HONG KONG Cheung Kong Property 1113 HK Outperform Portfolio management, in a global context Price (at 08:09, 12 Aug 2016 GMT) HK$54.85 Valuation HK$ 91.84 Event - DCF 12-month target HK$ 67.00 . Same investment philosophy, but now entering into a global spectrum. Upside/Downside % +22.2 Unlike most of its local peers, CK Property (CKOP) has one of the most 12-month TSR % +25.4 sophisticated and experienced management teams concerning overseas Volatility Index Medium investment. With an ample war-chest of HK$50bn and net gearing of ~3%, GICS sector Real Estate CKOP has been actively pursuing overseas investments, in order to enhance Market cap HK$m 210,898 its growth visibility. For example, Cheung Kong consortium’s bid for London Market cap US$m 27,191 City Airport at a ~£2bn valuation in February this year, albeit unsuccessful, Free float % 70 shows its intention to increase its global footprint. 30-day avg turnover US$m 42.9 . Solid in China/HK business. China offered the biggest surprise with better- Number shares on issue m 3,845 than-expected 1H16 contracted sales of HK$21.5bn (2015A: HK$25bn). Investment fundamentals China saleable resources should be more than enough to sustain sales for the Year end 31 Dec 2015A 2016E 2017E 2018E next six years, offsetting the potential slippage in HK due to limited land bank Revenue m 57,280 66,412 70,831 73,127 EBIT m 21,610 26,744 29,552 28,994 replenishment. The Hong Kong rental business remains largely resilient, but EBIT growth % 7.2 23.8 10.5 -1.9 hotel still faces challenges. We raise our TP by 1.0% to HK$67.0 to reflect Reported profit m 17,113 19,813 20,576 19,086 Adjusted profit m 15,568 19,250 19,948 19,037 better-than-expected China sales. Reiterate Outperform. EPS rep HK$ 4.43 5.14 5.34 4.96 EPS rep growth % -67.7 15.9 3.9 -7.1 Impact EPS adj HK$ 4.03 4.99 5.18 4.95 EPS adj growth % -6.7 23.8 3.7 -4.4 . Harvesting in China. We raise our 2016E China contracted sales by 30% to PER rep x 12.4 10.7 10.3 11.1 HK$35bn (1H16A: HK$22bn) from our earlier bullish assumption of HK$27bn. PER adj x 13.6 11.0 10.6 11.1 Total DPS HK$ 1.40 1.75 1.87 1.88 Its diversified portfolios in tier 1/2 cities continue to deliver in line with the Total DPS growth % nmf 25.1 6.6 0.7 China physical market recovery. Key contributors are Nanjing Emerald City Total div yield % 2.6 3.2 3.4 3.4 ROA % 5.5 7.2 7.7 7.2 (HK$3.7bn), Qingdao The Harbourfront (HK$3.4bn), Beijing La Grande Ville ROE % 6.4 7.1 7.0 6.4 (HK$2.9bn), and Dongguan Laguna Verona (HK$2.8bn). EV/EBITDA x 9.7 7.7 7.0 7.1 Net debt/equity % 5.6 -1.4 -11.2 -16.2 . What can we expect in new business opportunities? The new business P/BV x 0.8 0.8 0.7 0.7 opportunities underpin the following investment criteria: 1) generating stable 1113 HK rel HSI performance, & rec income and providing a steady stream of liquidity in the long term; 2) providing history income in the short to medium term, and enhancing overall profitability; and 3) strengthening further the Group’s dividend distribution capability. It will meet the objective of generating revenue from different sources to balance the cyclical impact on cash flows associated with property development. 2016E dividend yield of 3.2% based on 35% payout. During the group restructuring announcement in Jan-15, the company said it expects FY16 payout ratio to be higher than FY15 (2015A: 34.7%). However, we believe some investors are confused about its 2016E dividend as consensus’ 1H16 Note: Recommendation timeline - if not a continuous line, then there was no estimates vary between HK$1.40 and HK$2.00; CKOP increased its interim Macquarie coverage at the time or there was an embargo period. dividend by 8.6% YoY to HK$0.38/sh in 1H16. Source: FactSet, Macquarie Research, August 2016 (all figures in HKD unless noted) Earnings and target price revision . Adjusted earnings: FY17E +5.7%. TP increased by 1.0% to HK$67.00 and NAV increased by 3.6% to HK$91.84/sh to reflect higher ASPs and sales assumptions of China projects Analyst(s) Raymond Liu, CFA Price catalyst +852 3922 3629 [email protected] David Ng, CFA . 12-month price target: HK$67.00 based on a Sum of Parts methodology. +852 3922 1291 [email protected] Catherine Li . Catalyst: Successful overseas expansion and disposal of en bloc project +852 3922 1161 [email protected] Action and recommendation 15 August 2016 Macquarie Capital Limited . CKOP is one of our top picks in HK property. It trades at 10.6x FY17E PE, 0.8x PB and a 40% NAV discount. Maintain Outperform. Please refer to page 20 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research Cheung Kong Property NAV discount at 40% (25-56% range) CK Property trades at a NAV discount of 40%, based on our estimate of HK$91.84/sh, in contrast to the 36% NAV discount of Sun Hung Kai Properties (16 HK, HK$111.30, Outperform, TP: HK$132.00). Its highest NAV discount was 56% in February 2016 and the lowest was 25% in June 2015, post the group restructuring last year. As a secondary reference, CK Property released its NAV estimate of HK$98.64/sh during Cheung Kong Group’s restructuring in early 2015. NAV discount of Sun Hung Kai Properties the best proxy We believe the NAV discount of Sun Hung Kai Properties is the best proxy for CK Property. Both are leading property companies in Hong Kong and their valuations now largely pertain to their property businesses. CKOP has a very short history since its spin-off as a pure property play from Cheung Kong Hutchison (1 HK, HK$95.75, Outperform, TP: HK$100.63, David Ng) in May 2015. Historical NAV pattern of Cheung Kong (1 HK) no longer a good reference Before 2012, Cheung Kong generally traded at a higher discount to Sun Hung Kai due to its associate Hutchison Whampoa’s 10-15% discount. But as the Hutchison business has improved and the restructuring got underway, Cheung Kong has traded at a lower discount (since late 2012). Fig 1 NAV discounts of CK Property and Sun Hung Kai move largely in tandem post restructuring since May 2015 40% CK Property (1113 HK) NAV discount: 40% Sun Hung Kai (16 HK) 20% NAV discount: 36% 10-year average: 23% -1 S.D. : 39% +1 S.D.: 7% 0% -20% -40% Apr 03 Oct 08 -60% 48% NAV discount 45% NAV discount Aug 98 66% NAV discount -80% Dec 88 Dec 90 Dec 92 Dec 94 Dec 96 Dec 98 Dec 00 Dec 02 Dec 04 Dec 06 Dec 08 Dec 10 Dec 12 Dec 14 Sun Hung Kai (16 HK) Avg -1 S.D. +1 S.D. Cheung Kong (1 HK, before restructuring) CK Property (1113 HK) Source: Bloomberg, Macquarie Research, August 2016 Fig 2 Share price performances of CK’s sister companies since Jun-15 (CK Hutchison, CK Infrastructure and CK Property) 130% 120% 110% 100% Brexit event in Jun 2016 90% 80% 70% 60% 50% May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 CK Hutchison (1 HK) CK Property (1113 HK) CK Infrastructure (1038 HK) Source: Bloomberg; Macquarie Research, August 2016; Index base of 100% by the end of May 2015 15 August 2016 2 Macquarie Research Cheung Kong Property Stable and increasing dividends Investors looking for dividend yield and conviction In an ultra low interest rate environment amid an influx of liquidity, investors are actively looking for a sustainable business with stable and reasonable yields. We believe CKOP’s inconsistent dividend yields and consensus’ wide range of 2016 estimates (HK$1.40-2.00/sh, 2.6-3.6% yields) cause some investor concerns, which we believe are unjustified. 2016E dividend payout ratio of 35% We expect the company’s 2016E DPS to be HK$1.75, or a 3.2% dividend yield based on a 35% payout ratio. We expect its payout ratio to increase gradually in coming years. The company increased its interim dividend by 8.6% YoY to HK$0.38/sh in 1H16. An unjustified range: consensus’ 2016E DPS range is HK$1.40-2.00 Bloomberg consensus’ estimates indicate that its major peers’ dividend ranges are much smaller, with Sun Hung Kai Properties at HK$3.45-3.83/sh (3.1-3.4% yield) and Wharf at HK$1.90-2.03/sh (3.5-3.7% yield). CK Property’s dividend policy: Payout ratios to rise At the announcement of group restructuring in Jan-15, the company stipulated a clear dividend policy: “For FY2016 and after, subject to business conditions and maintenance of a strong credit profile, each of CKH Holdings and CK Property expects its dividend policy to result in a higher dividend payout ratio than that in financial year 2015.” Dividend payout ratio in 2015 was 34.7%.