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04 June 2015 Asia Pacific/Hong Kong Equity Research Real Estate Management & Development Cheung Kong Property (1113.HK / 1113 HK) Rating OUTPERFORM* [V] Price (03 Jun 15, HK$) 74.10 INITIATION Target price (HK$) 86.00¹ Upside/downside (%) 16.1 Mkt cap (HK$ mn) 286,002 (US$36,887) Property giant with quality Enterprise value (HK$ mn) 333,663 Number of shares (mn) 3,859.68 Free float (%) 69.8 ■ We initiate coverage on CKP with an OUTPERFORM rating and HK$86 52-week price range 74.1 - 74.1 target price (16% potential upside), based on 21% target discount to FY15E ADTO - 6M (US$ mn) 832.5 NAV of HK$109.1/share – narrower than the current sector average of 32%. *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. CKP is one of the largest property companies in the world in terms of NAV and ¹Target price is for 12 months. market cap. 27% of CKP's assets are in HK investment properties (IP), and it [V] = Stock considered volatile (see Disclosure Appendix). is the second-largest Central office landlord. While the sector is currently on Research Analysts an upcycle, CKP has more upside than its peers, in our view, given the room Joyce Kwock for NAV accretion via upgrade, redevelopment or divestment of its Central 852 2101 7496 [email protected] office portfolio. Jinsong Du ■ CKP in China warrants a narrower discount to NAV. According to the 852 2101 6589 [email protected] updated proprietary study by Credit Suisse on HK developers in China, first published in January 2014, CKP stands out from HK peers, as its property exposure in China is heavily geared towards development properties (DP), which deserve a narrower discount. It also stands out from its China peers given its lower fundraising risk and margin volatility, while it has an equally long-established track record and geographical diversity in its China operation. ■ 17% IRR from HK$10 bn annual landbanking in HK. With low gearing and strong recurring income base, as well as its absence from the land sale market in HK for the past 2.5 years, CKP is ready to gear itself to replenish its landbank. By spending HK$10 bn per year on landbanking to regain its market share in HK, 17% IRR can be generated—assuming a 25% margin. ■ Investment risks. The key risks to our view are: (1) the interest rate trend that drives the cap rate and the HK residential market's sentiment and (2) the volatility of China property market driven by economy and policies. Share price performance Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Price (LHS) Rebased Rel (RHS) Revenue (HK$ mn) 46,606.0 64,929.2 77,956.0 90,742.3 10 120 EBITDA (HK$ mn) 20,974.0 26,156.8 35,575.3 37,762.2 8 110 EBIT (HK$ mn) 20,345.0 25,527.8 34,946.3 37,133.2 100 Net attributable profit (HK$ mn) 19,304.0 21,844.4 25,988.1 27,648.8 6 90 EPS (CS adj.) (HK$) 5.00 5.66 6.73 7.16 4 80 Change from previous EPS (%) n.a. Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Consensus EPS (HK$) n.a. — — — The price relative chart measures performance against the EPS growth (%) n.a. 13.2 19.0 6.4 HANG SENG INDEX which closed at 27657.47 on 03/06/15 P/E (x) 14.8 13.1 11.0 10.3 On 03/06/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 3.4 3.8 4.5 4.8 EV/EBITDA (x) 12.9 12.8 9.7 9.2 Performance over 1M 3M 12M ROE (%) 8.7 9.0 9.7 9.9 Absolute (%) 2.3 13.0 26.2 Net debt/equity (%) Net cash 18.0 21.3 20.9 Relative (%) 3.9 -1.4 7.4 NAV per share (HK$) — 109 — — Disc./(prem.) to NAV (%) — 32.1 — — Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 04 June 2015 Focus charts and tables Figure 1: Breakdown of HK$420 bn property valuation by Figure 2: CKP is the 2nd largest office landlord in geography as at 28 February 2015 Central—and the Central office is on an up-cycle now 6.0 5.2 Overseas 5.0 HK$13bn 3% 4.0 China 3.2 HK$138bn 33% 3.0 2.2 1.9 Hong Kong 2.0 1.6 HK$269bn 64% 1.0 0.0 HK Land CKP Swire SHKP / Champion REIT Henderson Source: Company data Source: Company data, Credit Suisse estimates Note: The chart illustrates the Central office portfolio GFA in mn sq ft, by the major Central office landlords Figure 3: CKP deserves a narrower discount to its HK Figure 4: CKP's landbanking history in China—lower fund- peers, with its substantial exposure to China business raising and inventory risks, and profit margin volatility 25.0 avg land cost 120 Most aggressive at only RMB 19.7 landbanking in 20.0 238psf 100 17.4 2004- 2007 80 15.0 11.7 10.2 60 10.0 early landbanking 6.6 5.5 history 40 5.0 3.4 20 0.0 0 CKP NWD Kerry Wharf SHKP 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 HKLand Henderson Total landbank balance New land acquisitions during the year Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Note: the chart illustrates development landbank in China in mn sq m, by major HK property companies Figure 5: 17% IRR for CKP's HK$10 bn landbanking in HK Figure 6: CKP's major earnings contributor and growth driver is property sales; a comparison with SHKP (in HK$mn) Year 0 Year 1 Year 2 Year 3 (EBIT HK$mn) 3Y (2015-17E) 5Y (2015-19E) Sales Proceeds 0 0 18,182 4,545 Property Sales as % of total CAGR as % of total CAGR Land cost -10,000 0 0 0 CKP 71% 35% 74% 27% SHKP 56% 32% 64% 29% Construction cost 0 -2,121 -2,121 -2,121 Property rental Financing cost 0 -800 -200 0 CKP 21% 13% 18% 12% Marketing cost and others 0 0 -818 0 SHKP 40% 2% 33% 2% Cashflow -10,000 -2,921 15,042 2,424 Hotel operation Discounted cashflow -10,000 -2,730 13,139 1,979 CKP 9% 9% 8% 7% NAV accretion 2,387 SHKP 4% 10% 4% 8% Total IRR 17% CKP 100% 23% 100% 19% SHKP 100% 18% 100% 17% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Cheung Kong Property (1113.HK / 1113 HK) 2 04 June 2015 Property giant with quality More upside than other Central office landlords CKP is one of the largest property companies in Hong Kong-China and globally in terms of CKP is one of the largest net asset value (NAV) and market cap. It has a leading market share in Hong Kong, strong property companies in Hong penetration in China, and projects in Singapore and the UK. CKP has a HK$420 bn Kong-China and globally in property portfolio, and stakes in listed REITs that are worth HK$16 bn. terms of net asset value (NAV) and market cap. It 27% of CKP's assets are in HK investment properties, including four Grade-A office has a HK$420 bn property buildings located in Central, making CKP the second-largest Central office landlord after portfolio, and stakes in listed Hongkong Land. While the sector is currently on an upcycle, CKP has more upside than REITs that are worth HK$16 its peers, given the potential for NAV accretion via asset enhancement initiatives (AEI), bn. redevelopment or the divestment of Hutchison House and China Building. We assign a 15% target discount to CKP's HK IP while deriving our SOTP-based target price. CKP in China warrants a narrower discount to NAV CKP has been in the China property business since the 1980s and has approximately 210 mn According to our updated sq ft landbank in the country. The company stands out from HK peers, as its property proprietary study on Hong exposure in China is heavily geared towards DP, which deserves a narrower discount. Kong developers in China, CKP has an early According to the updated proprietary study by Credit Suisse on Hong Kong developers in landbanking history in China China, first published in January 2014, CKP has an early landbanking history in China since 2001, and the average since 2001, and the average land cost is only Rmb238 psf—this also warrants CKP a land cost is only Rmb238 stronger holding power against cyclicality. CKP also has virtually no fundraising risk, given psf its strong balance sheet. We assign a 20% target discount to CKP's China property assets, while deriving our SOTP-based target price.

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