec 174 43.45 49.00 BUY 11.7 16.7 81.7 (47) 3.6 3.6 K Wah Int'l 173 HK Dec 14 4.61 5.29 BUY 7.1 3.3 13.2 (65) 3.9 3.9 Kerry Props 683 HK Dec 38 26.50 30.20 BUY 7.6 10.7 75.5 (65) 4.2 4.2 MTR Corp 66 HK Dec 258 43.65 40.00 HOLD 29.0 29.7 46.0 (5) 7.5^ 2.5 New World Dev 17 HK Jun 97 9.91 11.80 BUY 12.7 12.5 23.6 (58) 4.4 4.4 Sino Land 83 HK Jun 80 12.74 14.88 BUY 15.4 16.7 24.8 (49) 4.0 4.0 SHKP 16 HK Jun 335 115.5 131.1 BUY 13.0 11.4 218.5 (47) 3.5 3.6 Tai Cheung 88 HK Mar 5 8.30 8.58 HOLD 26.1 10.4 21.4 (61) 3.9 3.9 Wheelock & Co. 20 HK Dec 117 57.30 65.80 BUY 10.7 9.5 82.3 (30) 2.3 2.3 Wing Tai Properties 369 HK Dec 7 5.21 5.92 BUY 16.8 9.6 16.9 (69) 3.5 3.5 ^ Included proposed special dividend
Source: Thomson Reuters, DBS Vickers
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Cheung Kong Property– Discount to NAV Cheung Kong Property– – Discount to NAV band
% HK$ (25) 75 -30% (30) +2SD: -31% 70 65 (35) +1SD: -37% -37% 60 (40) Average: -43% 55 -44% (45) 50 -1SD: -50% -51% (50) 45 -2SD: -56% (55) 40 -58% (60) 35 -16 -17 -16 -15 -16 -15 -16 -17 r-16 r-17 -15 -16 y y p g g r-16 r-17 y y p p p g g Jul-16 Jul-17 Jul-15 p p Jul-16 Jul-17 Jul-15 Jan-16 Jan-17 Jun-16 Jun-17 Jun-15 Oct-15 Oct-16 Feb-16 Feb-17 A A Sep-15 Se Dec-15 Dec-16 Nov-15 Nov-16 Au Au Jan-16 Jan-17 Jun-16 Jun-17 Jun-15 Mar-16 Mar-17 Ma Ma Oct-15 Oct-16 Feb-16 Feb-17 A A Se Sep-16 Dec-15 Dec-16 Nov-15 Nov-16 Mar-16 Mar-17 Au Au Ma Ma
Henderson Land – Discount to NAV Henderson Land – Discount to NAV band
% HK$ 30 120 20 18% 10 +2SD: -3% 100 0 -2% (10) +1SD: -19% 80 (20) -23% (30) Average: -35% 60 (40) -43% -1SD: -51% (50) 40 (60) -2SD: -67% -63% 20 (70) (80) 0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
K Wah Int’l – Discount to NAV K Wah Int’l – Discount to NAV band
% HK$ (35) 7.0 (40) -46% (45) 6.0 (50) +2SD: -52% 5.0 -55% (55) +1SD: -58% -64% (60) Average: -64% 4.0 (65) -1SD: -70% -73% (70) 3.0 -2SD: -76% (75) -82% (80) 2.0 (85) 1.0 Jul-10 Jul-16 Feb-13 Oct-14 Sep-09 Apr-12 Dec-13 Aug-15 Jul-10 Jul-16 May-11 May-17 Feb-13 Oct-14 Apr-12 Sep-09 Dec-13 Aug-15 May-11 May-17 Source: Thomson Reuters, DBS Vickers
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Kerry Properties – Discount to NAV Kerry Properties – Discount to NAV band
% HK$ 40 120 20 +2SD: 2% 100 30% 0 80 3% (20) +1SD: -22% 60 -24% (40) Average: -45% 40 -50% (60) -1SD: -68% 20 -77% (80) -2SD: -92% 0 (100) Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
MTR Corp. – Discount to NAV MTR Corp. – Discount to NAV band
% HK$ 10 52 5 47 7% 0 +2SD: 0% -2% (5) 42 (10) +1SD: -7% -10% 37 (15) Average: -13% -19% (20) 32 -27% -1SD: -20% (25) (30) -2SD: -26% 27 (35) 22 Jul-12 Jul-16 Jan-12 Jan-16 Apr-10 Apr-14 Jul-16 Jul-12 Sep-10 Sep-14 Dec-12 Dec-16 Nov-09 Nov-13 Aug-11 Aug-15 Mar-11 Mar-15 May-09 May-13 May-17 Jan-16 Jan-12 Apr-14 Sep-14 Apr-10 Sep-10 Dec-16 Dec-12 Nov-13 Nov-09 Mar-15 Mar-11 Aug-15 Aug-11 May-17 May-13 May-09
New World Development – Discount to NAV New World Development – Discount to NAV band
% HK$ 0 35 (10) 30 (20) +2SD: -28% 25 (30) -22% +1SD: -40% (40) 20 -2% (50) Average: -53% 15 (60) -42% 10 (70) -1SD: -65% -61% (80) -2SD: -77% 5 -81% (90) 0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Thomson Reuters, DBS Vickers
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Sino Land – Discount to NAV Sino Land – Discount to NAV band
HK$ % 60 35 40% 40 30 12% 20 25 +2SD: 2% 0 20 +1SD: -17% -17% (20) Average: -35% 15 -45% (40) 10 -1SD: -53% -73% (60) -2SD: -72% 5 (80) 0
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
SHKP – Discount to NAV SHKP – Discount to NAV band
% HK$ 40 320 20 +2SD: 9% 270 30% 0 +1SD: -10% 220 8%
(20) Average: -28% 170 -14%
(40) -1SD: -47% 120 -36% -58% (60) -2SD: -66% 70
(80) 20
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Tai Cheung – Discount to NAV Tai Cheung – Discount to NAV band
% HK$ (20) 14 -38% (30) 12 -49% (40) 10 +2SD: -48% -61% (50) +1SD: -55% 8 (60) Average: -63% 6 -72% -1SD: -70% (70) 4 -83% -2SD: -77% (80) 2
(90) 0 -13 -14 -09 -08 r-11 r-12 y y p g p p Jul-16 Jul-07 Jan-17 Jan-07 Jun-15 Jul-17 Jul-07 Jul-08 Feb-09 Oct-11 Oct-12 Feb-08 A A Se Sep-10 Dec-14 Dec-15 Nov-13 Au Mar-10 Jan-08 Jun-16 Ma Ma Oct-12 Oct-13
Feb-09 Feb-10 Sep-11 Apr-13
Dec-15 Dec-16 Nov-14 Mar-11 Mar-12 Aug-09 Aug-10 May-14 May-15 Source: Thomson Reuters, DBS Vickers
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China / Hong Kong Industry Focus HK Property Sector
Wheelock & Co. – Discount to NAV Wheelock & Co. – Discount to NAV band
% HK$ 20 100 10 90 +2SD: -1% 17% 0 80 70 1% (10) +1SD: -15% 60 -15% (20) Average: -28% 50 -31% (30) 40 -1SD: -41% -47% (40) 30 20 (50) -2SD: -54% 10 (60) 0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Wing Tai Properties – Discount to NAV Wing Tai Properties – Discount to NAV band
% (40) 9.0 -51% (45) 8.0 -57% (50) +2SD: -55% 7.0 (55) 6.0 -63% +1SD: -60% (60) -68% Average: -65% 5.0 (65) -74% -1SD: -70% 4.0 (70) -2SD: -75% 3.0 (75) (80) 2.0 -14 -12 -15 r-12 y p g p Jul-13 Jan-16 Jul-13 Jun-16 Feb-13 Oct-14 Apr-17 A Se Dec-13 Nov-16 Nov-11 Au Jan-16 Jun-16 Mar-15 Oct-14 Feb-13 Ma Apr-17 Apr-12 Sep-12 Dec-13 Nov-16 Nov-11 Aug-15 Mar-15 May-14 Source: Thomson Reuters, DBS Vickers
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HK Property Sector
Price to book chart
Cheung Kong Property Henderson Land
x x 1.1 1.2 1.0 1.0 0.9 Average: 0.78x 0.8 0.8 Average: 0.49x 0.6 0.7 0.4 0.6 0.5 0.2 0.4 0.0 -16 -17 -15 -16 -15 -16 r-16 r-17 y y p p g g p p Jul-16 Jul-17 Jul-15 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-16 Jan-17 Jun-16 Jun-17 Oct-15 Oct-16 Feb-16 Feb-17 A A Se Se Dec-15 Dec-16 Nov-15 Nov-16 Au Au Mar-16 Mar-17 Ma Ma
K Wah International Kerry Properties
x x 1.6 3.0 1.4 2.5 1.2 1.0 2.0 0.8 1.5 Average: 0.55x Average: 0.83x 0.6 1.0 0.4 0.2 0.5 0.0 0.0
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
MTR Corporation
x 2.3 2.1 1.9 1.7 Average: 1.35x 1.5 1.3 1.1 0.9 0.7 0.5
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Source: Thomson Reuters, Company
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China / Hong Kong Industry Focus HK Property Sector
Price to book chart (continued)
New World Development Sino Land
x x 1.8 3.0 1.6 2.5 1.4 1.2 2.0 1.0 1.5 0.8 Average: 0.53x Average: 0.86x 0.6 1.0 0.4 0.5 0.2 0.0 0.0
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Sun Hung Kai Properties Tai Cheung
x x 2.4 1.4 2.2 1.2 2.0 1.8 1.0 Average: 0.67x 1.6 0.8 1.4 1.2 Average: 0.96x 0.6 1.0 0.4 0.8 0.2 0.6 0.4 0.0
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Wheelock & Co. Wing Tai Properties
x x 1.2 0.45
1.0 0.40 Average: 0.31x 0.8 0.35 Average: 0.55x 0.6 0.30
0.4 0.25 0.20 0.2 0.15 0.0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Source: Thomson Reuters, Company
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China / Hong Kong Industry Focus
HK Property Sector
Property investors is trading at a 36% discount to our assessed current NAV. BUY with HK$30.6 TP.
Supported by continued tight market supply and sustained Share price performance leasing demand, Hongkong Land's Central office vacancy Performance (%) stayed low at 2.4% in Mar-17. Positive rental reversion is 1-mth 3-mth 6-mth 2016 YTD expected to push up the average office rents when c.32% of floor area is up for roll over or rental review in 2017. This Hang Lung Properties (4.2) (2.6) 15.1 (6.8) 21.2 should in turn drive the rental earnings growth. Retail HK Land (3.4) (2.9) 9.0 (9.6) 18.2 portfolio was fully let in Mar-17 but base rent reversion has Hysan Development (1.5) 0.7 8.8 0.9 15.4 turned neutral. Office portfolio in Singapore registered Swire Properties (1.3) 8.3 19.9 (4.5) 25.2 mildly negative rental reversions because of supply glut. WF Wharf Holdings (8.9) (2.0) 14.9 19.9 25.4 Central in Beijing is nearing completion with its retail Sector average (4.6) 0.5 14.5 1.9 22.5 portion scheduled to open in 2H17. The stock is trading 37% below our assessed current NAV. Maintain BUY with HSI Index (2.4) 4.4 12.6 0.4 15.2 US$8.93 TP. HSP Index (4.9) 2.1 14.5 (3.1) 19.9 Wharf's Harbour City resumed retail tenants' sales growth Source: Thomson Reuters with 1.4% y-o-y improvement in 1Q17, led by the sales recovery of luxury brands amidst the return of tourists. YTD, shares of property investors have risen 15-25% or Times Square lagged behind in sales performance but both 23% on a weighted average basis, outperforming the Hang malls achieved single-digit rental reversion. The Ocean Seng Index (+15%), property developers(+20%) and REITs Terminal Extension is targeted to open for business in (16%) . Wharf is the best performing landlord with its share Jul/Aug and should help attract more foot traffic with the price surging 25% as the company is considering to seek a recruitment of F&B outlets. In China, Chengdu IFS, separate listing of its investment properties in Hong Kong Chongqing Times Square and Dalian Times Square recorded via distribution in species. Hongkong Land and Swire impressive retail sales growth of 20-30% in 1Q17. The retail Properties saw their share prices increasing 18-25% due to portions of Chongqing IFS and Changsha IFS are scheduled rising office rents on Hong Kong Island. to open in Sep-17 and early 2018 respectively, adding spice to the company's earnings. The stock is trading at a 33% Following the sector rally, property investors are now discount to our appraised current NAV. BUY with HK$73 TP. trading at a 37% discount to our current NAV estimates on a weighted average basis. This compares with the 10-year Excluding Apple Stores, tenants' sales at Hysan average of 28%. Wharf stands to benefit the most from the Development's retail portfolio recovered modestly by 3% in gradual retail market recovery. Potential spin-off of its Hong 4M17. This was mainly led by Lee Gardens hub as a result of Kong investment properties could add to its investment a recovery in sales of luxury jewellery retailers. Despite this, appeal. Given heavy office exposure in Island East, Swire the overall rental reversion for its retail portfolio should be Properties is set to benefit from sustained office negative at c.20% in 1H17. The office portfolio fared better decentralisation and improving transportation links there. with a healthy rental reversion of 15%. Lee Garden Three is Central office market is going from strength to strength and approaching completion with pre-leasing of its office hence our positive view on Hongkong Land. Mandarin portion proceeding well. The retail portion will house Oriental is considering a possible sale of The Excelsior in lifestyle and experience-themed tenants with targeted Causeway Bay (which is allowed to be redeveloped into a opening in 1Q18. The stock is trading at a 47% discount to commercial tower) in view of the buoyant office sales our estimated current NAV. HOLD with HK$38.5 TP. market. Should this hotel property be sold at a high price, this could prompt further price appreciation for office Hang Lung Properties sees improving momentum for properties on Hong Kong Island. tenants' sales growth at its retail malls in Shanghai and second-tier cities in 1Q17. Plaza 66 fared better than its Swire Properties' office portfolio remains virtually fully peers with retail sales growth of >20% and rental reversion leased. Healthy rental reversion is working its way through of >10%. Although the retail sales growth is encouraging, its Pacific Place Offices. Retail sales declines of The Mall at unit rents at selected retail malls in second-tier cities are Pacific Place and Citygate Outlet Mall narrowed in 1Q17. under downward pressure. Despite rental disruption, the China retail portfolio is a bright spot. INDIGO in Beijing, renovation at Grand Gateway 66 should enhance the Taikoo Hui in Guangzhou and Sino Ocean Taikoo Li in property's long-term competitiveness. In Hong Kong, Hang Chengdu posted stellar growth of tenant sales in the Lung Properties has commenced the property enhancement corresponding period which should bode well for future works at The Peak Galleria which is scheduled to be reversionary growth. Newly opened HKRI Taikoo Li in completed in 2019. The stock is trading at a 40% discount Shanghai has started to provide rental contributions, thus to our assessed current NAV. HOLD with HK$19.85 TP. augmenting the company's rental income growth. The stock VICKERS SECURITIES
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China / Hong Kong Industry Focus HK Property Sector
Peers valuation
Disc. to Mkt Last 12-m PE PE J un-18 J un-18 Yield Yield Company Code FYE Cap Price target Recom FY17 FY18 NAV NAV FY17 FY18 HK$bn HK$ HK$ x x HK$ % % %
Hang Lung Props 101 HK Dec 90 19.92 19.85 HOLD 19.3 18.3 33.1 (40) 3.8 3.8 HK Land @ HKL SP Dec 18 7.47 8.93 BUY 19.9 19.4 12.8 (41) 2.5 2.7 Hy san Dev 14 HK Dec 39 37.00 38.50 HOLD 15.6 16.4 70.0 (47) 3.7 3.7 Swire Props 1972 HK Dec 157 26.80 30.60 BUY 20.0 20.8 43.7 (39) 2.6 2.6
Wharf 4 HK Dec 196 64.65 73.00 BUY 13.7 13.3 97.3 (34) 3.4 3.4 @ denominated in USD Source: Thomson Reuters, DBS Vickers
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Difference in the NAV discounts for property developers Discount to NAV – property investors sector average and investors
% % 20 20 Property investors become relatively 10 +2SD: 3% 15 expensive 0 10 (10) +1SD: -11% 5 (20) Average: -28% 0 (30) -1SD: -38% (5) (40) (10) (50) -2SD: -52% (15) (60) (70) (20) Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jul-07 Oct-13 Sep-11 Nov-15 Aug-09
Hang Lung Properties – Discount to NAV Hang Lung Properties – Discount to NAV band
% HK$ 40 60 +2SD: 21% 20 50 35% +1SD: -1% 0 40 13% Average: -23% (20) 30 -9% -1SD: -44% (40) 20 -37% (60) -2SD: -66% -61% 10 (80) 0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Hongkong Land – Discount to NAV Hongkong Land – Discount to NAV band
% US$ 10 14 +2SD: -1% 11% 0 12 (10) +1SD: -15% -7% 10 (20) Average: -28% 8 -26% (30) 6 -44% (40) -1SD: -42% 4 -62% (50) -2SD: -56% (60) 2 (70) 0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Thomson Reuters, DBS Vickers
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China / Hong Kong Industry Focus HK Property Sector
Hysan – Discount to NAV Hysan – Discount to NAV band
% HK$ 0 73 -10% (10) +2SD: -20% 63 (20) -25% +1SD: -30% 53 (30) Average: -40% 43 -40% (40) -1SD: -50% 33 -54% (50) -2SD: -60% -69% (60) 23 (70) 13 (80) 3 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-07 Jan-12 Jun-15 Oct-13 Feb-17 Sep-08
May-10
Swire Properties – Discount to NAV Swire Properties – Discount to NAV band
% HK$ (5) 40 (10) -13% (15) +2SD: -17% 35 (20) +1SD: -26% -23% (25) 30 (30) Average: -35% -32% (35) 25 -42% (40) -1SD: -43% (45) 20 -51% (50) -2SD: -52% (55) 15 Jul-16 Jul-16 Jan-12 Jan-14 Jun-12 Jun-14 Jan-14 Jan-12 Jun-14 Jun-12 Feb-16 Apr-15 Apr-17 Apr-13 Feb-16 Apr-13 Sep-13 Apr-15 Sep-15 Apr-17 Sep-15 Sep-13 Nov-12 Nov-14 Nov-16 Nov-14 Nov-16 Nov-12
Wharf – Discount to NAV Wharf – Discount to NAV band
% +2SD: -3% HK$ 0 120 (10) -1% +1SD: -16% 100 (20) -17% Average: -30% 80 (30) -33% -1SD: -43% (40) 60 -50% (50) -2SD: -57% 40 -66% (60) 20 (70) 0 Jul-07 Jun-14 Feb-16 Sep-12 Dec-10 Mar-09 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Thomson Reuters, DBS Vickers
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China / Hong Kong Industry Focus
HK Property Sector
Price to Book chart
Hang Lung Properties Hongkong Land
x x 3.0 1.4 2.5 1.2 1.0 2.0 Average: 0.67x Average: 1.16x 0.8 1.5 0.6 1.0 0.4 0.5 0.2 0.0 0.0
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Hysan Development Swire Properties
x x 1.2 1.0
1.0 0.9 Average: 0.64x 0.8 0.8 0.6 Average: 0.66x 0.7 0.4 0.2 0.6 0.0 0.5 Jul-13 Jul-14 Jul-15 Jul-16 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-13 Jan-14 Jan-15 Jan-16
Wharf
x 1.6 1.4 1.2 Average: 0.74x 1.0 0.8 0.6 0.4 0.2 0.0
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Source: Thomson Reuters, Company
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China / Hong Kong Industry Focus HK Property Sector
REITs
Share price performance 10 year US treasury bond yield
Performance (%) % 1-mth 3-mth 6-mth 2016 YTD 4.0 Champion REIT 3.9 7.1 22.7 8.2 26.0 3.5 Langham Hospitality 0.0 (0.9) 2.2 10.2 5.1 3.0 New Century REIT (1.6) (1.2) (2.0) (14.1) (1.6) 2.5 Regal REIT 1.8 1.8 12.1 6.2 12.6 Spring REIT 0.0 2.7 6.6 6.3 5.0 2.0 Sunlight REIT (1.0) 6.4 7.3 16.7 12.1 1.5 Link REIT (4.5) 5.0 11.2 8.6 16.9 1.0 2.386% Yuexiu REIT 4.0 4.7 16.6 (1.7) 20.0 0.5 Sector av erage* (2.5) 5.3 12.2 9.3 16.9 0.0
HSI Index (2.4) 4.4 12.6 0.4 15.2 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 HSP Index (4.9) 2.1 14.5 (3.1) 19.9 * DBSV coverage only Source: Bloomberg Finance L.P.
Source: Thomson Reuters
Year-to-date (YTD), the REITs under our coverage have Yield of the 10-year Hong Kong Exchange Fund note appreciated by 17% on a weighted average basis, amid softening US treasury bond yields. This was despite the US % Fed raising rates twice. Overall, these stocks performed 3.5 marginally better than the broad market but lagged 3.0 property developers and investors slightly. Within the sector, Champion REIT, which is exploring the possibility of selling 2.5 Langham Place Office Tower, was the best performer. 2.0 1.612%
Following the unit price rally, the REITs we cover are current 1.5 trading at prospective distribution yields of 4.3% on a 1.0 weighted average basis, near the low end of the trading 0.5 range. YTD, the yield of the Hong Kong 10-year Exchange Fund Note has softened to1.61% in tandem with US 0.0 treasury bond yields. As a result, the sector yield spread current stands at 2.7%, against the average of 3.2%. Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Thomson Reuters
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China / Hong Kong Industry Focus
HK Property Sector
negotiations with prospective anchor tenants. Link REIT is Sector yield spread trading at distribution yield of 4.1-4.5% for FY18-19. The valuation is fair. HOLD with HK$59.7 TP % 10 8.9% With spot rents of c.HK$110psf substantially above expiring 9 rents, Champion REIT's Three Garden Road records strong 8 rental reversion of 35-40%. Occupancy at this Central office 7 property, however, retreated to low 90s as anchor tenant 6 Citibank reduced its space requirements. Leasing demand 5 +1SD: 4.5% comes mainly from China-based firms including CMBI which has agreed to take up two floors surrendered by Citibank to 4 Average: 3.2% consolidate its operations across different locations. 3 Champion REIT is exploring the possibility of selling the 2 Langham Place Office Tower property capitalising on strong 1 -1SD: 2% office property valuations. This triggered sharp rally in unit 0 price recently. Champion REIT is now trading at distribution yields of 4.4% for FY17-18. Upside potential is limited
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 unless the REIT distributes a special dividend after the Source: Thomson Reuters, DBS Vickers disposal. Downgraded to HOLD with HK$5.38 TP.
Given its emphasis on non-discretionary trades, Link REIT’s Sunlight REIT’s office portfolio continues to see healthy average monthly retail gross sales in Hong Kong grew 4% reversionary growth. The largest office tenant at Sunlight on a per square foot (psf) basis in FY17, outperforming the Tower has renewed its lease due for expiry in 1QFY18 with market by 7.6%. This should support retail rental reversion favourable rental growth of 12%. Grade B offices in Sheung which is expected to remain solid at c.20% in FY18. EC Mall Wan/Central is supported by solid demand for affordable in Beijing and newly acquired Metropolitan Plaza in office accommodation among small-to-medium sized Guangzhou should see rental reversions of >20% in FY18. corporates. Despite recent signs of improving tenant sales, This, coupled strong asset enhancement pipeline, should Sunlight REIT has yet to fully lease out the revamped area at underpin the REIT’s rental income growth. Pre-leasing of Sheung Shui Centre Shopping Arcade. Beverly Commercial tower portion at 700 Nathan Road is progressing well with Centre property is suffering from negative reversionary 50% of space already pre-committed or in final discussion growth. Sunlight REIT is trading at distribution yields of 5- stages. Tenants are expected to move in towards the year- 5.4% for FY17-18. HOLD with HK$5.0 TP. Potential unit end. Retail leasing remains challenging. Link REIT is in lease buyback could provide support to unit price.
Peers valuation
Mkt Last 12-m Yield Yield Yield Price/ REIT Code FYE Cap Price Target Recom FY16A FY17F FY18F BV HK$m HK$ HK$ % % % (x) Champion REIT* 2778 HK Dec 30,745 5.29 5.38 HOLD 4.3 4.4 4.4 0.61 Langham Hospitality^ 1270 HK Dec 6,839 3.29 n.a. NR 7.8 6.8 6.7 0.58 New Century REIT^ 1275 HK Dec 2,348 2.45 n.a. NR 7.8 n.a. n.a. 0.85 Spring REIT^ 1426 HK Dec 4,229 3.38 n.a. NR 6.8 6.4 6.4 0.53 Sunlight REIT* 435 HK Jun 8,205 5.01 5.00 HOLD 4.9 5.0 5.4 0.61 Link REIT* 823 HK Mar 130,438 58.90 59.70 HOLD 3.5 3.9 4.1 1.04
Yuexiu REIT^ 405 HK Dec 14,417 4.91 n.a. NR 5.7 6.2 6.3 0.88 ^ DPU based on consensus Source: Thomson Reuters, *DBS Vickers
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Champion REIT – Price to book NAV Champion REIT – Yield vs Gov’t bond
x % 0.9 30 0.8 25 0.7 20 0.6 0.5 15 Low: 4.4% 0.4 10 Current: 4.4% 0.3 5 0.2 0 0.1 0.0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Dividend Yield HK 10-yr ex fund notes Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17
Link REIT – Price to book NAV Link REIT – Yield vs Gov’t bond
x % 1.7 8 7 Low: 3.4% 1.5 6 Current: 4.1% 1.3 5 4 1.1 3 2 0.9 1 0.7 0
0.5 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17
Dividend Yield HK 10-yr exc fund notes Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17
Sunlight REIT – Price to book NAV Sunlight REIT – Yield vs Gov’t bond
x % 0.9 30 0.8 25 0.7 20 0.6 Low: 4.6% 15 0.5 Current: 5% 10 0.4 0.3 5 0.2 0 0.1
0.0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Dividend Yield HK 10-yr ex fund notes Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17
Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Source: Thomson Reuters, DBS Vickers
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China / Hong Kong Industry Focus
HK Property Sector
Diversified properties
Peers valuation
Disc. to Mkt Last 12-m PE PE J un-18 J un-18 Yield Yield Company Code FYE Cap Price target Recom FY17 FY18 NAV NAV FY17 FY18 HK$bn HK$ HK$ x x HK$ % % %
Far East Consortium 35 HK Mar 10 4.28 4.94 BUY 8.3 6.6 12.3 (65) 4.3 4.3
Great Eagle 41 HK Dec 28 40.10 39.05 HOLD 15.0 14.8 78.1 (49) 1.9 1.9 Source: Thomson Reuters, DBS Vickers
Great Eagle – Discount to NAV Great Eagle– Discount to NAV band
% HK$ (20) 60 (30) -29% +2SD: -39% 50 (40) -42% +1SD: -48% 40 (50) Average: -57% -55% 30 (60) -1SD: -66% -68% (70) -2SD: -75% 20 (80) -82% 10 (90) 0 Jul-07 Apr-14 Dec-15 Nov-10 Aug-12 Mar-09 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Far East Consortium – Discount to NAV Far East Consortium– Discount to NAV band
HK$ % (60) +2SD: -61% 5.0
4.5 (65) +1SD: -66% -63%
Average: -70% 4.0 (70) -68% 3.5 -1SD: -75% -72% (75) 3.0 -2SD: -79% -77% (80) 2.5 -81% (85) 2.0 Jun-17 Jun-16 Oct-16 Feb-17 Apr-17 Dec-16 Aug-16 Jun-16 Jun-17 Oct-16 Feb-17 Apr-17 Dec-16 Aug-16 Source: Thomson Reuters, DBS Vickers
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Price to Book chart
Great Eagle Far East Consortium
x x 1.0 0.50 0.9 0.45 0.8 0.40 0.7 0.6 0.35 Average: 0.3x 0.5 Average: 0.45x 0.30 0.4 0.25 0.3 0.20 0.2 0.1 0.15 0.0 0.10 -14 -15 -16 r-14 r-15 r-16 r-17 g g g p p p p Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jun-14 Jun-15 Jun-16 Jun-17 Oct-13 Feb-14 Oct-14 Feb-15 Oct-15 Feb-16 Oct-16 Feb-17 A A A A Dec-13 Dec-14 Dec-15 Dec-16 Au Au Au Source: Thomson Reuters, Company
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Appendix: Asset breakdown
Property developers
GAV Breakdown (%) Cheung Henderson K. Wah Kerry Props MTRC Kong Land Property HK 76 57 42 44 46 Residential 19 10 38 31 17 Office 22 14167 Retail 11 184620 Hotel 18 2000 Industrial 4 1000 Others 1 8013 Farmland 0 4000 China 9 14 43 46 1 Ov erseas 2 0020 Listed subsidiaries. associates 29 15 6 0 & investments 3 Other assets 9 00154 Total 100 100 100 100 100
GAV Breakdown (%) New World Wheelock & Wing Tai Sino Land SHKP Tai Cheung Dev Co. Props
HK 46 88 78 97 24 93 Residential 131924462122 Office 10 23 21 18 0 60 Retail 133724430 Hotel 7252805 Industrial 041006 Others 122000 Farmland 101000 China 42317001 Overseas 071355 Listed subsidiaries. associates 12 1 3 1 71 1 & investments Other assets 012000 Total 100 100 100 100 100 100
* For Wheelock & Co, its stake in Wheelock Properties (Singapore) is classified under "Overseas" instead of "listed subsidiaries, associates and investments
Source: DBS Vickers
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Property investors
GAV Breakdown (%) Hang Lung Props Hongkong Land Hysan Swire Props Wharf HK 55 67 92 81 73 Residential 11 0 15 4 9 Office 16 58 41 58 26 Retail 26 9 36 13 36 Hotel 01032 Industrial 00000 Others 20120 Farmland 00000 China 45 15 6 16 23 Ov erseas 018030 Listed subsidiaries. associates & 00103 inv estments Other assets 00000 100 100 100 100 100 Total Source: DBS Vickers
Diversified properties
GAV Breakdown (%) Far East Consortium Great Eagle HK 37 15 Residential 5 8 Office 1 6 Retail 1 1 Hotel 29 0 Industrial 0 0 Others 0 0 Farmland 0 0 China 22 7 Ov erseas 40 27 Listed subsidiaries. associates & 46 inv estments 0 Other assets 0 5 Total 100 100 Source: DBS Vickers
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Appendix: NAV sensitivities
Property developers
% increase in NAV Cheung Kong Henderson K.Wah Kerry Props M T RC if the follow ing prices Property Land rise by 10% Office -HK 2.3% 1.5% 0.1% 0.8% 0.7% Retail - HK 1.2% 2.0% 0.5% 0.7% 2.8% Residential - HK 0.9% 0.9% 4.1% 2.7% 2.6% Hotels - HK & overseas 1.9% 0.1% 0.1% 0.5% 0.0%
% increase in NAV New World Dev Sino Land SHKP Tai Cheung Wheelock & Wing Tai if the follow ing prices Co Props rise by 10% Office -HK 1.7% 1.8% 2.3% 1.0% 0.0% 7.3% Retail - HK 2.0% 3.1% 2.6% 0.3% 0.3% 0.0% Residential - HK 1.9% 1.7% 2.2% 3.6% 2.3% 3.3% Hotels - HK & overseas 1.9% 0.6% 0.4% 2.3% 0.0% 0.7%
Source: DBS Vickers
Property investors
% increase in NAV Hang Lung Props Hongkong Hysan Swire Props Wharf if the follow ing prices Land rise by 10% Office -HK 1.6% 6.2% 4.4% 6.9% 2.9% Retail - HK 2.6% 0.9% 3.8% 1.4% 3.9% Residential - HK 0.8% 0.0% 1.6% 0.5% 1.2% Hotels - HK & overseas 0.0% 0.0% 0.0% 0.5% 0.2%
Source: DBS Vickers
Diversified properties
% increase in NA V F ar East Great Eagle if the follow ing prices Consortium rise by 10% Office -HK 0.3% 0.6% Retail - HK 0.3% 0.1% Residential - HK 0.6% 1.2% Hotels - HK & overseas 6.4% 3.3%
Source: DBS Vickers
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China / Hong Kong Industry Focus HK Property Sector
Policy chart Hang Seng Property Index Centa-City Leading Index 170 40,000 (24-27) 160 (23) 35,000 (14) (22) 150 (4)(5) (15) (20) (21) (22) (16) 140 (13) (24-27) (14) (16) 30,000 (2) (7) (21) 130 (12) (12) (17)&(18) (23) 120 (10)&(11) (20) (6) (17)&(18)(19 (7) 25,000 (3) (10)&(11) (8) (15) (19) (1) (9) 110 (13) (6) (9) (8) 100 (3) (5) 20,000 90 (1)(2) 80 (4) 15,000 70 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 HS Property Index Performance (%) 1-day 1-wk 2-wk 1-mth 3-mth
(1) 23-Feb-10 Raise stamp duty rate for properties valued at more than HK$20m from 3.75% to 0.5 4.1 7.9 5.5 (6.2) 4.25% Put up sev eral urban residential sites in the application list for sale in the next tw o years if they are not triggered for sale Liase with MTRC and URA to increase the supply of small to medium sized units Explore means to revitalise the Home Ownership Scheme secondary market (2) 19-Apr-10 Introduced new guidelines for sale of flats 0.1 (1.6) (5.4) (10.4) (3.5) Initiated the auction of two luxury sites in Ho Man Tin and The Peak (3) 13-Aug-10 Lower the max. LTV ratio for residential properties valued at > HK$12m at 60% (2.6) (2.3) (3.0) 3.1 16.7 Lower the max. LTV ratio for non owner-occupied residential properties to 60% Standardise the max. debt servicing ratio of mortgage applicants to 50% from 50- 60% Prohibition of confirmor transaction for first-hand uncompleted flats (4) 13-Oct-10 Introduce a new subsidised housing scheme (My Home Purchase Plan) to assist the 1.2 0.1 (1.8) 1.8 (0.0) sandwich class to purchase flats Remov e real estate from qualified inv estment asset classes for inv estment (5) 19-Nov-10 Introduce a special stamp duty, ranging from 5 to 15% of property values, on (2.5) (4.9) (2.5) (5.6) (7.1) top of the current stamp duty, on residential properties resold within 2 years after purchase Any deferred payment of current stamp duty no longer allowed Lower the max.LTV ratio for self-use residential properties valued at > HK$12m to 50% from 60% Lower the max.LTV ratio for self-use residential properties valued at HK$8-12m to 60% from 70% Cap the LTV ratio for non-owner occupied residential properties, properties held by company and industrial and commercial properties at 50% (6) 23-Feb-11 Proactively increase land supply in FY11/12 (0.6) 3.4 6.1 2.3 1.5 Housing land available could provide 30,000-40,000 private residential units (7) 10-Jun-11 The max. LTV ratio for residential properties valued at HK$10-12m is lowered to (0.3) (2.6) (0.7) 4.4 (8.5) 50% from 60%. The max. LTV ratio for residential properties valued at HK$7-10m is 60% with the max. loan amount capped at HK$5m. The max. LTV ratio for residential properties valued at Source: Thomson Reuters, Centaline Property Agency, DBS Vickers VICKERS SECURITIES Page 54 China / Hong Kong Industry Focus HK Property Sector Policy chart (continued) Hang Seng Property Index Centa-City Leading Index 170 40,000 (24-27) 160 (23) 35,000 (14) (22) 150 (4)(5) (15) (20) (21) (22) (16) 140 (13) (24-27) (14) (16) 30,000 (2) (7) (21) 130 (12) (12) (17)&(18) (23) 120 (10)&(11) (20) (6) (17)&(18)(19 (7) 25,000 (3) (10)&(11) (8) (15) (19) (1) (9) 110 (13) (6) (9) (8) 100 (3) (5) 20,000 90 (1)(2) 80 (4) 15,000 70 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 HS Property Index Performance (%) 1-day 1-wk 2-wk 1-mth 3-mth (8) 12-Oct-11 Introduced the modified Home Ownership Scheme 4.4 (0.1) 2.9 2.4 2.9 Modified the My Home Purchase Plan (9) 30-Aug-12 Relaunch 830 unsold HOS units 1.0 0.5 8.3 12.9 19.0 Offers c.1,000 units under the revised "My Home Purchase Plan" in Tsing Yi for pre-sale in 2013 Expedites the approvals for pre-sale consent Redevelop Chai Wan Factory Estate into 180 PRH units and the URA will roll out two pilot schemes on two industrial building redevelopments Initiates the sales of 6 sites in application list and tender Tsuen Wan TW 6 development in 4Q12 (10) 06-Sep-12 Unveiled the "Hong Kong Property for Hong Kong Residents" policy. Two 3.5 7.8 9.5 12.8 19.4 projects (c.1,100 units) to be built on Kai Tak New Development Area can only be sold to Hong Kong residents (11) 08-Sep-12 Government planned to allow owners to convert their industrial buildings into 0.0 7.5 6.2 7.6 15.8 small-sized residential units without paying land premium. There were an estimated of 700 eligible industrial buildings. (12) 14-Sep-12 Tightened mortgage lending rule for second home buyers (0.5) (1.2) 1.0 (1.3) 8.7 The max. debt service ratio (DSR) is lowered from 50% to 40% in base case scenario and the maximum DSR is lowered from 60% to 50%. LTV ratio for buyers with income derived mainly outside Hong Kong is lowered 10 ppts to 30-50% The max. LTV ratio for mortgage loans assessed based on net worth of applicants is lowered to 30% regardless of proeprty values. The max. loan tenure for all properties is limited to 30 y ears (13) 26-Oct-12 Introduced Buyer's Stamp Duty (BSD), equivalent to 15% of property values on (3.7) 0.1 (1.5) 2.8 15.4 top of current stamp duty, for all-non Hong Kong permanent residents and corporate homebuy ers Modified the Special Stamp Duty (SSD) on residential properties with restriction period extended from 2 years to 3 years and applicable tax rate increased to 10- 20% of property values from 5-15% Source: Thomson Reuters, Centaline Property Agency, DBS Vickers VICKERS SECURITIES Page 55 China / Hong Kong Industry Focus HK Property Sector Policy chart (continued) Hang Seng Property Index Centa-City Leading Index 170 40,000 (24-27) 160 (23) 35,000 (14) (22) 150 (4)(5) (15) (20) (21) (22) (16) 140 (13) (24-27) (14) (16) 30,000 (2) (7) (21) 130 (12) (12) (17)&(18) (23) 120 (10)&(11) (20) (6) (17)&(18)(19 (7) 25,000 (3) (10)&(11) (8) (15) (19) (1) (9) 110 (13) (6) (9) (8) 100 (3) (5) 20,000 90 (1)(2) 80 (4) 15,000 70 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 HS Property Index Performance (%) 1-day 1-wk 2-wk 1-mth 3-mth (14) 16-Jan-13 36 designated GIC sites and other Government sites (27 ha) will be converted for 0.1 0.3 1.1 (2.6) (9.2) housing development to provide 11,900 flats 13 sites in Green Belt areas (57 ha) are considered suitable for rezoning into residential use 16 pieces of industrial land (30 ha) are considered suitable for rezoning for residential development Government will expedite adminstrative approval procedures for 55 residential projects (45,000 units) for which planning applications are approved Take forward the planning of Kam Tin South West Rail Kam Sheung Road Station and Pat Heung Station Maintenance Depot (8,700 units) Government expedite the development of four projects including the former Diamond Hill Squatter Area, former Cha Kwo Ling Kaolin Mine, former Lamma Quarry and A nderson Road Quarry . (15) 22-Feb-13 Double stamp duties on ALL properties of >HK$2m increases to as much as 8.5% (0.3) 1.1 (0.2) (6.6) 2.9 of purchase prices. For transaction valued at HK$2m or below, the stamp duty w ill increase from HK$100 to 1.5% of trasaction v alue. In stress-testing mortgage applicants?repay ment ability , banks are required to assume a mortgage rate increase of 300bps instead of the existing 200bps for all types of property T he max. LT V ratio for mortgage loans for all commercial and industrial properties shall be low ered by 10% from the existing applicable lev els. T he max. LT V ratio for mortgage loans for all standalone car park space shall be set at 40% with max. tenor of 15 years Only mortgage loans of properties valued at HK$4m or below?(down from HK$6m currently ) is eligible for the maximum Mortgage Insurance Programme cover of 90% of LTV ? Stamp duties will be charged on signing S&P agreements for non-residential properties instead of upon the execution of a conv ey ance (16) 29-Apr-13 The Residential Properties (First-hand Sales) Ordinance comes into effective. (0.1) 1.4 0.0 (3.5) (8.3) (17) 27-Jun-13 Government extends the pre-sale period of private residential flats to 30 months 2.1 (0.5) 4.5 5.9 10.6 from 20 months before project completion. (18) 04-Jul-13 Government revised the plot ratios from 3.5 to 6 for Kwu Tung Area and from 2 2.2 5.0 3.6 8.6 10.6 to 6 for F anling North. This should increase number of residential flats to 60,700 from 47,300. The proportion of public housing in the new dev elopment areas w ill rise to 60% (47% of the land). For private housing, "Hong Kong people for Hong Kong property" measure will be adopted as far as possible. Source: Thomson Reuters, Centaline Property Agency, DBS Vickers VICKERS SECURITIES Page 56 China / Hong Kong Industry Focus HK Property Sector Policy chart (continued) Hang Seng Property Index Centa-City Leading Index 170 40,000 (24-27) 160 (23) 35,000 (14) (22) 150 (4)(5) (15) (20) (21) (22) (16) 140 (13) (24-27) (14) (16) 30,000 (2) (7) (21) 130 (12) (12) (17)&(18) (23) 120 (10)&(11) (20) (6) (17)&(18)(19 (7) 25,000 (3) (10)&(11) (8) (15) (19) (1) (9) 110 (13) (6) (9) (8) 100 (3) (5) 20,000 90 (1)(2) 80 (4) 15,000 70 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 HS Property Index Performance (%) 1-day 1-wk 2-wk 1-mth 3-mth (19) 13-May-14 Government proposed to extend the waiver period for homebuyers to obtain 1.8 1.2 2.4 4.8 13.9 refund for Double Stamp Duty. Local homebuyers who sell their existing flats within six months after the execution of a conveyance on sale of new flats, instead of signing the provisional sales & purchase agreement could qualify for the refund (20) 31-Oct-14 The government announced to offer five new Home Ownership Scheme projects 0.0 (2.7) (0.9) 0.3 4.8 for pre-sale with applications to commence in late 2014 and balloting in Mar 2015. (21) 27-Feb-15 Maximum LTV ratio for self-use residential properties valued at Source: Thomson Reuters, Centaline Property Agency, DBS Vickers VICKERS SECURITIES Page 57 China / Hong Kong Industry Focus HK Property Sector Appendix: Share buyback Share buyback Date No. of shares Av erage price (HK$/sh) Amount (HK$m) Sunlight REIT (435 HK) 09-Feb-17 300,000 4.8 1.4 10-Feb-17 299,000 4.8 1.4 13-Feb-17 340,000 4.8 1.6 14-Feb-17 541,000 4.7 2.5 09-May-17 267,000 4.9 1.3 10-May-17 25,000 4.9 0.1 16-May-17 21,000 5.0 0.1 19-May-17 170,000 5.0 0.8 22-May-17 303,000 4.9 1.5 23-May-17 114,000 5.0 0.6 24-May-17 70,000 5.0 0.3 13-J un-17 134,000 5.1 0.7 15-J un-17 125,000 5.2 0.6 Link REIT (823 HK) 04-J an-17 906,000 50.8 46.1 05-J an-17 1,300,000 52.0 67.6 06-J an-17 1,210,000 53.0 64.1 Source: HKEx VICKERS SECURITIES Page 58 China / Hong Kong Industry Focus HK Property Sector Share buyback (continued) Date No. of shares Av erage price (HK$/sh) A mount (HK$m) CK Property (1113 HK) 16-Jan-17 4,244,000 49.5 210.2 17-Jan-17 3,619,000 50.7 183.3 18-Jan-17 3,717,500 52.2 194.2 19-Jan-17 5,247,500 52.1 273.5 20-Jan-17 6,977,000 51.2 357.0 23-Mar-17 6,293,000 53.8 338.3 24-Mar-17 8,747,500 54.2 474.5 27-Mar-17 8,508,000 53.9 458.2 28-Mar-17 201,000 54.0 10.9 03-Apr-17 3,028,000 52.6 159.3 05-Apr-17 10,669,000 52.9 564.7 06-Apr-17 5,543,000 53.4 296.2 07-Apr-17 2,178,500 53.3 116.2 10-Apr-17 241,500 53.8 13.0 11-Apr-17 1,532,500 53.7 82.2 12-Apr-17 686,000 54.5 37.4 13-Apr-17 892,000 55.3 49.3 18-04-17 1,433,500 54.6 78.3 19-04-17 593,000 54.5 32.3 20-04-17 170,500 54.7 9.3 21-04-17 2,541,000 54.8 139.2 24-04-17 3,723,000 54.4 202.7 27-04-17 694,000 55.3 38.3 04-05-17 1,246,500 56.0 69.8 05-05-17 4,154,000 56.1 232.9 08-05-17 1,715,000 56.3 96.5 09-05-17 1,683,000 56.1 94.4 12-05-17 1,548,000 57.2 88.5 15-05-17 589,500 57.3 33.8 16-05-17 100,000 56.3 5.6 18-05-17 1,817,500 57.1 103.8 19-05-17 400,000 57.0 22.8 23-05-17 2,094,500 57.0 119.4 24-05-17 1,005,500 57.2 57.5 25-05-17 906,000 57.5 52.1 26-05-17 736,000 57.7 42.4 29-05-17 253,500 57.8 14.7 31-05-17 2,557,000 57.9 148.2 02-06-17 225,500 59.2 13.3 05-06-17 640,500 59.9 38.3 06-06-17 103,500 60.0 6.2 08-06-17 366,500 61.0 22.3 09-06-17 1,732,500 60.8 105.4 12-06-17 991,000 60.5 59.9 13-06-17 1,517,500 60.8 92.2 14-06-17 2,951,500 61.2 180.8 15-06-17 1,298,500 60.4 78.5 16-06-17 1,000,000 61.1 61.1 19-06-17 810,500 61.4 49.8 20-06-17 297,000 61.7 18.3 21-06-17 383,000 61.6 23.6 22-06-17 1,676,000 61.6 103.2 23-06-17 1,400,000 61.3 85.8 26-06-17 436,500 61.7 26.9 27-06-17 1,032,000 61.6 63.6 28-06-17 1,030,500 61.5 63.4 29-06-17 3,455,500 61.6 213.0 30-06-17 2,867,000 61.1 175.2 Source: HKEx VICKERS SECURITIES Page 59 China / Hong Kong Industry Focus HK Property Sector STOCK PROFILES VICKERS SECURITIES Page 60 HK Property Sector Cheung Kong Property Bloomberg: 1113 HK | Reuters: 1113.HK Refer to important disclosures at the end of this report BUY Ongoing share buyback to support price Last Traded Price (7 Jul 2017): HK$60.10 (HSI: 25,341) • Brisk projects sales to lock in earnings Price Target 12-mth: HK$66.00 (10% upside) (Prev HK$62.1) • Non-property ventures to boost recurrent earnings Potential Catalyst: Share buyback, accretive acquisitions • BUY with HK$66 TP Where we differ: Market has similar earnings estimate for FY17. Brisk project sales to lock in earnings. Despite the introduction of Analyst more cooling measures, Cheung Kong has achieved robust contracted Jeff YAU CFA, +852 2820 4912 sales of >HK$25bn from Hong Kong in 1H17. The bulk came from [email protected] selling two waterfront developments, Ocean Pride in Tsuen Wan and Ian CHUI +852 2971 1915 Harbour Glory in North Point. The 970-unit Ocean Pride is virtually fully [email protected] sold for >HK$10bn. Even after taking into account the profit sharing arrangement with Kowloon-Canton Railway Corporation (KCRC), this project should be lucrative to Cheung Kong with estimated pre-tax margins of 35-40%. With smooth project pre-sales, we estimate Price Relative Cheung Kong Property has locked in c.70% of our projected development earnings from Hong Kong in FY17-18. Non-property ventures to boost recurrent earnings. In an attempt to beef up its recurrent earnings, Cheung Kong teamed up with its affiliates Cheung Kong Infrastructure (CKI) and Power Assets Holdings (PAH) to acquire Australia-listed DUET Group in Jan-17. The transaction was completed in May-17. Cheung Kong Property paid A$2.9bn for a 40% stake in Duet which owns and operates energy utility assets in Australia, US, UK, and Europe. The partnership arrangement allows the Forecasts and Valuation company to leverage on the expertise of CKI and PAH in operation of FY Dec (HK$ m) 2015A 2016A 2017F 2018F Turnover 57,280 69,300 52,896 68,726 infrastructure assets and enables it to participate in this sizeable EBITDA 22,300 27,171 26,054 32,515 investment without stretching its balance sheet. This, coupled with Pre-tax Profit 24,355 27,250 25,303 32,014 aircraft leasing business acquired in late 2016 should boost the Underlying Profit 17,113 19,415 18,981 24,113 company’s recurrent earnings by some 20%. In Mar-17, Cheung Kong EPS (HK$) 4.43 5.08 5.12 6.50 Property reached an agreement to buy Reliance Home Comfort, a EPS Gth (%) 42.0 14.5 0.8 27.0 Canada-based building equipment provider for C$2.82bn. The PE (X) 13.6 11.8 11.7 9.2 P/Cash Flow (X) 8.1 4.7 6.1 29.0 acquisition is pending approvals from the authorities. EV/EBITDA (X) 10.9 9.0 9.3 7.5 DPS (HK$) 1.40 1.53 1.63 1.75 BUY with HK$66 TP. The stock is trading at 38% discount to our Div Yield (%) 2.3 2.5 2.7 2.9 assessed current NAV. YTD, Cheung Kong Property has repurchased Net Gearing (%) 6 3 CASH 7 126m shares for HK$6.8bn, which has supported its share price. In ROE (%) 9.5 7.3 6.7 7.9 May-17, Cheung Kong issued US$1.5bn perpetual securities with Est. NAV (HK$) 97.4 101.6 favourable coupon rate of 4.6% p.a. This, coupled with robust Disc. to NAV (%) (38) (41) proceeds from property sales should give Cheung Kong Property Earnings Rev (%): 4 New financial clout to pursue new investments, property or non-property Consensus EPS (HK$): 5.01 5.61 related, for long-term growth. BUY with HK$66 TP, based on 35% Other Broker Recs: B: 13 S: 1 H: 4 discount to our Jun-2018 NAV estimate. Potential share buyback should cushion downside risk for the stock. ICB Industry: Financials Real Estate Holding & Development ICB Sector: At A Glance Principal Business: Property development and investment, and hotel Issued Capital (m shrs) 3,824 operation in Hong Kong, China, Singapore and the UK Mkt. Cap (HK$m/US$m) 222,834 / 28,522 Source of all data on this page: Company, DBSV, Thomson Reuters, Major Shareholders HKEX Trust & Li Family (%) 30.2 Free Float (%) 69.9 3m Avg. Daily Val. (US$m) 45.7 Page 61 ed- JS / sa- AH HK Property Sector Cheung Kong Property Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 57,280 69,300 52,896 68,726 Fixed Assets 138,573 159,001 162,419 169,382 EBITDA 22,300 27,171 26,054 32,515 Other LT Assets 21,735 25,031 42,869 66,667 Depr / Amort (508) (779) (841) (909) Cash & ST Invts 45,861 62,601 65,693 19,019 EBIT 21,792 26,392 25,213 31,606 Other Current Assets 165,636 150,203 139,447 157,970 Associates Inc 322 238 740 1,178 Total Assets 371,805 396,836 410,428 413,038 Interest (Exp)/Inc (549) (645) (650) (770) ST Debt 5,772 4,378 4,000 4,001 Exceptionals 2,790 1,265 0 0 Creditors 14,785 17,396 17,096 16,796 Pre-tax Profit 24,355 27,250 25,303 32,014 Other Current Liab 16,070 21,983 21,983 21,983 Tax (6,447) (7,441) (5,404) (6,784) LT Debt 55,217 65,798 56,176 36,175 Minority Interest (795) (394) (918) (1,117) Other LT Liabilities 10,274 11,007 11,007 11,007 Net Profit 17,113 19,415 18,981 24,113 Minority Interests 6,591 6,075 6,993 8,110 Shareholder’s Equity 263,096 270,199 293,173 314,967 Total Cap. & Liab. 371,805 396,836 410,428 413,038 Sales Gth (%) 138 21 (24) 30 Share Capital (m) 3,860 3,824 3,708 3,708 Net Profit Gth (%) 42 13 (2) 27 Net Cash/(Debt) (15,128) (7,575) 5,517 (21,157) EBITDA Margins (%) 39 39 49 47 Working Capital 174,870 169,047 162,061 134,209 EBIT Margin (%) 38 38 48 46 Net Gearing (%) 6 3 CASH 7 Tax Rate (%) 26 27 21 21 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 21,792 26,392 25,213 31,606 Revenues (HK$ m) Tax Paid (3,866) (7,639) (5,404) (6,784) Property sales 48,141 56,475 37,964 53,188 Depr/Amort 508 779 841 909 Property rental 4,935 7,316 7,812 8,093 Chg in Wkg.Cap 7,654 21,550 11,106 (18,093) Hotels and serviced suites 3,767 4,823 5,236 5,454 Other Non-Cash (8,170) (2,114) 0 (6,220) Property and project 437 500 525 551 Operating CF 17,918 38,968 31,756 1,418 Others 0 186 1,359 1,440 Net Capex (65) (69) 0 0 Total 57,280 69,300 52,896 68,726 Assoc, MI, Invsmt 8,828 (12,727) (17,598) (20,400) Investing CF 8,763 (12,796) (17,598) (20,400) Net Chg in Debt 42,364 1,613 (10,000) (20,000) Key Assumptions (%) 2017F 2018F New Capital 0 (1,772) 6,152 0 Residential price - HK 8 (8) Dividend (2,112) (5,974) (5,918) (6,192) Office rental - HK 3 3 Other Financing CF (31,904) (1,427) (1,300) (1,500) Retail rental (High street shops) - HK (8) 0 Financing CF 8,348 (7,560) (11,066) (27,692) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 35,029 18,612 3,092 (46,674) Source: Company, DBS Vickers Page 62 HK Property Sector Henderson Land Bloomberg: 12 HK | Reuters: 12.HK Refer to important disclosures at the end of this report Fitter and stronger BUY (Upgrade from HOLD) Last Traded Price (7 Jul 2017): HK$43.45 (HSI: 25,341) • Clinched the prime office site in Central Price Target 12-mth: HK$49.00 (13% upside) (Prev HK$49.85) • Unlocking the enormous hidden value of non-core property assets Potential Catalyst: Asset disposal, farmland conversion Where we differ: Market has higher earnings estimate for FY18. • BUY with HK$49 TP Analyst Clinched the prime office site in Central. Henderson Land Jeff YAU CFA, +852 2820 4912 Development secured the Murray Road car-park site in Central [email protected] through a government tender for HK$23.28bn or HK$50,065 psf. Ian CHUI +852 2971 1915 [email protected] The site is located opposite to Hutchison House and close to Central MTR Station. Henderson Land plans to redevelop the site into a landmark office tower with retail facilities. Scheduled for completion in 2022, this office development offers total GFA of Price Relative 465,000 sf. Adding construction and financing costs, we estimate the all-in development cost at HK$58,000psf. Based on our assumed average rent of HK$140psf upon completion and efficiency ratio of 85%, we estimate yield on cost at 2.4-2.5%. Unlocking the enormous hidden value of non-core property assets. In Mar and May 2017, the company launched Mega Cube in Kowloon Bay and The Globe in Cheung Sha Wan, both of which are converted into office from industrial use under the government’s revitalisation policy for industrial buildings, for Forecasts and Valuation strata-title sale. Market response has been overwhelming. FY Dec (HK$ m) 2015A 2016A 2017F 2018F Turnover 23,641 25,568 19,830 13,405 Coupled with the disposal of Newton Inn, Newton Place Hotel, EBITDA 8,516 10,309 9,782 7,091 Fairview Heights retail shops and Henderson Centre shopping mall, Pre-tax Profit 13,200 16,383 17,101 12,133 Henderson Land has generated c.HK$9bn revenue from selling Underlying Profit 11,009 14,169 14,893 10,439 EPS (HK$) 2.75 3.54 3.72 2.61 commercial and hotel properties, with handsome disposal gains. EPS Gth (%) 11.4 28.6 5.1 (29.9) Exit yield is estimated at c.2% or below. By acquiring a prime PE (X) 15.8 12.3 11.7 16.7 office site in Central and disposing non-core property assets, P/Cash Flow (X) 613.6 23.9 18.8 91.5 EV/EBITDA (X) 23.2 19.1 20.2 27.8 Henderson Land has been rejuvenating its property portfolio DPS (HK$) 1.20 1.41 1.55 1.55 without stretching its balance sheet. Div Yield (%) 2.8 3.2 3.6 3.6 Net Gearing (%) 16 13 11 13 BUY with HK$49 TP. The stock is trading at 45% discount to our ROE (%) 4.5 5.5 5.5 3.8 assessed current NAV. The company has been unlocking its NAV Est. NAV (HK$) 78.9 81.7 via non-core asset disposals which could narrow its NAV discount. Disc. to NAV (%) (45) (47) Any positive news flow on agricultural land conversion could Earnings Rev (%): (1) (8) provide upside on stock. Upgrade to BUY with HK$49 TP, Consensus EPS (HK$): 3.00 2.95 premised on a 40% discount to Jun-2018 NAV estimate. Other Broker Recs: B: 7 S: 7 H: 5 ICB Industry: Financials At A Glance 3,637 ICB Sector: Real Estate Holding & Development Issued Capital (m shrs) Principal Business: Property development and investment in Hong Mkt. Cap (HK$m/US$m) 158,045 / 20,240 Kong & China with stakes in three listed associates including Hong Major Shareholders Kong & China Gas Lee Shau-Kee (%) 73.1 Source of all data on this page: Company, DBSV, Thomson Reuters, Free Float (%) 26.9 HKEX 3m Avg. Daily Val. (US$m) 17.3 Page 63 ed- JS / sa- AH HK Property Sector Henderson Land Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 23,641 25,568 19,830 13,405 Fixed Assets 130,289 133,269 137,085 138,550 EBITDA 8,516 10,309 9,782 7,091 Other LT Assets 96,721 104,253 106,081 108,765 Depr / Amort (139) (106) (108) (110) Cash & ST Invts 14,512 24,255 31,350 30,306 EBIT 8,377 10,203 9,674 6,981 Other Current Assets 94,747 93,721 95,428 102,018 Associates Inc 4,698 4,478 4,697 5,852 Total Assets 336,269 355,498 369,944 379,639 Interest (Exp)/Inc (649) (555) (630) (700) ST Debt 10,224 14,392 14,792 15,192 Exceptionals 774 2,257 3,361 0 Creditors 19,098 21,223 21,123 21,023 Pre-tax Profit 13,200 16,383 17,101 12,133 Other Current Liab 2,982 6,846 6,846 6,846 Tax (1,453) (1,810) (1,809) (1,193) LT Debt 39,680 36,248 39,848 43,449 Minority Interest (738) (404) (400) (500) Other LT Liabilities 8,016 7,488 7,488 7,488 Underlying Profit 11,009 14,169 14,893 10,439 Minority Interests 5,022 5,767 6,024 6,382 Shareholder’s Equity 251,247 263,534 273,823 279,259 Total Cap. & Liab. 336,269 355,498 369,944 379,639 Sales Gth (%) 1 8 (22) (32) Share Capital (m) 4,001 4,001 4,001 4,001 Net Profit Gth (%) 12 29 5 (30) Net Cash/(Debt) (40,317) (33,434) (30,339) (35,384) EBITDA Margins (%) 36 40 49 53 Working Capital 76,955 75,515 84,017 89,263 EBIT Margin (%) 35 40 49 52 Net Gearing (%) 16 13 11 13 Tax Rate (%) 11 11 11 10 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 8,377 10,203 9,674 6,981 Revenues (HK$ m) Tax Paid (1,268) (1,219) (1,809) (1,193) Sales of property 15,690 17,679 11,869 5,236 Depr/Amort 139 106 108 110 Rental Income 5,589 5,559 5,586 5,753 Chg in Wkg.Cap (7,007) (164) (907) (5,590) Hotel operation 99 78 69 31 Other Non-Cash (1,019) (2,596) 370 400 Department store operation 879 871 884 919 Operating CF (778) 6,330 7,436 707 Others 1,384 1,381 1,422 1,465 Net Capex (408) (2,491) (245) (244) Total 23,641 25,568 19,830 13,405 Assoc, MI, Invsmt 1,894 3,014 3,869 3,168 Investing CF 1,486 523 3,624 2,924 Net Chg in Debt 4,884 4,342 4,000 4,001 Key Assumptions (%) 2017F 2018F New Capital 0 0 0 0 Residential Price - HK 8 (8) Dividend (3,391) (6,348) (6,065) (6,477) Office rental - HK 3 3 Other Financing CF (2,232) 155 (1,900) (2,200) Retail Rental (High Street Shops) - HK (8) 0 Financing CF (739) (1,851) (3,965) (4,676) Retail Rental (Shopping Center) - HK 0 2 Chg in Cash (31) 5,002 7,095 (1,044) Source: Company, DBS Vickers Page 64 HK Property Sector K.Wah International Bloomberg: 173 HK | Reuters: 0173.HK Refer to important disclosures at the end of this report Good earnings visibility BUY Last Traded Price (7 Jul 2017): HK$4.61 (HSI: 25,341) Near-term development profit well secured Price Target 12-mth: HK$5.29 (15% upside) (Prev HK$5.54) Land bank restocking to strengthen development Potential Catalyst: Project sales in Shanghai pipeline Where we differ: Market has higher earnings estimate for FY17 BUY with HK$5.29 TP Analyst Jeff YAU CFA, +852 2820 4912 Capitalising on [email protected] Near-term development profit well secured. surging home demand in Kai Tak, K. Wah International offered K.City Ian CHUI +852 2971 1915 for pre-sale in Feb-17 and market response was encouraging. More [email protected] than 810 units, or 90% of total, were sold for c.HK$8bn or c.HK$20,000psf on average. K.Wah acquired the site where K.City is being built through government tender for HK$2.94bn or HK$5,331psf Price Relative on GFA basis in Feb-14. Based on our estimated all-in costs of HK$ Relative Index HK$12,000psf on saleable area basis, we project that K.City, if fully 7.2 212 6.7 sold, should yield pre-tax earnings of >HK$3bn and be the company's 6.2 192 5.7 172 5.2 earnings growth engine upon its scheduled completion in FY18. 152 4.7 4.2 132 Including inventory sales at The Spectra and other projects, K.Wah has 3.7 112 3.2 generated sales proceeds of c.HK$9bn from Hong Kong YTD. With The 92 2.7 2.2 72 Palace Ph 2 in Shanghai, and The Spectra and K.City in Hong Kong Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 already substantially sold, we estimate that the company has locked in K.Wah International (LHS) Relative HSI (RHS) c.65% of our projected development earnings for FY17-18. Forecasts and Valuation FY Dec (HK$ m) 2015A 2016A 2017F 2018F Turnover 4,720 9,620 12,953 17,035 Land bank restocking to strengthen development pipeline. EBITDA 2,536 3,720 5,039 5,950 Following the acquisition of one residential site in Kai Tak and two in Pre-tax Profit 2,815 5,072 5,090 5,918 Nanjing, K. Wah teamed up with Sino Land and China Overseas Land Underlying Profit 1,317 2,808 1,929 4,124 to secure the Kam Sheung Road West Rail Station Ph 1 project via Net Profit 1,367 3,182 1,929 4,124 EPS (HK cts) 46.38 94.97 65.17 139.29 public tender with a winning bid of HK$8.33bn or HK$6,736psf on EPS (HK$) 0.46 0.95 0.65 1.39 GFA basis in May-17. Each developer has a one-third stake in this EPS Gth (%) 91.1 104.8 (31.4) 113.7 development which will provide >1,652 residential units with GFA of PE (X) 9.9 4.9 7.1 3.3 P/Cash Flow (X) 5.7 3.4 (15.3) 4.0 1.23m sf. The joint venture arrangement enables the company to invest EV/EBITDA (X) 8.6 4.3 3.8 2.8 in this large-scale project without stretching its balance sheet and DPS (HK cts) 17.00 18.00 18.00 18.00 taking on excessive business risk. With a string of land acquisitions, the DPS (HK$) 0.17 0.18 0.18 0.18 company's land bank should be sufficient to underpin its development Div Yield (%) 3.7 3.9 3.9 3.9 Net Gearing (%) 38 15 26 13 activities over the next four to five years. ROE (%) 5.8 13.5 7.4 14.2 Est. NAV (HK$) 12.4 13.2 BUY with HK$5.29 TP. Following the sharp share price appreciation Disc. to NAV (%) (63) (65) YTD, the stock is now trading at a 63% discount to our assessed current NAV. Valuation remains inexpensive in view of its good Earnings Rev (%): 21 11 earnings visibility led by favourable project pre-sales. Maintain BUY with Consensus EPS (HK$): 0.91 1.19 Other Broker Recs: B: 3 S: 0 H: 1 HK$5.29 TP, based on a 60% discount to our Jun-2018 NAV estimate. ICB Industry: Financials Real Estate Holding & Development At A Glance ICB Sector: Issued Capital (m shrs) 2,962 Principal Business: Property development & investment in Hong Kong & China Mkt. Cap (HK$m/US$m) 13,653 / 1,748 Major Shareholders Source of all data on this page: Company, DBSV, Thomson Reuters, Lui family 62.14 HKEX Free Float (%) 37.86 3m Avg. Daily Val. (US$m) 1.9 Page 65 ed-JS / sa- AH HK Property Sector K.Wah International Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 4,720 9,620 12,953 17,035 Fixed Assets 8,346 8,752 9,130 9,529 EBITDA 2,536 3,720 5,039 5,950 Other LT Assets 5,507 8,003 10,018 10,018 Depr / Amort (43) (37) (36) (36) Cash & ST Invts 4,337 8,577 4,764 7,723 EBIT 2,493 3,684 5,002 5,913 Other Current Assets 28,373 25,141 28,367 29,192 Associates Inc 191 893 53 0 Total Assets 46,564 50,473 52,280 56,461 Interest (Exp)/Inc 17 41 35 5 ST Debt 460 3,080 2,800 2,000 Exceptionals 114 454 0 0 Creditors 6,837 7,497 7,577 7,657 Pre-tax Profit 2,815 5,072 5,090 5,918 Other Current Liab 2,143 3,260 3,260 3,260 Tax (1,368) (1,846) (2,745) (1,719) LT Debt 12,125 7,933 7,713 8,513 Minority Interest (80) (44) (415) (75) Other LT Liabilities 1,663 1,576 1,472 1,363 Net Profit 1,367 3,182 1,929 4,124 Minority Interests 1,512 1,767 2,338 2,576 Underlying Profit 1,317 2,808 1,929 4,124 Shareholder’s Equity 21,825 25,360 27,119 31,092 Total Cap. & Liab. 46,564 50,473 52,280 56,461 Sales Gth (%) 97 104 35 32 Share Capital (m) 2,840 2,957 2,957 2,957 Net Profit Gth (%) (25) 133 (39) 114 Net Cash/(Debt) (8,248) (3,764) (7,077) (4,119) EBITDA Margins (%) 54 39 39 35 Working Capital 23,271 19,881 19,494 23,997 EBIT Margin (%) 53 38 39 35 Net Gearing (%) 38 15 26 13 Tax Rate (%) 49 36 54 29 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 2,493 3,684 5,002 5,913 Revenues (HK$ m) Tax Paid (438) (1,083) (2,745) (1,719) Sale of properties 4,264 9,125 12,425 16,429 Depr/Amort 43 37 36 36 Rental income 351 393 424 499 Chg in Wkg.Cap 989 1,877 (2,587) (184) Hotel operation 106 103 104 107 Other Non-Cash (757) (531) (600) (630) Total 4,720 9,620 12,953 17,035 Operating CF 2,330 3,983 (893) 3,416 Net Capex (16) (9) 0 0 Assoc, MI, Invsmt 2,464 5 (1,887) 75 Investing CF 2,448 (4) (1,887) 75 Net Chg in Debt (5,217) (1,605) (500) 0 Key Assumptions (%) 2017F 2018F New Capital 0 1 0 0 Residential price - HK 8 (8) Dividend (329) (125) (532) (533) Office rental - HK 3 3 Other Financing CF 54 320 0 0 Retail rental (High street shops) - HK (8) 0 Financing CF (5,493) (1,409) (1,032) (533) Retail rental (Shopping centre) - HK 0 2 Chg in Cash (716) 2,570 (3,813) 2,958 Source: Company, DBS Vickers Page 66 HK Property Sector Kerry Properties Bloomberg: 683 HK | Reuters: 683.HK Refer to important disclosures at the end of this report Clearing inventory with focus on margins BUY Last Traded Price (7 Jul 2017): HK$26.50 (HSI: 25,341) • Mantin Heights and The Bloomsway to dominate sales Price Target 12-mth: HK$30.20 (14% upside) (Prev HK$30.60) activities and development earnings • On track to meet sales target in China Potential Catalyst: Better project sales in Hong Kong & China Where we differ: Market has slightly higher earnings estimate for FY17 • BUY with HK$30.2 TP Analyst Mantin Heights and The Bloomsway to dominate sale activities Jeff YAU CFA, +852 2820 4912 and development earnings. In 5M17, Kerry Properties achieved [email protected] contracted sales of HK$4bn from Hong Kong, representing 40% of its Ian CHUI +852 2971 1915 FY17 sales target. This included HK$3bn from newly completed Mantin [email protected] Heights with the balance stemming from The Bloomsway, and Dragons Range. Since its launch in Mar-16, Kerry Properties has sold over 52% of the total units at Mantin Heights for HK$10.3bn. At The Bloomsway, 912 units have been sold, representing 83% of total, for HK$6.6bn. Price Relative The remaining units are mainly garden houses and low-rise apartments HK$ Relative Index which carry higher unit prices. In 2H17, Kerry Properties will focus on 214 35.3 194 clearing inventory at these two large residential projects. If fully sold, 174 30.3 154 we expect combined pre-tax earnings of >HK$4.5bn, dominating the 134 25.3 company’s development earnings in FY17-18. Kerry also plans to retain 114 20.3 94 the Shan Kwong Road project (GFA: 81,000sf) in Happy Valley for 74 15.3 54 rental upon scheduled completion in 2017. Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Kerry Properties (LHS) Relative HSI (RHS) On track to meet sales target in China. In China, Kerry Properties Forecasts and Valuation generated Rmb2.9bn or HK$3.3bn from project sales in 5M17, FY Dec (HK$ m) 2015A 2016A 2017F 2018F representing c.55% of its full-year target. Hangzhou Castalia Court Turnover 10,393 12,989 34,628 22,697 remained the key contributor with significantly higher ASP achieved EBITDA 3,827 5,926 8,229 6,343 Pre-tax Profit 4,745 6,405 8,395 6,064 compared to 2016. Since 2015, Kerry Properties has generated Underlying Profit 3,481 3,647 5,012 3,577 >Rmb4bn from selling Hangzhou Castalia Court which is scheduled for EPS (HK$) 2.41 2.53 3.47 2.48 completion in phases in 2017-19. In 1H17, Kerry Properties launched EPS Gth (%) (20.7) 4.9 37.4 (28.6) Lake Grandeur (residential portion of Hangzhou Kerry Centre) for sale, PE (X) 11.0 10.5 7.6 10.7 achieving contracted sales of Rmb235m in 5M17 on ASP of P/Cash Flow (X) 6.9 8.1 3.6 5.9 EV/EBITDA (X) 20.8 13.4 9.7 12.5 Rmb96,300psm. On the leasing side, Hangzhou Kerry Centre should DPS (HK$) 0.90 1.10 1.10 1.10 provide first full-year contributions to support mild rental income Div Yield (%) 3.4 4.2 4.2 4.2 growth in FY17. However, growing new supply could exert pressure on Net Gearing (%) 32 35 30 29 the company’s office income in Shanghai, Beijing and Shenzhen from ROE (%) 4.3 4.4 6.0 4.2 Est. NAV (HK$) 74.7 75.5 FY18. Disc. to NAV (%) (65) (65) The stock is trading at 65% discount to our BUY with HK$30.2 TP Earnings Rev (%): (4) (4) assessed current NAV. Valuation remains undemanding. The company Consensus EPS (HK$): 3.69 3.13 will focus on inventory sales with emphasis on margin maximisation in Other Broker Recs: B: 11 S: 4 H: 4 2H17. We maintain BUY at this stage for strong asset backing with HK$30.2 TP. This is premised on 60% discount to our Jun-2018 NAV ICB Industry: Financials Real Estate Holding & Development estimate. ICB Sector: Principal Business: Property development and investment in Hong Kong & China At A Glance Issued Capital (m shrs) 1,443 Source of all data on this page: Company, DBSV, Thomson Reuters, Mkt. Cap (HK$m/US$m) 38,243 / 4,896 HKEX Major Shareholders Kerry Group Limited (%) 59.0 Free Float (%) 41.0 3m Avg. Daily Val. (US$m) 7.6 Page 67 ed- JS / sa- AH HK Property Sector Kerry Properties Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 10,393 12,989 34,628 22,697 Fixed Assets 80,956 87,994 86,645 85,815 EBITDA 3,827 5,926 8,229 6,343 Other LT Assets 22,564 24,731 27,447 29,086 Depr / Amort (424) (555) (611) (672) Cash & ST Invts 11,056 16,487 17,320 18,969 EBIT 3,403 5,371 7,619 5,671 Other Current Assets 36,641 43,433 41,529 42,309 Associates Inc 1,969 1,144 1,097 912 Total Assets 151,217 172,646 172,941 176,179 Interest (Exp)/Inc (226) (110) (320) (520) ST Debt 9,642 3,856 4,000 4,001 Exceptionals (400) 0 0 0 Creditors 10,015 20,534 20,554 20,574 Pre-tax Profit 4,745 6,405 8,395 6,064 Other Current Liab 4,423 6,544 6,205 6,205 Tax (911) (1,952) (2,555) (1,700) LT Debt 24,150 36,825 34,181 35,180 Minority Interest (353) (806) (828) (787) Other LT Liabilities 8,825 9,668 9,383 9,244 Underlying Profit 3,481 3,647 5,012 3,577 Minority Interests 12,809 12,474 13,302 14,089 Shareholder’s Equity 81,353 82,744 85,315 86,886 Total Cap. & Liab. 151,217 172,646 172,941 176,179 Sales Gth (%) (29) 25 167 (34) Share Capital (m) 1,446 1,443 1,443 1,443 Net Profit Gth (%) (21) 5 37 (29) Net Cash/(Debt) (26,181) (28,852) (25,519) (24,870) EBITDA Margins (%) 37 46 24 28 Working Capital 23,617 28,986 28,090 30,497 EBIT Margin (%) 33 41 22 25 Net Gearing (%) 32 35 30 29 Tax Rate (%) 19 30 30 28 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 3,403 5,371 7,619 5,671 Revenues (HK$ m) Tax Paid (1,270) (1,329) (2,555) (1,700) Property rental 3,801 4,051 4,207 4,295 Depr/Amort 424 555 611 672 Property sales 5,084 7,204 28,569 16,475 Chg in Wkg.Cap 1,909 (328) 1,041 220 Hotel operation 1,507 1,734 1,852 1,927 Other Non-Cash (1,432) (2,107) (167) (1,916) Total 10,393 12,989 34,628 22,697 Operating CF 3,034 2,162 6,550 2,947 Net Capex (3,510) (1,356) (400) (400) Assoc, MI, Invsmt (724) (2,036) (1,229) (311) Investing CF (4,235) (3,392) (1,629) (711) Net Chg in Debt 3,236 12,062 (2,500) 1,000 Key Assumptions (%) 2017F 2018F New Capital 30 (52) 0 0 Residential price - HK 8 (8) Dividend (1,671) (1,683) (1,588) (1,588) Office rental - HK 3 3 Other Financing CF 152 (3,098) 0 0 Retail rental (High street shops) - HK (8) 0 Financing CF 1,746 7,229 (4,088) (588) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 546 5,998 833 1,649 Source: Company, DBS Vickers Page 68 HK Property Sector MTR Corporation Bloomberg: 66 HK | Reuters: 0066.HK Refer to important disclosures at the end of this report HOLD Fairly valued Last Traded Price (7 Jul 2017): HK$43.65 (HSI: 25,341) Ongoing project tenders to tap strong land demand Price Target 12-mth: HK$40.00 (8% downside) (Prev HK$39.50) Retail reversionary growth turns negative HOLD with HK$40 TP Potential Catalyst: Project tender Where we differ: Market has slightly higher earnings estimate for FY18 Ongoing project tenders to tap the strong land demand. MTRC offered two residential sites for tender in 1H17. In Feb-17, MTRC Analyst Jeff YAU CFA, +852 2820 4912 awarded the development rights of the Wong Chuk Hang Station Ph [email protected] 1 project on South Island Line to a China-based consortium. This Ian CHUI +852 2971 1915 development offers c.800 units with total GFA of 0.58m sf. Land [email protected] premium is set at HK$4.684bn or HK$8,119psf. The winning consortium has to pay MTRC an undisclosed amount for development rights and share 35% of development profits with MTRC. In May-17, the company tendered out the Kam Sheung Road Station Ph 1 project Price Relative (GFA:1.23msf) to Sino Land consortium on behalf of the government. HK$ Relative Index 54.2 220 In the coming nine months, MTRC intends to offer six other packages 200 49.2 for tender. These include Packages 2 & 3 at Wong Chuk Hang, 180 44.2 160 39.2 Packages 10 & 11 at Lohas Park Stations, Ho Man Tin Station Package 140 34.2 120 2, and Yau Tong Station Ventilation Building site. This should enable 29.2 100 the company to tap the buoyant land market. 24.2 80 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Given the low MTR Corporation (LHS) Relative HSI (RHS) Retail reversionary growth turns negative. comparison base, Elements at Kowloon Station achieved low-to-mid Forecasts and Valuation single digit growth in retail sales in 1Q17, led by luxury retail tenants. FY Dec (HK$ m) 2015A 2016A 2017F 2018F Turnover 41,701 45,189 52,001 45,633 However, other regional malls posted c.5% decline in retail sales EBITDA 16,120 17,313 18,144 17,160 dragged by fashion and electronic goods tenants. Retail reversionary Pre-tax Profit 13,275 11,633 10,784 10,361 Underlying Profit 10,894 9,446 8,911 8,688 growth has turned negative given high expiring rents. IFC office fared EPS (HK$) 1.87 1.61 1.51 1.47 better with favourable rental growth on lease renewal. MTRC has EPS Gth (%) (6.4) (13.8) (6.2) (2.5) completed the conversion of 7/8 F of Telford Plaza II from office into PE (X) 23.4 27.2 29.0 29.7 P/Cash Flow (X) 14.9 13.0 14.1 14.9 retail use. The additional space (36,600 sf) is leased to a Chinese EV/EBITDA (X) 17.9 16.7 15.9 16.8 restaurant and fitness centre. This should help draw the crowd to DPS (HK$) 1.06 3.27 3.27 1.07 Telford Plaza II where some F&B outlets and a book store have been Div Yield (%) 2.4 7.5 7.5 2.5 Net Gearing (%) 11 20 30 28 relocated to the high zone with prime space freed up for higher ROE (%) 6.5 5.9 6.1 6.1 yielding tenants. The Maritime Square Extension is targeted to open Est. NAV (HK$) 44.4 46.0 for business in late 2017. The existing cinema will be shifted to this Disc. to NAV (%) (2) (5) new extension. Earnings Rev (%): 3 1 The stock is trading 2% below our assessed Consensus EPS (HK$): 1.57 1.63 HOLD with HK$40 TP Other Broker Recs: B: 2 S: 5 H: 2 current NAV. Valuation is fair. We maintain our HOLD call at this stage with HK$40 TP. This is derived by applying respective discounts Financials ICB Industry: of 20% and 30% to our Jun-2018 estimated valuation for Real Estate Holding & Development ICB Sector: development and investment properties. Principal Business: Operate pre-dominantly a rail-based transportation system in HK with exposure to residential and commercial markets At A Glance Source of all data on this page: Company, DBSV, Thomson Reuters, Issued Capital (m shrs) 5,910 HKEX Mkt. Cap (HK$m/US$m) 257,989 / 33,022 Major Shareholders The Financial Secretary Incorp (%) 75.4 Free Float (%) 24.6 3m Avg. Daily Val. (US$m) 29.6 Page 69 ed- JS / sa- AH HK Property Sector MTR Corporation Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 41,701 45,189 52,001 45,633 Fixed Assets 175,719 201,942 201,968 202,130 EBITDA 16,120 17,313 18,144 17,160 Other LT Assets 43,366 25,014 30,066 34,238 Depr / Amort (3,849) (4,127) (4,845) (4,979) Cash & ST Invts 12,654 20,660 25,571 27,234 EBIT 12,271 13,186 13,299 12,180 Other Current Assets 9,364 9,724 9,624 9,524 Profit on property 2,891 311 300 1,177 Total Assets 241,103 257,340 267,229 273,125 Associates Inc 361 535 531 600 ST Debt 1,649 1,350 0 0 Interest (Exp)/Inc (599) (612) (1,438) (1,564) Creditors 22,860 30,896 32,854 34,936 Variable payment to KCRC (1,649) (1,787) (1,908) (2,032) Other Current Liab 4,635 13,487 13,487 13,487 Pre-tax Profit 13,275 11,633 10,784 10,361 LT Debt 19,162 38,589 56,819 56,819 Tax (2,237) (2,093) (1,792) (1,611) Other LT Liabilities 22,626 23,462 23,428 23,392 Minority Interest (144) (94) (80) (63) Minority Interests 116 95 175 238 Underlying Profit 10,894 9,446 8,911 8,688 Shareholder’s Equity 170,055 149,461 140,466 144,253 Total Cap. & Liab. 241,103 257,340 267,229 273,125 Share Capital (m) 5,858 5,905 5,905 5,905 Net Cash/(Debt) (19,167) (30,265) (42,201) (40,501) Sales Gth (%) 4 8 15 (12) Working Capital (7,126) (15,349) (11,146) (11,666) Net Profit Gth (%) (6) (13) (6) (3) Net Gearing (%) 11 20 30 28 EBITDA Margins (%) 39 38 35 38 EBIT Margin (%) 29 29 26 27 Tax Rate (%) 17 18 17 16 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 12,271 13,186 13,299 12,180 Revenues (HK$ m) Tax Paid (2,169) (2,626) (1,792) (1,611) HK transportation operations 16,916 17,655 18,272 18,782 Depr/Amort 3,849 4,127 4,845 4,979 HK station commercial 5,380 5,544 5,603 5,503 Chg in Wkg.Cap 271 1,661 150 150 b HK Property rental & mgt 4,533 4,741 4,841 5,019 Other Non-Cash 719 787 0 0 China & Intl subsidiaries 12,572 14,826 20,882 13,651 Operating CF 14,941 17,135 16,502 15,699 Other business 2,300 2,423 2,403 2,678 Net Capex (21,670) (11,939) (7,482) (5,708) Total 41,701 45,189 52,001 45,633 Assoc, MI, Invsmt 3,624 (5,179) (750) (750) Investing CF (18,046) (17,118) (8,232) (6,458) Net Chg in Debt 150 12,872 16,880 0 Key Assumptions (%) 2017F 2018F New Capital 569 845 0 0 Residential price - HK 8 (8) Dividend (5,905) (18,616) (19,308) (6,327) Office rental - HK 3 3 Other Financing CF (727) 5,991 (932) (1,251) Retail rental (High street shops) - HK (8) 0 Financing CF (5,913) 1,092 (3,359) (7,578) Retail rental (Shopping centre) - HK 0 2 Chg in Cash (9,018) 1,109 4,911 1,663 Source: Company, DBS Vickers Page 70 HK Property Sector New World Development Bloomberg: 17 HK | Reuters: 0017.HK Refer to important disclosures at the end of this report BUY Undemanding valuations Last Traded Price (7 Jul 2017): HK$9.91 (HSI: 25,341) Stellar sales performance Price Target 12-mth: HK$11.80 (19% upside) (Prev HK$11.26) Foray into Kowloon West office market Potential Catalyst: Pre-leasing of New World Centre redevelopment BUY with HK$11.80 TP Where we differ: Market has similar earnings estimate for FY17. Stellar sales performance. Pre-sale of The Pavilia Bay in Tsuen Analyst Jeff YAU CFA, +852 2820 4912 Wan was strong. Since its initial launch in Jan-17, New World [email protected] Development has sold c.950 units, or 97% of total, for Ian CHUI +852 2971 1915 >HK$9bn. The company has an 80% stake in this residential [email protected] development with the balance held by China Vanke. Upon scheduled completion in FY18, we estimate that a sale of all units at The Pavila Bay would generate attributable pre-tax development earnings of c.HK$1.8bn to New World Price Relative Development. Elsewhere, New World has sold 6 houses at Park HK$ Relative Index 217 Villa in Yuen Long and 75 units at Mount Villa in Sai Kung. 12.4 197 11.4 177 Overall, the company has attained attributable contracted sales 10.4 157 9.4 of c.HK$14bn in FY17, exceeding its sales target of HK$10bn. 137 8.4 117 The company plans to launch Artisan House in Sai Ying Pun 7.4 97 6.4 77 and the Heung Sze Hui Road project in Tuen Mun towards the 5.4 57 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 year-end. New World Development (LHS) Relative HSI (RHS) In 1H17, New Forecasts and Valuation Foray into the Kowloon West office market. World Development acquired two sites in Cheung Sha Wan for FY Jun (HK$ m) 2015A 2016A 2017F 2018F Turnover 55,245 59,570 56,927 68,327 office development for c.HK$ 11.8bn in total. These two office EBITDA 11,843 11,751 11,191 14,051 projects will provide combined GFA of c.1.5m sf upon Pre-tax Profit 31,137 18,707 12,786 13,701 Underlying Profit 6,770 6,893 7,502 7,801 completion. The recent strata-titled sale of 650 Cheung Sha Net Profit 19,112 8,666 7,502 7,801 Wan Road in the area met with encouraging response, EPS (HK$) 0.77 0.75 0.78 0.79 reflecting solid demand for quality office space there. Currently, EPS Gth (%) (15.9) (2.2) 3.6 1.8 PE (X) 12.9 13.2 12.7 12.5 office assets in Cheung Sha Wan are transacting at P/Cash Flow (X) 6.3 7.3 8.5 4.7 HK$14,000psf. Based on our estimated all-in cost of EV/EBITDA (X) 16.4 16.5 17.4 13.8 HK$11,000psf, these two office projects offer reasonable DPS (HK$) 0.42 0.44 0.44 0.44 Div Yield (%) 4.2 4.4 4.4 4.4 returns to the company. Net Gearing (%) 30 43 45 42 Trading at 56% discount to our ROE (%) 11.3 4.8 4.1 4.2 BUY with HK$11.80 TP. Est. NAV (HK$) 22.7 23.6 assessed current NAV and dividend yield of 4.4% for FY17-18, Disc. to NAV (%) (56) (58) the stock is inexpensive in our view. Thus we maintain our BUY rating with HK$11.8 TP, based on 50% discount to our - Earnings Rev (%): (9) (3) Jun Consensus EPS (HK$): 0.80 0.85 2018 NAV estimate. Near term, news flow on pre-leasing of Other Broker Recs: B: 13 S: 0 H: 4 retail portion of New World Centre should dictate share price movement. ICB Industry: Financials Real Estate Holding & Development ICB Sector: Principal Business: Engaged in property and hotel businesses in Hong At A Glance Kong and China, service and infrastructure operations and department Issued Capital (m shrs) 9,803 store Mkt. Cap (HK$m/US$m) 97,146 / 12,437 Source of all data on this page: Company, DBSV, Thomson Reuters, Major Shareholders HKEX Cheng Yu Tung Family (%) 44.2 Free Float (%) 55.8 3m Avg. Daily Val. (US$m) 19.2 Page 71 ed- JS / sa- AH HK Property Sector New World Development Income Statement (HK$ m) Balance Sheet (HK$ m) FY Jun 2015A 2016A 2017F 2018F FY Jun 2015A 2016A 2017F 2018F Turnover 55,245 59,570 56,927 68,327 Fixed Assets 114,452 112,402 114,050 115,566 EBITDA 11,843 11,751 11,191 14,051 Other LT Assets 124,093 124,652 130,164 131,465 Depr / Amort (2,314) (1,929) (2,084) (2,250) Cash & ST Invts 59,465 55,171 55,119 64,635 EBIT 9,529 9,822 9,108 11,801 Other Current Assets 99,920 99,884 101,672 98,310 Associates Inc 3,657 2,661 3,070 2,894 Total Assets 397,931 392,109 401,005 409,976 Interest (Exp)/Inc (492) (537) (691) (995) ST Debt 33,518 20,090 33,178 33,178 Exceptionals 18,442 6,761 1,300 0 Creditors 27,152 26,770 26,720 26,670 Pre-tax Profit 31,137 18,707 12,786 13,701 Other Current Liab 20,333 19,663 19,663 19,663 Tax (4,264) (6,424) (2,946) (3,566) LT Debt 83,638 114,842 106,754 111,754 Minority Interest (7,760) (3,617) (2,338) (2,333) Other LT Liabilities 10,931 9,848 9,848 9,848 Net Profit 19,112 8,666 7,502 7,801 Minority Interests 43,439 21,322 22,160 22,992 Underlying Profit 6,770 6,893 7,502 7,801 Shareholder’s Equity 178,919 179,573 182,681 185,870 Total Cap. & Liab. 397,931 392,109 401,005 409,976 Sales Gth (%) (2) 8 (4) 20 Share Capital (m) 8,997 9,388 9,388 9,388 Net Profit Gth (%) 97 (55) (13) 4 Net Cash/(Debt) (53,539) (77,049) (82,100) (77,585) EBITDA Margins (%) 21 20 20 21 Working Capital 78,382 88,532 77,230 83,434 EBIT Margin (%) 17 16 16 17 Net Gearing (%) 30 43 45 42 Tax Rate (%) 14 34 23 26 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Jun 2015A 2016A 2017F 2018F FY Jun 2015A 2016A 2017F 2018F EBIT 9,529 9,822 9,108 11,801 Revenues (HK$ m) Tax Paid (3,982) (4,359) (2,946) (3,566) Property Investment 2,402 2,492 2,517 2,733 Depr/Amort 2,314 1,929 2,084 2,250 Property Development 25,682 28,528 25,457 36,232 Chg in Wkg.Cap 1,849 1,344 (1,337) 6,812 Services 15,844 19,904 20,202 20,505 Other Non-Cash 137 (731) 1,300 0 Infrastrcture 2,471 2,444 2,468 2,493 Operating CF 9,847 8,006 8,208 17,296 Hotels 4,061 1,762 1,789 1,817 Net Capex (8,987) (8,921) (2,000) (2,000) Department Stores & Others 4,786 4,440 4,493 4,547 Assoc, MI, Invsmt 10,635 9,529 2,166 3,299 Total 55,245 59,570 56,927 68,327 Investing CF 1,648 608 166 1,299 Net Chg in Debt (2,937) 20,384 5,000 5,000 Key Assumptions (%) 2017F 2018F New Capital 148 4 0 0 Residential price - HK 8 (8) Dividend (5,427) (1,882) (7,626) (7,880) Office rental - HK 3 3 Other Financing CF (5,462) (31,030) (5,800) (6,200) Retail rental (High street shops) - HK (8) 0 Financing CF (13,678) (12,525) (8,426) (9,080) Retail rental (Shopping centre) - HK 0 2 Chg in Cash (2,184) (3,911) (51) 9,516 Source: Company, DBS Vickers Page 72 HK Property Sector Sino Land Bloomberg: 83 HK | Reuters: 83.HK Refer to important disclosures at the end of this report BUY On acquisition mode Last Traded Price ( 7 Jul 2017): HK$12.74 (HSI: 25,341) • Replenishing land bank via various means Price Target 12-mth: HK$14.88 (17% upside) (Prev HK$14.50) • Well poised for more acquisitions • BUY with HK$14.88 TP Potential Catalyst: Land acquisitions Where we differ: Market has similar earnings estimate for FY17 Replenishing land bank via various means. In Jan-17, a Analyst consortium between Sino Land (60%)and Empire Group (40%) won Jeff YAU CFA, +852 2820 4912 the tender for the development of the Hong Kong Ocean Park [email protected] Fullerton Hotel which will provide 460 rooms. Total project cost is Ian CHUI +852 2971 1915 estimated to be c.HK$3bn including land premium of HK$750m. In [email protected] Feb-17, Sino Land secured the development rights of URA's Peel Street residential project in Central. In Apr-17, Sino Land secured an industrial site in Kwai Chung through government tender for Price Relative HK$451m or HK$2,548psf. Sino Land teamed up with K.Wah International and China Overseas Land to secure the development right of Kam Sheung Road West Rail Station Ph 1 project via tender for HK$8.33bn or HK$6,735psf in May-17. Each developer has one- third stake in this sizeable residential project. Overall, we estimate that Sino Land has added 0.86m sf (in attributable GFA terms) to its development land bank with attributable land costs of >HK$4bn YTD. The land acquired is diversified in terms of usage and geographical locations. And the joint venture arrangement for the Ocean Park Forecasts and Valuation Fullerton Hotel and Kam Sheung Road Station projects enables the FY Jun (HK$ m) 2015A 2016A 2017F 2018F company to diversify the investment risk. Turnover 21,839 10,804 16,305 13,748 EBITDA 5,159 4,258 7,035 4,278 Well poised for more acquisitions. Following this string of land Pre-tax Profit 6,324 5,968 8,070 5,631 acquisitions in 1H17, we estimate that Sino Land still sits on net cash Underlying Profit 5,301 5,351 5,170 4,825 EPS (HK$) 0.87 0.87 0.83 0.76 holding of c.HK$20bn. Impeccable balance sheet strength puts Sino EPS Gth (%) 3.7 (0.4) (4.7) (7.7) Land in an advantageous position to continue its land bank restocking PE (X) 14.6 14.7 15.4 16.7 when opportunities avail. We believe the company will remain on P/Cash Flow (X) 9.1 8.4 33.6 57.9 EV/EBITDA (X) 11.3 13.7 8.3 13.6 acquisition mode in 2H17. DPS (HK$) 0.50 0.51 0.51 0.51 The stock is trading 48% below our Div Yield (%) 3.9 4.0 4.0 4.0 BUY with HK$14.88 TP. Net Gearing (%) CASH CASH CASH CASH appraised current NAV. The valuation appears inexpensive taking into ROE (%) 4.6 4.4 4.2 3.8 account the company's enviable financial strength. We therefore Est. NAV (HK$) 24.6 24.8 maintain our BUY call with HK$14.88 TP. This is based on a 40% Disc. to NAV (%) (48) (49) target discount to our Jun-2018 NAV estimate. Earnings Rev (%): 2 (2) Consensus EPS (HK$): 0.84 0.84 At A Glance Other Broker Recs: B: 7 S: 4 H: 10 Issued Capital (m shrs) 6,316 Mkt. Cap (HK$m/US$m) 80,460 / 10,300 Financials ICB Industry: Real Estate Holding & Development Major Shareholders ICB Sector: Tsim Sha Tsui Properties (%) 54.7 Principal Business: Property development and investment, hotel operations, primarily in Hong Kong Free Float (%) 45.3 3m Avg. Daily Val. (US$m) 6.2 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Page 73 ed-TH / sa- AH HK Property Sector Sino Land Income Statement (HK$ m) Balance Sheet (HK$ m) FY Jun 2015A 2016A 2017F 2018F FY Jun 2015A 2016A 2017F 2018F Turnover 21,839 10,804 16,305 13,748 Fixed Assets 60,244 61,398 62,803 64,244 EBITDA 5,159 4,258 7,035 4,278 Other LT Assets 30,355 29,373 30,494 33,709 Depr / Amort (90) (82) (82) (81) Cash & ST Invts 19,709 27,450 23,627 19,105 EBIT 5,069 4,176 6,953 4,198 Other Current Assets 31,494 30,837 35,585 38,554 Associates Inc 957 1,498 912 1,123 Total Assets 141,803 149,058 152,510 155,611 Interest (Exp)/Inc 298 295 205 310 ST Debt 801 0 3,865 577 Pre-tax Profit 6,324 5,968 8,070 5,631 Creditors 8,178 5,765 5,815 5,865 Tax (941) (553) (2,302) (766) Other Current Liab 3,863 11,884 11,884 11,884 Minority Interest (81) (64) (598) (40) LT Debt 5,238 4,442 577 3,865 Underlying Profit 5,301 5,351 5,170 4,825 Other LT Liabilities 4,696 4,292 4,292 4,292 Minority Interests 468 543 543 543 Shareholder’s Equity 118,558 122,131 125,533 128,584 Total Cap. & Liab. 141,803 149,058 152,510 155,611 Sales Gth (%) 193 (51) 51 (16) Share Capital (m) 6,086 6,165 6,165 6,165 Net Profit Gth (%) 6 1 (3) (7) Net Cash/(Debt) 13,658 23,000 19,177 14,654 EBITDA Margins (%) 24 39 43 31 Working Capital 38,361 40,638 37,648 39,332 EBIT Margin (%) 23 39 43 31 Net Gearing (%) CASH CASH CASH CASH Tax Rate (%) 15 9 29 14 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Jun 2015A 2016A 2017F 2018F FY Jun 2015A 2016A 2017F 2018F EBIT 5,069 4,176 6,953 4,198 Revenues (HK$ m) Tax Paid (711) (604) (2,302) (766) Property sales 16,957 5,760 11,146 8,460 Depr/Amort 90 82 82 81 Property rental 2,863 2,963 3,073 3,156 Chg in Wkg.Cap 3,402 5,534 (4,668) (2,889) Hotel operations 885 859 854 866 Other Non-Cash (31) (445) 0 0 Property management and 1,073 1,156 1,156 1,190 Operating CF 7,818 8,743 65 623 Investments in securities 60 64 64 64 Net Capex (162) 945 (100) (100) Financing 1 3 12 12 Assoc, MI, Invsmt 3,732 (12,455) 215 (1,561) Total 21,839 10,804 16,305 13,748 Investing CF 3,570 (11,510) 115 (1,661) Net Chg in Debt (1,488) (1,610) 0 0 Key Assumptions (%) 2017F 2018F New Capital (31) (47) 0 0 Residential price - HK 8 (8) Dividend (2,121) (2,123) (3,752) (3,235) Office rental - HK 3 3 Other Financing CF (3,031) (836) (250) (250) Retail rental (High street shops) - HK (8) 0 Financing CF (6,672) (4,616) (4,002) (3,485) Retail rental (Shopping Centre) - HK 0 2 Chg in Cash 4,717 (7,383) (3,823) (4,523) Source: Company, DBS Vickers Page 74 HK Property Sector Sun Hung Kai Properties Bloomberg: 16 HK | Reuters: 16.HK Refer to important disclosures at the end of this report Strong execution BUY Last Traded Price (7 Jul 2017): HK$115.50 (HSI: 25,341) Brisk project sales with decent profit margins Price Target 12-mth: HK$131.1 (14% upside) (Prev HK$124.3) New properties to boost rental earnings BUY with HK$131.1 TP Potential Catalyst: Farmland conversion, project launches Sun Hung Kai Where we differ: Market has similar earnings estimate for FY17. Stellar project sales with decent profit margins. Properties (SHKP) has achieved contracted sales of c.HK$45bn from Hong Kong for FY17, exceeding its sales target of HK$33bn. The Analyst Jeff YAU CFA, +852 2820 4912 March launch of Cullinan West above Nam Cheong West Rail Station [email protected] was well received. SHKP has pre-sold >90% of total units at an ASP Ian CHUI +852 2971 1915 of HK$22,000psf. Given low land costs, we estimate that pre-tax [email protected] development margin is decent at c.40%. Elsewhere, Eight Regency in Tuen Mun has also been substantially pre-sold with handsome pre-tax margin estimated at c.45%. SHKP is currently selling Park YOHO Genova in Yuen Long. In the coming nine months, major projects for Price Relative sale include Victoria Harbour in North Point, St. Barths in Ma On Shan, HK$ Relative Index St. Moritz in Kau To, Cullinan West Ph 3, and Lohas Park Station 217 142.3 197 Package 4. These projects are diversified in terms of flat mix, 132.3 177 122.3 positioning, and location and should enable the company to tap the 157 112.3 demand from a wide spectrum of homebuyers. 102.3 137 92.3 117 Positive rental reversion 82.3 97 New properties to boost rental earnings. 72.3 77 continues to work its way through its retail malls in Hong Kong which Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 posted largely flat tenant sales growth. Office portfolio registered Sun Hung Kai Properties (LHS) Relative HSI (RHS) better reversionary growth of 10-15%. Shanghai IFC and IAPM Forecasts and Valuation posted >30% retail sales growth led by luxury goods retailers. This FY Jun (HK$ m) 2015A 2016A 2017F 2018F Turnover 66,783 91,184 81,469 100,393 bodes well for its future reversionary growth. Grand YOHO Mall will EBITDA 24,750 30,806 31,640 38,477 open for business shortly, and is almost fully let with anchor tenants Pre-tax Profit 25,067 30,228 31,539 37,408 including a cinema and a supermarket. Together with YOHO Mall I &II, Underlying Profit 19,825 24,170 25,774 29,380 it will form a 1.1m sf regional mall with rental income of >HK$500m EPS (HK$) 7.07 8.37 8.90 10.14 EPS Gth (%) (11.1) 18.4 6.3 14.0 p.a. expected. The retail portions of The Wing IIIA & IIIB are targeted PE (X) 16.3 13.8 13.0 11.4 for opening in 2H17. At ITC One in Shanghai, office units (>50% P/Cash Flow (X) 20.1 16.4 11.5 18.1 committed) are being handed over to tenants. The addition of new EV/EBITDA (X) 15.4 12.4 12.1 9.9 investment properties should beef up SHKP’s rental income. DPS (HK$) 3.35 3.85 4.00 4.15 Div Yield (%) 2.9 3.3 3.5 3.6 BUY with HK$131.1 TP. The stock, trading at 46% discount to our Net Gearing (%) 11 11 8 9 appraised current NAV, remains attractive in view of its strong ROE (%) 4.6 5.3 5.4 5.9 execution. Recently, SHKP issued US$500m perpetual securities at a Est. NAV (HK$) 212.8 218.5 Disc. to NAV (%) (46) (47) favourable coupon rate of 4.45%. This gives the company more financial muscle for new acquisitions. Any positive news flow on Earnings Rev (%): 3 3 agricultural land conversion could boost sentiment towards the Consensus EPS (HK$): 8.88 9.66 counter. We maintain our BUY call with HK$131.1 TP, based on a Other Broker Recs: B: 16 S: 2 H: 3 40% discount to our Jun-2018 NAV estimate. Financials ICB Industry: ICB Sector: Real Estate Holding & Development At A Glance 2,895 Principal Business: A leading property developer and investor in HK, Issued Capital (m shrs) with exposure to hotel, logistics, telecom, construction and Mkt. Cap (HK$m/US$m) 334,426 / 42,814 transportation infrastructure business Major Shareholders Kwong Siu Hing (%) 26.2 Source of all data on this page: Company, DBSV, Thomson Reuters, Kwok Ping Kwong, Thomas (%) 7.9 HKEX Kwok Ping Luen, Raymond (%) 7.5 Kwok Ping Sheung, Walter (%) 7.3 Genesis Trust & Corporate Services Ltd. (%) 6.5 Free Float (%) 51.1 3m Avg. Daily Val. (US$m) 56.9 Page 75 ed- JS / sa- AH HK Property Sector Sun Hung Kai Properties Income Statement (HK$ m) Balance Sheet (HK$ m) FY Jun 2015A 2016A 2017F 2018F FY Jun 2015A 2016A 2017F 2018F Turnover 66,783 91,184 81,469 100,393 Fixed Assets 334,826 343,963 347,640 351,288 EBITDA 24,750 30,806 31,640 38,477 Other LT Assets 65,095 68,922 70,968 74,898 Depr / Amort (1,972) (1,950) (2,009) (2,069) Cash & ST Invts 33,455 31,166 54,223 58,016 EBIT 22,778 28,856 29,631 36,408 Other Current Assets 170,734 170,464 173,772 194,468 Associates Inc 3,376 3,053 3,402 3,249 Total Assets 604,110 614,515 646,603 678,671 Interest (Exp)/Inc (2,180) (2,055) (1,900) (2,250) ST Debt 10,816 17,486 3,642 10,086 Exceptionals 1,093 374 405 0 Creditors 25,690 27,493 27,693 27,893 Pre-tax Profit 25,067 30,228 31,539 37,408 Other Current Liab 21,227 14,092 14,092 14,092 Tax (4,017) (5,348) (5,269) (6,832) LT Debt 72,316 63,275 87,119 90,675 Minority Interest (1,225) (710) (495) (1,196) Other LT Liabilities 17,243 17,661 17,661 17,661 Underlying Profit 19,825 24,170 25,774 29,380 Minority Interests 5,792 5,801 6,099 7,099 Shareholder’s Equity 451,026 468,707 490,296 511,164 Total Cap. & Liab. 604,110 614,515 646,603 678,671 Sales Gth (%) (11) 37 (11) 23 Share Capital (m) 2,876 2,895 2,895 2,895 Net Profit Gth (%) (7) 22 7 14 Net Cash/(Debt) (50,571) (50,713) (37,656) (43,863) EBITDA Margins (%) 37 34 39 38 Working Capital 146,456 142,559 182,568 200,414 EBIT Margin (%) 34 32 36 36 Net Gearing (%) 11 11 8 9 Tax Rate (%) 16 18 17 18 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Jun 2015A 2016A 2017F 2018F FY Jun 2015A 2016A 2017F 2018F EBIT 22,778 28,856 29,631 36,408 Revenues (HK$ m) Tax Paid (2,896) (5,038) (5,269) (6,832) Property sales 17,676 40,790 32,743 50,541 Depr/Amort 1,972 1,950 2,009 2,069 Rental income 16,053 17,240 17,858 18,543 Chg in Wkg.Cap (8,204) (9,803) (2,658) (19,946) Hotel operation 4,136 4,031 4,175 4,284 Other Non-Cash (407) (669) 0 0 Others 28,918 29,123 26,693 27,025 Operating CF 13,243 15,296 23,713 11,699 Total 66,783 91,184 81,469 100,393 Net Capex (4,684) (6,954) (2,500) (2,500) Assoc, MI, Invsmt 3,659 1,133 1,762 (681) Investing CF (1,025) (5,821) (738) (3,181) Net Chg in Debt (255) (1,147) 10,000 10,000 Key Assumptions (%) 2017F 2018F New Capital 14,893 1,910 3,900 0 Residential price - HK 8 (8) Dividend (9,938) (10,517) (11,467) (11,925) Office rental - HK 3 3 Other Financing CF (15,046) (287) (2,350) (2,800) Retail rental (High street shops) - HK (8) 0 Financing CF (10,346) (10,041) 83 (4,725) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 1,872 (566) 23,057 3,793 Source: Company, DBS Vickers Page 76 HK Property Sector Tai Cheung Bloomberg: 88 HK | Reuters: 88.HK Refer to important disclosures at the end of this report HOLD Repulse Bay luxury project a crown Last Traded Price (7 Jul 2017): HK$8.30 (HSI: 25,341) jewel Price Target 12-mth: HK$8.58 (3% upside) • Soon-to-be-completed Repulse Bay luxury house Potential Catalyst: Project sales development is a profit bonanza Where we differ: n.a. • Office disposal at Metropole Square expedited Analyst Jeff YAU CFA, +852 2820 4912 [email protected] • HOLD with HK$8.58 TP Ian CHUI +852 2971 1915 [email protected] Soon-to-be-completed Repulse Bay luxury house development is a profit bonanza. Scheduled for completion in 4Q17, this superbly-located luxury project contains eight houses with unobstructed sea views. Total GFA stands at Price Relative 42,000sf. Judging from the favourable market response to the launch of Mount Nicholson on the Peak, Tai Cheung’s Repulse Bay luxury development should be equally popular among affluent home buyers when offered for sale after the project is completed. Given the scarcity of such developments, this luxury house project should be able to fetch HK$100,000 per square foot (psf), against our estimated all-in cost of HK$54,000psf. Hence, it should be a profit bonanza for Tai Cheung. Strata- Office disposal at Metropole Square expedited. Forecasts and Valuation titled sales of Metropole Square in Shatin have accelerated FY Mar (HK$ m) 2016A 2017A 2018F 2019F Turnover 589 743 1,493 1,493 since the beginning of 2017. Since its initial launch in mid-2015, EBITDA 36 47 400 399 Tai Cheung has sold >50% of office space there. Ongoing sales Pre-tax Profit 191 205 562 566 Net Profit 226 196 493 498 of this office property should provide the mainstay of the EPS (HK$) 0.37 0.32 0.80 0.81 company’s near-term development earnings. Superstructure EPS Gth (%) (59.1) (13.3) 151.2 1.0 works for the French Valley Airport Center project in California, PE (X) 22.6 26.1 10.4 10.3 US, began in Jun-17. Tai Cheung will offer this P/Cash Flow (X) 11.3 (55.4) 2.6 3.6 EV/EBITDA (X) 73.3 56.2 6.6 6.6 industrial/commercial project for sale on strata-titled basis DPS (HK$) 0.30 0.32 0.32 0.32 which should add another layer of spice to the company’s Div Yield (%) 3.6 3.9 3.9 3.9 earnings. Net Gearing (%) CASH CASH CASH CASH ROE (%) 3.3 2.8 6.9 6.7 HOLD with HK$8.58 TP. The stock is trading at 61% discount Est. NAV (HK$) 21.2 21.4 to our assessed current NAV, against its 10-year average of Disc. to NAV (%) (61) (61) 63%. Estimated dividend yield stands at 3.9% for FY18. Earnings Rev (%): Nil Nil Excluding net cash of c.HK$2.48bn, the remaining stub is Other Broker Recs: B: 0 S: 0 H: 1 trading at 75% discount. The current valuation is less ICB Industry: Financials compelling now following the recent share price rally. HOLD ICB Sector: Real Estate Holding & Development with HK$8.58 TP, premised on 60% discount to our Jun-2018 Principal Business: Engaged primarily in property development and NAV estimate. hotel operation in Hong Kong Source of all data on this page: Company, DBSV, Thomson Reuters, At A Glance HKEX Issued Capital (m shrs) 618 Mkt. Cap (HK$m/US$m) 5,126 / 656 Major Shareholders Chan Pun David (%) 19.2 Free Float (%) 80.8 3m Avg. Daily Val. (US$m) 0.2 Page 77 ed- JS / sa- AH HK Property Sector Tai Cheung Income Statement (HK$ m) Balance Sheet (HK$ m) FY Mar 2016A 2017A 2018F 2019F FY Mar 2016A 2017A 2018F 2019F Turnover 589 743 1,493 1,493 Fixed Assets 11 12 11 10 EBITDA 36 47 400 399 Other LT Assets 236 256 256 256 Depr / Amort (1) (1) (1) (1) Cash & ST Invts 2,755 2,669 4,534 5,825 EBIT 35 46 399 398 Other Current Assets 4,407 4,534 2,962 1,968 Associates Inc 143 139 143 149 Total Assets 7,409 7,470 7,762 8,059 Interest (Exp)/Inc 13 19 19 19 ST Debt 0 189 189 189 Exceptionals 0 0 0 0 Creditors 106 157 154 151 Pre-tax Profit 191 205 562 566 Other Current Liab 53 64 64 64 Tax 35 (9) (69) (69) LT Debt 128 0 0 0 Minority Interest 0 0 0 0 Other LT Liabilities 178 116 116 116 Net Profit 226 196 493 498 Minority Interests 0 0 0 0 Shareholder’s Equity 6,946 6,944 7,239 7,539 Total Cap. & Liab. 7,409 7,470 7,762 8,059 Sales Gth (%) 30 26 101 0 Share Capital (m) 617 617 617 617 Net Profit Gth (%) (59) (13) 151 1 Net Cash/(Debt) 2,627 2,480 4,344 5,636 EBITDA Margins (%) 6 6 27 27 Working Capital 7,004 6,792 7,088 7,389 EBIT Margin (%) 6 6 27 27 Net Gearing (%) CASH CASH CASH CASH Tax Rate (%) N/A 4 12 12 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Mar 2016A 2017E 2018F 2019F FY Mar 2016A 2017A 2018F 2019F EBIT 35 46 399 398 Revenues (HK$ m) Tax Paid (23) (9) (69) (69) Prop. development & leasing 579 730 1,481 1,481 Depr/Amort 1 1 1 1 Property management 10 13 13 13 Chg in Wkg.Cap 421 (159) 1,568 991 Total 589 743 1,493 1,493 Other Non-Cash (3) 19 19 19 Operating CF 431 (101) 1,919 1,340 Net Capex (1) 0 0 0 Assoc, MI, Invsmt 166 139 143 149 Investing CF 165 139 143 149 Net Chg in Debt 24 62 0 0 Key Assumptions (%) 2018F 2019F New Capital 0 0 0 0 Residential price - HK 8 (8) Dividend (185) (185) (198) (198) Office rental - HK 3 3 Other Financing CF 0 0 0 0 Retail rental (High street shops) - HK (8) 0 Financing CF (162) (124) (198) (198) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 434 (85) 1,864 1,292 Source: Company, DBS Vickers Page 78 HK Property Sector Wheelock & Co Bloomberg: 20 HK | Reuters: 0020.HK Refer to important disclosures at the end of this report BUY Robust sales to boost earnings visibility Last Traded Price (7 Jul 2017): HK$57.30 (HSI: 25,341) Full-year sales target attained Price Target 12-mth: HK$65.80 (15% upside) (Prev HK$60.00) Good earnings visibility aided by strong project take-ups Potential Catalyst: Project sales, group restructuring BUY with HK$65.8TP Where we differ: Market has slightly higher earnings estimate for FY17- 18. Wheelock & Co. has met its full- Full-year sales target achieved. year contracted sales of HK$10bn. The launch of Monterey in Tseung Analyst Jeff YAU CFA, +852 2820 4912 Kwan O went well. Since its initial launch in Mar-17, Wheelock has [email protected] sold c.70% of the total 926 units for HK$5.8bn or c.HK$15,000psf Ian CHUI +852 2971 1915 on average. Elsewhere, continued sales at Mount Nicholson, One [email protected] Homantin and NAPA have yielded sales proceeds of HK$1.6bn, HK$1.3bn and HK$1.2bn respectively YTD. In 2H17, Wheelock plans to offer its residential projects in Kai Tak and Lohas Park MTR Station for pre-sale. Wheelock will adhere to its high asset turnover to Price Relative HK$ Relative Index enhance the project’s internal rate of return. 69.7 64.7 204 59.7 184 Good earnings visibility aided by strong project take-up. 54.7 164 Meanwhile, Capri and Savannah in Tseung Kwan O are virtually fully 49.7 144 44.7 124 sold. In addition, c.83%, c.70% and c.70% of units at One Homantin, 39.7 34.7 104 Monterey and NAPA have been taken up. Aided by robust project 29.7 84 24.7 64 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 pre-sale, Wheelock’s near-term development earnings should be well Wheelock & Co (LHS) Relative HSI (RHS) assured. We estimate that the company has already locked in 65% of our projected development profits for FY17-18. Backed by strong Forecasts and Valuation FY Dec (HK$ m) 2015A 2016A 2017F 2018F proceeds from project sales, Wheelock’s gearing should improve Turnover 57,455 60,579 53,776 60,488 further from Dec-16’s 13.8%. This should put the company in an EBITDA 21,002 21,823 22,145 24,834 Pre-tax Profit 19,965 22,386 21,792 24,784 advantageous position to pursue land acquisitions in Hong Kong. Underlying Profit 10,598 11,811 10,966 12,305 EPS (HK$) 5.21 5.80 5.37 6.03 BUY with HK$65.8 TP. The stock is trading at a 23% discount to our EPS Gth (%) 30.8 11.4 (7.4) 12.2 assessed current NAV. Wharf is contemplating to seek a separate PE (X) 11.0 9.9 10.7 9.5 listing of its investment properties in Hong Kong by way of P/Cash Flow (X) 3.1 3.2 15.2 3.4 distribution in specie. Should the spin-off go ahead, the remaining EV/EBITDA (X) 14.4 13.8 13.6 12.2 DPS (HK$) 1.15 1.30 1.30 1.30 assets held by Wharf could be a candidate for privatisation. This may Div Yield (%) 2.0 2.3 2.3 2.3 in turn improve the group structure and ultimately benefit Wheelock. Net Gearing (%) 39 24 26 17 BUY with HK$65.8 TP, based on a 20% discount to our Jun-2018 ROE (%) 5.4 5.7 5.0 5.3 Est. NAV (HK$) 73.9 82.3 NAV estimate. Disc. to NAV (%) (23) (30) At A Glance Earnings Rev (%): 1 5 Issued Capital (m shrs) 2,039 Consensus EPS (HK$): 5.89 6.38 Mkt. Cap (HK$m/US$m) 116,820 / 14,955 Other Broker Recs: B: 3 S: 2 H: 5 Major Shareholders ICB Industry: Financials Woo's Family (%) 60.8 ICB Sector: Real Estate Holding & Development Free Float (%) 39.2 Engaged in property business in Hong Kong with Principal Business: 3m Avg. Daily Val. (US$m) 7.4 c.76% stake in Wheelock Properties and c.61% stake in Wharf Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Page 79 ed-TH / sa- AH HK Property Sector Wheelock & Co Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 57,455 60,579 53,776 60,488 Fixed Assets 347,848 349,813 353,566 358,037 EBITDA 21,002 21,823 22,145 24,834 Other LT Assets 53,908 46,583 49,284 49,746 Depr / Amort (1,555) (1,412) (1,440) (1,469) Cash & ST Invts 27,618 44,393 34,250 50,926 EBIT 19,447 20,411 20,704 23,365 Other Current Assets 83,384 79,646 96,108 88,289 Associates Inc 1,463 3,174 2,184 2,436 Total Assets 512,758 520,435 533,209 546,997 Interest (Exp)/Inc (1,039) (760) (1,097) (1,017) ST Debt 10,512 25,886 9,000 10,000 Exceptionals 94 (439) 0 0 Creditors 26,493 28,881 28,931 28,731 Pre-tax Profit 19,965 22,386 21,792 24,784 Other Current Liab 25,941 34,015 34,015 34,015 Tax (4,222) (4,668) (4,533) (6,003) LT Debt 95,681 69,055 83,941 80,941 Minority Interest (5,145) (5,907) (6,292) (6,476) Other LT Liabilities 13,272 13,078 13,078 13,078 Underlying Profit 10,598 11,811 10,966 12,305 Minority Interests 139,192 134,155 138,612 142,971 Shareholder’s Equity 201,667 215,365 225,631 237,260 Total Cap. & Liab. 512,758 520,435 533,208 546,997 Sales Gth (%) 40 5 (11) 12 Share Capital (m) 2,035 2,035 2,035 2,035 Net Profit Gth (%) 31 11 (7) 12 Net Cash/(Debt) (78,927) (50,977) (59,120) (40,444) EBITDA Margins (%) 37 36 41 41 Working Capital 48,056 35,257 58,412 66,468 EBIT Margin (%) 34 34 39 39 Net Gearing (%) 39 24 26 17 Tax Rate (%) 21 21 21 24 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 19,447 20,411 20,704 23,365 Revenues (HK$ m) Tax Paid (3,321) (3,685) (4,533) (6,003) Investment Property 14,872 15,485 15,839 16,341 Depr/Amort 1,555 1,412 1,440 1,469 Development Property 33,718 36,539 30,807 38,190 Chg in Wkg.Cap 16,634 14,185 (14,882) 9,320 Hotels 1,549 1,587 1,637 1,702 Other Non-Cash (1,639) (687) (2,327) (2,417) CME 3,423 3,082 1,349 0 Operating CF 32,676 31,636 402 25,734 Logistics 2,848 2,748 2,949 3,000 Net Capex (7,535) (9,674) (2,000) (2,700) Investment and others 1,045 1,138 1,195 1,255 Assoc, MI, Invsmt (3,746) 3,785 (817) 1,674 Total 57,455 60,579 53,776 60,488 Investing CF (11,281) (5,889) (2,817) (1,026) Net Chg in Debt (10,170) (10,885) (2,000) (2,000) Key Assumptions (%) 2017F 2018F New Capital 0 0 0 0 Residential Price - HK 8 (8) Dividend (5,048) (5,415) (5,728) (6,033) Office rental - HK 3 3 Other Financing CF 926 113 0 0 Financing CF (14,292) (16,187) (7,728) (8,033) Chg in Cash 7,103 9,560 (10,143) 16,675 Source: Company, DBS Vickers Page 80 HK Property Sector Wing Tai Properties Bloomberg: 369 HK | Reuters: 0369.HK Refer to important disclosures at the end of this report BUY Strong asset backing Last Traded Price (7 Jul 2017): HK$5.21 (HSI: 25,341) Price Target 12-mth: HK$5.92 (14% upside) (Prev HK$6.45) Moderating reversionary growth at Landmark East Potential Catalyst: Project sales Plans to launch two low-density luxury projects Where we differ: n.a. BUY with HK$5.92 TP Analyst Jeff YAU CFA, +852 2820 4912 Moderating reversionary growth at Landmark East. [email protected] Occupancy at its flagship investment property Landmark East in Ian CHUI +852 2971 1915 Kwun Tong has recovered to 97% from Dec-16's 93%, with [email protected] new tenants including AAStocks and Black & Veatch (consulting firm). Spot rate remains stable HK$33-34psf. About 21% of leases are scheduled for expiry or subject to rent review in 2017. With an increase in expiring rents, rental reversion is Price Relative expected to moderate to 10-15% in 2017 from 2016's 30%. HK$ Relative Index 6.1 Reversionary growth for other Hong Kong rental properties 212 5.6 192 such as W Square and Winner Godown is largely neutral. In 172 5.1 152 London, Savile Row and 10 Fleet Square are fully let while 35 4.6 132 Berkeley Square is 80% leased. Occupancy of Brook Street 112 4.1 92 retreated to 80% from Dec-16's 100%. Refurbishment works 3.6 72 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 at the Cavendish property, which is currently vacant, is well Wing Tai Properties (LHS) Relative HSI (RHS) underway. Forecasts and Valuation Currently, FY Dec (HK$ m) 2015A 2016A 2017F 2018F Plans to launch two low-density luxury projects. Turnover 1,009 1,103 1,002 1,608 Wing Tai Properties focuses on clearing the remaining 10 units, EBITDA 446 517 537 567 mainly specialty units, at Homantin Hillside. These would Pre-tax Profit 1,182 1,260 493 807 Net Profit 1,099 1,147 417 729 dominate the company's near-term development profits. EPS (HK$) 0.82 0.85 0.31 0.54 Towards the end of this year, Wing Tai Properties plans to EPS Gth (%) (43.6) 4.1 (63.7) 75.0 launch two low-density luxury developments in Kau To of PE (X) 6.4 6.1 16.8 9.6 Shatin, Le Cap and La Vetta. The company intends to sell the P/Cash Flow (X) 5.9 (4.9) 752.5 (133.9) EV/EBITDA (X) 23.6 20.3 19.6 18.5 luxury houses first to set a price benchmark. The Shau Kei Wan DPS (HK$) 0.15 0.18 0.18 0.18 project comprising 75 residential units is expected to go on sale Div Yield (%) 2.9 3.5 3.5 3.5 in 2018. This harbourfront project should appeal to property Net Gearing (%) 7 14 16 17 ROE (%) 4.8 4.8 1.7 2.9 investors. Est. NAV (HK$) 16.8 16.9 The stock is trading at 69% discount Disc. to NAV (%) (69) (69) BUY with HK$5.92 TP. to our assessed current NAV. Strong asset backing should Earnings Rev (%): (20) 17 continue to support its share price. With low gearing of <15%, Other Broker Recs: B: 1 S: 0 H: 0 Wing Tai Properties is well positioned to pursue new ICB Industry: Financials acquisitions to drive its NAV growth. A good response to the ICB Sector: Real Estate Holding & Development launches of Le Cap and La Vetta could provide upside on stock. Property development, property investment and Principal Business: BUY with HK$5.92 TP, based on a 65% discount to our Jun- management, and hotel investment and management 2018 NAV estimate. Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX At A Glance Issued Capital (m shrs) 1,346 Mkt. Cap (HK$m/US$m) 7,013 / 898 Major Shareholders Wing Tai Hldgs & Cheng's Family (%) 50.1 Sun Hung Kai Properties Ltd (%) 13.7 Free Float (%) 36.2 3m Avg. Daily Val. (US$m) 0.2 Page 81 ed- JS / sa- AH HK Property Sector Wing Tai Properties Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 1,009 1,103 1,002 1,608 Fixed Assets 21,505 22,027 22,143 22,259 EBITDA 446 517 537 567 Other LT Assets 2,543 2,753 2,789 3,132 Depr / Amort (5) (4) (4) (4) Cash & ST Invts 2,089 1,683 1,781 1,792 EBIT 441 513 532 563 Other Current Assets 2,085 4,313 4,851 5,480 Associates Inc 70 81 36 344 Total Assets 28,221 30,776 31,563 32,663 Interest (Exp)/Inc (92) (43) (75) (100) ST Debt 440 477 1,236 1,236 Exceptionals 763 710 0 0 Creditors 396 634 634 634 Pre-tax Profit 1,182 1,260 493 807 Other Current Liab 108 49 49 49 Tax (83) (111) (74) (75) LT Debt 3,327 4,708 4,449 4,949 Minority Interest 0 (3) (3) (3) Other LT Liabilities 604 597 597 597 Net Profit 1,099 1,147 417 729 Minority Interests 1 4 6 9 Shareholder’s Equity 23,346 24,309 24,593 25,191 Total Cap. & Liab. 28,221 30,776 31,563 32,663 Sales Gth (%) (43) 9 (9) 60 Share Capital (m) 1,341 1,343 1,343 1,343 Net Profit Gth (%) (43) 4 (64) 75 Net Cash/(Debt) (1,692) (3,502) (3,904) (4,393) EBITDA Margins (%) 44 47 54 35 Working Capital 3,230 4,837 4,713 5,353 EBIT Margin (%) 44 46 53 35 Net Gearing (%) 7 14 16 17 Tax Rate (%) 7 9 15 9 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 441 513 532 563 Revenues (HK$ m) Tax Paid (9) (87) (74) (75) Property development 149 213 86 677 Depr/Amort 5 4 4 4 Property investment & mgmt 691 746 768 779 Chg in Wkg.Cap 707 (1,953) (537) (629) Hotel investment & mgmt 147 131 122 127 Other Non-Cash (85) (120) (75) (100) Investing 22 13 25 25 Operating CF 1,059 (1,643) (149) (237) Total 1,009 1,103 1,002 1,608 Net Capex (84) 447 (10) (10) Assoc, MI, Invsmt (266) (494) 0 0 Investing CF (351) (47) (10) (10) Net Chg in Debt (22) 1,509 500 500 Key Assumptions (%) 2017F 2018F New Capital 0 0 0 0 Residential price - HK 8 (8) Dividend (181) (202) (242) (243) Office rental - HK 3 3 Other Financing CF (20) 42 0 0 Retail rental (High street shops) - HK (8) 0 Financing CF (224) 1,350 258 257 Retail rental (Shopping centre) - HK 0 2 Chg in Cash 485 (340) 98 10 Source: Company, DBS Vickers Page 82 HK Property Sector Hang Lung Properties Bloomberg: 101 HK | Reuters: 101.HK Refer to important disclosures at the end of this report HOLD Sustained retail sales improvement Last Traded Price ( 12 Jul 2017): HK$19.92 (HSI: 25,341) • Retail malls in China recorded sequential sales improvement Price Target 12-mth: HK$19.85 (0.4% downside) (Prev Ongoing asset enhancement initiative to unlock value HK$18.00) • • HOLD with HK$19.85 TP Potential Catalyst: Retail market improvement Where we differ: Market has higher earnings estimate for FY17. Retail malls in China recorded sequential sales improvement. Hang Lung Properties' malls in China continued to display good retail Analyst sales growth momentum YTD, after recording an improvement in 2H16 Jeff YAU CFA, +852 2820 4912 [email protected] compared to 1H16. In 1Q17, retail sales at Plaza 66 in Shanghai rose Ian CHUI +852 2971 1915 >20% led by higher sales of luxury brands. The newly completed asset [email protected] enhancement programme also contributed to stronger retail sales. As such, rental reversion is solid at >10%. Grand Gateway 66 also saw c.5% tenant sales growth during the same period. This was despite the closure of some retail area for renovation. Tenant sales at retail malls Price Relative outside Shanghai also exhibited growth. Retail sales at Palace 66, Riverside 66 and Centre 66 rose >10% while that of Forum 66 grew by c.5%. While sustained improvement in tenant sales bodes well for future reversionary and income growth for its malls in second tier cities, unit rents remain under pressure in the near term. Allowing for rental disruption led by extensive renovation at Grand Gateway 66, Hang Lung Properties' rental income from China should retreat by 1% in FY17. The final Forecasts and Valuation Ongoing asset enhancement initiative to unlock value. FY Dec (HK$ m) 2015A 2016A 2017F 2018F phase of asset enhancement works at Fashion Walk in Causeway Bay is Turnover 8,948 13,059 10,502 10,795 currently underway with targeted completion in 4Q17. The asset EBITDA 6,013 8,373 6,796 7,293 Pre-tax Profit 6,015 8,264 6,285 6,603 enhancement initiative at The Peak Galleria has commenced with full Underlying Profit 4,387 6,341 4,639 4,902 completion scheduled in 2019. It involves facade upgrade and space EPS (HK$) 0.98 1.41 1.03 1.09 reconfiguration which will give it a new look. Kornhill Plaza will be the EPS Gth (%) (56.3) 44.3 (26.9) 5.7 next candidate for renovation after the completion of The Peak PE (X) 20.4 14.1 19.3 18.3 P/Cash Flow (X) 11.7 11.6 11.1 10.7 Galleria's. Positive rental reversion continues to work its way through EV/EBITDA (X) 16.3 11.7 14.4 13.4 office/retail portfolio. Overall, we forecast the Hong Kong rental DPS (HK$) 0.75 0.75 0.75 0.75 portfolio to post 3% income growth in FY17. The company may divest Div Yield (%) 3.8 3.8 3.8 3.8 Net Gearing (%) 1 2 4 6 some non-core rental assets such as the retail mall at Aqua Marine if it ROE (%) 3.4 5.0 3.7 3.8 receives a good offer. Est. NAV (HK$) 33.1 33.1 Disc. to NAV (%) (40) (40) HOLD with HK$19.85 TP. The stock is trading at 40% discount to our assessed current NAV. Continued sales improvement at its landmark malls Earnings Rev (%): (9) (5) in China prompts us to raise our TP to HK$19.85, representing 40% Consensus EPS (HK$): 1.21 1.09 Other Broker Recs: B: 7 S: 2 H: 10 discount to our Jun-2018 NAV estimate. Maintain HOLD at this stage but would be a buyer if share price is 5-10% below the current level. ICB Industry: Financials ICB Sector: Real Estate Holding & Development Property investment in Hong Kong and China At A Glance Principal Business: Issued Capital (m shrs) 4,498 Mkt. Cap (HK$m/US$m) 89,592 / 11,470 Source of all data on this page: Company, DBSV, Thomson Reuters, Major Shareholders HKEX Hang Lung Group (%) 55.8 First Eagle Inv. Mgmt, LLC (%) 6.0 Free Float (%) 38.24 3m Avg. Daily Val. (US$m) 11.1 Page 83 ed- JS / sa- AH HK Property Sector Hang Lung Properties Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 8,948 13,059 10,502 10,795 Fixed Assets 146,470 143,030 145,819 150,758 EBITDA 6,013 8,373 6,796 7,293 Other LT Assets 1,256 1,261 1,283 1,308 Depr / Amort (51) (53) (53) (53) Cash & ST Invts 31,289 24,325 24,402 23,471 EBIT 5,962 8,320 6,743 7,240 Other Current Assets 5,003 6,291 5,231 4,597 Associates Inc 59 61 61 63 Total Assets 184,018 174,907 176,736 180,134 Interest (Exp)/Inc (6) (117) (520) (700) ST Debt 4,693 568 3,106 2,000 Exceptionals 0 0 0 0 Creditors 6,806 6,327 6,220 6,113 Pre-tax Profit 6,015 8,264 6,285 6,603 Other Current Liab 501 932 1,032 1,132 Tax (1,184) (1,520) (1,257) (1,321) LT Debt 28,078 26,514 25,976 29,082 Minority Interest (444) (403) (389) (380) Other LT Liabilities 9,048 8,421 7,918 7,592 Underlying Profit 4,387 6,341 4,639 4,902 Minority Interests 5,903 5,580 5,851 6,121 Shareholder’s Equity 128,989 126,565 126,633 128,093 Total Cap. & Liab. 184,018 174,907 176,736 180,134 Sales Gth (%) (47) 46 (20) 3 Share Capital (m) 4,497 4,498 4,498 4,498 Net Profit Gth (%) (56) 45 (27) 6 Net Cash/(Debt) (1,482) (2,757) (4,680) (7,611) EBITDA Margins (%) 67 64 65 68 Working Capital 24,292 22,789 19,275 18,823 EBIT Margin (%) 67 64 64 67 Net Gearing (%) 1 2 4 6 Tax Rate (%) 20 18 20 20 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 5,962 8,320 6,743 7,240 Revenues (HK$ m) Tax Paid (2,153) (1,002) (1,257) (1,321) Property sales 1,197 5,322 2,728 2,967 Depr/Amort 51 53 53 53 Property leasing 7,751 7,737 7,775 7,827 Chg in Wkg.Cap 1,500 (729) 1,310 1,084 Total 8,948 13,059 10,502 10,795 Other Non-Cash 100 93 0 0 Operating CF 5,460 6,735 6,849 7,056 Net Capex (6,084) (2,666) (4,272) (5,115) Assoc, MI, Invsmt (3,250) 4,279 817 838 Investing CF (9,334) 1,613 (3,455) (4,277) Net Chg in Debt (1,828) (5,051) 2,000 2,000 Key Assumptions (%) 2017F 2018F New Capital 205 7 0 0 Residential price - HK 8 (8) Dividend (4,281) (3,702) (3,762) (3,753) Office rental - HK 3 3 Other Financing CF (1,427) (1,287) (1,557) (1,957) Retail rental (High street shops) - HK (8) 0 Financing CF (7,331) (10,033) (3,319) (3,710) Retail rental (Shopping centre) - HK 0 2 Chg in Cash (11,205) (1,685) 75 (931) Source: Company, DBS Vickers Page 84 HK Property Sector Hongkong Land Bloomberg: HKL SP | Reuters: HKLD.SI Refer to important disclosures at the end of this report BUY Riding on sweet cycle Last Traded Price (7 Jul 2017): US$7.47 (STI : 3,229) Price Target 12-mth: US$8.93 (20% upside) (Prev US$8.51) • Riding on upcycle in Central office market Potential Catalyst: Higher office rents and prices in Central Where we differ: Market has slightly higher earnings estimate for FY17- • Singapore residential projects selling satisfactorily 18. • BUY with US$8.93 TP Analyst Jeff YAU CFA, +852 2820 4912 Riding on upcycle in Central office market. Benefitting from [email protected] continued tight market supply and sustained leasing demand, Ian CHUI +852 2971 1915 the vacancy of Hongkong Land’s Central office portfolio stayed [email protected] low at 2.4% in Mar-17. According to Jones Lang LaSalle, Central office rents grew by 3.6% in 1H17. In 2017, about 32% of floor area is subject to lease expiry or rent review. Positive reversionary growth should continue to push up its Price Relative average office rents which stood at HK$103psf in 2016. Retail portfolio was fully leased as at Mar-17. But base rent reversion, which were largely positive in 2016, has turned neutral as expected. In Singapore, office portfolio recorded mildly negative rental reversions due to supply glut. On a positive note, portfolio vacancy remained low at 0.3% in Mar-17. WF Central, a retail-cum-hotel project in Beijing is nearing completion. Retail portion is schedule to open in 2H17 which should augment the company’s rental income. The 74-room hotel will Forecasts and Valuation be operated by Mandarin Oriental and is targeted to open in FY Dec (US$ m) 2015A 2016A 2017F 2018F Turnover 1,932 1,994 2,182 2,445 1H18. EBITDA 975 971 952 930 Pre-tax Profit 1,060 1,019 1,083 1,101 Singapore residential projects selling satisfactorily. Underlying Profit 905 848 885 905 Continued sales at the Sol Acres and Lake Grande projects in EPS (US$) 0.38 0.36 0.38 0.38 EPS Gth (%) (2.7) (6.3) 4.4 2.3 Singapore are progressing satisfactorily. The substantially-sold PE (X) 19.4 20.7 19.9 19.4 Lakeville project was completed in 1Q17 and is the only P/Cash Flow (X) 16.4 14.2 21.0 16.6 residential development in Singapore scheduled to complete in EV/EBITDA (X) 20.1 20.2 20.6 21.1 2017. In China, Hongkong Land registered attributable DPS (US$) 0.19 0.19 0.19 0.20 Div Yield (%) 2.5 2.5 2.5 2.7 contracted sales of US$287m, up 48% y-o-y but down 36% q- Net Gearing (%) 8 6 6 6 o-q. ROE (%) 3.2 2.8 2.7 2.7 Est. NAV (HK$) 11.8 12.8 BUY with US$8.93 TP. The stock is trading at 37% discount Disc. to NAV (%) (37) (41) to our appraised current NAV. Valuation remains attractive given that Central office market should remain on an upward Earnings Rev (%): 0 1 Consensus EPS (US$): 0.40 0.41 trajectory supported by solid demand from Chinese firms. Other Broker Recs: B: 8 S: 4 H: 3 Hence we are positive on Hongkong Land’s share price performance and reiterate our BUY call with US$8.93 TP. This is ICB Industry: Financials ICB Sector: Real Estate Holding & Development based on a 30% discount to our Jun-2018 NAV estimate. Principal Business: A leading property investment, management and development group with the majority of earnings derived from rentals in the core CBD of HK. At A Glance Issued Capital (m shrs) 2,353 Source of all data on this page: Company, DBSV, Thomson Reuters, Mkt. Cap (US$m/US$m) 17,575 / 17,575 HKEX Major Shareholders Jardine Strategic (%) 50.0 Free Float (%) 50.0 3m Avg. Daily Val. (US$m) 13.2 Page 85 ed- JS / sa- AH HK Property Sector Hongkong Land Income Statement (US$ m) Balance Sheet (US$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 1,932 1,994 2,182 2,445 Fixed Assets 24,991 27,757 29,170 30,653 EBITDA 975 971 952 930 Other LT Assets 4,734 4,582 4,772 5,000 Depr / Amort (3) (3) (3) (3) Cash & ST Invts 1,569 1,909 1,968 2,103 EBIT 972 967 949 927 Other Current Assets 3,078 2,707 3,091 3,234 Associates Inc 141 117 200 239 Total Assets 34,372 36,955 39,001 40,991 Interest (Exp)/Inc (74) (69) (67) (65) ST Debt 169 221 500 501 Exceptionals 21 3 0 0 Creditors 1,484 1,490 1,515 1,540 Pre-tax Profit 1,060 1,019 1,083 1,101 Other Current Liab 69 80 80 80 Tax (151) (168) (194) (190) LT Debt 3,741 3,696 3,616 3,665 Minority Interest (5) (3) (4) (6) Other LT Liabilities 189 154 154 154 Underlying Profit 905 848 885 905 Minority Interests 35 20 18 18 Shareholder’s Equity 28,685 31,294 33,118 35,033 Total Cap. & Liab. 34,372 36,955 39,001 40,991 Sales Gth (%) 3 3 9 12 Share Capital (m) 2,353 2,353 2,353 2,353 Net Profit Gth (%) (3) (6) 4 2 Net Cash/(Debt) (2,341) (2,008) (2,149) (2,063) EBITDA Margins (%) 50 49 44 38 Working Capital 2,925 2,825 2,964 3,216 EBIT Margin (%) 50 49 43 38 Net Gearing (%) 8 6 6 6 Tax Rate (%) 14 17 18 17 Cash Flow Statement (US$ m) Segmental Breakdown (US$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 972 967 949 927 Revenues (US$ m) Tax Paid (175) (141) (194) (190) Rental income 851 859 907 969 Depr/Amort 3 3 3 3 Service and mgmt charges 126 131 153 178 Chg in Wkg.Cap 120 253 (34) 211 Sale of trading properties 955 1,004 1,122 1,298 Other Non-Cash (24) 13 (82) (83) Total 1,932 1,994 2,182 2,445 Operating CF 896 1,096 642 868 Net Capex (58) (91) (30) (30) Assoc, MI, Invsmt (88) (154) (300) (300) Investing CF (146) (245) (330) (330) Net Chg in Debt (347) 6 200 50 Key Assumptions (%) 2017F 2018F New Capital 0 0 0 0 Residential price - HK 8 (8) Dividend (449) (448) (453) (453) Office rental - HK 3 3 Other Financing CF 0 0 0 0 Retail rental (High street shops) - HK (8) 0 Financing CF (796) (442) (253) (403) Retail rental (Shopping centre) - HK 0 2 Chg in Cash (46) 409 59 135 Source: Company, DBS Vickers Page 86 HK Property Sector Hysan Development Bloomberg: 14 HK | Reuters: 0014.HK Refer to important disclosures at the end of this report HOLD Eye on Lee Garden Three pre-leasing Last Traded Price (7 Jul 2017): HK$37.00 (HSI: 25,341) • Retail tenant sales recovering but negative retail Price Target 12-mth: HK$38.50 (4% upside) (Prev HK$32.10) reversionary growth underway • Office pre-leasing at Lee Garden Three proceeding well Potential Catalyst: Pre-leasing of Lee Garden Three & retail market • HOLD with HK$38.5 TP recovery Where we differ: Market has slightly lower earnings estimate for FY17. Retail tenant sales recovering but negative retail reversionary In 4M17, tenant sales at Hysan Development’s Analyst growth underway. Jeff YAU CFA, +852 2820 4912 retail portfolio, excluding Apple Store, rebounded 3%. This was mainly [email protected] led by Lee Gardens hub, with 8% sales growth over the corresponding Ian CHUI +852 2971 1915 period thanks to a recovery in sales of luxury jewellery retailers. Tenant [email protected] sales at Hysan Place grew 3% led by T Galleria. Lee Theatre Plaza registered flat sales growth dragged by lackluster performance of fashion tenants. About 26% of retail leases is scheduled for renewal in Price Relative 2017. In 1H17, overall rental reversion for retail portfolio should be negative at 20%. Ralph Lauren will surrender its retail premises at Lee Garden Two to Hysan Development in Aug-17 with a one-off rental compensation for early tenancy termination. Hysan Development plans bring in three F&B outlets as replacement tenants and has secured two already. However, new rents upon re-letting are expected to be substantially lower. The office portfolio is in better shape with healthy rental reversion of 15%. Office portfolio’s occupancy stays high at 95- 96% with vacancy concentrated in Grade B offices. Forecasts and Valuation Office pre-leasing at Lee Garden Three proceeding well. Lee FY Dec (HK$ m) 2015A 2016A 2017F 2018F Turnover 3,430 3,535 3,517 3,612 Garden Three is approaching completion with occupation permit EBITDA 2,803 2,909 3,063 2,928 expected to be received in late 2017. Pre-leasing of office portion is Pre-tax Profit 2,874 2,991 3,100 2,937 progressing well. The office rents are similar to the nearby Lee Garden Underlying Profit 2,283 2,369 2,484 2,355 EPS (HK$) 2.15 2.26 2.38 2.25 One at HK$55-65psf, but lower than those in Central. This makes this EPS Gth (%) 5.7 5.3 5.0 (5.2) Grade A office development attractive to those which seek more PE (X) 17.2 16.4 15.6 16.4 affordable office accommodation. The retail portion will house lifestyle P/Cash Flow (X) 13.5 11.6 12.6 13.2 and experience-themed tenants, with targeted opening in 1Q18. EV/EBITDA (X) 15.8 15.2 14.4 15.1 DPS (HK$) 1.32 1.35 1.37 1.37 The stock is trading at 47% discount to our Div Yield (%) 3.6 3.6 3.7 3.7 HOLD with HK$38.5 TP. Net Gearing (%) 3 5 6 5 appraised current NAV. In our view, news flow on pre-leasing of retail ROE (%) 3.4 3.5 3.7 3.5 portion of Lee Garden Three and potential new investments would Est. NAV (HK$) 69.7 70.0 dictate its share price performance. Maintain HOLD at this stage with Disc. to NAV (%) (47) (47) HK$38.5 TP. This is based on 45% discount to our Jun-2018 NAV Earnings Rev (%): 4 0 estimate. Consensus EPS (HK$): 2.26 2.33 Other Broker Recs: B: 6 S: 3 H: 8 At A Glance Issued Capital (m shrs) 1,045 ICB Industry: Financials Real Estate Holding & Development Mkt. Cap (HK$m/US$m) 38,677 / 4,951 ICB Sector: Major Shareholders Principal Business: Property leasing with core focus in Causeway Bay Lee Hysan Estate Co. (%) 41.1 Silchester International Investors (%) 9.0 Source of all data on this page: Company, DBSV, Thomson Reuters, First Eagle Inv. Mgmt, LLC (%) 5.0 HKEX Free Float (%) 44.96 3m Avg. Daily Val. (US$m) 4.5 Page 87 ed- JS / sa- AH HK Property Sector Hysan Development Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 3,430 3,535 3,517 3,612 Fixed Assets 70,515 70,353 69,977 68,807 EBITDA 2,803 2,909 3,063 2,928 Other LT Assets 4,852 5,396 5,806 6,208 Depr / Amort (21) (22) (21) (21) Cash & ST Invts 2,804 2,630 2,829 3,192 EBIT 2,782 2,888 3,042 2,907 Other Current Assets 617 1,642 1,627 1,612 Associates Inc 242 231 213 205 Total Assets 78,788 80,021 80,239 79,819 Interest (Exp)/Inc (150) (128) (155) (175) ST Debt 250 1,180 1,015 300 Exceptionals 0 0 0 0 Creditors 470 935 920 905 Pre-tax Profit 2,874 2,991 3,100 2,937 Other Current Liab 743 778 778 778 Tax (438) (463) (468) (442) LT Debt 4,609 5,113 5,778 6,493 Minority Interest (153) (159) (148) (139) Other LT Liabilities 1,348 1,330 1,330 1,330 Underlying Profit 2,283 2,369 2,484 2,355 Minority Interests 3,196 3,195 3,190 3,178 Shareholder’s Equity 68,172 67,490 67,228 66,835 Total Cap. & Liab. 78,788 80,021 80,239 79,819 Sales Gth (%) 6 3 (1) 3 Share Capital (m) 1,057 1,045 1,045 1,045 Net Profit Gth (%) 6 4 5 (5) Net Cash/(Debt) (2,055) (3,663) (3,964) (3,601) EBITDA Margins (%) 82 82 87 81 Working Capital 1,958 1,379 1,743 2,821 EBIT Margin (%) 81 82 86 80 Net Gearing (%) 3 5 6 5 Tax Rate (%) 15 15 15 15 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 2,782 2,888 3,042 2,907 Revenues (HK$ m) Tax Paid (368) (407) (468) (442) Property rental income 3,430 3,535 3,517 3,612 Depr/Amort 21 22 21 21 Total 3,430 3,535 3,517 3,612 Chg in Wkg.Cap 97 411 0 0 Other Non-Cash 8 5 0 0 Operating CF 2,540 2,919 2,595 2,485 Net Capex (414) (847) (1,027) (236) Assoc, MI, Invsmt 1,336 (639) (147) (147) Investing CF 922 (1,486) (1,174) (383) Net Chg in Debt (1,582) (250) 500 0 Key Assumptions (%) 2017F 2018F New Capital (215) 1,285 0 0 Dividend (1,455) (1,524) (1,506) (1,514) Office rental - HK 3 3 Other Financing CF (202) (161) (215) (225) Retail rental (High street shops) - HK (8) 0 Financing CF (3,454) (650) (1,221) (1,739) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 8 783 199 362 Source: Company, DBS Vickers Page 88 HK Property Sector Swire Properties Bloomberg: 1972 HK | Reuters: 1972.HK Refer to important disclosures at the end of this report BUY Prime beneficiary of sustained office Last Traded Price (7 Jul 2017): HK$26.80 (HSI: 25,341) decentralisation trend Price Target 12-mth: HK$30.60 (14% upside) (Prev HK$27.05) • Office leasing in good shape Potential Catalyst: Office tenant decentralisation • Mixed performance at retail assets Where we differ: Market has slightly higher earnings estimate for FY17. • BUY with HK$30.6 TP Analyst All office properties were fully Jeff YAU CFA, +852 2820 4912 Office leasing in good shape [email protected] occupied except Cityplaza, which was 99% let. The spot rates for Ian CHUI +852 2971 1915 One and Two Pacific Place were firm at HK$115-135psf in Mar-17 [email protected] while that for Three Pacific Place improved to HK$100-110psf from Dec-16’s HK$100-105psf. Rental reversion remained solid at 15% in 1Q17. Spot rents for the Island East office portfolio remained stable at low 40s to high 60s. Cityplaza recorded 10% rental growth on Price Relative renewals or new lettings while rental reversion at Taikoo Place and One Island East were largely neutral in 1Q17. Pre-leasing of 1.02m sf of space at One Taikoo Place, which is scheduled for completion in 2018, has been progressing well given the office decentralisation trend. Mixed performance at retail assets. Retail sales slowdown at The Mall at Pacific Place is starting to moderate as the yearly decline narrowed to 2.3% y-o-y in 1Q17, against overall retail sales decline of 1.3% for Hong Kong in the same period. Retail sales at its 20%- Forecasts and Valuation FY Dec (HK$ m) 2015A 2016A 2017F 2018F owned Citygate Outlet Mall in Tung Chung, which targets primarily Turnover 16,447 16,792 18,607 13,763 tourists, fell just 0.7% in 1Q17 (2016: -8%), reflecting gradual EBITDA 9,453 9,296 10,351 8,627 Pre-tax Profit 8,370 8,312 9,322 8,723 recovery in inbound tourism. However, retail sales at regional mall Underlying Profit 7,078 7,112 7,824 7,520 Cityplaza dropped by a larger 7.7% in 1Q17 due to weaker sales of EPS (HK$) 1.21 1.22 1.34 1.29 apparel and footwear, and foot traffic was also affected by the EPS Gth (%) (1.0) 0.5 10.0 (3.9) PE (X) 22.1 22.0 20.0 20.8 closure of the cinema. Meanwhile, Taikoo Hui in Guangzhou, INDIGO P/Cash Flow (X) 14.8 14.6 11.8 19.3 in Beijing and Sino-Ocean Taikoo Li in Chengdu recorded impressive EV/EBITDA (X) 20.5 20.9 18.7 22.5 retail sales growth of 32-57% in 1Q17 primarily led by luxury goods DPS (HK$) 0.71 0.71 0.71 0.71 retailers. The retail portion of HKRI Taikoo Hui in Shanghai started Div Yield (%) 2.6 2.6 2.6 2.6 Net Gearing (%) 15 16 14 13 operations in May-17. ROE (%) 3.3 3.2 3.4 3.2 Est. NAV (HK$) 41.6 43.7 BUY with HK$30.6 TP. Trading 36% below our assessed current Disc. to NAV (%) (36) (39) NAV, the stock remains inexpensive in our view. Given heavy office exposure in Island East where transportation accessibility will improve Earnings Rev (%): 1 0 remarkably after the completion of Wan Chai bypass in 2018, Swire Consensus EPS (HK$): 1.42 1.30 Other Broker Recs: B: 11 S: 2 H: 3 Properties is well poised to capitalise on the office decentralisation trend. Maintain BUY with HK$30.6 TP, premised on 30% discount to Financials ICB Industry: our Jun-2017 NAV estimate ICB Sector: Real Estate Holding & Development Principal Business: Property investment and development in Hong Kong, China & US At A Glance Issued Capital (m shrs) 5,850 Source of all data on this page: Company, DBSV, Thomson Reuters, Mkt. Cap (HK$m/US$m) 156,780 / 20,067 HKEX Major Shareholders Swire Pacific (%) 82.0 Free Float (%) 18.0 3m Avg. Daily Val. (US$m) 8.2 Page 89 ed- JS / sa- CW HK Property Sector Swire Properties Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 16,447 16,792 18,607 13,763 Fixed Assets 236,692 243,839 251,431 255,939 EBITDA 9,453 9,296 10,351 8,627 Other LT Assets 21,091 27,550 28,352 28,951 Depr / Amort (345) (374) (393) (412) Cash & ST Invts 4,386 1,681 8,094 10,127 EBIT 9,108 8,922 9,958 8,215 Other Current Assets 10,555 8,638 7,034 6,986 Associates Inc 413 437 524 602 Total Assets 272,724 281,708 294,912 302,003 Interest (Exp)/Inc (1,179) (1,050) (1,160) (1,260) ST Debt 7,260 7,499 7,956 7,956 Exceptionals 28 3 0 1,166 Creditors 8,943 7,845 8,698 7,592 Pre-tax Profit 8,370 8,312 9,322 8,723 Other Current Liab 541 279 279 279 Tax (1,209) (1,162) (1,408) (1,113) LT Debt 30,474 29,559 33,102 33,102 Minority Interest (83) (38) (90) (90) Other LT Liabilities 7,557 9,301 9,301 9,301 Underlying Profit 7,078 7,112 7,824 7,520 Minority Interests 1,702 1,856 1,829 1,802 Shareholder’s Equity 216,247 225,369 233,747 241,971 Total Cap. & Liab. 272,724 281,708 294,912 302,003 Sales Gth (%) 7 2 11 (26) Share Capital (m) 5,850 5,850 5,850 5,850 Net Profit Gth (%) (1) 0 10 (4) Net Cash/(Debt) (33,348) (35,377) (32,964) (30,931) EBITDA Margins (%) 57 55 56 63 Working Capital (1,803) (5,304) (1,804) 1,286 EBIT Margin (%) 55 53 54 60 Net Gearing (%) 15 16 14 13 Tax Rate (%) 14 14 15 13 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 9,108 8,922 9,958 8,215 Revenues (HK$ m) Tax Paid (1,267) (1,413) (1,408) (1,113) Property Investment 10,857 10,902 11,492 11,875 Depr/Amort 345 374 393 412 Property trading 4,463 4,760 5,861 601 Chg in Wkg.Cap 1,039 1,693 2,906 (508) Hotels 1,127 1,130 1,254 1,287 Other Non-Cash (1,055) (951) (1,306) (1,506) Total 16,447 16,792 18,607 13,763 Operating CF 8,170 8,625 10,544 5,501 Net Capex (3,667) (6,430) (3,277) 1,103 Assoc, MI, Invsmt (758) (197) (583) (301) Investing CF (4,425) (6,627) (3,860) 802 Net Chg in Debt 2,784 4,190 4,000 0 Key Assumptions (%) 2017F 2018F New Capital 0 0 0 0 Residential price - HK 8 (8) Dividend (3,930) (4,226) (4,271) (4,271) Office rental - HK 3 3 Other Financing CF (1,033) (4,568) 0 0 Retail rental (High street shops) - HK (8) 0 Financing CF (2,179) (4,604) (271) (4,271) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 1,566 (2,606) 6,413 2,032 Source: Company, DBS Vickers Page 90 HK Property Sector Wharf Bloomberg: 4 HK | Reuters: 4.HK Refer to important disclosures at the end of this report BUY Eyeing property spin-offs Last Traded Price (7 Jul 2017): HK$64.65 (HSI: 25,341) Price Target 12-mth: HK$73.00 (13% upside) (Prev HK$74.90) • Key malls displayed sequential improvement in sales • Growing rental footage in China Potential Catalyst:Potential investment property spin-off • BUY with HK$73 TP Where we differ: Market has similar earnings estimate for FY17-18. Tenant sales Analyst Key malls displayed sequential improvement in sales. Jeff YAU CFA, +852 2820 4912 at Harbour City in Tsim Sha Tsui resumed growth with 1.4% y-o-y [email protected] improvement in 1Q17, after falling for nine consecutive quarters. This Ian CHUI +852 2971 1915 compared favourably with the 1.3% decline in the overall Hong Kong [email protected] retail market during the same period. We believe that the improved business was led by sales recovery of luxury brands as tourists returned. Price Relative Times Square in Causeway Bay lagged behind with retail sales decline of 4.8% in 1Q17, which was narrower than the previous quarters given the lower comparison base. Moreover, both malls achieved single-digit rental reversion in 1Q17. Ongoing tenant mix refinement should help enrich the malls’ offering, thus increasing their attractiveness. For example, Times Square saw improved beauty product offerings on the high zone with the opening of a popular beauty mega store, Facesss, in Jun-17. The Ocean Terminal Extension will open for business in Jul/Aug, and accommodates 10-12 restaurants with GFA of 45,000sf. This Forecasts and Valuation FY Dec (HK$ m) 2015A 2016A 2017F 2018F should increase the foot traffic for Ocean Terminal. Turnover 40,875 46,627 38,154 40,464 EBITDA 16,038 18,011 19,001 20,277 Growing rental footage in China. In China, Chengdu IFS, Chongqing Pre-tax Profit 15,082 18,082 18,912 20,542 Times Square and Dalian Times Square recorded retail sales growth of Underlying Profit 10,969 13,754 14,344 14,706 20-30% in 1Q17. In particular, Dalian Times Square, which features EPS (HK$) 3.62 4.54 4.73 4.85 EPS Gth (%) 4.7 25.4 4.2 2.5 international luxury goods retailers, has recorded a noticeable increase PE (X) 17.9 14.2 13.7 13.3 in tenant sales since 2H16. The retail portions at Chongqing IFS and P/Cash Flow (X) 7.0 6.1 10.3 11.2 Changsha IFS are scheduled to open for business in Sep-17 and early EV/EBITDA (X) 14.3 12.7 12.0 11.3 DPS (HK$) 1.90 2.15 2.22 2.22 2018 respectively, with the majority of the respective retail space Div Yield (%) 2.9 3.3 3.4 3.4 already under offer or in advanced stage of discussions. Portfolio Net Gearing (%) 15 8 6 6 expansion should give a boost to rental income in China. ROE (%) 3.6 4.4 4.5 4.4 Est. NAV (HK$) 96.2 97.3 BUY with HK$73 TP. The stock is trading at 33% discount to our Disc. to NAV (%) (33) (34) assessed current NAV. Wharf is contemplating a separate listing of its Earnings Rev (%): (2) (6) investment properties in Hong Kong. If this materialises, we believe that Consensus EPS (HK$): 4.61 4.88 it makes sense for its parent Wheelock to further optimise the group Other Broker Recs: B: 8 S: 3 H: 6 structure by privatising Wharf’s remaining assets. This should justify a higher valuation and hence our BUY call. Our TP of HK$73 is based on ICB Industry: Financials ICB Sector: Real Estate Holding & Development a 25% discount to our Jun-2018 NAV estimate. Principal Business: Engaged in property investments, property developments, container terminal operations and communication, media and entertainment businesses. At A Glance Source of all data on this page: Company, DBSV, Thomson Reuters, Issued Capital (m shrs) 3,034 HKEX Mkt. Cap (HK$m/US$m) 196,124 / 25,103 Major Shareholders Wheelock (%) 61.0 Free Float (%) 39.0 3m Avg. Daily Val. (US$m) 31.7 Page 91 ed- JS / sa- AH HK Property Sector Wharf Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 40,875 46,627 38,154 40,464 Fixed Assets 332,956 340,033 344,112 349,170 EBITDA 16,038 18,011 19,001 20,277 Other LT Assets 45,326 38,321 41,322 42,084 Depr / Amort (1,548) (1,406) (1,114) (882) Cash & ST Invts 23,510 36,957 38,152 37,719 EBIT 14,490 16,605 17,888 19,395 Other Current Assets 42,124 28,516 29,302 32,721 Associates Inc 1,392 2,906 2,184 2,436 Total Assets 443,916 443,827 452,888 461,695 Interest (Exp)/Inc (1,110) (901) (1,160) (1,290) ST Debt 8,463 15,178 6,500 6,500 Exceptionals 310 (528) 0 0 Creditors 41,535 43,182 43,232 43,032 Pre-tax Profit 15,082 18,082 18,912 20,542 Other Current Liab 1,854 1,968 1,968 1,968 Tax (3,341) (4,084) (4,015) (5,239) LT Debt 62,244 45,616 52,294 50,294 Minority Interest (772) (244) (554) (596) Other LT Liabilities 12,640 12,477 12,477 12,477 Underlying Profit 10,969 13,754 14,344 14,706 Minority Interests 9,452 8,612 8,666 8,462 Shareholder’s Equity 307,728 316,794 327,752 338,962 Total Cap. & Liab. 443,916 443,827 452,888 461,695 Sales Gth (%) 7 14 (18) 6 Share Capital (m) 3,031 3,032 3,032 3,032 Net Profit Gth (%) 5 25 4 3 Net Cash/(Debt) (47,197) (23,837) (20,642) (19,075) EBITDA Margins (%) 39 39 50 50 Working Capital 13,782 5,145 15,753 18,940 EBIT Margin (%) 35 36 47 48 Net Gearing (%) 15 8 6 6 Tax Rate (%) 22 23 21 26 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 14,490 16,605 17,888 19,395 Revenues (HK$ m) Tax Paid (3,212) (3,464) (4,015) (5,239) Investment Property 14,322 15,121 15,543 16,044 Depr/Amort 1,548 1,406 1,114 882 Hotels 1,549 1,587 1,637 1,702 Chg in Wkg.Cap 11,887 14,406 (256) (3,069) Logistics 2,848 2,748 2,949 3,000 Other Non-Cash (660) 131 (1,640) (1,840) Communications, media and 3,423 3,082 1,349 0 Operating CF 24,053 29,084 13,091 10,129 Development Property 18,018 23,275 15,820 18,837 Net Capex (6,849) (14,077) (2,000) (2,700) Investment and others 715 814 855 880 Assoc, MI, Invsmt (441) 11,599 (817) 1,674 Total 40,875 46,627 38,154 40,464 Investing CF (7,290) (2,478) (2,817) (1,026) Net Chg in Debt (6,100) (9,605) (2,000) (2,000) Key Assumptions (%) 2017F 2018F New Capital 50 52 0 0 Residential price - HK 8 (8) Dividend (5,851) (6,440) (7,079) (7,535) Office rental - HK 3 3 Other Financing CF 876 (48) 0 0 Retail rental (High street shops) - HK (8) 0 Financing CF (11,025) (16,041) (9,079) (9,535) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 5,738 10,565 1,195 (433) Source: Company, DBS Vickers Page 92 HK Property Sector Far East Consortium Bloomberg: 35 HK | Reuters: 0035.HK Refer to important disclosures at the end of this report BUY On growth trajectory Last Traded Price ( 7 Jul 2017): HK$4.28 (HSI: 25,341) Price Target 12-mth: HK$4.94 (15% upside) (Prev HK$4.86) • Hong Kong hotels on recovery path • Northern Gateway project to strengthen development Potential Catalyst:Overseas project sales, improving hotel operations pipeline significantly Where we differ: Market has slightly lower earnings estimate for FY18. • BUY with HK$4.94TP Analyst Led by occupancy Jeff YAU CFA, +852 2820 4912 Hong Kong hotels on recovery path. [email protected] improvement amidst the return of overnight tourists, Far East Consortium (FEC)’s hotels in Hong Kong have seen RevPar growth of Ian CHUI +852 2971 1915 [email protected] 3% y-o-y in 2HFY17, after a drop of 5% in 1HFY17. With overall occupancy back up to 90%, FEC is expected to regain its pricing power gradually. Silka Tsuen Wan, a 3-star hotel in Kwai Chung, held a soft opening in Feb-17, adding 409 rooms to the company’s hotel inventory. Price Relative Dorsett City in London will officially open for business in Jul-17. Portfolio expansion should add further momentum to hotel earnings, which is recovering. This is despite the earnings shortfall arising from the disposal of Silka West Kowloon in Tai Kok Tsui, which is estimated to bring in gains of HK$316m in FY18. FEC is contemplating to divest non-core hotels when opportunity knocks. Northern Gateway project to strengthen development pipeline As of Mar-17, FEC had total cumulative pre-sales of significantly. HK$10.7bn, which will be booked in FY18-21. Since Apr-17, the Forecasts and Valuation company has launched Artra in Singapore, Marin Point in Hong Kong, FY Mar (HK$ m) 2016A 2017A 2018F 2019F Turnover 3,995 5,005 5,781 5,981 and West Side Place (Tower 4) in Melbourne for pre-sale. Initial market EBITDA 1,335 1,694 2,228 1,999 response has been satisfactory with sales proceeds of >HK$2bn Pre-tax Profit 979 1,576 2,014 1,424 Net Profit 734 1,127 1,444 1,016 generated. Smooth project pre-sale should point to high visibility of EPS (HK$) 0.37 0.52 0.64 0.45 development earnings. In Apr-17, FEC signed an agreement with the EPS Gth (%) (28.4) 41.9 24.4 (29.6) Manchester City Council to deliver the Northern Gateway project which PE (X) 11.7 8.3 6.6 9.4 P/Cash Flow (X) (57.9) 7.9 5.9 20.4 is situated close to its Angel Meadow site and Victoria Station. Covering EV/EBITDA (X) 12.3 9.7 7.4 8.2 an area of >350 acres, the sizeable project is expected to provide DPS (HK$) 0.16 0.19 0.19 0.19 >10,000 new homes upon full completion. This has strengthened FEC’s Div Yield (%) 3.7 4.3 4.3 4.3 development pipeline significantly over the long term. FEC had already Net Gearing (%) 38 31 29 32 ROE (%) 7.6 10.8 12.8 8.4 acquired first parcel of land which is estimated to produce saleable Est. NAV (HK$) 12.0 12.3 floor area of 1.5m sf. Disc. to NAV (%) (64) (65) BUY with HK$4.94 TP. The stock, trading at 64% discount to our Earnings Rev (%): 0 Nil appraised current NAV, is inexpensive. FEC’s share price has potential to Consensus EPS (HK$): 0.60 0.65 appreciate further if it can successfully replicate its success in Other Broker Recs: B: 3 S: 0 H: 0 Melbourne to other cities. BUY with HK$4.94 TP, premised on a 60% ICB Industry: Financials discount to our Jun-2018 NAV estimate. ICB Sector: Real Estate Holding & Development Engages in property development & investment, Principal Business: hotel investment & operations, and car park and facility mangement At A Glance operations across different cities Issued Capital (m shrs) 2,245 Mkt. Cap (HK$m/US$m) 9,608 / 1,230 Source of all data on this page: Company, DBSV, Thomson Reuters, Major Shareholders HKEX Chiu David & his family (%) 54.6 Value Partners (%) 5.0 Free Float (%) 45.4 3m Avg. Daily Val. (US$m) 1.1 Page 93 ed- JS / sa- AH HK Property Sector Far East Consortium Income Statement (HK$ m) Balance Sheet (HK$ m) FY Mar 2016A 2017A 2018F 2019F FY Mar 2016A 2017A 2018F 2019F Turnover 3,995 5,005 5,781 5,981 Fixed Assets 11,025 10,483 10,621 10,686 EBITDA 1,335 1,694 2,228 1,999 Other LT Assets 1,435 2,135 2,170 2,206 Depr / Amort (316) (324) (362) (396) Cash & ST Invts 2,556 4,186 4,955 4,429 EBIT 1,019 1,370 1,866 1,603 Other Current Assets 11,145 11,596 12,747 14,827 Associates Inc 1 (4) (4) (4) Total Assets 26,161 28,400 30,493 32,147 Interest (Exp)/Inc (222) (158) (164) (174) ST Debt 2,933 2,755 2,755 2,755 Exceptionals 181 368 316 0 Creditors 829 889 1,189 1,489 Pre-tax Profit 979 1,576 2,014 1,424 Other Current Liab 2,710 2,536 2,786 3,036 Tax (221) (434) (562) (400) LT Debt 8,732 10,507 11,007 11,507 Minority Interest (24) (15) (8) (8) Other LT Liabilities 691 768 768 768 Net Profit 734 1,127 1,444 1,016 Minority Interests 127 152 155 158 Shareholder’s Equity 10,140 10,792 11,832 12,433 Total Cap. & Liab. 26,161 28,400 30,493 32,147 Sales Gth (%) (22) 25 15 3 Share Capital (m) 2,132 2,238 2,238 2,238 Net Profit Gth (%) (23) 53 28 (30) Net Cash/(Debt) (7,923) (7,646) (7,377) (8,403) EBITDA Margins (%) 33 34 39 33 Working Capital 7,230 9,601 10,970 11,975 EBIT Margin (%) 26 27 32 27 Net Gearing (%) 38 31 29 32 Tax Rate (%) 23 28 28 28 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Mar 2016A 2017A 2018F 2019F FY Mar 2016A 2017A 2018F 2019F EBIT 1,019 1,370 1,866 1,603 Revenues (HK$ m) Tax Paid (372) (275) (562) (400) Property Development 1,979 2,937 3,589 3,703 Depr/Amort 316 324 362 396 Property Investment 51 55 57 59 Chg in Wkg.Cap (1,502) (556) (601) (1,530) Hotel Operations 1,321 1,309 1,415 1,472 Other Non-Cash 18 38 1 1 Car Park Operations 623 641 683 711 Operating CF (520) 901 1,066 70 Others 21 64 36 36 Net Capex (635) 80 (183) (461) Total 3,995 5,005 5,781 5,981 Assoc, MI, Invsmt (333) (870) (35) (35) Investing CF (968) (789) (218) (496) Net Chg in Debt 1,942 (450) 500 500 Key Assumptions (%) 2018F 2019F New Capital (75) 2,309 0 0 Residential price - HK 8 (8) Dividend (97) (53) (409) (419) Office rental - HK 3 3 Other Financing CF (163) (363) (170) (180) Retail rental (High street shops) - HK (8) 0 Financing CF 1,607 1,443 (79) (99) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 118 1,555 768 (526) Source: Company, DBS Vickers Page 94 HK Property Sector Great Eagle Bloomberg: 41 HK | Reuters: 0041.HK Refer to important disclosures at the end of this report HOLD Family dispute under spotlight Last Traded Price (7 Jul 2017): HK$40.10 (HSI: 25,341) • Hotels in London and Toronto to deliver higher earnings Price Target 12-mth: HK$39.05 (3% downside) (Prev HK$36.30) • Champion REIT and Langham Hospitality Trust provide mainstay of earnings Potential Catalyst: Stake increase by major shareholder • HOLD with HK$39.05 TP Where we differ: Market has similar earnings estimate for FY17-18. Hotels in London and Toronto to deliver higher earnings. The Langham Analyst London benefits from increased room inventory following the Jeff YAU CFA, +852 2820 4912 [email protected] renovation, and earnings should post a recovery in FY17. In North America, the Chelsea hotel in Toronto is a bright spot with better Ian CHUI +852 2971 1915 [email protected] RevPAR achieved. Coupled with positive operating leverage, EBITDA should continue to grow further. RevPAR at The Langham Fifth Avenue in New York has been recovering from a low base. Great Eagle will subdivide the suites to create an additional 20 standard rooms to boost Price Relative occupancy in response to competition from Airbnb. On the other hand, The Langham in Boston and Chicago are expected to deliver stable performance. Profitability at The Langham Sydney and The Langham Auckland should continue to improve on higher RevPAR. EBITDA growth at The Langham Xintindi should be primarily driven by cost containment measures. The HUB hotel in Shanghai commenced operations in late May, while Eaton in Washington is scheduled to open for business in late 2017. Overall, we forecast hotel EBITDA to grow 7% in FY17 with The Langham London and Chelsea hotel in Toronto as Forecasts and Valuation primary drivers. FY Dec (HK$ m) 2015A 2016A 2017F 2018F Turnover 5,623 6,261 6,176 6,485 Champion REIT and Langham Hospitality Trust provide the EBITDA 2,194 2,634 2,264 2,313 Contributions from Champion REIT should rise Pre-tax Profit 1,909 2,563 1,949 1,975 mainstay of earnings. Underlying Profit 1,780 2,022 1,814 1,839 2% in FY17 on increased managers’ fees and dividends, mainly led by EPS (HK$) 2.68 2.99 2.68 2.72 strong reversionary growth of Three Garden Road. The growth should EPS Gth (%) (8.5) 11.5 (10.3) 1.4 be offset by lower dividend from Langham Hospitality Trust resulting PE (X) 15.0 13.4 15.0 14.8 P/Cash Flow (X) 14.3 8.6 8.2 10.0 from higher cash interest costs. Overall, these two trusts should EV/EBITDA (X) 21.2 17.6 20.5 20.1 continue to provide Great Eagle with steady contribution and be its DPS (HK$) 2.74 1.25 0.75 0.75 main profit contributor. Div Yield (%) 6.8 3.1 1.9 1.9 Net Gearing (%) 37 38 36 35 HOLD with HK$39.05 TP. The counter is trading at 49% discount to ROE (%) 3.4 3.7 3.2 3.2 our estimated current NAV, against its 10-year average of 57%. Est. NAV (HK$) 79.0 78.1 Disc. to NAV (%) (49) (49) Valuation does not appear compelling from an historical perspective. Based on target discount of 50% to our Jun-2018 NAV estimate, we Earnings Rev (%): 1 1 set our TP at HK$39.05 and recommend HOLD. But recently Lo family Consensus EPS (HK$): 2.66 2.72 has increased its stake in the company after disputes between two Other Broker Recs: B: 2 S: 1 H: 2 opposing camps within the family intensified. The counter could ICB Industry: Financials possibly trade higher if the Lo family or its members further raise their Real Estate Holding & Development ICB Sector: stakes. Principal Business: Engaged in hotel operation and holds c.63% stake in Champion REIT and c.61% of Langham Hospitality Trust At A Glance Source of all data on this page: Company, DBSV, Thomson Reuters, Issued Capital (m shrs) 688 HKEX Mkt. Cap (HK$m/US$m) 27,580 / 3,530 Major Shareholders Lo Ka Shui (%) 60.5 Surewit Finance (%) 6.0 Eagle Guardian Limited (%) 5.1 Free Float (%) 28.48 3m Avg. Daily Val. (US$m) 0.8 Page 95 ed- JS / sa- AH HK Property Sector Great Eagle Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Turnover 5,623 6,261 6,176 6,485 Fixed Assets 91,130 91,658 92,065 92,459 EBITDA 2,194 2,634 2,264 2,313 Other LT Assets 2,678 2,755 2,735 2,725 Depr / Amort (165) (153) (156) (169) Cash & ST Invts 6,832 6,779 7,669 7,846 EBIT 2,029 2,480 2,108 2,145 Other Current Assets 4,548 5,137 5,120 5,863 Associates Inc (23) (20) (20) (10) Total Assets 105,188 106,329 107,588 108,892 Interest (Exp)/Inc (25) (92) (139) (159) ST Debt 9,968 2,495 4,721 4,721 Exceptionals (71) 194 0 0 Creditors 3,176 3,476 3,704 3,933 Pre-tax Profit 1,909 2,563 1,949 1,975 Other Current Liab 360 431 431 431 Tax (124) (531) (125) (127) LT Debt 17,192 25,694 23,469 23,469 Minority Interest (6) (9) (9) (9) Other LT Liabilities 1,449 1,304 1,304 1,304 Underlying Profit 1,780 2,022 1,814 1,839 Minority Interests 18,710 17,081 17,090 17,100 Shareholder’s Equity 54,333 55,847 56,869 57,935 Total Cap. & Liab. 105,188 106,329 107,588 108,892 Sales Gth (%) 1 11 (1) 5 Share Capital (m) 665 677 677 677 Net Profit Gth (%) (7) 14 (10) 1 Net Cash/(Debt) (20,328) (21,410) (20,520) (20,344) EBITDA Margins (%) 39 42 37 36 Working Capital (2,125) 5,513 3,932 4,624 EBIT Margin (%) 36 40 34 33 Net Gearing (%) 37 38 36 35 Tax Rate (%) 6 21 6 6 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F EBIT 2,029 2,480 2,108 2,145 Revenues (HK$ m) Tax Paid (276) (562) (125) (127) Rental income 236 244 226 231 Depr/Amort 165 153 156 169 Building management fee 0 0 0 0 Chg in Wkg.Cap (1,126) (322) 129 (514) Hotel operation 3,628 3,715 3,919 4,193 Other Non-Cash 796 838 923 923 Income fr. Champion & LHT 1,283 1,797 1,515 1,535 Operating CF 1,588 2,587 3,190 2,595 Other operations 475 505 515 525 Net Capex (3,109) (2,441) (500) (499) Total 5,623 6,261 6,176 6,485 Assoc, MI, Invsmt 3,073 3,517 65 65 Investing CF (36) 1,076 (435) (434) Net Chg in Debt (666) 1,371 0 0 Key Assumptions (%) 2017F 2018F New Capital 18 108 0 0 Residential price - HK 8 (8) Dividend (925) (3,464) (1,293) (1,275) Office rental - HK 3 3 Other Financing CF (323) (1,199) 58 (710) Retail rental (High street shops) - HK (8) 0 Financing CF (1,896) (3,183) (1,235) (1,984) Retail rental (Shopping Centre) - HK 0 2 Chg in Cash (344) 479 1,521 177 Source: Company, DBS Vickers Page 96 HK Property Sector Champion REIT Bloomberg: 2778 HK | Reuters: 2778.HK Refer to important disclosures at the end of this report HOLD (Downgrade from Buy) Positives priced in Last Traded Price (7 Jul 2017): HK$5.29 (HSI : 25,341) Price Target 12-mth: HK$5.38 (2% upside) Chinese firms dominate leasing demand at Three Potential Catalyst: Disposal of Langham Place Office Tower & Special Garden Road dividend Where we differ: Market has slightly higher DPU estimates for FY17-18. Possible sale of Langham Place Office Tower property HOLD with HK$5.38 TP Analyst Jeff YAU CFA, +852 2820 4912 [email protected] Chinese firms dominate leasing demand at Three Garden Ian CHUI +852 2971 1915 Road. Spot rent at Three Garden Road stays at HK$110psf. [email protected] With expiring rents of HK$ Relative Index floors surrendered by Citibank have recently been re-let. CMBI 5.9 212 has leased two floors to consolidate its business operations 5.4 192 across different locations. Existing tenant China Industrial Bank 4.9 172 152 (CIB) has agreed to take up two more floors. Following this in- 4.4 132 3.9 house expansion, CIB will occupy four office floors at Three 112 3.4 92 Garden Road. Since the new tenancies will commence in 2H17, 2.9 72 occupancy at Three Garden Road will retreat to the low 90s in Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 mid-2017 before picking up. Despite the lower expected Champion REIT (LHS) Relative HSI (RHS) average occupancy, we forecast Three Garden Road to post 7% Forecasts and Valuation growth in rental income in FY17 led by robust rental reversion. FY Dec (HK$ m) 2015A 2016A 2017F 2018F Gross Revenue 2,289 2,557 2,656 2,762 Net Property Inc 1,784 2,026 2,102 2,187 Possible sale of Langham Place Office Tower property. Net Profit 3,305 3,182 1,318 1,314 Champion REIT is exploring the possibility of disposing the Distribution Inc 1,146 1,331 1,365 1,366 Langham Place Office Tower property in Mongkok. Given the DPU (HK$) 0.20 0.23 0.23 0.23 current strong office property valuations in Hong Kong, it DPU Gth (%) (3) 16 2 0 makes sense for Champion REIT to crystallize the high value of Div Yield (%) 3.7 4.3 4.4 4.4 this strata-titled office property via disposal. When the potential Gross Gearing (%) 22 22 21 21 Book Value (HK$) 8.40 8.72 8.87 9.02 sale is likely to be NAV accretive, it could be yield dilutive unless P/Book Value (x) 0.6 0.6 0.6 0.6 the disposal proceeds are redeployed into new acquisitions or unit buyback. Earnings Rev (%): 0 0 Consensus DPU (HK$): 0.24 0.24 HOLD with HK$5.38 TP. Following the sharp unit price rally Other Broker Recs: B: 8 S: 3 H: 4 led by potential sale of Langham Place Office Tower property, Financials Champion REIT is trading at distribution yields of 4.4% for ICB Industry: FY17-18, its all-time low since listing. Unless Champion REIT ICB Sector: REITs (HK) Principal Business: Leasing of Three Garden Road and Langham distributes a special dividend post disposal, further upside Place in Hong Kong potential should be limited. Downgraded to HOLD with Source of all data on this page: Company, DBSV, Thomson Reuters, HK$5.38 TP. HKEX At A Glance Issued Capital (m shrs) 5,812 Mkt. Cap (HK$m/US$m) 30,745 / 3,936 Major Shareholders Great Eagle (%) 65.6 Free Float (%) 34.4 3m Avg. Daily Val. (US$m) 3.8 Page 97 ed- JS / sa- AH HK Property Sector Champion REIT Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Gross revenue 2,289 2,557 2,656 2,762 Fixed Assets 64,783 66,842 67,884 68,941 Property expenses (506) (531) (554) (575) Other LT Assets 223 254 254 254 Net Property Income 1,784 2,026 2,102 2,187 Cash & ST Invts 693 958 989 1,030 Other expenses (229) (266) (276) (287) Other Current Assets 265 320 320 320 Interest (Exp)/Inc (323) (336) (294) (372) Total Assets 65,964 68,373 69,447 70,545 Exceptionals 2,281 2,002 0 0 ST Debt 2,197 0 0 5,200 Pre-Tax Profit 3,513 3,427 1,533 1,528 Creditors 1,270 1,280 1,280 1,280 Tax (208) (245) (215) (214) Other Current Liab 1,191 1,321 1,313 1,314 Non-Controlling Interests 0 0 0 0 LT Debt 12,309 14,739 14,739 9,539 Net Profit 3,305 3,182 1,318 1,314 Other LT Liabilities 529 498 498 498 Distribution income 1,146 1,331 1,365 1,366 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 48,468 50,535 51,616 52,714 Revenue Gth (%) 0 12 4 4 Total Capital 65,964 68,373 69,447 70,545 NPI Gth (%) (1) 14 4 4 Share Capital (m) 5,772 5,798 5,821 5,845 Dist. Inc Growth (%) (2) 16 3 0 Gross Debt (14,591) (14,841) (14,841) (14,841) DPU Growth (%) (3) 16 2 0 Working Capital (3,700) (1,323) (1,285) (6,444) Book NAV (HK$) 8.40 8.72 8.87 9.02 Gross Gearing (%) 22 22 21 21 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2015A 2016A 2017F 2018F FY Dec 2015A 2016A 2017F 2018F Pre-Tax Income 3,513 3,427 1,533 1,528 Revenues (HK$ m) Tax Paid (147) (179) (215) (214) Rental income 1,995 2,224 2,299 2,388 Depr/Amort 0 0 0 0 Carpark income 39 43 46 49 Chg in Wkg.Cap. (13) (57) 0 0 Building management fee 227 258 278 290 Other Non-Cash (2,151) (1,817) 114 119 Rental related income 29 32 33 35 Operational CF 1,203 1,373 1,432 1,433 Total 2,289 2,557 2,656 2,762 Net Capex (66) (57) (40) (39) Assoc, MI, Invsmt (216) 14 12 12 Investment CF (282) (43) (28) (27) Net Chg in Debt (109) 250 0 0 Key Assumptions (%) 2017F 2018F New issues/Unit Buyback 0 0 0 0 Distribution Paid (1,124) (1,230) (1,373) (1,365) Office rental - HK 3 3 Other Financing CF 0 (86) 0 0 Retail rental (High street shops) - HK (8) 0 Financing CF (1,233) (1,066) (1,373) (1,365) Retail rental (Shopping centre) - HK 0 2 Chg in Cash (312) 265 31 41 Source: Company, DBS Vickers Page 98 HK Property Sector Link REIT Bloomberg: 823 HK | Reuters: 823.HK Refer to important disclosures at the end of this report HOLD Sound operations but fairly valued Last Traded Price ( 12 Jul 2017): HK$58.90 (HSI : 25,341) Price Target 12-mth: HK$59.70 (1% upside) (Prev HK$58.00) • Retail reversionary growth shows no signs of moderation Potential Catalyst: Positive retail rental reversion & asset enhancement • Spotlight on pre-leasing of Mongkok project initiatives Where we differ: Market has similar DPU estimates for FY18-19. • HOLD with HK$59.70 TP Analyst Retail reversionary growth shows no sign of moderation. Jeff YAU CFA, +852 2820 4912 In FY17, Link REIT’s composite rental reversion remained strong [email protected] at 23.8%. For shops, rental reversion was similar at 23.4%. In Ian CHUI +852 2971 1915 the same period, its average monthly retail gross sales in Hong [email protected] Kong grew 4% on a psf basis given its emphasis on non- discretionary trades, outperforming the market by 7.6%. In particular, F&B tenants posted stronger-than-average sales growth of 6.9%. Therefore, rent-to-sales ratio, though Price Relative marginally higher than in FY16, remained healthy at 12.1% in FY17. This should provide scope for future reversionary growth. We expect its retail reversion rate to stay at c.20% in FY18. Elsewhere, EC Mall in Beijing and newly acquired Metropolitan Plaza in Guangzhou should achieve rental reversion of >20% in FY18. These should support revenue expansion. Spotlight on pre-leasing of Mongkok project. Pre-leasing of the tower portion of 700 Nathan Road in Mongkok is Forecasts and Valuation progressing well with 50% of floor area pre-committed or in FY Mar (HK$ m) 2016A 2017A 2018F 2019F final discussions. Targeted tenants include clinics, business Gross Revenue 8,740 9,255 9,822 10,676 Net Property Inc 6,513 6,994 7,483 8,234 centres, and co-working space operators. Tenants are expected Net Profit 16,295 17,711 5,398 5,884 to move in towards the end of 2017. The leasing progress on Distribution Inc 4,634 5,075 5,328 5,814 the retail portion is slower-than-expected with average rents DPU (HK$) 2.06 2.28 2.41 2.63 DPU Gth (%) 13 11 5 9 expected to fall short of the original guidance (HK$150psf), Div Yield (%) 3.5 3.9 4.1 4.5 given the fierce market competition in the neighbourhood. Link Gross Gearing (%) 16 16 18 17 REIT is currently in lease discussions with potential anchor Book Value (HK$) 56.79 62.47 66.32 70.54 P/Book Value (x) 1.0 0.9 0.9 0.8 tenants (Japanese/Korean fashion brands). The retail arcade is expected to open for business in 1H18. Earnings Rev (%): Nil Nil Consensus DPU (HK$): 2.42 2.60 HOLD with HK$59.70 TP. Link REIT offers distribution yields of Other Broker Recs: B: 7 S: 3 H: 7 4.1-4.5% for FY18-19. This translates into yield spread of 2.5- 2.9%, compared to its average of 2.4%. Valuation is not ICB Industry: Financials ICB Sector: REITs (HK) compelling despite the REIT’s sound fundamentals. Maintain Principal Business: Leasing of retail and car park facilities primarily HOLD with DDM-based TP of HK$59.70. in Hong Kong and engaging in property development Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX At A Glance Issued Capital (m shrs) 2,215 Mkt. Cap (HK$m/US$m) 130,438 / 16,696 Major Shareholders Blackrock, Inc. (%) 7.1 The Capital Group Companies, Inc. (%) 7.0 APG Asset Management N.V. (%) 5.1 Free Float (%) 100.0 3m Avg. Daily Val. (US$m) 33.8 Page 99 ed- JS / sa- AH HK Property Sector Link REIT Income Statement (HK$ m) Balance Sheet (HK$ m) FY Mar 2016A 2017A 2018F 2019F FY Mar 2016A 2017A 2018F 2019F Gross revenue 8,740 9,255 9,822 10,676 Fixed Assets 157,688 172,998 187,421 197,820 Property expenses (2,227) (2,261) (2,339) (2,443) Other LT Assets 1,740 1,677 1,678 1,677 Net Property Income 6,513 6,994 7,483 8,234 Cash & ST Invts 454 685 880 820 Other expenses (368) (342) (352) (363) Other Current Assets 3,570 580 590 600 Interest (Exp)/Inc (502) (563) (619) (773) Total Assets 163,452 175,940 190,568 200,917 Exceptionals 11,659 12,881 0 0 ST Debt 959 300 2,587 4,817 Pre-Tax Profit 17,302 18,970 6,512 7,098 Creditors 1,643 1,870 1,860 1,850 Tax (953) (1,057) (1,113) (1,213) Other Current Liab 1,785 1,876 1,906 1,936 Non-Controlling Interests (54) (202) 0 0 LT Debt 25,965 27,197 30,992 29,762 Net Profit 16,295 17,711 5,398 5,884 Other LT Liabilities 5,659 6,200 6,200 6,200 Distribution income 4,634 5,075 5,328 5,814 Non-Controlling Interests 54 256 256 256 Unitholders’ funds 127,387 138,241 146,767 156,096 Revenue Gth (%) 13 6 6 9 Total Capital 163,452 175,940 190,568 200,917 NPI Gth (%) 15 7 7 10 Share Capital (m) 2,243 2,213 2,213 2,213 Dist. Inc Growth (%) 11 10 5 9 Gross Debt (26,924) (27,497) (33,579) (34,579) DPU Growth (%) 13 11 5 9 Working Capital (363) (2,781) (4,883) (7,183) Book NAV (HK$) 56.79 62.47 66.32 70.54 Gross Gearing (%) 16 16 18 17 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Mar 2016A 2017A 2018F 2019F FY Mar 2016A 2017A 2018F 2019F Pre-Tax Income 17,302 18,970 6,512 7,098 Revenues (HK$ m) Tax Paid (726) (858) (1,113) (1,213) Retail and commercial 6,506 6,914 7,394 8,118 Depr/Amort 22 27 27 27 Car parks 1,846 1,940 2,012 2,127 Chg in Wkg.Cap. 188 243 10 10 Other revenues 388 401 416 431 Other Non-Cash (11,104) (12,305) 285 461 Total 8,740 9,255 9,822 10,676 Operational CF 5,682 6,077 5,720 6,382 Net Capex (9,578) 450 (5,307) (625) Assoc, MI, Invsmt 16 (28) (474) (474) Investment CF (9,562) 422 (5,781) (1,099) Net Chg in Debt 9,099 928 6,082 1,000 Key Assumptions (%) 2017F 2018F New issues/Unit Buyback (2,197) (1,697) 0 0 Retail rental (High street shops) - HK (8) 0 Distribution Paid (4,368) (4,898) (5,203) (5,566) Retail rental (Shopping centre) -HK 0 2 Other Financing CF (547) (624) (623) (777) Financing CF 1,987 (6,291) 257 (5,343) Chg in Cash (1,893) 208 195 (60) Source: Company, DBS Vickers Page 100 HK Property Sector Sunlight REIT Bloomberg: 435 HK | Reuters: 0435.HK Refer to important disclosures at the end of this report HOLD Office remains a bright spot Last Traded Price (7 Jul 2017): HK$5.01 (HSI: 25,341) Healthy office reversionary growth to continue Price Target 12-mth: HK$5.00 (0%) Retail properties to deliver mixed performance Potential Catalyst: Unit buyback HOLD with HK$5 TP Where we differ: Market has similar DPU estimates for FY17-18. Healthy office reversionary growth to continue. About Analyst Jeff YAU CFA, +852 2820 4912 58% of tenancies at Sunlight Tower are scheduled for renewal [email protected] in FY18. The largest tenant Anglo Eastern Shipping Ian CHUI +852 2971 1915 Management has already renewed its leases that will expire in [email protected] 1QFY18 at a favourable rental increment of c.12%. After taking up an additional floor which was previously occupied by Euromoney for in-house expansion in recent months, this tenant currently occupies >20% of GRA of Sunlight Tower. Price Relative With spot rate increasing modestly to HK$40psf and expiring HK$ Relative Index 216 rent of HK$35psf, Sunlight Tower should see healthy rental 5.5 196 5.0 reversion of 12-13% in FY18. Elsewhere, rental reversion for 176 4.5 156 Grade B offices in Sheung Wan/Central should stay steady at 4.0 136 3.5 116 >10%, thanks to solid demand for affordable office 3.0 96 accommodation among small- to medium-sized firms. 2.5 76 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 At Sheung Sunlight REIT (LHS) Relative HSI (RHS) Retail properties to deliver mixed performance. Shui Centre Shopping Centre, Sunlight REIT is in leasing Forecasts and Valuation discussions with prospective tenants for the ground-floor space FY Jun (HK$ m) 2015A 2016A 2017F 2018F Gross Revenue 754 770 785 817 (3,100sf or 2.6% of GRA) surrendered by a banking tenant in Net Property Inc 587 608 618 645 3QFY17 prior to the lease expiry. A one-off rental Net Profit 1,903 825 380 412 Distribution Inc 360 398 412 444 compensation arising from its early lease termination should be DPU (HK$) 0.22 0.24 0.25 0.27 recognised in 2HFY17. Sunlight REIT is still securing tenants for DPU Gth (%) 10 10 4 7 the refurbished space in Sheung Shui Centre Shopping Arcade Div Yield (%) 4.4 4.9 5.0 5.4 Gross Gearing (%) 22 22 21 21 which has yet to be fully let. Take-up rate appears slower than Book Value (HK$) 7.99 8.26 8.48 8.72 what we previously anticipated. Metro City Ph 1 property which P/Book Value (x) 0.6 0.6 0.6 0.6 serves the daily needs of residents nearby should see rental Earnings Rev (%): Nil Nil growth of 8-10% on renewal while Beverly Commercial Centre Consensus DPU (HK$): 0.25 0.27 property continues to suffer from negative reversionary growth. Other Broker Recs: B: 1 S: 0 H: 1 HOLD with HK$5.0 TP. Sunlight REIT offers distribution yields ICB Industry: Financials of 5-5.4% for FY17-18, near the low end of its trading range. REITs (HK) ICB Sector: We maintain our HOLD call with HK$5.0 TP. YTD, Sunlight REIT Principal Business: Leasing of office and retail properties in Hong Kong has repurchased 2.7m units for HK$13m or HK$4.86 on Source of all data on this page: Company, DBSV, Thomson Reuters, average, thus supporting the unit price. HKEX At A Glance Issued Capital (m shrs) 1,638 Mkt. Cap (HK$m/US$m) 8,205 / 1,050 Major Shareholders Shau Kee Financial Enterprises (%) 23.0 Henderson Land (%) 14.2 Silchester International Investors Limited (%) 16.0 Free Float (%) 46.8 3m Avg. Daily Val. (US$m) 0.4 Page 101 ed-TH / sa- AH HK Property Sector Sunlight REIT Income Statement (HK$ m) Balance Sheet (HK$ m) FY Jun 2015A 2016A 2017F 2018F FY Jun 2015A 2016A 2017F 2018F Gross revenue 754 770 785 817 Fixed Assets 16,193 16,651 17,066 17,533 Property expenses (168) (161) (167) (172) Other LT Assets 206 105 105 105 Net Property Income 587 608 618 645 Cash & ST Invts 464 1,135 1,095 1,102 Other expenses (109) (98) (100) (103) Other Current Assets 1,034 34 34 34 Interest (Exp)/Inc (107) (119) (78) (62) Total Assets 17,898 17,925 18,300 18,773 Exceptionals 1,597 504 0 0 ST Debt 10 0 0 0 Pre-Tax Profit 1,968 894 440 481 Creditors 310 69 69 69 Tax (65) (69) (60) (69) Other Current Liab 305 276 281 286 Non-Controlling Interests 0 0 0 0 LT Debt 3,884 3,896 3,896 3,896 Net Profit 1,903 825 380 412 Other LT Liabilities 292 166 166 166 Distribution income 360 398 412 444 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 13,097 13,518 13,888 14,357 Revenue Gth (%) 10 2 2 4 Total Capital 17,898 17,925 18,300 18,773 NPI Gth (%) 10 4 2 4 Share Capital (m) 1,638 1,636 1,638 1,647 Dist. Inc Growth (%) 11 11 4 8 Gross Debt (3,894) (3,896) (3,896) (3,896) DPU Growth (%) 10 10 4 7 Working Capital 875 824 779 781 Book NAV (HK$) 7.99 8.26 8.48 8.72 Gross Gearing (%) 22 22 21 21 Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Jun 2015A 2016A 2017F 2018F FY Jun 2015A 2016A 2017F 2018F Pre-Tax Income 1,968 894 440 481 Revenues (HK$ m) Tax Paid (53) 81 (60) (69) Rental income 604 618 631 655 Depr/Amort 0 0 0 0 Carpark income 34 29 31 33 Chg in Wkg.Cap. 14 (139) 5 5 Rental-related income 117 123 123 129 Other Non-Cash (1,447) (341) 120 106 Total 754 770 785 817 Operational CF 482 496 506 523 Net Capex 66 791 (30) (30) Assoc, MI, Invsmt 103 (68) 9 9 Investment CF 170 723 (21) (21) Net Chg in Debt 10 (32) 0 0 Key Assumptions (%) 2017F 2018F New issues/Unit Buyback (3) (55) (38) 0 Distribution Paid (341) (385) (401) (424) Office rental - HK 3 3 Other Financing CF (99) (90) (87) (71) Retail rental (High street shops) - HK (8) 0 Financing CF (433) (562) (525) (495) Retail rental (Shopping centre) - HK 0 2 Chg in Cash 219 657 (40) 7 Source: Company, DBS Vickers Page 102 China / Hong Kong Industry Focus HK Property Sector This page has been left blank intentionally VICKERS SECURITIES Page 103 China / Hong Kong Industry Focus HK Property Sector DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) * Share price appreciation + dividends Completed Date: 14 Jul 2017 08:01:36 (HKT) Dissemination Date: 14 Jul 2017 15:44:14 (HKT) Sources for all charts and tables are DBS Vickers unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSV HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Bank (Hong Kong) Limited (DBS HK), DBSV HK, and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSV HK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. VICKERS SECURITIES Page 104 China / Hong Kong Industry Focus HK Property Sector ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in Cheung Kong Property Holdings Limited (1113 HK), Henderson Land Development Company Limited (12 HK), Mtr Corporation Limited (66 HK), New World Development Company Limited (17 HK), Sun Hung Kai Properties Limited (16 HK), Hysan Development Company Limited (14 HK), The Wharf Holdings Limited (4 HK), Langham Hospitality Investment Limited (1270 HK) and Yuexiu Real Estate Investment Trust (405 HK) recommended in this report as of 12 Jul 2017. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have a proprietary position in Hongkong Land Holdings Limited (HKL SP) recommended in this report as of 30 Jun 2017. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Yuexiu Real Estate Investment Trust (405 HK) recommended in this report as of 12 Jul 2017. 4. DBS Bank Ltd, DBS HK, DBSVS, DBS Vickers Securities (USA) Inc ("DBSVUSA"), DBSV HK or their subsidiaries and/or other affiliates beneficially own a total of 1% of the issuer's market capitalization of Yuexiu Real Estate Investment Trust (405 HK) as of 12 Jul 2017. 5. Compensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from MTR Corporation Limited (66 HK), Far East Consortium International Limited (35 HK), Regal Hotels International Holdings Limited (78 HK) and CSI Properties Limited (497 HK) as of 30 Jun 2017. 6. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for MTR Corporation Limited (66 HK), Far East Consortium International Limited (35 HK), Regal Hotels International Holdings Limited (78 HK) and CSI Properties Limited (497 HK) in the past 12 months, as of 30 Jun 2017. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 7. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. VICKERS SECURITIES Page 105 China / Hong Kong Industry Focus HK Property Sector RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946. 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Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Vickers (Hong Kong) Limited 18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523 Company Regn. No. 31758 VICKERS SECURITIES Page 107 China / Hong Kong Industry Focus HK Property Sector Asian Equities Sales, Sales Trading and Research Contacts Sales Heads Tel: Email: Singapore Kenneth Tang 65-6398 6951 [email protected] Hong Kong Andrew Au 852-2820 4992 [email protected] Hong Kong Christy Lam 852-2971-1939 [email protected] London Graham Booth 44-20-7618 1881 [email protected] New York Elaine Yu 1-212-826 3553 [email protected] Thailand Narisara Viseskosin 662-657 7759 [email protected] Indonesia Ricardo Silaen, CFA 6221 3003 4911 [email protected] Sales Trading Contacts Tel: Email: Singapore Vivian Goh 65-6398 6927 [email protected] Hong Kong Franco Law 852-2971 1828 [email protected] London Charles Davies 44-20-7618 1883 [email protected] New York Brenda Wong 1-212-826 3558 [email protected] Research Contacts Tel: Email: Regional Timothy Wong 65-6682 3691 [email protected] Singapore Janice Chua 65-6682 3692 [email protected] Hong Kong Carol Wu 852-2863 8841 [email protected] Malaysia Wong Ming Tek 603-2604 3970 [email protected] Thailand Chanpen Sirithanarattanakul 662-657 7824 [email protected] Indonesia Maynard Priajaya Arif 6221 3003 4930 [email protected] DBS V ickers Securities - Regional Offices HONG KONG MALAYSIA SINGAPORE DBS V ickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose 12 Marina Boulevard 68 Des V oeux Road Central Capital Square, 8 Jalan Munshi Abdullah Level 40 Central, Hong Kong 50100 Kuala Lumpur Marina Bay Financial Centre Tel: 852-2820 4888 Tel: 603 2604 3333 Tower 3, Singapore 018982 Fax: 852-2868 1523 Fax: 603 2604 3921 Tel: 65-6878 8888 Participant of The Stock Exchange of Hong Kong Limited INDONESIA UNITED STATES UNITED KINGDOM PT DBS V ickers Securities (Indonesia) DBS V ickers Securities (USA) Inc DBS V ickers Securities (UK) Ltd DBS Bank Tower 777 Third Avenue 4th Floor Paternoster House Ciputra World 1, 32/F Suite 26A 65 St Paul's Churchyard Jl. Prof. Dr. Satrio Kav. 3-5 New York, New York 10017 London EC4M 8AB Jakarta 12940, Indonesia Tel: 1-212-826 1888 Tel: 44-20-7618 1888 Tel: 62-21- 3003 4900 Fax: 1-212-826 8704 Fax: 44-20-7618 1900 Fax: 62-21- 3003 4943 Member of FINRA and SIPC Regulated by The Financial Services Authority THAILAND DBS V ickers Securities (Thailand) Co, Ltd 989 Siam Piwat Tower Building, 9th, 14th-15th Floor, Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 657 7831 Fax: 66 2 658 1269 VICKERS SECURITIES Page 108