Equity Research 28 October 2013
Hong Kong Property Not crying wolf
Barclays Capital Inc. and/or one of its affiliates 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. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 132. Barclays | Hong Kong Property
HONG KONG PROPERTY
Not crying wolf Asia ex-Japan Real Estate First real downturn since 1998, home prices to fall 30% by end-2015E: We initiate Industry view: NEGATIVE coverage of the Hong Kong property sector with a negative view. We believe the property From Neutral market is about to enter its first real downturn since 1998 and we expect home prices to drop by at least 30% by the end of 2015. While we believe consensus also expects prices to decline, we think the magnitude of the fall is underestimated, as are the potential Paul Louie knock-on effects on commercial property. We expect a synchronised downturn, with +852 2903 4545 office prices falling by 20%, while retail properties escape with just zero growth through [email protected] end-2015E. Among the 14 stocks on which we initiate coverage, we rate eight UW, four Barclays Bank, Hong Kong EW and only two OW. Our UW-rated stocks are: SHKP, NWD, Sino, Kerry, Midland, Wharf, Swire Prop and HKL. Our negative view on Hong Kong causes us to also downgrade our Zita Qin Asia ex-Japan Real Estate industry view to Negative from Neutral. +852 2903 4450 [email protected] Why 30% and why now? Although there have been previous calls for a property market Barclays Bank, Hong Kong correction, the key questions remain: “How much?” and “Why now?”
How much? We believe property prices are always set by the marginal buyer. Our analysis of the home price-to-income multiple, the buy-vs-rent cash flow equation and the opportunity costs of holding a property suggest that home prices should correct by at least 30%. With home prices up 111% since end-2008, we believe there is significant scope for owners to take profit on their property holdings.
Why now? While the market waits for interest rates to trigger a correction, we see other important catalysts: 1) household income growth is stalling; 2) rents are hitting the income ceiling; 3) supply is exceeding demand; and 4) developers are speeding up presales. As developers and homeowners adjust their opportunity cost expectations from a rising to a falling market, a downward spiral of home prices is likely.
Stock selection: First pain, then gain: With property stocks being macro-driven, during the initial home price correction we believe the right strategy is to underweight the sector. As past cycles suggest, property stocks can rebound significantly as physical prices bottom, but we believe this is premature and the time to bargain hunt can wait.
Screen for maximum defensiveness: We recommend investors focus on companies with: 1) overseas/non-property exposure; 2) cashed up balance sheets; 3) short-duration/high- margin landbanks; and 4) depressed valuations. After screening for these factors, Cheung Kong and Hang Lung Properties are our only OWs. We expect our eight UW-rated stocks to fall by an average of 16% to our 12-month PTs.
Risks to our negative outlook: Key upside risks include: 1) pre-emptive unwinding of the various property cooling measures; 2) additional quantitative easing and stimulus in the US causing 10-year Treasury yields to fall back below 2.0%; and 3) a significant rally in Chinese equities, which could trigger a re-rating for Hong Kong stocks, including property.
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Summary of our Ratings, Price Targets and Earnings Estimates in this Report
Company Rating Price Target EPS FY1 (E) EPS FY2 (E)
Old New Date Price Old New %Chg Old New %Chg Old New %Chg
Asia ex-Japan Real Estate Neu Neg Champion REIT (2778 HK / 2778.HK) N/A EW 23-Oct-2013 3.47 N/A 3.31 - N/A 0.23 - N/A 0.16 - Cheung Kong (Holdings) Ltd. (1 HK / 0001.HK) N/A OW 23-Oct-2013 122.40 N/A 135.00 - N/A 12.08 - N/A 11.81 - Hang Lung Properties Ltd. (101 HK / 0101.HK) N/A OW 23-Oct-2013 25.55 N/A 27.95 - N/A 0.88 - N/A 1.58 - Henderson Land Development Co., Ltd. (12 HK / 0012.HK) N/A EW 23-Oct-2013 46.45 N/A 46.70 - N/A 3.10 - N/A 3.38 - Hongkong Land Holdings Ltd. (HKL SP / HKLD.SI) N/A UW 23-Oct-2013 6.26 N/A 5.59 - N/A 0.40 - N/A 0.39 - Hysan Development Co., Ltd. (14 HK / 0014.HK) N/A EW 23-Oct-2013 35.85 N/A 33.32 - N/A 1.93 - N/A 2.03 - Kerry Properties Ltd. (683 HK / 0683.HK) N/A UW 23-Oct-2013 33.30 N/A 28.06 - N/A 3.02 - N/A 2.31 - Link REIT (823 HK / 0823.HK) N/A EW 23-Oct-2013 38.90 N/A 37.94 - N/A 1.58 - N/A 1.69 - Midland Holdings Ltd. (1200 HK / 1200.HK) N/A UW 23-Oct-2013 3.05 N/A 2.25 - N/A -0.35 - N/A -0.05 - New World Development Co., Ltd. (17 HK / 0017.HK) N/A UW 23-Oct-2013 10.96 N/A 8.52 - N/A 1.17 - N/A 1.12 - Sino Land Co., Ltd. (83 HK / 0083.HK) N/A UW 23-Oct-2013 11.18 N/A 9.69 - N/A 0.91 - N/A 1.08 - Sun Hung Kai Properties Ltd. (16 HK / 0016.HK) N/A UW 23-Oct-2013 101.60 N/A 84.00 - N/A 6.89 - N/A 7.17 - Swire Properties Ltd. (1972 HK / 1972.HK) N/A UW 23-Oct-2013 21.45 N/A 18.65 - N/A 0.97 - N/A 1.13 - Wharf (Holdings) Ltd. (4 HK / 0004.HK) N/A UW 23-Oct-2013 67.65 N/A 59.50 - N/A 3.74 - N/A 3.80 - Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency. FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research. Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended Industry View: Pos: Positive; Neu: Neutral; Neg: Negative
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CONTENTS
INVESTMENT SUMMARY ...... 4
PHYSICAL MARKET OUTLOOK ...... 9
IS THE POTENTIAL DROP PRICED IN? TWO COMMON MISCONCEPTIONS ...... 22
IS IT PRICED IN? SHARE PRICE PERFORMANCE AND VALUATIONS . 28
STOCK SELECTION: FIRST PAIN, THEN GAIN ...... 33
STOCK PICKS: CK AND HLP, MOST DEFENSIVE ...... 41
KEY INVESTMENT RISKS ...... 44
DISCOUNTS TO NAV ...... 45
COMPANIES ...... 50
CHEUNG KONG (1 HK; OW; PT HKD135.00; +10%) ...... 51
HENDERSON LAND (12 HK; EW; PT HKD46.70, +1%) ...... 56
SUN HUNG KAI PROPERTIES (16 HK; UW; PT HKD84.00; -17%) ...... 61
NEW WORLD DEVELOPMENT (17 HK; UW; PT HKD8.52, -22%) ...... 66
SINO LAND (83 HK; UW; PT HKD9.69; -13%) ...... 71
HANG LUNG PROPERTIES (101 HK; OW; PT HKD27.95; +9%) ...... 76
KERRY PROPERTIES (683 HK; UW; PT HKD28.06; -16%) ...... 81
MIDLAND HOLDINGS (1200 HK; UW; PT HKD2.25; -26%) ...... 86
WHARF HOLDINGS (4 HK; UW; PT HKD59.50; -12%) ...... 90
HYSAN DEVELOPMENT (14 HK; EW; PT HKD33.32; -7%) ...... 95
SWIRE PROPERTIES (1972 HK; UW; PT HKD18.65; -13%) ...... 100
HONGKONG LAND (HKLD.SI; UW; PT USD5.59; -11%) ...... 105
LINK REIT (823 HK; EW; PT HKD37.94; -2%) ...... 110
CHAMPION REIT (2778 HK; EW; PT HKD3.31; -5%) ...... 115
APPENDIX ...... 120
28 October 2013 3 Barclays | Hong Kong Property
INVESTMENT SUMMARY
Not crying wolf We initiate coverage of the Hong Kong property sector with a negative view. We believe the Hong Kong property market is about to enter its first real downturn since 1998 and we expect home prices to drop by at least 30% by the end of 2015. While the market consensus view is also for prices to decline, we believe consensus has underestimated the magnitude of the fall, as well as the potential knock-on effects that a fall in residential prices will have on the commercial property sector. As past cycles have shown, housing, office and retail property prices tend to be highly correlated, and we expect a synchronised downturn. Our forecast is for office prices to fall by 20% and retail prices to escape the worst, with zero growth, by end-2015E.
With property stocks being macro-driven, during the initial home price correction we believe the right strategy is to underweight the sector. We recommend investors screen for maximum defensiveness. Among the 14 stocks on which we initiate, we rate eight UW, four EW and only two OW (Cheung Kong and Hang Lung Properties). Given our negative view on Hong Kong property, we also downgrade our Asia ex-Japan Real Estate industry view to Negative from Neutral.
Why a 30% decline, and why now? Although there have been previous calls for a property market correction, what has always been important are the answers to “How much?”, “Why now?” and “Is it priced in?”
Why would home prices drop 30% and not 15%? We believe property prices are always set by the marginal buyer, in this case, the end-user. In our view, the risk from rising interest rates is an obvious and well understood catalyst for a fall in property prices, and the consensus forecast of a 15% home price correction (which is our assessment of where market consensus is1) essentially reflects the mathematical impact from a 200bp increase in Hong Kong mortgage rates.
FIGURE 1 FIGURE 2 Barclays Research: Hong Kong property price forecasts Hong Kong property Home Price Index – forecast decline
Change in price (Dec on Dec) 2014E 2015E 2014-15E 140
Mass housing -18% -15% -30% 120 Grade A office - Central -10% -10% -20% 100 Grade A office - Overall -10% -10% -20% 80 Retail 0% 0% 0% 60 30% home price Change in rents (Dec on Dec) 2014E 2015E 2014-15E 40 drop to return HK home prices back 20 Mass housing -8% -8% -14% to October 2010 Grade A office - Central -5% -5% -10% 0 94 96 00 02 04 08 10 12 14 Grade A office - Overall -5% -5% -10% 98 06 ------
Retail 6% 6% 12% Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan CCL Our expectations
Source: Barclays Research estimates Source: Centa-City Leading Index (CCL), Barclays Research estimates
1 Of the seven industry sources collated, we found: one is forecasting a 10% decline in home prices in 2014; one a 10- 15% drop; two a 15% drop; one a 15-20% drop; and two a decline of 20%. On this basis, we estimate that the average forecast is a 15% decline in home prices and we consider this to be the market consensus, for the purposes of our comparative discussion.
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While this calculation is technically correct, we believe it doesn’t consider who will be marginal buyers once home prices start to turn and what they will be thinking at that time. Putting ourselves into the position of an end-user, we analyse: 1) home price-to-income multiples; 2) the buy-versus-rent cash flow equation; and 3) the opportunity costs of holding a property. These factors suggest to us that Hong Kong home prices should correct by at least 30%.
Although Hong Kong’s cash-rich households and their low use of leverage are often cited as reasons to protect against a big drop in home prices, we calculate that the average household that has bought residential property since 2000 is sitting on an unrealised gain of around 99%. We believe this provides significant scope for owners to take profit on their property holdings, and this situation could exacerbate the fall in the residential market.
Why now? Why not earlier in 2009, or later in 2015? As to the question of timing, rather than focusing on interest rate increases alone, we believe there are several less obvious catalysts that make the first real downturn since 1998 much more likely:
1. Household income growth has stalled. After rising as fast as 14.8% y/y in 4Q11, private median household income has decelerated and recorded 0% y/y growth in 2Q13.
2. Housing rents are only 4.5% away from the income ceiling, so, the only way to restore yields without further income growth is for home prices to fall.
3. Supply already far exceeds demand; with the government’s regular land sales and property cooling measures simultaneously boosting supply and curbing demand, we believe the developers’ 70,000 units on hand already far exceeds demand.
4. Developers need to speed up contract sales to make up for slow ytd sales (down 47% y/y through 9M13); hence, we believe price cutting is inevitable. Once developers and secondary home owners start to adjust their opportunity cost expectations from a rising to a falling market, we believe a downward spiral of primary and secondary prices will be triggered.
Is it priced in? Misconceptions and valuations Compared to the start of 2013, although consensus has become more cautious, we do not believe our bearish views have been priced into the Hong Kong property stocks’ share prices. Year-to-date, Hong Kong developers’ share prices have only corrected by 8% (vs. the HSI’s gain of 2%), while the landlords/REITs have dropped by 1% on average. Furthermore, with Bloomberg consensus FY14 earnings forecasts only being revised down by 3.4% so far this year for the developers (the landlords have actually been revised up 1.0%), we believe the market remains far too optimistic that: 1) a reversal of property cooling measures can arrest the downtrend; and 2) commercial properties can decouple from the residential correction.
With developers and landlords only trading 0.95 standard deviation (SD) and 0.57 SD below their norms, we believe share prices have yet to price in a significant downturn in home prices and the potential second-round effects on commercial properties.
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FIGURE 3 FIGURE 4 Hong Kong property stocks – performance 1H96-2H98 (h/h Hong Kong property stocks – performance 1H12 to now change) (h/h change)
60% 53% 30% 27% Developers Landlords Developers Landlords 25% 40% 25% 21% 27% 29% 28% 20% 15% 20% 13% 15%
10% 7% 0% 5% -3% 5% -10% -20% 0% -1% -5% -1% -40% -33% -39% -39% -40% -10% -60% -15% -13% 1H 96 2H 96 1H 97 2H 97 1H 98 2H 98 1H 12 2H 12 1H 13 2H 13 Source: Datastream, Barclays Research Note: Prices to 23 October 2013. Source: Datastream, Barclays Research
Stock selection: position for maximum defensiveness With property being a macro-driven sector, if our forecast of a 30% fall in Hong Kong home prices by end-2015 proves correct, in the initial stage of the fall we believe the pain could be significant as stocks’ discounts to NAV widen. At this point, the only strategy is to underweight the sector.
But all is not lost, as past cycles have shown: as the markets start to approach a bottom, even a temporary one, property stocks can rebound significantly. In such an environment we believe that, rather than the traditional “buy and hold” strategy, a trading-oriented strategy could be more effective in capturing the wide swings in NAV discounts.
But before we skip ahead to the potential rebound, we believe investors must first be prepared for the initial drop. This is about reducing risks and what can go wrong. We identify four criteria by which to screen the Hong Kong property stocks with a view to minimising potential downside and focusing on maximum defensiveness. These include:
· Overseas or non-property exposure
· Cashed up balance sheet
· Short-duration and high-margin landbank
· Depressed valuations
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FIGURE 5 Hong Kong property: Which companies are most defensive?
Less than 2/3 Net debt-to- >33% FY14 Embedded exposure to HK equity ratio Absolute net development margin above Defensiveness Prop below 10%* debt below 2008 profit locked in 30% count
CK Y Y Y 3 HLD Y 1 SHKP ** Y 1 NWD Y 1 Sino Y Y 2 HLP Y Y Y 3 Kerry Y 1 Midland Y 1 Wharf Y 1 Hysan Y Y 2 Swire Prop Y 1 HK Land Y 1 Link Y 1 Champion ** Y 1
Note: *For REITs, total debt-to-total assets ratio used. **SHKP and Champion’s net debt data adjusted to reflect Xujiahui and FSI acquisitions. Source: Barclays Research estimates
Eight UWs, four EWs and only two OWs Cheung Kong and Hang Lung are the only OWs Based on our stock selection screen, we believe Cheung Kong and Hang Lung Properties are the most defensive property stocks in our coverage group, and they are the only two that merit an OW rating. Of our remaining 12 covered stocks, we have eight UWs and four EWs.
· Rated UW: SHKP, NWD, Sino, Kerry, Midland, Wharf, Swire and HK Land
· Rated EW: HLD, Hysan, Link and Champion
· Rated OW: CK and HLP
As a group, we expect our UW-rated stocks to potentially fall by an average 16% to our 12- month price targets and our EW-rated stocks to move within a potential range of +1 to -7%.
Valuation and risks
Valuation methodology Given our forecast for home prices to fall by 30% by end-2015, our starting point on valuation is to base target discounts on mid-cycle levels minus one standard deviation (SD), as one SD is meant to cover 68% probability, leaving 15.9% potential downside. Where companies have got more defensive characteristics, we have narrowed their target discounts by 5pp to 10pp. We apply the narrowest target NAV discount, at 20%, for Cheung Kong and Hang Lung Properties given their defensive profiles (we rate both stocks OW). For Sino Land and Hysan, both with two defensive characteristics each, according to our stock screen (see Figure 5), we set their target discounts at 40% and 45%, respectively. For the remainder, our target discounts are generally between 45% and 55%.
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Upside risks to our negative outlook We see three key upside risks to our bearish view on the Hong Kong property market.
1. A pre-emptive unwinding of the government’s various property cooling measures which could engineer a soft-landing for the Hong Kong property market and allow property companies’ NAV discounts to potentially revert back to mid-cycle averages.
2. Additional quantitative easing and stimulus in the US to cause US 10-year Treasury yields to drop back below 2.0%. This could help sustain the current low property yields in Hong Kong and push out the timing of our forecast correction.
3. A significant rally in Chinese equities, which could trigger a re-rating of valuation multiples for all Hong Kong listed stocks, including property stocks.
FIGURE 6 Hong Kong property stocks – summary of valuation and ratings
Mkt Pot. up/ Disc. to Disc. to Cap Share Price Downside Current Current Forward Forward Target Year P/E (x) Dividend Yield (USDmn) Curr. Price Target to PT Rating NAV NAV NAV NAV Disc. End FY12A FY13A/E FY14E FY12A FY13A/E FY14E Property Developers 1 HK Cheung Kong 37,041 HKD 122.40 135.00 10% OW 169.38 -28% 168.35 -27% -20% Dec 10.4 10.1 10.4 2.6% 2.7% 2.8% 12 HK Henderson Land 16,030 HKD 46.45 46.70 1% EW 89.68 -48% 84.92 -45% -45% Dec 15.6 15.0 13.7 2.3% 2.3% 2.3% 16 HK SHKP 35,206 HKD 101.60 84.00 -17% UW 165.99 -39% 153.43 -34% -45% Jun 12.1 14.4 14.7 3.3% 3.3% 3.3% 17 HK New World Dev 8,938 HKD 10.96 8.52 -22% UW 20.63 -47% 18.94 -42% -55% Jun 11.8 10.8 9.4 3.5% 3.8% 3.8% 83 HK Sino Land 8,438 HKD 11.18 9.69 -13% UW 18.45 -39% 16.15 -31% -40% Jun 12.3 10.0 12.2 4.1% 4.5% 4.5% 101 HK Hang Lung Prop 14,730 HKD 25.55 27.95 9% OW 36.11 -29% 34.93 -27% -20% Dec 18.5 29.0 16.2 2.9% 2.9% 2.9% 683 HK Kerry Properties 6,260 HKD 33.30 28.06 -16% UW 66.64 -50% 62.35 -47% -55% Dec 10.2 11.0 14.4 2.9% 2.7% 2.7% 1200 HK Midland 295 HKD 3.05 2.25 -26% UW NA NA NA NA NA Dec 9.9 - 8.7 - 55.7 8.0% 0.0% 0.0% Property Investors 4 HK Wharf 27,062 HKD 67.65 59.50 -12% UW 104.74 -35% 108.23 -37% -45% Dec 18.6 18.1 17.8 2.4% 2.6% 2.7% 14 HK Hysan 4,945 HKD 35.85 33.32 -7% EW 64.32 -44% 60.57 -41% -45% Dec 28.9 23.5 18.6 2.6% 3.3% 3.4% 1972 HK Swire Properties 16,825 HKD 21.45 18.65 -13% UW 37.32 -43% 33.90 -37% -45% Dec 18.1 22.2 19.0 2.8% 2.4% 2.6% HKL SP HK Land 15,011 USD 6.25 5.59 -11% UW 11.01 -43% 10.16 -38% -45% Dec 18.9 15.5 16.2 2.7% 2.9% 2.9% Mkt Upside/ Potential Spread Cap Share Price Downside EV Dividend Total on 10-yr Year P/E (x) Dividend Yield (USDmn) Curr. Price Target to PT Rating (HKDmn) Yield Return BVPS Bond (bps) End FY12A FY13A/E FY14A/E FY12A FY13A/E FY14A/E
HK REITs 823 HK Link REIT 11,534 HKD 38.90 37.94 -2% EW 100,777 4.1% 1.3% 35.68 148 Mar 29.9 26.5 24.6 3.3% 3.8% 4.1% 2778 HK Champion REIT 2,565 HKD 3.47 3.31 -5% EW 31,406 5.5% 0.9% 7.96 292 Dec 23.5 15.1 21.2 6.0% 5.5% 5.0% Notes: Prices as of the market close on 23 October 2013. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Real Estate industry view is Negative. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, company data, Barclays Research estimates
FIGURE 7 Hong Kong property stocks – summary of key metrics
Mkt Cap Year Current Forward Underlying EPS 3-yr DPS 3-yr (USDmn) End Curr. NAV NAV Change (%) FY12A FY13A/E FY14E FY15E CAGR (%) FY12A FY13A/E FY14E FY15E CAGR (%) Property Developers 1 HK Cheung Kong 37,041 Dec HKD 169.38 168.35 -1% 11.77 12.08 11.81 13.77 5.4% 3.16 3.33 3.43 3.43 2.8% 12 HK Henderson Land 16,030 Dec HKD 89.68 84.92 -5% 2.97 3.10 3.38 3.49 5.5% 1.06 1.06 1.06 1.06 0.0% 16 HK SHKP 35,206 Jun HKD 165.99 153.43 -8% 8.37 7.05 6.89 7.17 -5.0% 3.35 3.35 3.35 3.35 0.0% 17 HK New World Dev 8,938 Jun HKD 20.63 18.94 -8% 0.93 1.02 1.17 1.12 6.2% 0.38 0.42 0.42 0.42 3.4% 83 HK Sino Land 8,438 Jun HKD 18.45 16.15 -12% 0.91 1.12 0.91 1.08 5.8% 0.46 0.50 0.50 0.50 2.8% 101 HK Hang Lung Properties 14,730 Dec HKD 36.11 34.93 -3% 1.38 0.88 1.58 1.71 7.5% 0.74 0.74 0.74 0.74 0.0% 683 HK Kerry Properties 6,260 Dec HKD 66.64 62.35 -6% 3.26 3.02 2.31 2.56 -7.8% 0.95 0.90 0.90 0.90 -1.8% 1200 HK Midland 295 Dec HKD NA NA NA 0.31 - 0.35 - 0.05 0.02 -61.6% 0.24 - - 0.01 -62.3% Property Investors 4 HK Wharf 27,062 Dec HKD 104.74 108.23 3% 3.64 3.74 3.80 4.86 10.1% 1.65 1.75 1.85 2.15 9.2% 14 HK Hysan 4,945 Dec HKD 64.32 60.57 -6% 1.24 1.53 1.93 2.03 17.9% 0.95 1.17 1.23 1.28 10.4% 1972 HK Swire Properties 16,825 Dec HKD 37.32 33.90 -9% 1.18 0.97 1.13 1.35 4.3% 0.60 0.52 0.56 0.60 0.0% HKL SP HK Land 15,011 Dec USD 11.01 10.16 -8% 0.33 0.40 0.39 0.37 3.5% 0.17 0.18 0.18 0.18 1.9% HK REITs 823 HK Link REIT 11,534 Mar HKD NA NA NA 1.30 1.47 1.58 1.69 9.1% 1.29 1.46 1.58 1.69 9.4% 2778 HK Champion REIT 2,565 Dec HKD NA NA NA 0.15 0.23 0.16 0.15 -0.2% 0.21 0.19 0.17 0.16 -9.5% Source: Bloomberg, Company data, Barclays Research estimates
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PHYSICAL MARKET OUTLOOK
Since hitting the Credit Crisis trough at end-December 2008, Hong Kong home prices have risen 111%. At 119.83, the Centa-City Leading Index (CCL) of home prices is currently 16.4% higher than its 1997 peak and has risen 63% since the Hong Kong government and Hong Kong Monetary Authority (HKMA) first began their property cooling measures back in October 2009. Although there have been previous calls for an impending property correction, we believe this time it is for real.
First real property downturn since 1998 appears likely Over the course of the next We expect Hong Kong’s housing market to soon enter its first real downturn since 1998 two years, we expect Hong driven by a combination of: 1) the broken housing ladder, with affordability low; 2) stalled Kong home prices to fall by household income growth; 3) an increased housing supply; and 4) a change in homebuyer 30% psychology on the opportunity cost of holding property. Over the course of the next two years, we expect Hong Kong home prices to fall by 30%. We envision a two-stage drop:
· First, as developers and homeowners begin to undercut secondary prices, price support will only come from end-users once the cash flows from buying and renting start to equalise. Based on current mass and luxury yields of 2.88% and 2.31%, we expect end- users to only step in after mass and luxury prices have corrected by 24% and 31%.
· Second, after an initial drop of 15-20%, we expect the government to start rolling back its previous property cooling measures. Just like in 1998, this should provide temporary respite with home prices rebounding briefly. However, with affordability remaining stretched and demand already exhausted by the last four years of excesses, we expect home prices to take a second step down, leading to cumulative decline of 30% by end- 2015.
FIGURE 8 Hong Kong property Home Price Index – likely path of the decline
140
120
100
80
60 30% home price drop to 40 return HK home prices back to October 2010 levels 20
0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 ------Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan CCL Our expectations
Source: Centa-City Leading Index (CCL), Barclays Research estimates
We expect Grade A office Although we believe affordability may be healthier in the commercial property market, we prices to decline by 20% while believe this segment is unlikely to escape the downturn unscathed. Past cycles have shown retail properties see no growth that the housing, retail and office markets are highly correlated. As home prices decline, we for the next two years expect retail property to be affected by the potential negative wealth effect on local consumption with a secondary knock-on effect affecting office rental demand. Overall, we expect Grade A office prices to decline by 20% while retail properties see no growth for the next two years.
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FIGURE 9 Hong Kong property – Barclays Research price and rental estimates
Change in price (Dec on Dec) 2012 2013E 2014E 2015E 2014-15
Mass housing 20% 4% -18% -15% -30%
Grade A office - Central 3% -9% -10% -10% -20%
Grade A office - Overall 25% 9% -10% -10% -20%
Retail 41% 6% 0% 0% 0%
Change in rents (Dec on Dec) 2012 2013E 2014E 2015E 2014-15
Mass housing 20% 2% -8% -8% -14%
Grade A office - Central -12% -1% -5% -5% -10%
Grade A office - Overall 8% 7% -5% -5% -10%
Retail 13% 8% 6% 6% 12%
Source: CCL, R&V, Barclays Research estimates
Why would home prices drop 30% and not 15%? Consensus now appears bearish, with most expecting Hong Kong home prices to drop by 15%2. However, we believe the actual drop will be more severe, and we expect home prices to correct by 30% by end-2015. Inevitably, the questions will be: Why 30%? Why not 15%? Why not 45%?
To begin, we believe it is important to understand where the consensus outlook for a 15% drop is coming from and then to see where we are different. In our view, the consensus for a decline of 15% has only considered the affordability impact from a 200-300bps increase in mortgage rates but has not considered other issues that we believe are most relevant to the end-user, the only remaining marginal buyer. These include the following:
· Home price to income multiples
· Is it better to buy or rent?
· The opportunity costs to the seller
Where is the consensus 15% drop coming from? Although the timing of when the US might raise rates remains uncertain, we believe most homebuyers do expect rates to go up at some point in time. The current 2.2% mortgage rate is seen as abnormally low. With the HKMA requiring banks to stress test homeowners against a 300bps increase in rates and also the US Fed suggesting that its target rates are likely to be up by 200bps, we believe the affordability impact from a 200bps increase is already part of the consensus view. Given that the HKD is pegged to the USD, Hong Kong interest rates should follow US interest rates in tandem. (Please refer to Barclays 19 September 2013 Interest Rates Research report “Dude, where’s my taper?” for the latest estimates for US rates.)
2 Of the seven industry sources collated, we found: one is forecasting a 10% decline in home prices in 2014; one a 10- 15% drop; two a 15% drop; one a 15-20% drop; and two a decline of 20%. On this basis, we estimate that the average forecast is a 15% decline in home prices and we consider this to be the market consensus, for the purposes of our comparative discussion.
28 October 2013 10 Barclays | Hong Kong Property
FIGURE 10 Hong Kong property – affordability as measured by monthly mortgage-to-income ratio
120.0
Less affordable 100.0
80.0
60.0
40.0
20.0 More affordable 0.0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E Source: CEIC, Barclays Research estimates
Our affordability index is based on a 718-square-foot flat selling for about HKD4.8mn. Against a private median household income of HKD30,125 per month and a 20-year mortgage at 70% loan to value (LTV), we estimate the current mortgage-to-income ratio at 57%. This is in line with Hong Kong’s long-run average.
We reckon that the consensus estimate for a 15% decline in home prices is coming from flexing this debt servicing ratio against higher mortgage rates. We estimate that a 200/300bps increase in mortgage rates to 4.2/5.2% would cause monthly mortgage payments to increase by 20/30%. The affordability ratio would deteriorate by 11/17ppt to 69/75%. At a 4.2% mortgage rate, to bring affordability back to the historical average, the size of the mortgage and therefore the price of the home would have to fall by 16%. Likewise, to offset a 300bps increase in rates to 5.2%, home prices would have to fall by 23% (see Figure 11).
FIGURE 11 Hong Kong property – assumptions on interest rates and affordability; what is the consensus 15% drop in home price based on?
Impact of higher To restore interest rates affordability
Now +200bps +300bps +200bps +300bps
Price (HKD psf) 6,677 6,677 6,677 5,582 5,128 Size (sf) 718 718 718 718 718 Price (HKD mn) 4.79 4.79 4.79 4.01 3.68 LTV 70% 70% 70% 70% 70% Term (years) 20 20 20 20 20 Mortgage (HKD mn) 3.36 3.36 3.36 2.81 2.58 Mortgage rate (%) 2.20% 4.20% 5.20% 4.20% 5.20% Monthly payment (HKD) 17,296 20,691 22,520 17,296 17,296 Private median household income 30,125 30,125 30,125 30,125 30,125 (HKD) Monthly mortgage to income ratio 57% 69% 75% 57% 57% Increase in mortgage payment 20% 30% Change in affordability 11% 17% Change in home prices -16% -23% Source: Barclays Research estimates
28 October 2013 11 Barclays | Hong Kong Property
Technically, this is how the maths works but when home prices start to correct, we have to ask who would be the buyers and what would they be considering.
· Speculators and investors – With the government’s various stamp duties imposing transaction costs of 21-43.5% (SSD at 20% within six months; BSD at 15%; ad valorem stamp duty at 1.5-8.5%), we believe speculators and investors are unlikely to step in until these measures are removed.
· End-users – For end-users, once prices fall and potential capital gains become unlikely, their decision will become much more utilitarian. We believe they would likely consider: 1) the overall lump sum involved; and 2) whether they are better off buying or renting.
Home price-to-income multiple – Reversion from 13.3x to 8.7x suggests a 34% fall Since the housing market bottomed in 2003, the upcycle for past 10 years has taken Hong Kong’s home price-to-income multiple from 5.5x to 13.3x currently. This has now surpassed the peak of the 1996/97 bubble when it reached 13.2x. Against Hong Kong’s long-term average of 8.7x for 1984-2002, the current home price-to-income multiple is 1.75 standard deviation above the norm.
FIGURE 12 Hong Kong property – home price-to-income multiple currently at 13.3x
14
12
10
8
6
4
2
0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E Home price to income (x) Average +One SD -One SD
Source: CEIC, Barclays Research estimates
But as the upcycles of 1991-97 and more recently 2009-current have shown, although something is expensive, it can still become more expensive. As long as there is still a marginal buyer willing to pay, that is where price is set. For marginal buyers, we believe they also consider the potential for growth. During periods of strong and sustained growth, what may be unaffordable today could shortly become affordable as income levels rise. In fact, when we overlay the home price to income multiple with income growth, we see precisely this.
28 October 2013 12 Barclays | Hong Kong Property
FIGURE 13 Hong Kong Property – home price-to-income ratio vs. average income growth rate
Home price to income (LHS) 3-yr Avg income growth (RHS) 20 20% 18 16 15% 14 12 10% 10 8 5% 6 4 0% 2 - -5% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: CEIC, Barclays Research
Adjusting Hong Kong’s average home price to income multiple of 8.68x by average income growth (taking out periods of negative growth), we calculate Hong Kong’s PEG at 1.68x. This is one reason why we believe a correction is imminent. Income growth has stalled. After rising at a clip of 8-15% in 2011, the private median household income growth rate had slowed to 0% as of 2Q13.
FIGURE 14 Hong Kong – median household income growth Median monthly household income y-y % change 25% Median monthly private household income y-y % change 20% 15% 10% 6.3% 5% 0% 0.0% -5% -10% -15% 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 ------
Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Source: CEIC, Barclays Research
Without an expectation of rising incomes, we believe the affordability equation will have to revert back to the mean. Even without assuming any kind of overshoot, as Hong Kong’s home-price-to-income multiple reverts from the current 13.26x to 8.68x, this would suggest a potential 34% correction in home prices.
Buy vs rent – focus shifting from expense to cash flow Delving further into where price support may come from, we put ourselves in the position of the end-user. Instead of theoretical affordability calculations, we believe potential homebuyers are likely to simply consider whether they are better off to buy or to rent.
For the mass housing market, we use a HKD5mn home as an illustration and assume the following: 1) housing yield of 2.88% based on R&V data and 2) a 20-year mortgage with a
28 October 2013 13 Barclays | Hong Kong Property
LTV of 50% and a mortgage rate of 2.2%. As shown below, the annual cash outlay for ownership would be 24% higher than renting. But of course, some would argue this fails to take into consideration that in the current low interest rate environment, 65% of first year mortgage payments is principal repayment so from an expense perspective, it is actually 46% cheaper to buy than to rent.
Normally, we would agree, but we believe this argument is premised on rising home prices in which a homeowner would be building equity. If home prices were to fall, the mark-to- market loss would far outweigh the positive rental-interest carry. Once home prices begin to turn, we believe it is cash flows that matter, and until the buy-vs-rent cash flows equalize, end-users would have little incentive to buy.
Holding all else unchanged, we estimate that to restore our Buy-vs-Rent Equation to 1:1, mass housing yields would have to rise by 81bp to 3.69% and home prices would have to fall by 21.9%.
FIGURE 15 Hong Kong property – buy-vs-rent equation, mass housing market (i.e. 2.88% yield), HKD Mass housing: Current Buy Rent Buy Vs. Rent Ratio Mortgage 154,623 …Principal - Year one 100,634 …Interest - Year one 53,989 Rent 144,000 Other outgoings 23,220.0 …Management fee 11,700 …Gov't rates & rent 11,520
Annual cash outlay 177,843 144,000 1.24 Annual expenses (ex principal) 77,209 144,000 0.54
Mass housing: Support scenario Buy Rent Buy Vs. Rent Ratio Monthly mortgage payment 120,780 …Average principal pymt in year 1 78,608 …Avg interest pymt in year 1 42,172 Rent 144,000 Other outgoings 23,220.0 …Mgmt fee 11,700 …Gov't rates & rent 11,520
Annual cash outlay 144,000 144,000 1.00 Annual expense (ex principal) 65,392 144,000 0.45
Adjustment Yield Home Price Before 2.88% 7,692 After 3.69% 6,009 Change 0.81% -21.9% Source: Barclays Research estimates
Using the same approach toward the luxury housing market for which yields are lower at 2.31%, we calculate the current Buy-vs-Rent cash flow ratio at 1.47x and the Buy-vs-Rent expense ratio at 0.59x. To equalise the cash flow ratio to 1.0x, we estimate luxury housing yields would have to expand by 123bp from 2.31% to 3.54% and prices would have to correct by 34.8%.
28 October 2013 14 Barclays | Hong Kong Property
FIGURE 16 Hong Kong property – buy-vs-rent equation, luxury housing market (i.e. 2.31% yield), HKD Luxury housing: Current Buy Rent Buy Vs. Rent Ratio Mortgage 618,492 …Principal - Year one 402,534 …Interest - Year one 215,957 Rent 462,000 Other outgoings 58,560.0 …Management fee 21,600 …Gov't rates & rent 36,960
Annual cash outlay 677,052 462,000 1.47 Annual expenses (ex principal) 274,517 462,000 0.59
Luxury housing: Support scenario Buy Rent Buy Vs. Rent Ratio Monthly mortgage payment 403,440 …Average principal pymt in year 1 262,572 …Avg interest pymt in year 1 140,868 Rent 462,000 Other outgoings 58,560.0 …Mgmt fee 21,600 …Gov't rates & rent 36,960
Annual cash outlay 462,000 462,000 1.00 Annual expense (ex principal) 199,428 462,000 0.43
Adjustment Yield Home Price Before 2.31% 16,667 After 3.54% 10,872 Change 1.23% -34.8% Source: Barclays Research estimates
Although the above 22-35% drop may already seem large, we have in fact been optimistic because we have only: 1) assumed an LTV of 50% (thereby reducing the mortgage payment; 2) kept mortgage rates unchanged at 2.2%; and 3) held rents steady. If we were to flex our assumptions to factor in a 4.2% mortgage rate, we estimate that the equalisation
process would mean that mass housing yields would have to rise by 153bp to 4.41% while
luxury yields would have to rise by 193bp to 4.24%. This would translate to a higher home price drop of 35% for the mass market and 45% for the luxury market. By the same token, if we assume a 70% LTV for the mass market with the current Buy -vs-Rent cash flow at 1.66x, prices would have to adjust by 44%. For a more detailed discussion on Hong Kong
mortgage rates, please see Sharnie Wong’s report of 28 October 2013, “Hong Kong Banks:
When will mortgage rates rise? ”
Why now? Why not earlier in 2009 or later in 2015?
In addition to the magnitude of the drop, an equally important issue is when. We believe a rise in US interest rates in 2015 would be an obvious and well-understood trigger. But in addition to this, we believe there are several less obvious but equally important
developments that would make an imminent correction much more likely. These include
the following: 1) household income growth has stalled; 2) housing rents are starting to hit the income ceiling; 3) supply already far exceeds demand; and 4) developers’ need to speed up contract sales.
Without income growth, there is little room for rents to rise further
As we highlight in Figure 14, Hong Kong’s private household income growth has already stalled. While income growth also stalled in 2009, back then there was still a large cushion between income and rents. But as housing rents have risen 40% since end-2009, there is
28 October 2013 15 Barclays | Hong Kong Property
now only a 4.5% gap before rents hit the income ceiling. Without further rental growth, the only way for housing yields to be restored would be by adjusting home prices down.
FIGURE 17 Hong Kong property – housing rents vs household income; rents are starting to hit the income ceiling
33,000 180 30,000 160 27,000 140 24,000 21,000 120 18,000 100 15,000 80 12,000 60 9,000 40 6,000 3,000 20 0 - 83 87 91 95 99 03 07 11 81 85 89 93 97 01 05 09 84 88 92 96 00 04 08 12 ------Apr Apr Apr Apr Apr Apr Apr Apr Dec Dec Dec Dec Dec Dec Dec Dec Aug Aug Aug Aug Aug Aug Aug Aug Private median household income (LHS) R&V Rental Index (RHS)
Source: CEIC, Barclays Research
Supply already far exceeds demand For the past four years, as the government started to initiate regular land sales, private housing supply has risen from a low of 52,000 units in September 2009 to 70,000 as of June 2013. In absolute terms, private housing supply is back to a level similar to 2004 before talks of a housing shortage became consensus. But we believe there is a crucial difference – demand is now lower. In addition to the impact of the government’s property cooling measures, much of the underlying demand has also been curbed by higher home prices. Checking private housing supply against the current quarter’s primary sales, we find that developers’ effective months of inventory have now risen from 54-72 months (ie, 4.5-6 years supply) in 2012 to 144 months for 2Q13 (See Figures 196 and 197 in the Appendix for the full supply outlook and projects awaiting presale consent).
FIGURE 18 FIGURE 19 Hong Kong property – private housing supply vs recent take- Hong Kong property – effective months of inventory up rate
75,000 8,000 180 164 154
7,000 160 144 70,000 139 6,000 140 121 116 5,000 120
65,000 97 94 4,000 100 72 72 71 70 68 67
60,000 64
80 62
3,000 60 59 56 56 55 54 49 49 46 45 41 60 41
2,000 40 39 38 37 36 55,000 34 31
1,000 40 25 50,000 - 20 04 05 06 07 08 09 10 11 12 05 06 07 08 09 10 11 12 13 0 ------04 05 06 07 08 09 10 11 12 05 06 07 08 09 10 11 12 13 ------Sep Sep Sep Sep Sep Sep Sep Sep Sep Mar Mar Mar Mar Mar Mar Mar Mar Mar Sep Sep Sep Sep Sep Sep Sep Sep Sep Total private housing supply (LHS) Mar Mar Mar Mar Mar Mar Mar Mar Mar Units sold during current quarter (RHS) Months of inventory
Source: Transport & Housing Bureau, Centaline, Barclays Research Source: Transport & Housing Bureau, Centaline, Barclays Research
28 October 2013 16 Barclays | Hong Kong Property
Previous demand front loading has been very significant Although the 144 months as of 2Q13 may be skewed by the new primary sales rules, considering how much demand had already been front loaded over the past few years, we believe demand is unlikely to rise sufficiently to absorb the upcoming supply. In Figures 20 and 21, we show by how much recent private housing sales volumes and values have exceeded their long-run averages for July 1995 to September 2008.
FIGURE 20 Hong Kong property – private housing sales volumes
25,000 Surplus Surplus Surplus transactions transactions 101,601 - 24 transactions 20,000 15,305 - 18 months 70,260 - 27 Cumulative months months deficit now at 15,000 56,469 - 27 months Deficit - 10,000 122,914
5,000 Deficit -17,642 0
Overall private residential volume Average
Source: Centaline, Barclays Research
Interestingly, while the government’s various cooling measures appear to have worked to bring down the speculative excesses in volume terms, in value terms, the surplus capital is still even higher than 1997.
FIGURE 21 Hong Kong property – private housing sales values (HKDmn)
100,000 HKD240bn of HKD775bn of 90,000 HKD455bn of excess excess excess transactions 80,000 transactions transactions 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Overall private residential value Average
Source: Centaline, Barclays Research
Developers need to speed up contract sales The fourth trigger for “why now?” would be the developers’ need to speed up contract sales in Hong Kong, in our view. Regardless of whether the new primary sales regulations are to be blamed for the very light YTD housing sales, the reality is that to end-September, developers have only managed to clear 5,873 units for HKD51.1bn. Compared with the first nine months of 2012, these numbers are down 36% and 47% y/y, respectively. Relative to
28 October 2013 17 Barclays | Hong Kong Property
the figures for full-year 2012 (12,713 units for HKD131.8bn), developers’ sales have only reached 46% in volume terms and 39% in value terms.
Had this simply been a presales timing issue, demand should have flowed over to the secondary market. But since secondary sales volume and values have also fallen by 40% and 35% so far this year, we believe that underlying demand is indeed very weak. In such an environment, as developers try to make up for lost time and speed up sales, discounting is a very likely strategy.
FIGURE 22 FIGURE 23 Hong Kong property – private housing sales volumes Hong Kong property – private housing sales values through through 9M13 9M13
60,000 250
50,000 200
40,000 150
30,000 100
20,000 50 10,000 0 0 Private primary value (HKD bn) Private secondary value (HKD Private primary volume Private secondary volume bn) 9M 2012 9M 2013 9M 2012 9M 2013
Source: Centaline, Barclays Research Source: Centaline, Barclays Research
Taking a closer look at numbers, we find that the demand profile has further narrowed. Private primary sales for flats priced at less than HKD5mn was the only category to register any volume growth this year, at 6%. But even this is coming at the expense of the secondary market. As developers and public housing (the 5,000 HOS quota) tapped into this remaining pool of demand, private secondary housing sales for flats priced at less than HKD5mn fell by 46% through 9M13. In the higher value category, private primary sales for units priced at more than HKD5mn fell by 54% y/y while private secondary sales for units priced at more than HKD5mn dropped by 22% y/y. To us, this suggests that Hong Kong’s housing ladder may already be broken. If price-sensitive first-time homebuyers are the only group left to buy, developers will have little choice but to continue to lower the price point to try to draw out demand.
28 October 2013 18 Barclays | Hong Kong Property
FIGURE 24 FIGURE 25 Hong Kong property – private housing sales for units priced Hong Kong property – private housing sales for units priced at less than HKD5mn at more than HKD5mn
40,000 14,000
35,000 12,000 30,000 10,000 -22% 25,000 -46% 8,000 20,000 6,000 15,000 4,000 -54% 10,000 +6% 5,000 2,000 0 0 Private primary below Private secondary below Private primary above Private secondary above HKD5mn HKD5mn HKD5mn HKD5mn 9M 2012 9M 2013 9M 2012 9M 2013
Source: Centaline, Barclays Research Source: Centaline, Barclays Research
Hong Kong is cash-rich, so what is the incentive to sell? Opportunity cost One of the frequent arguments against a significant fall in Hong Kong home prices is that Hong Kong is cash-rich and, thus, that there is little incentive to sell. On the surface, this would certainly seem the case as 60% of Hong Kong homes are mortgage free and most mortgages only have average LTVs of 55%.
FIGURE 26 FIGURE 27 Hong Kong property – 60% of homeowners are mortgage Hong Kong property – mortgage LTV at origination free
70.0% 75 60.1% 60.0% 70 52.2% 48.5% 65 50.0% 60 40.0% 55 30.0% 50 20.0% 45
10.0% 40
0.0% Jun-02 Jun-05 Jun-08 Jun-11 Sep-01 Sep-04 Sep-07 Sep-10
2001 2006 2011 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Mar-03 Mar-06 Mar-09 Mar-12 Households without mortgage LTV
Source: Census & Statistics Department, Barclays Research Source: CEIC, Barclays Research
Opportunity costs are very different in rising and falling markets Even at the developer level, with the average net debt/equity ratios at 15.4% (Figure 62), one could also argue that developers have strong holding power and little incentive to cut prices. This might be true on one level, but we believe this line of thinking is premised on a rising market. In a rising market, the seller’s opportunity cost to selling too early is to “make less money” and hence sellers tend to delay their decisions. But in a falling market, the opportunity cost of NOT selling early is also to “make less money”. For instance, when transactions are low as they are now, homeowners can either 1) list their homes at full market values and wait or 2) they can undercut secondary prices by 10% to speed up sales.
28 October 2013 19 Barclays | Hong Kong Property
Using a HKD20mn home as an example, we estimate that the initial opportunity cost would appear to be foregoing HKD2mn of potential profit by cutting prices 10% and selling at HKD18mn instead of HKD20mn. But what if one knew that in a year home prices would be down by 30%? In this case, by waiting and not selling today, the homeowner’s real opportunity cost would be HKD4mn since the selling price would have dropped further to HKD14mn instead of selling for HKD18mn today.
We believe that this opportunity cost would also dent the traditionally “lack of alternatives” idea. Those bullish on property stocks often cite that with bank deposit rates near zero, homeowners have little avenue to invest the cash proceeds from selling their home. A 0.1% bank interest rate may not be great, but if home prices were to drop by 10%, cash in the bank would have outperformed by 10.1%.
Embedded gains are high – likelihood of cuts also high Although we do not know exactly when this concept of “opportunity cost” may take hold, with consensus already forecasting a fall, we believe it is only a matter of time before the view of the herd begins to turn. Importantly, this is where Hong Kong’s low gearing and cash rich nature comes back into consideration. On one level, low debt and high embedded gains means there should be little distress, but on another level, this also means there is little resistance to “profit taking”. For homeowners who are enjoying unrealised gains of 100% to cut their asking price by 20% still means that they could make realised gains of 80%. Conversely, for someone with an embedded gain of just 10%, we believe they would be more reluctant to cut prices as they would realise a loss on the sale.
FIGURE 28 Hong Kong property – private housing sales since 2000; potential embedded gains
140,000 350%
120,000 300%
100,000 250%
80,000 200%
60,000 150%
40,000 100%
20,000 50%
0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD Private housing sales (LHS) Not yet re-transacted (LHS) Average gain (RHS) Source: Centaline, R&V Department, Barclays Research
Based on the Rating & Valuations Department’s home price index, we estimate that the average homeowner who bought in 2012 is likely sitting on an embedded gain of 19%. Those who bought in 2011, 2010 and 2009 are likely to be enjoying even higher unrealised gains of 34%, 62% and 102%, respectively. Assuming that Hong Kong turns over its housing stock once every 13.5 years (based on 1.17mn housing units against average private housing sales of 82,906 units per year between 2000 and 2012), we estimate an average unrealised gain of 99% for those who have bought since 2000 (Figure 28). With such high embedded gains, the room to take profits can be very significant.
28 October 2013 20 Barclays | Hong Kong Property
Delinquency and negative equity back in 1998 Taking a look at the aftermath of the 1996/1997 bubble, when the HKMA began releasing data on the number of negative equity cases, there were initially 65,000 cases in September 2001. But as home prices corrected further, the number eventually increased to the peak of 105,697 cases as of June 2003 during the SARS bottom. As a percentage of Hong Kong’s overall housing stock, these 65,000 and 105,697 cases were roughly 6.3% and 10.5%. While Hong Kong homeowners were definitely under stress from the cumulative 70% fall in home prices, Hong Kong’s delinquency ratio only reached as high as 1.43% back in April 2001. This suggest that Hong Kong homeowners were either very responsive as to cut losses early on or they just continued to stick it out.
FIGURE 29 FIGURE 30 Hong Kong property – negative equity and home prices Hong Kong property – residential mortgages delinquency ratio 120,000 140 Cases (LHS) CCL Index (RHS) 1.60
100,000 120 1.40
100 1.20 80,000 1.00 80 60,000 0.80 60 0.60 40,000 40 0.40
20,000 20 0.20 0.00 - - 2009 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 Residential mortgage delinquency Ratio (> 3 Months) Source: CCL, CEIC, Barclays Research Source: CEIC, Barclays Research
28 October 2013 21 Barclays | Hong Kong Property
IS THE POTENTIAL DROP PRICED IN? TWO COMMON MISCONCEPTIONS
Policies and commercial properties to the rescue? The question remains whether the potential downturn in the housing market has already been priced in by the market. Before examining the quantitative aspect, we believe there are two common misconceptions to address:
Misconception No. 1 – The government does not want to see home prices fall. Once home prices correct, the various property cooling measures will be rolled back and the housing market should rebound.
Misconception No. 2 – While the housing market has risks, since Hong Kong developers now have much larger investment property portfolios, this should help buffer their risk from a correction in the housing market.
Policy: Can rollback of cooling measures come to the rescue? Do we believe the Hong Kong government will roll back the various stamp duties and other property cooling measures if home prices fall 15-20%? Yes, we do. But will this help support the market and stabilise home prices? No, we do not believe so. The experience from the 1998 Asian Crisis and the recent tightening clearly show that the various tightening/easing measures only have a fleeting impact and it took a long time to reverse the overall trend.
1997-98 crisis: Policy rolled back within nine months: Looking back to 1997-99, once the housing market began to correct in October 1997, the Hong Kong government began to roll back previous tightening measures very quickly. Within nine months, it had: (i) lifted restrictions on primary subsales; (ii) suspended land sales; (iii) increased the number of Home Purchase Loans and Home Starter Loans; and (iv) increased the LTV ratio for luxury homes from 60% to 70%. Home prices found a temporary bottom in October 1998 and even rebounded by 9.4% to December 1998, but then went on to fall by 15% to December 1999 and another 10% to December 2000.
FIGURE 31 Hong Kong property – policies and home prices from 1997 to 2000
Dec 97: New Tenants 120 May 98: Pre-sale Purchase Scheme period extended from CCL home price Index (TPS) proposed Jan 98: Gov't 15 mths to 20 mths withdrew Tamar Aug 98: Mortgage 100 site auction; TPS limit on luxury flats officially launched Jun 98: Some raised from 60% to 5,000 new units 70% allocated for PRH 80 Dec 98: With HKMC's mortgage re-insurance Oct 97: Gov’t introduced, LTV limit announced effectively up to 85% 60 housing target: 85,000 to be Feb 98: Flexible 40 built every landsale year for ten program; years Interest on Jun 98: Introduction Oct 98: Sandwich mortgage Jul 98: Mortgage limit Class Housing 20 of 8 measures became including nine- under Home Purchase Scheme suspended deductible from month moratorium Loan Scheme raised salary tax on land sales 0
Source: Hong Kong Yearbook 1998, Hong Kong Government, Barclays Research
28 October 2013 22 Barclays | Hong Kong Property
· 2009-Now: Policies did not work on the way up: More recently, we have seen how policy worked as prices were on their way up. When the HKMA first moved to reduce LTV for luxury homes above HKD20mn from 70% to 60% in 2009, the secondary market consolidated for 10 weeks and transaction volumes fell. When the government then announced another nine measures and 12 initiatives to rein in the market in April 2010, the market then consolidated for six weeks and volumes fell by 16%. But with each subsequent measure, the effectiveness became progressively shorter such that even very punitive measures like the Special Stamp Duty and Buyer Stamp Duty introduced in November 2010 and October 2012 failed to rein in prices. It was not until four years after the first tightening measure was announced that their cumulative effects began to work, in our opinion. Our concern is that if the various property measures had not worked on the way up, why would they work in reverse to support home prices as they come down?
FIGURE 32 Hong Kong property – 2009 to now: Housing market reaction to previous cooling measures
500 Oct 12: 15% BSD introduced. 130 Housing volume index (units) (LHS) Home price index (RHS) SSD raised by 5% and 450 extended to 3 yrs 120 Jul 11: Further Aug 12: 10 supply- 400 Aug 10: LTV cut to 60% cuts on LTV side measures for non-self use and > 110 Feb 13: DSD for both resi 350 Sep 09: HKMA HKD12mn home stepped in to rein and non-resi properties. Lower LTV and stricter 100 300 low mortgage rates Jan 10: HKMA warn stress test banks on cash Sep 12: 'HK Property for HK 250 rebates 90 People' measures 200 introduced. DSR and LTV cuts. Max mortgage tenor 80 Nov 10: introduction capped at 30 years 150 of SSD & further LTV Apr 10: 9 cuts 70 100 measures &12 Oct 09: HKMA capped LTV for initiatives 60 50 high-end homes > HKD20mn from 70% to 60% 0 50 09 11 13 12 09 11 10 12 09 11 13 09 09 10 10 11 12 12 10 12 09 11 13 09 11 13 10 12 10 12 11 13 ------Jul Jul Jan Jan Jan Jan Jun Jun Jun Oct Oct Oct Feb Feb Apr Apr Apr Sep Sep Dec Dec Dec Nov Nov Mar Mar Mar Aug Aug Aug May May Source: Hong Kong Government, CCL, Midland, Barclays Research
Are commercial properties a better alternative to residential for investors? While the market seems to appreciate the headwinds facing the housing market, many believe office and retail properties may be able to escape relatively unscathed due to the lack of new supply and the impact of Chinese tourist spending. But, if history is any guide, we see that this has rarely happened. In fact, with Hong Kong being a small, open, services- based economy, the three asset classes have traditionally been highly correlated, rising and falling as a group.
28 October 2013 23 Barclays | Hong Kong Property
FIGURE 33 FIGURE 34 Hong Kong property – rental value index: housing vs office Hong Kong property – capital value index: housing vs office vs retail vs retail
250 600
500 200
400 150 300 100 200
50 100
0 0 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 ------Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Res Retail Office Res Retail Office
Source: CEIC, Barclays Research Source: CEIC, Barclays Research
FIGURE 35 FIGURE 36 Hong Kong property – rental index, y/y chg Hong Kong property – capital value index, y/y chg
100% 120% Correlation: Correlation: 80% Residential vs. Office: 80.1% 100% Residential vs. Office: 78.7% Residential vs. Retail: 90.2% Residential vs. Retail: 86.3% 80% 60% 60% 40% 40% 20% 20%
0% 0% -20% -20% -40% -40% -60% 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 ------Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Res Retail Office Res Retail Office Source: CEIC, Barclays Research Source: CEIC, Barclays Research
Office and retail rents are highly correlated to GDP growth Our regression analysis shows that office and retail rents are highly correlated to real GDP growth. For the overall office market, for every 1% gain in GDP growth above or below 3.0%, rents are likely to move by 3.7%. For Central Grade A office rents, sensitivity is even higher, with a 1% GDP swing translating to an 8.6% swing in rents. By comparison, the retail market has less volatility with a near 1:1.4 impact from real GDP growth.
28 October 2013 24 Barclays | Hong Kong Property
FIGURE 37 Hong Kong property – historical regression of commercial property rents to real GDP growth
Change in: Driver Correlaion Regression Equation R-Square Period GDP Growth Assumption
3.5% 2.5% 1.5%
Office rents - Central Grade A Real GDP % 0.85 y= 8.63x -0.25 0.73 1995-now 5.7% -3.0% -11.6% Office rents - Overall Grade A Real GDP % 0.81 y= 3.70x -0.11 0.66 1995-now 1.5% -2.2% -5.9% Retail rents Real GDP % 0.67 y= 1.42x -0.03 0.45 1995-now 1.9% 0.5% -0.9% Home prices Real GDP % 0.40 y= 1.94x +0.01 0.16 1995-now 7.8% 5.9% 3.9%
Source: CEIC, JLL, Barclays Research
Barclays economics team forecasts Hong Kong’s economy to grow at 3.5% in 2014 and our regression analysis suggests that Central and overall office rents should rise by 5.7% and 1.5%, while retail rents should grow 0.8%. But if GDP growth were to be revised down by 1ppt to 2.5%, then Central and overall Grade A office rents should fall by -3.0% and -2.2%, while retail rents would also decline by 0.7%, on our estimates. Given the possible negative wealth effect that a 30% home price fall may cause, as local growth slows, the office and retail market are also vulnerable to downward revisions.
Can Chinese tourist spending provide a sufficient buffer? We are mindful that over the past 10 years there have been some structural changes in the retail property market. For instance, with the rise of Chinese tourist spending, local spending is now a smaller slice of the overall pie. Compared to 1998, when tourist spending made up 16% of overall Hong Kong retail sales, in 2012 tourist spending made up 44%. This may be one of the reasons why, in recent years, the correlation between retail rents and real GDP growth has declined. Based on datapoints prior to 2005, the historical correlation between retail rents and real GDP growth was previously as high as 0.88. But with the surge in retail rents in recent years, the correlation has now been reduced to 0.67.
FIGURE 38 FIGURE 39 Hong Kong – tourist spending contribution to retail sales Hong Kong – tourist arrivals and retail sales growth, y/y chg
Visitor Arrivals 300 Visitors' spending (HKDbn) (LHS) 50% 50% Retail Sales and Restaurant Receipts % contribution to HK retail sales (RHS) 45% 40% 250 40% 30% 200 35% 20%
150 30% 10% 25% 100 0% 20% -10% 50 15% -20% - 10% -30% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: CEIC, Barclays Research Source: CEIC, Barclays Research
So far this year, the continued rise in Chinese tourists has helped retail sales maintain an uptrend. Through the first eight months of 2013, retail sales are up 13.4% y/y. Stripping out the effects of the surge in jewellery sales (+30.4% y/y in 8M2013) that was triggered by the drop in gold prices, other broad categories like clothing, footwear and allied product (+9.1%), consumer durable goods (+5.6%) and other consumer goods (+9.9%) mostly saw single-digit y/y growth. While these are not bad numbers, especially when compared to the
28 October 2013 25 Barclays | Hong Kong Property
office market’s stagnant growth, we believe they may not be good enough if and when cap rates start to rise.
Commercial cap rates – A problem of time and base effect Conceptually, cap rates or property yields reflect the required return that property owners demand for holding a risk asset. As such, the cap rate can be deconstructed into a risk free rate and a risk premium. For the risk-free rate, despite September’s 35bps compression from 3.0% to 2.65%, the reality is that relative to the start of the year, 10-year US Treasury (UST) yields have increased by 90bp from 1.75% to 2.65%. While the market’s short-term focus is still on when tapering might start, it will start eventually. Taking a longer-term view, our US economics team expects 10-year UST yields to reach 3.5% by 3Q14 (Refer to “Dude, where’s my taper?” of 19 September 2013). By that time, with bond yields having increased by 175bps to 3.5%, local property yields will be under strong upward pressure.
FIGURE 40 US Treasuries – Taper or not, 10Y bond yields are up 90bp this year from 1.75% to 2.65%
3.5
3.0
2.5
2.0
1.5
1.0 12 13 11 12 12 13 12 13 12 12 13 13 11 12 12 13 11 12 13 13 12 12 13 12 13 ------Jul Jul Jan Jan Jun Jun Oct Oct Oct Feb Feb Apr Apr Sep Sep Dec Dec Nov Nov Mar Mar Aug Aug May May Source: Datastream, Barclays Research
Looking back, we find that Grade A office and retail property yields have both traded at a 51bp premium to 10-year UST yields (see charts below). In the strata-title retail market, with current yields at 2.45%, retail property yields are 25bp below 10-year UST. The Central office market may appear healthier with a current yield gap of 79bps as of 1Q13, but as time goes by and the 10-year UST continues to rise, this should begin to exert pressure first on strata-title market yields and later on cap rates that independent valuers use to value the various investment property portfolios of the listed Hong Kong property companies.
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FIGURE 41 FIGURE 42 Hong Kong property – office yields versus 10Y UST Hong Kong property – retail yields versus 10Y UST Spread Spread 12 12% 10 Year Bond Yield Retail yield 10 Central Office Yield 10% 10 Year Bond Yield 8 8% 6 6% 4 4% 2 2% - 0% Historical Avg. = 51bp -2 Historical Avg. = 51bp Current = 79bp -2% Current = -25bp -4 -4% 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 ------89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 ------Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Source: JLL, Datastream, Barclays Research Source: CEIC, Datastream, Barclays Research
Here, we believe it is very important to consider the maths behind how yields are calculated and, specifically, the low base effect. Since another way to express property yields is simply Rents divided by Price, there are two ways to restore yields – either rents would have to rise or price would have to fall. Four years ago, when property yields were close to 5.0%, a 50bps increase in yields would have only required rents to be raised by 10%. However, with current strata-title office and retail yields at 3.44% and 2.45%, respectively, a 50bps increase in yields would require rents to rise by 14.5% and 20%, respectively. Even in the listed space where valuers have tended to use more conservative cap rates of 4.0-4.5% for office and 4.5%-5.0% for retail, a 50bps hike in cap rates would require rents to rise by 10- 12.5%.
FIGURE 43 Hong Kong property – rental growth required to offset a 50bp increase in cap rates
Current yield 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
+50bps 3.5% 4.5% 5.5% 6.5% 7.5% 8.5%
Required rental growth 16.7% 12.5% 10.0% 8.3% 7.1% 6.3%
Source: Barclays Research
28 October 2013 27 Barclays | Hong Kong Property
IS IT PRICED IN? SHARE PRICE PERFORMANCE AND VALUATIONS
Although consensus has turned cautious, we believe our bearish market view has yet to be fully reflected into share prices and valuations.
Developers only down 8% ytd, landlords/REITs are down 1% First, from a share price performance perspective, despite the very slow housing sales to date, the group of listed Hong Kong developers has only corrected by 8%. Landlords/REITs are only down 1% ytd. Although neither group has outperformed the Hang Seng Index’s 2% ytd gain, considering the fact that 10-year UST has increased from 1.75% to 2.65%, the underperformance is very muted, in our view. Stretching further back to the start of 2012, we find that the developers’ 8% ytd correction has simply brought two-year cumulative performance (+23%) back in line with the Hang Seng Index (+25%) while the landlords/REITs’ 53% outstrips them both.
FIGURE 44 FIGURE 45 Hong Kong property – share price performance Hong Kong property – developers, landlords/REITs share price performance
200 0 11% 180 0
160 5% 0 2% 140 0 120 0% 0% -1% 0 100 0 -8% 80 -8% 0 -13% 1H 2013 2H 2013 YTD Developers Landlords/REITs HS Index Developers Landlords/REITs HS Index
Note: Share price performance up to October 23, 2013 Note: Share price performance up to October 23, 2013 Source: Datastream, Barclays Research Source: Datastream, Barclays Research
Price-to-book suggests commercial risk yet to be priced in As share prices have only seen minor fluctuations in 2013, the developers’ and landlords’ discounts to NAV and trailing price-to-book ratios have also remained largely unchanged. Based on June 2013 BVPS, as a group, the Hong Kong developers are currently trading at 0.73x trailing P/B, 31% lower than the long-term (1990-current) average of 1.08x trailing P/B and 0.95 SD below the norm. In comparison, the landlord/REITs’ current P/B of 0.73x is only 11% and 0.52 SD below the long-term average of 0.82x.
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FIGURE 46 FIGURE 47 Hong Kong property – developers’ trailing P/B ratios Hong Kong property – landlords/REITs’ trailing P/B ratios
2.5 1.4
1.2 2.0 1.0
1.5 0.8
1.0 0.6 0.4 0.5 0.2
- -
Developers (P/B) Avg +1SD -1SD Landlords/REITs (P/B) Avg +1SD -1SD Source: Datastream, Barclays Research Source: Datastream, Barclays Research
A more detailed review at the individual stock level shows that some stocks are indeed very depressed compared to their historical average valuations. For instance:
· SHKP’s 0.70x P/B (based on June 2013 BVPS) is 39% and 1.7 SD below its norm
· Swire Properties’ 0.64x P/B is 32% and 1.5 SD below its norm
· Henderson Land’s 0.53x P/B is 55% below and 1.3 SD below its norm · HK Land’s 0.56x P/B is 22% below and 1.0 SD below its norm
But for most of the other stocks, current valuations are still within 1.0 SD, suggesting that current share prices are nowhere near stressed levels. Furthermore, if one were to adopt the view that today’s developers are in essence more similar to landlords, the developers’ 0.73x average P/B is still higher than the landlord’s 0.68x P /B.
FIGURE 48 Current price-to-book ratios Average P/B One SD Current P/B vs. Average +/- SD (x) Cheung Kong 1.23x 0.46x 0.85x -31% -0.85x Henderson Land 1.18x 0.52x 0.53x -55% -1.27x SHKP 1.15x 0.27x 0.70x -39% -1.67x New World Dev 0.68x 0.33x 0.50x -27% -0.56x Sino Land 0.75x 0.35x 0.63x -16% -0.34x Hang Lung Prop 0.97x 0.34x 0.96x -1% -0.03x Kerry Props 0.75x 0.38x 0.63x -16% -0.32x Midland 2.13x 1.09x 1.52x -29% -0.56x Wharf 0.76x 0.18x 0.78x 3% 0.11x Hysan 0.61x 0.14x 0.63x 3% 0.12x Swire Prop 0.94x 0.20x 0.64x -32% -1.48x HK Land 0.71x 0.15x 0.56x -22% -1.02x Link REIT 1.11x 0.18x 1.09x -2% -0.09x Champion REIT 0.53x 0.13x 0.44x -18% -0.75x Weighted Average Developers 1.08x 0.38x 0.73x -31% -0.95x Landlords 0.78x 0.18x 0.68x -12% -0.57x REITs 1.00x 0.17x 0.97x -5% -0.21x Note: Current P/B based on June 2013 BVPS and share price as of 23 October 2013. Average P/B and SD based on data from 1990 onwards. Source: Datastream, Company data, Barclays Research estimates
28 October 2013 29 Barclays | Hong Kong Property
Whether the current valuations offer a sufficient cushion would depend on how the Hong Kong property companies’ BVPS were to change. If the BVPS were to be maintained, then the current valuations are indeed too low. However, if the past nine year’s average BVPS growth rate of 13% were to reverse, the current valuation could start to look very “normal” soon. Taking the cue from the 1998-2003 downcycle, the Hong Kong property companies saw their BVPS erode by an average of 5% p.a.
FIGURE 49 FIGURE 50 Hong Kong property – BVPS growth during 2004-12 upcycle Hong Kong property stocks – BVPS decline during 1998- 2003 downcycle
25% 15% 9% 20% 10% 7% 20% 17% 5% 15% 13% 0% 15% 13% 13% -5% 10% -4% 10% 8% -10% -7% -6% 6% -15% 5% -20%
0% -25% -21% 2004 2005 2006 2007 2008 2009 2010 2011 2012 1998 1999 2000 2001 2002 2003 BVPS y-y growth BVPS y-y growth
Note: Based on arithmetic average growth of 10 property companies: CK, HLD, Note: Based on arithmetic average growth of 10 property companies: CK, HLD, SHKP, NWD, Sino Land, HLP, Kerry, Wharf, Hysan, and HK Land. SHKP, NWD, Sino Land, HLP, Kerry, Wharf, Hysan, and HK Land. Source: Company data, Datastream, Barclays Research Source: Company data, Datastream, Barclays Research
Discounts to NAV Further cross-checking the trailing P/B valuations against our end-2013 NAV estimates, we find the following:
· The developers’ current average discount to NAV at 37% is 20% wider than the historical average of 17%.
· The landlords’ current average discount of 40% is 8% wider than their historical average discount of 32%.
FIGURE 51 FIGURE 52 Hong Kong property – developers’ discount to NAV Hong Kong property – landlords’ discount to NAV
30% 20% Sector Average= -17% Sector Average= -32% 0% 10%
-20% -10% -40% -30% -60% Developers - NAV Discount Landords - NAV Discount -50% Average Discount -80% Average Discount +1SD +1SD -70% -1SD -1SD -100% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Datastream, Barclays Research estimates Source: Datastream, Barclays Research estimates
28 October 2013 30 Barclays | Hong Kong Property
· In relative terms, SHKP and Henderson appear to be trading at the most depressed levels relative to their historical averages, with respective discounts of 29% and 25% wider than normal. Among the landlords, Swire Properties and HK Land, with respective NAV discounts of 15% and 13% wider than normal, appear most depressed.
· In absolute terms, Kerry offers the widest NAV discount at 50%. Henderson Land with its 48% discount is second, followed by New World Development and Hysan at 47% and 44% respectively.
FIGURE 53 Hong Kong property – developers’ and landlords’ NAV discounts are currently 20% and 8% wider than average 100% Current discount Historical avg. discount 80% 60% Developers Landlords 40% 20% 0% -20% -40% -60% -80% -100% SHKP Wharf Hysan Dev Kerry Kerry HK Land Sino Land Sino Landlords Developer Properties Properties Swire Prop Swire Hend Land Hang Lung Lung Hang New World Cheung Kong Cheung
Note: Current discount based on end-2013 NAV, historical average based on data from 1994-current period Source: Barclays Research estimates
Although the current discounts for developers and landlords of 37% and 40%, respectively, may appear generous, their NAV discount levels have tested 50%-70% during previous times of stress. Figure 54 below shows the NAV discount that the property stocks traded at during the 1998 Asian Crisis, SARS and the 2008 Credit Crisis.
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FIGURE 54 Hong Kong property – NAV discounts during times of stress
Discounts to NAV SDs below norm 98 Asian 2008 Credit 98 Asian 2008 Credit 9/11 2003 SARS 9/11 2003 SARS Crisis Crisis Crisis Crisis Developer Cheung Kong -35% -21% -28% -21% -1.9SD -0.5SD -1.2SD -0.5SD Henderson Land -52% -44% -49% -52% -1.5SD -1.1SD -1.3SD -1.5SD SHKP -62% -26% -35% -52% -2.5SD -0.8SD -1.2SD -2.0SD New World Dev -73% -68% -83% -65% -1.6SD -1.4SD -2.1SD -1.3SD Sino Land -66% -67% -64% -57% -1.6SD -1.6SD -1.5SD -1.1SD Hang Lung Properties -61% -32% -30% -35% -2.0SD -0.6SD -0.5SD -0.7SD Kerry Properties -81% -63% -59% -63% -2.4SD -1.4SD -1.2SD -1.4SD Midland (based on PB) NA NA 0.57 1.19 NA NA -1.4SD -0.9SD Landlords Wharf -76% -53% -46% -66% -3.4SD -1.6SD -1.1SD -2.6SD Hysan -77% -67% -66% -67% -2.8SD -2.0SD -1.9SD -2.0SD Swire Prop/Pac -61% -44% -48% -54% -2.5SD -1.2SD -1.5SD -2.0SD HK Land (USD) -61% -43% -42% -61% -2.3SD -1.0SD -0.9SD -2.3SD Great Eagle -82% -69% -85% -80% -1.8SD -1.1SD -2.0SD -1.7SD
REITs (Based on yield spreads)
Link NA NA NA 176bps NA NA NA 0.5SD Champion NA NA NA 1,850bps NA NA NA 3.0SD
Discount to NAV Developers avg -61% -46% -50% -49% -1.9SD -1.1SD -1.3SD -1.3SD Landlords avg -71% -55% -57% -66% -2.5SD -1.4SD -1.5SD -2.1SD Source: Barclays Research estimates
Earnings revisions As a final check on our whether our bearish outlook has been fully reflected into share prices and valuations, we consider consensus earnings and dividend forecast revisions. Compared to the start of the year, consensus earnings forecasts for FY14 (sourced from Bloomberg) for the developers have been adjusted down by 3.4%. But for the landlords, consensus earnings forecasts have in fact been raised by 1.0%. Consensus DPS forecast revisions for FY14 have also followed a similar trend. Developers’ FY14E DPS has been cut by 3.9% on average by Bloomberg consensus, while the landlords’ and REITs’ forecast dividends were raised by 10.4% and 0.7%, respectively.
FIGURE 55 FIGURE 56 Hong Kong property – consensus FY14E earnings revisions Hong Kong property – consensus FY14E DPS revisions
HKDmn Consensus FY14E underlying profit (total profit) HKD/share Consensus FY14E DPS (arithmetic average ) 90,000 1.60 ↓3.4% ↓3.9% 80,000 1.40 ↑10.4% 70,000 1.20 60,000 1.00 ↑0.7% 50,000 0.80 40,000 ↑1.0% 0.60 30,000 20,000 0.40 ↓7.0% 10,000 0.20 - - Developers Landlords REITs Developers Landlords REITs As of 1/1/2013 As of 23 Oct As of 1/1/2013 As of 23 Oct
Source: Bloomberg consensus estimates, Barclays Research Source: Bloomberg consensus estimates, Barclays Research
28 October 2013 32 Barclays | Hong Kong Property
STOCK SELECTION: FIRST PAIN, THEN GAIN
With property being a macro-driven sector, if our call for a 30% drop in Hong Kong home prices by end-2015 proves correct, we believe investors will need to take a tactical approach towards the sector. Rather than the traditional “buy and hold” strategy, as volatility increases, a trading-oriented strategy could be more effective in capturing the wide swings in NAV discounts. As past corrections have shown, in the initial stage of a correction, the pain can be severe as NAV discounts widen. But once the market starts to approach a bottom, even a temporary one, property stocks can rebound significantly. For instance:
· 1997-98: As the Asian Crisis took hold and Hong Kong home prices declined by nearly 50%, the Hang Seng Property Index (HSP) corrected by 75% from 27,778 to 7,010 from August 1997 to August 1998. However, once the housing market stabilised and home prices even rebounded by 9%, the HSP rebounded by 157% to 18,052 by July 1999.
· 2008-09: Partly driven by enthusiasm around China, the HSP rose as high as 38,179 in December 2007. Home prices continued to rise for another three months but, as the Credit Crisis took hold in late 2008, home prices fell by 23% and the HSP fell by 62% to 14,236 by November 2008. Subsequently, as home prices rebounded and recovered to pre-Crisis level, the HSP rebounded by 106% to 29,393 by October 2009.
· 2011-12: Even in the milder correction in late 2011/early 2012, when home prices only corrected by 6.5%, the HSP declined by 33%. However, as prices recovered, the HSP rebounded by 63% to 34,228 by January 2013.
FIGURE 57 Hong Kong property – Hang Seng Property Index vs CCL home price index
160 45,000 140 40,000 120 35,000 30,000 100 25,000 80 20,000 60 15,000 40 10,000 20 5,000 0 0 99 00 10 11 94 95 96 97 98 01 02 03 04 05 06 07 08 09 12 13 ------Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
CCL (LHS) Hang Seng Prop Index (RHS) Source: CCL, Datastream, Barclays Research
For these reasons, despite our negative view on the Hong Kong property market, we believe this is not a sector that investors can afford to ignore. Although the initial correction can be painful and should be avoided, the subsequent rebound can be equally painful for investors to miss.
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FIGURE 58 FIGURE 59 Hong Kong property stocks – performance 1H96-2H98 Hong Kong property stocks – performance 1H12 to now (h/h change) (h/h change)
60% 53% 30% 27% Developers Landlords Developers Landlords 25% 40% 25% 21% 27% 29% 28% 20% 15% 20% 13% 15%
10% 7% 0% 5% -3% 5% -10% -20% 0% -1% -5% -1% -40% -33% -39% -39% -40% -10% -60% -15% -13% 1H 96 2H 96 1H 97 2H 97 1H 98 2H 98 1H 12 2H 12 1H 13 2H 13 Source: Datastream, Barclays Research Note: Prices to 23 October 2013. Source: Datastream, Barclays Research Over the past two years, the Hong Kong property stocks appear to have followed a similar path to previous cycles, with 2012 mirroring 1996 and the first half of 2013 resembling 1H97. While we hope that this time is different, we believe investors should be prepared.
Four stock screens to minimize the initial pain But before we skip ahead to the subsequent rebound, we outline how investors should first prepare for the initial correction. This is about reducing risks and what can go wrong. We identify four criteria by which to screen the Hong Kong property stocks with a view to minimising potential downside and focusing on maximum defensiveness. These include: · Overseas or non-property exposure · Cashed up balance sheet · Short-duration and high-margin landbank · Depressed valuations FIGURE 60 Hong Kong property – Summary of stock selection screens HK property as Net debt-to- Current net Locked in Our estimates of percentage of NAV equity ratio debt Vs. June 08 FY14E development embedded margin of (As of End-2013E) (As of Jun-2013)* net debt profit development properties CK 29% 6.0% -41% 14% 21% HLD 61% 11.0% 18% 25% 19% SHKP ** 81% 19.6% 126% 33% 20% NWD 73% 47.5% 125% 38% 11% Sino 90% -1.7% NA 7% 20% HLP 54% 0.3% NA 0% 75% Kerry 64% 39.2% 99% 0% 13% Midland NA -74.1% 2% NA NA Wharf 68% 20.3% 147% NA NA Hysan 101% 6.3% 73% NA NA Swire Prop 78% 14.7% NA NA NA HK Land 92% 12.6% 29% NA NA Link 98% 13.7% 2% NA NA Champion ** 128% 23.7% 2% NA NA Note: *For REITs, total debt-to-total assets ratio used. **SHKP and Champion’s net debt data adjusted to reflect Xujiahui and FSI acquisitions. Source: Company data, Barclays Research estimates
28 October 2013 34 Barclays | Hong Kong Property
Overseas or non-property exposure In light of our bearish view on the Hong Kong property market, we believe the more exposure that companies have outside Hong Kong the better. This naturally favours the conglomerates and those companies that have made the initial push into overseas markets such as China.
· Most overseas or non-property exposure: Among our covered stocks, Cheung Kong, via its exposure to Hutchison Whampoa, has the least exposure to the Hong Kong property market, at 29% of its current NAV estimate. Hang Lung Properties, with 46% of its assets in China, is second with 54% exposure to Hong Kong. Henderson Land, with its China investment properties (IP) exposure and stake in HK & China Gas, is third with 61% exposure to Hong Kong.
· Least overseas or non-property exposure: At the other end of the spectrum, the Hong Kong REITs and Hysan are almost entirely exposed to Hong Kong property.
· Somewhere in the middle: Kerry and Wharf, with 48% and 38% exposure to China property, respectively, have 64% and 68% NAV exposure to Hong Kong, respectively.
FIGURE 61 Hong Kong property – companies’ current NAV exposure
HK - China & Non Residential HK - Retail HK - Office HK - Others Total HK Overseas Property
Cheung Kong 20% 4% 4% 0% 29% 13% 58% HLP 20% 22% 10% 2% 54% 46% 0% Henderson Land 18% 24% 17% 2% 61% 17% 22% Kerry 42% 8% 6% 8% 64% 48% -13% Wharf 9% 41% 18% 0% 68% 38% -6% NWD 38% 25% 8% 2% 73% 19% 9% HK Land 0% 18% 60% 0% 78% 36% -14% SHKP 22% 36% 23% 1% 81% 23% -5% Sino 36% 35% 15% 5% 90% 14% -5% Swire Prop 11% 23% 58% 0% 92% 16% -9% Link 0% 98% 0% 0% 98% 19% -17% Hysan 13% 52% 35% 1% 101% 4% -6% Champion 0% 34% 94% 0% 128% 2% -30% Note: Based on 2013E NAV estimates. Source: Barclays Research estimates
Cashed up balance sheet The second characteristic that we look for is a “cashed-up” balance sheet and very low nominal net debt levels. Considering that the Hong Kong property companies’ current net- debt-to-equity ratio averages only 15.4%, this may seem overly cautious. But when we consider how much asset and equity values have increased since 2008, we believe a review of how the various companies’ gearing and net debt positions have evolved should shed light on how the companies are positioned for the future.
28 October 2013 35 Barclays | Hong Kong Property
FIGURE 62 Hong Kong property – Headline gearing levels: June 2013 vs June 2008
60% Gearing ratio (%)
50% Jun-08 Jun-13
40%
30% Net 20% Cash 10%
0%
-10%
Source: Company data, Barclays Research
Net-debt-to-equity ratios Comparing June 2013 to June 2008 levels, developers’ gearing has fallen to 15.4% from 17.0%, while landlords’ gearing has declined to 15.7% from 16.4%. The Hong Kong REITs saw even greater improvement, with total-debt-to-total assets dropping to 14.9% from 23.9%. All the landlords and REITs reported a drop in gearing, while the developers were mixed with half the group showing reduced gearing (CK, HLD, Sino Land) and the other half increased gearing (SHKP, NWD, HLP and Kerry).
Nominal net debt, a more telling picture A more telling picture emerges when we examine by how much nominal net debt has increased. As a group, the developers’ net debt increased by 53.1% from HKD139bn as of June 2008 to HKD213.4bn as of June 2013. The landlords saw an even greater increase with nominal net debt rising 108.4% from HKD43.4bn to HKD90.4bn. The REITs were actually the most conservative, with net debt only edging up slightly by 1.7% from HKD23.7bn to HKD24.1bn (see Figure 199 in Appendix for full details).
· Biggest reduction in net debt: Among our 14 covered companies, only two reported an absolute decline in net debt. Sino Land had the biggest percentage decline as it went from a HKD12.3bn net debt position to HKD1.75bn net cash. Cheung Kong had a similar quantum improvement as it took its net debt down from HKD35.2bn to HKD20.8bn.
· Biggest increase in net debt: At the opposite end of the spectrum, Wharf had the biggest percentage increase, with net debt rising 147% or HKD31.7bn from HKD21.6bn to HKD53.3bn. In absolute terms, partly driven by the recent HKD27.7bn Xujiahui land purchase, SHKP had the biggest nominal increase (HKD42.2bn) as its net debt increased by 126% from HKD33.5bn to HKD75.7bn. Other companies to report a near 100% increase in net debt over the period include NWD (+125% from HKD29.4bn to HKD66.2bn) and Kerry (+99.2% from HKD14.9bn to HKD29.7bn).
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FIGURE 63 Hong Kong property – Net debt level: June 2013 vs June 2008
80,000 Net Debt (HKDmn) 70,000 Jun-08 Jun-13 60,000 50,000 40,000 30,000 20,000 10,000 0 -10,000
Source: Company data, Barclays Research
Short-duration and high-margin landbank Among our stock selection criteria, the third is very specific to the developers. We focus on the average embedded margin of the Hong Kong development landbank. We believe those developers with cheaper land costs and higher embedded margin should have much greater flexibility in their pricing strategy. For a company like Hang Lung Properties, which has an embedded margin of 75%, if it were to cut prices by 20% it would still be able to book a very respectable 55% margin on sales, on our estimates. Conversely, for a project that only has an embedded margin of 15%, a price cut of 20% would mean a “realised loss” and thus the need to make a provision.
FIGURE 64 FIGURE 65 Hong Kong property – percentage of FY14E development Hong Kong property – embedded development margin based profit locked in on current prices 38% 40% 80% 75%
35% 32% 70%
30% 60% 25% 25% 50%
20% 40% 14% 15% 30% 21% 20% 20% 19% 10% 7% 20% 13% 11% 5% 10% 0% 0% 0% 0% NWD SHKP HLD CK Sino HLP Kerry HLP CK SHKP Sino HLD Kerry NWD Locked in FY14E development profit Embedded margin of development properties
Source: Barclays Research estimates Source: Barclays Research estimates
28 October 2013 37 Barclays | Hong Kong Property
FIGURE 66 FIGURE 67 Hong Kong property – land price at Kau To Shan Hong Kong property – land purchases in 2011 10,885 12,000 10,551 10,303 35,000 42.5% 45% 9,551 9,071 40% 10,000 8,382 30,000 33.3% 6,837 35% 8,000 25,000 5,332 30% 6,000 20,000 25% 4,000 15,000 20% 2,000 15% 10,000 9.3% 0 4.6% 10% 5,000 3.2% STTL STTL STTL STTL STTL STTL STTL STTL 1.1% 0.8% 0.5% 5% 525 562 567 565 566 563 579 578 - 0% Aug- May- Aug- Jan-13 Mar- Aug- Sep-13Sep-13 SHKP CK NWD Kerry Sino Nan COLI Swire 11 12 12 13 13 Land Fung AV (HKDpsf) Consideration (HKDmn) % of total
Note: STTL = Shatin Town Lot Source: Land Department, Barclays Research estimates Source: Lands Department, Barclays Research Another way to look at this issue is to consider the vintage of the landbank. Until 3Q13 when land prices began to correct (see Figure 66), the competitive dynamics of the land tender/auction would normally mean that the winning developer’s entry margin into a project was only about 10-15%, if not less. As home prices increase after the purchase, however, margins expand. As home prices fall, margins contract (Figure 70).
Looking back over the past three years, Cheung Kong and SHKP were the biggest initial buyers of land back in 2011 and 2012 but they have since stopped.
· In 2011, SHKP and CK spent HKD30.2bn and HKD23.7bn each buying land in Hong Kong, accounting for 42.5% and 33.3% of the overall residential land sales, respectively.
· In 2012, CK and SHKP reduced their land purchase to HKD12.5bn and HKD10.5bn, respectively, but were still the leading land buyers with a residential land sales market share of 19.9% and 16.6%, respectively.
This year, SHKP has only committed HKD2.2bn to buying land in Hong Kong while CK did not buy any land at all. Instead, Kerry and Wheelock have been the largest land buyers, committing HKD11.7bn and HKD11.3bn, respectively.
FIGURE 68 FIGURE 69 Hong Kong property – land purchases in 2012 Hong Kong property – land purchases in 2013
14,000 25% 14,000 30.0% 19.9% 24.5% 12,000 12,000 23.8% 25.0% 16.6% 20% 10,000 10,000 20.0% 10.1% 15% 8,000 8,000 9.5% 9.5% 6,000 15.0% 6.9% 10% 6,000 9.0% 4,000 4.3% 10.0% 4.1%4.0%3.3% 5.8% 5% 4,000 4.6% 2,000 1.4% 3.3% 2,000 1.4%1.3% 5.0% - 0% 0.2% - 0.0%
Consideration (HKDmn) % of total Consideration (HKDmn) % of total
Source: Land Department, Barclays Research estimates Source: Lands Department, Barclays Research estimates
28 October 2013 38 Barclays | Hong Kong Property
To model how development margins change over time, the following illustration (Figure 70) assumes a developer buys land with an entry margin of 20% and subsequently sells the project at T+3 years. Once the land costs is fixed, the theoretical margin basically moves in the same direction as the subsequent home price change in the ensuing three years. Based on the past few years of home price appreciation, this top-down model suggests that for land bought in 2011 the 24% home price appreciation since then has boosted margins to 35%. For land bought in 2012 the average margin would be 30% and for land bought in 2013 the average margin would only be 20%.
FIGURE 70 Hong Kong property – how development margins change
70% Theoretical margin Home price appreciation in T+3 years 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Landbank vintage (T)
Note: Landbank vintage refers to year of purchase. Source: Barclays Research estimates
Depressed valuations: Below 0.5x P/B or 1.644 SD As an initial valuation screen, we prefer to use trailing price-to-book. NAV is good but since it is a subjective measure, it is difficult to establish a common language as assumptions and cap rates may vary.
In screening for value, we look for one of two conditions: 1) a trailing P/B ratio that is 1.644 SD below the historical average; and/or 2) a P/B ratio that is below 0.5x book. Since 1.644 SD is meant to cover 90% probability, this should leave only 5% to the downside. But this measure could be overly harsh, we believe, as some property stocks have had very large SD swings. Take Kerry, for instance. With a historical average P/B of 0.75x since 1997 and one SD at 0.38x, to trade at 1.644 SD below book would imply a P/B of 0.12x. This is too harsh. For this reason, as stocks start to approach 0.5x P/B, we believe this should be another signal that value is starting to emerge.
28 October 2013 39 Barclays | Hong Kong Property
FIGURE 71 Hong Kong property stocks – valuation screen: Price-to-book below 0.5x or >1.644SD below norm
Current P/B vs. Average +/- SD (x) <0.5x P/B >1.644 SD
Cheung Kong 0.85x -31% -0.85x Henderson Land 0.53x -55% -1.27x SHKP 0.70x -39% -1.67x YES New World Dev 0.50x -27% -0.56x YES Sino Land 0.63x -16% -0.34x Hang Lung Prop 0.96x -1% -0.03x Kerry Props 0.63x -16% -0.32x Midland 1.52x -29% -0.56x Wharf 0.78x 3% 0.11x Hysan 0.63x 3% 0.12x Swire Prop 0.64x -32% -1.48x HK Land 0.56x -22% -1.02x Link REIT 1.09x -2% -0.09x Champion REIT 0.44x -18% -0.75x YES Weighted Average
Developers 0.73x -0.31x -0.95x Landlords 0.68x -0.12x -0.57x REITs 0.97x -0.05x -0.21x Note: Current P/B based on current share price and June 2013 BVPS. Average P/B and SD based on data from 1990 onwards. Source: Company data, Barclays Research
Using this criteria, we find the following:
· Stocks with a trailing P/B below 1.644 SD: SHKP is the only stock currently trading at more than 1.644 SD below its norm. Swire Properties at -1.48 SD is starting to get close.
· Stocks with a trailing P/B below 0.5x: Champion REIT’s 0.44x P/B is the lowest among our coverage group. NWD and HLD at 0.50x and 0.53x trailing P/B are also close.
28 October 2013 40 Barclays | Hong Kong Property
STOCK PICKS: CK AND HLP, MOST DEFENSIVE
A defensive approach Using the four criteria for screening outlined in the prior section, we summarise here the companies that have the most defensive characteristics. Specifically, we use the following cut-off points:
· Overseas or non-property exposure: Less than two-thirds of current NAV exposure to Hong Kong property.
· Cashed up balance sheet:
- Net debt-to-equity ratio below 10%.
- Absolute net debt below June 2008 levels.
· Landbank duration: More than 33% of FY14 development profit locked in.
· Embedded margin: Embedded development margin above 30%.
FIGURE 72 Hong Kong property: Which companies are most defensive?
Less than 2/3 Net debt-to- >33% FY14 Embedded exposure equity ratio Absolute net development margin Defensiveness to HK Prop below 10%* debt below 2008 profit locked in above 30% count
CK Y Y Y 3 HLD Y 1 SHKP ** Y 1 NWD Y 1 Sino Y Y 2 HLP Y Y Y 3 Kerry Y 1 Midland Y 1 Wharf Y 1 Hysan Y Y 2 Swire Prop Y 1 HK Land Y 1 Link Y 1 Champion ** Y 1
Note: *For REITs, total debt-to-total assets ratio used. **SHKP and Champion’s net debt data adjusted to reflect Xujiahui and FSI acquisitions. Source: Barclays Research estimates
In view of our negative sector outlook, we believe the more defensive characteristics a company has (ie, the higher its ‘defensiveness count’ in the table above), the better, as NAVs are likely to be more resilient. Among the stocks in our coverage universe, Cheung Kong and Hang Lung Properties appear most defensive, hitting three of the five categories. Sino Land and Hysan are second with two of the five. The others have one defensive characteristic each.
28 October 2013 41 Barclays | Hong Kong Property
Valuation methodology We incorporate the above framework in setting our target NAV discounts for the stocks, from which we derive our 12-month price targets. Given our forecast for home prices to fall by 30% by end-2015, our starting point on valuation is to base target discounts on mid- cycle levels minus one standard deviation. As one standard deviation is meant to cover 68% probability, our approach should only leave 15.9% potential downside. Where companies have got more defensive characteristics, we have narrowed their target discounts by 5pp to 10pp.
We apply the narrowest target NAV discount, at 20%, for Cheung Kong and Hang Lung Properties given their defensive profiles (we rate both stocks OW). For Sino Land and Hysan, both with two defensive characteristics, we set their target discounts at 40% and 45%, respectively. For the remainder, our target discounts are generally between 45% and 55%.
Applying this valuation overlay, of our 14 covered stocks, 8 are rated UW, 4 EW and only 2 OW. As a group, we expect our UW-rated stocks to potentially fall 16% on average to our 12-month price targets and our EW-rated stocks to move within a range of 1% to -7%. For our 2 OW-rated stocks, we expect potential average upside to our price targets of 10%.
Stock strategy – What to do? · Underweight the sector: There is no way to sugar-coat this. If we are right and Hong Kong home prices do drop by 30% by end-2015, we expect share prices for the entire sector to fall.
· Maximum defensiveness – Cheung Kong and Hang Lung Properties our top picks: We believe CK and HLP should prove most resilient given their healthy balance sheets and strong overseas exposure.
· Counter-intuitive stocks – Sino Land and Hysan: Given Sino Land’s and Hysan’s almost pure Hong Kong exposure, these are counter-intuitive stocks as we head into a downcycle. We believe both companies have prepared well by cashing up their balance sheets and maintaining strong financial discipline around new investments. These characteristics should allow Sino Land and Hysan to take advantage of future bargain- hunting opportunities, in our view, and should lay the groundwork for medium-term growth.
· The consensus view, but we believe it’s right – Cheung Kong and Link REIT: Our OW rating on Cheung Kong and EW rating on Link REIT appear to be in line with the consensus view. According to Bloomberg (as of October 23, 2013, there are 22 “Buys” and 1 “Hold” on Cheung Kong from sell-side analysts, and 12 “Buys”, 6 “Holds” and 2 “Sell” on Link REIT. We believe consensus has rightly identified Cheung Kong’s defensive characteristics in Hutchison, and Link REIT’s defensive exposure to the staples sector. We believe these characteristics should allow the two stocks to be relatively resilient on a 12-month view.
28 October 2013 42 Barclays | Hong Kong Property
FIGURE 73 Hong Kong property stocks – summary of valuation and ratings
Mkt Pot. up/ Disc. to Disc. to Cap Share Price Downside Current Current Forward Forward Target Year P/E (x) Dividend Yield (USDmn) Curr. Price Target to PT Rating NAV NAV NAV NAV Disc. End FY12A FY13A/E FY14E FY12A FY13A/E FY14E Property Developers 1 HK Cheung Kong 37,041 HKD 122.40 135.00 10% OW 169.38 -28% 168.35 -27% -20% Dec 10.4 10.1 10.4 2.6% 2.7% 2.8% 12 HK Henderson Land 16,030 HKD 46.45 46.70 1% EW 89.68 -48% 84.92 -45% -45% Dec 15.6 15.0 13.7 2.3% 2.3% 2.3% 16 HK SHKP 35,206 HKD 101.60 84.00 -17% UW 165.99 -39% 153.43 -34% -45% Jun 12.1 14.4 14.7 3.3% 3.3% 3.3% 17 HK New World Dev 8,938 HKD 10.96 8.52 -22% UW 20.63 -47% 18.94 -42% -55% Jun 11.8 10.8 9.4 3.5% 3.8% 3.8% 83 HK Sino Land 8,438 HKD 11.18 9.69 -13% UW 18.45 -39% 16.15 -31% -40% Jun 12.3 10.0 12.2 4.1% 4.5% 4.5% 101 HK Hang Lung Prop 14,730 HKD 25.55 27.95 9% OW 36.11 -29% 34.93 -27% -20% Dec 18.5 29.0 16.2 2.9% 2.9% 2.9% 683 HK Kerry Properties 6,260 HKD 33.30 28.06 -16% UW 66.64 -50% 62.35 -47% -55% Dec 10.2 11.0 14.4 2.9% 2.7% 2.7% 1200 HK Midland 295 HKD 3.05 2.25 -26% UW NA NA NA NA NA Dec 9.9 - 8.7 - 55.7 8.0% 0.0% 0.0% Property Investors 4 HK Wharf 27,062 HKD 67.65 59.50 -12% UW 104.74 -35% 108.23 -37% -45% Dec 18.6 18.1 17.8 2.4% 2.6% 2.7% 14 HK Hysan 4,945 HKD 35.85 33.32 -7% EW 64.32 -44% 60.57 -41% -45% Dec 28.9 23.5 18.6 2.6% 3.3% 3.4% 1972 HK Swire Properties 16,825 HKD 21.45 18.65 -13% UW 37.32 -43% 33.90 -37% -45% Dec 18.1 22.2 19.0 2.8% 2.4% 2.6% HKL SP HK Land 15,011 USD 6.25 5.59 -11% UW 11.01 -43% 10.16 -38% -45% Dec 18.9 15.5 16.2 2.7% 2.9% 2.9% Mkt Upside/ Potential Spread Cap Share Price Downside EV Dividend Total on 10-yr Year P/E (x) Dividend Yield (USDmn) Curr. Price Target to PT Rating (HKDmn) Yield Return BVPS Bond (bps) End FY12A FY13A/E FY14A/E FY12A FY13A/E FY14A/E HK REITs 823 HK Link REIT 11,534 HKD 38.90 37.94 -2% EW 100,777 4.1% 1.3% 35.68 148 Mar 29.9 26.5 24.6 3.3% 3.8% 4.1% 2778 HK Champion REIT 2,565 HKD 3.47 3.31 -5% EW 31,406 5.5% 0.9% 7.96 292 Dec 23.5 15.1 21.2 6.0% 5.5% 5.0%
Notes: Prices as of the market close on 23 October 2013. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Real Estate industry view is Negative. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, company data, Barclays Research estimates
28 October 2013 43 Barclays | Hong Kong Property
KEY INVESTMENT RISKS
Upside risks An earlier pre-emptive unwind of property cooling measures: Our base case expects the Hong Kong government to only roll back its previous property cooling measures once a 15- 20% correction in residential prices has taken place. By this time, we believe it would be too late to reverse the negative wealth effect and arrest the downward spiral of homebuyers’ sentiment. However, we see upside risk to our view if the Hong Kong government were to leapfrog this sequence of events and remove the cooling measures pre-emptively, which might engineer a soft landing for the property market. Under this scenario, Hong Kong property stocks might return to historical mid-cycle NAV discounts.
More QE and more stimulus, bond yields drops back below 2.0%: The impact of rising bond yields on cap rates is one of our key concerns for the Hong Kong property sector. While Barclays economics team forecasts 10-year UST to rise to 3.5% by 3Q14, in the event that rather than tapering we see additional easing that results in bond yields dropping back below 2.0%, the low current property yields in Hong Kong may be sustained. Under such a scenario, as office and retail property values hold, it may be possible for stocks to return to mid-cycle NAV discounts.
A rising tide lift all boats: At 8.49x trailing P/E, Chinese equities (ie, H-shares) are not expensive relative to their historical average trailing P/E of 13.9x based on data since 2001. Valuation also compares favourably with the S&P 500’s current 16.8x trailing P/E. Should Chinese equities stage a big rally and help to attract more fund flows into the region, this rising tide may also lift valuation multiples for the Hong Kong property sector as well. The Hong Kong developers and landlords are trading at 14.0x and 18.4x P/E (2014E). If the H- shares were to revert to the mean and rise by 64%, multiples for the Hong Kong developers and landlords would need to expand to 23.0x and 30.2x, respectively, to stay in line.
Downside risks Second-round and contagion effects, and rental declines could exacerbate the yield equalisation process: With three key variables to the yield equalisation equations, we have had to fix certain variables in arriving at our base case of a 30% decline in residential prices in the next two years. Specifically, we have not factored any significant drop in housing rents, which could further depress yields in an unfavourable manner. Furthermore, while we have tried to consider the potential negative wealth effect from a housing correction, the knock-on effect on the broader economy may be larger than we expect. These second- and third-round effects could cause property rents to weaken further and exacerbate the yield equalisation process.
What if overseas markets are even worse than Hong Kong? An underlying premise behind our preference for overseas exposure is that we expect those markets will not fall more than Hong Kong’s 30%. If we were to face a synchronised downturn in multiple markets, overseas exposure may not offer the defensiveness that we hope for. Nevertheless, in such a scenario, we note that with Chinese commercial properties generally being valued at a 7-8% yield vs Hong Kong commercial properties at 4-5% (2-3% in strata-title), overseas assets offer a greater buffer, in our opinion.
28 October 2013 44 Barclays | Hong Kong Property
DISCOUNTS TO NAV
FIGURE 74 FIGURE 75 Cheung Kong – Discount to NAV Henderson Land – Discount to NAV 20% 40% Average Disc.= -16% 30% Average Disc. = -23% 10% 20% 0% 10% 0% -10% -10% -20% -20% -30% -30% -40% -50% -40% -60% -50% -70% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Hend Land - NAV Discount Average Discount CK - NAV Discount Average Discount Source: Barclays Research Source: Barclays Research
FIGURE 76 FIGURE 77 SHKP – Discount to NAV NWD – Discount to NAV 60% 40% Average Disc. = -10% Average Disc.= -39% 40% 20%
20% 0%
0% -20%
-20% -40%
-40% -60%
-60% -80%
-80% -100% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 New World - NAV Discount Average Discount SHKP - NAV Discount Average Discount Source: Barclays Research Source: Barclays Research
FIGURE 78 FIGURE 79 Sino Land – Discount to NAV Hang Lung Prop – Discount to NAV 60% 100% Average Disc.= -32% Average Disc.= -19% 40% 80% 60% 20% 40% 0% 20% -20% 0% -20% -40% -40% -60% -60% -80% -80% 2001 2005 2009 2013 1994 1995 1996 1997 1998 1999 2000 2002 2003 2004 2006 2007 2008 2010 2011 2012 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sino Land - NAV Discount Average Discount HLP - NAV Discount Average Discount
Source: Barclays Research Source: Barclays Research
28 October 2013 45 Barclays | Hong Kong Property
FIGURE 80 FIGURE 81 Kerry Properties – Discount to NAV Wharf Holdings – Discount to NAV
40% 10% Average Disc.= -31% Average Disc. = -38% 20% 0% -10% 0% -20% -20% -30%
-40% -40% -50% -60% -60% -80% -70% -100% -80% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1996 Kerry Prop - NAV Discount Average Discount Wharf - NAV Discount Average Discount
Source: Barclays Research Source: Barclays Research
FIGURE 82 FIGURE 83 Hysan Development – Discount to NAV Swire Properties – Discount to NAV 0% 0% Average Disc. = -42% -10% -10% -20% -20% -30% -30% -40% -50% -40%
-60% -50% -70% -60% Average Disc.= -28% -80% -90% -70% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Swire Prop/Pac - NAV Discount Average Discount Hysan - NAV Discount Average Discount Source: Barclays Research Note: NAV discount prior to January 2012 is for Swire Properties Source: Barclays Research
FIGURE 84 FIGURE 85 HK Land – Discount to NAV Developers Vs Landlords – Discount to NAV 30% 40% 20% Average Disc.= -30% 20% 10% 0% 0% -10% -20% -20% -40% -30% -40% -60% -50% -80% -60% -70% -100% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 HK Land - NAV Discount Average Discount Developers NAV Disc. Landlords NAV Disc.
Source: Barclays Research Source: Barclays Research
28 October 2013 46 Barclays | Hong Kong Property
PRICE-TO-BOOK RATIOS
FIGURE 86 FIGURE 87 Cheung Kong – Price-to-book ratio Henderson Land – Price-to-book ratio 3.0 3.5
2.5 3.0 2.5 2.0 2.0 1.5 1.5 1.0 1.0
0.5 0.5
- -
Cheung Kong (P/B) Avg +1SD -1SD Henderson Land (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
FIGURE 88 FIGURE 89 SHKP – Price-to-book ratio NWD – Price-to-book ratio 2.5 2.5
2.0 2.0
1.5 1.5
1.0 1.0
0.5 0.5
- -
SHKP (P/B) Avg +1SD -1SD NWD (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
FIGURE 90 FIGURE 91 Sino Land – Price-to-book ratio Hang Lung Properties – Price-to-book ratio 2.5 3.0
2.0 2.5
2.0 1.5 1.5 1.0 1.0 0.5 0.5
- -
Sino Land (P/B) Avg +1SD -1SD Hang Lung Properties (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 47 Barclays | Hong Kong Property
FIGURE 92 FIGURE 93 Kerry Properties – Price-to-book ratio Midland Holdings – Price-to-book ratio 2.5 8.0 7.0 2.0 6.0 5.0 1.5 4.0 1.0 3.0 2.0 0.5 1.0 - - 01 02 03 04 05 06 07 08 09 10 11 12 13 ------May May May May May May May May May May May May May Kerry (P/B) Avg +1SD -1SD Midland (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
FIGURE 94 FIGURE 95 Wharf Holdings – Price-to-book ratio Hysan Development – Price-to-book ratio 1.4 1.2
1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4
0.2 0.2
- -
Wharf (P/B) Avg +1SD -1SD Hysan (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
FIGURE 96 FIGURE 97 Swire Properties – Price-to-book ratio HK Land – Price-to-book ratio 1.8 1.4
1.6 1.2 1.4 1.0 1.2 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 - -
Swire Prop/Pac (P/B) Avg +1SD -1SD HK Land (P/B) Avg +1SD -1SD
Note: P/B ratio prior to January 2012 is for Swire Properties Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 48 Barclays | Hong Kong Property
FIGURE 98 FIGURE 99 Link REIT – Price-to-book ratio Champion REIT – Price-to-book ratio
1.8 1.0 1.6 0.9 1.4 0.8 1.2 0.7 0.6 1.0 0.5 0.8 0.4 0.6 0.3 0.4 0.2 0.2 0.1 - -
Link REIT (P/B) Avg +1SD -1SD Champion REIT (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 49 Barclays | Hong Kong Property
Companies
COMPANIES
28 October 2013 50 Barclays | Hong Kong Property
CHEUNG KONG (1 HK; OW; PT HKD135.00; +10%)
1 HK / 0001.HK A consensus favourite – for good reasons Stock Rating We initiate coverage of Cheung Kong with an OW rating and a price target of HKD135.00. OVERWEIGHT With 22 “Buy” and 1 “Hold” ratings among sell-side analysts tracked by Bloomberg (as of Industry View 23 October 2013), Cheung Kong is a consensus favourite among the Hong Kong property NEGATIVE stocks. In this case, we agree with consensus. With gearing of only 5% and only 29% NAV Price Target exposure to Hong Kong property, Cheung Kong’s strong balance sheet and diversified HKD 135.00 income source should make it one of the most resilient property stocks, in our opinion, Price (23-Oct-2013) when local property prices start to correct. With 10% potential upside to our price target, HKD 122.40 Cheung Kong is one of only two stocks we rate OW among the Hong Kong property Potential Upside/Downside counters. +10% · 5% gearing and lower net debt than June 2008 – Cheung Kong has one of the
strongest balance sheets among the Hong Kong property companies. Its 5% net-debt- to-equity ratio is the third-lowest in the sector after Sino Land (net cash) and Hang Lung Properties (0.3%). Notably, Cheung Kong is one of only two Hong Kong property companies to have reduced its absolute net debt position over the past five years. As of June 2013, Cheung Kong’s HKD20.8bn net debt is 41% lower than the HKD35.2bn net debt as of June 2008. We believe its strong balance sheet ought to provide it with flexibility to hunt for bargains once property prices start to correct.
· Only 29% NAV exposure to Hong Kong property – We estimate that Cheung Kong has only 29% exposure to the local property market, with 20% in development properties for sale and 9% in investment properties. While Cheung Kong was active in land purchases in 2011, it has largely abstained from buying land over the past two years, except for the HKD9.6bn spent on the Tsuen Wan Bayside site. We estimate Cheung Kong’s Hong Kong developments have an embedded margin of 21%, the second highest in the sector after Hang Lung Properties’ estimated 75%.
· China development entering harvesting stage – In 1H13, China development contributed HKD6.8bn of Cheung Kong’s total HKD14.7bn in property sales turnover. With China contract sales (including Hutchison’s) of HKD24bn in 2012, turnover contributions from China development may soon exceed Hong Kong’s.
· Waiting for consent to presale in Hong Kong – In Hong Kong, Cheung Kong is continuing to wait for consent to presale to be granted for its three major projects: City Point in Tsuen Wan (1,717 units), Mont Vest in Tai Po (1,071 units) and Lohas Park Phase 3 in Tseung Kwan O (1,648 units). In keeping with Cheung Kong’s asset turnover strategy, it would look to commence presales procedures once the consent is given.
· Selective disposal of non-core assets – While 1H13 presales were slow, Cheung Kong disposed of Kingswood Ginza to Fortune REIT for HKD5,849mn in August 2013 (at an estimated net property yield of 3.95%). We estimate this sale should allow Cheung Kong to book a gain of about HKD2.1bn in 2013.
Cheung Kong (Holdings) Ltd.(0001.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 17.75A 11.77A 12.08E 11.81E 13.77E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 19.88A 12.16A 12.08E 12.95E 13.36E P/E 6.9 10.4 10.1 10.4 8.9 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 51 Barclays | Hong Kong Property
Valuation methodology Our HKD135 price target is based on a 20% discount to our end-2015 NAV estimate of HKD168.35 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, Cheung Kong has traded at an average discount of 16% with a one standard deviation swing of 10%. Our 20% discount is approximately 6pp narrower than mid-cycle minus one SD, and reflects Cheung Kong’s strong defensive characteristics.
Key investment risks Downside risks to our price target include:
Cheung Kong’s 49.9% stake in Hutchison Whampoa – This makes up 52% of Cheung Kong’s current NAV. Fluctuations in Hutchison’s share price would directly affect our NAV estimate for Cheung Kong.
Less exposed to Hong Kong but not immune – Although we believe Cheung Kong’s earnings are less vulnerable than others’ to a drop in home prices, they are not immune. We estimate Hong Kong development profit will still contribute 17% and 21% to Cheung Kong’s 2014E and 2015E PBT. Thus, a 30% drop in home prices in the next two years poses a risk to earnings.
28 October 2013 52 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Cheung Kong (Holdings) Ltd. (0001.HK) Stock Rating: OVERWEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 122.40 Revenue 31,106 35,158 49,634 52,049 18.7% Price Target HKD 135.00 EBITDA N/A N/A N/A N/A N/A Why Overweight? With gearing of 5% and only 29% EBIT 11,650 15,214 10,434 13,515 5.1% estimated NAV exposure to the Hong Kong property Pre-tax income 11,154 14,633 9,787 12,938 5.1% market, we view Cheung Kong as one of the most Net income 32,152 27,980 27,354 31,899 -0.3% defensive stocks within our property coverage. The EPS (reported) (HKD) 13.88 12.08 11.81 13.77 -0.3% company’s diversified income source and strong balance sheet should give it the flexibility required to Net income (adj) 27,267 27,980 27,354 31,899 5.4% navigate a potential downturn in the property market, EPS (adj) (HKD) 11.77 12.08 11.81 13.77 5.4% in our opinion. Diluted shares N/A N/A N/A N/A N/A
DPS (HKD) 3.16 3.33 3.43 3.43 2.8% Upside case HKD 143.09 Profit growth (%) -33.7 2.6 -2.2 16.6 N/A An earlier-than-expected reversal of property cooling
measures could allow the Hong Kong property stocks Margin and return data Average to trade back up to their mid-cycle discounts to NAV. EBITDA margin (%) N/A N/A N/A N/A N/A For Cheung Kong, this could potentially enable its EBIT margin (%) 37.5 43.3 21.0 26.0 31.9 discount to NAV to narrow to its mid-cycle average of Pre-tax margin (%) 116.2 93.0 61.0 68.5 84.7 15%. Net margin (%) 103.4 79.6 55.1 61.3 74.8 Net (adj) margin (%) N/A N/A N/A N/A N/A Downside case HKD 108.41 ROIC (%) 7.5 7.3 6.9 7.8 7.4 Should the decline in home prices trigger a greater ROA (%) 7.0 6.8 6.5 7.3 6.9 follow-on impact on rents and the broader local ROE (%) 8.5 8.2 7.6 8.3 8.1 economy, we believe property companies' discounts to NAV could widen further to the mid-cycle discount minus 1.5-2.0SD. Our downside case for CK factors in Balance sheet and cash flow (HKDmn) CAGR a 36% discount to NAV. Tangible fixed assets 39,623 35,645 37,167 38,782 -0.7%
Intangible fixed assets N/A N/A N/A N/A N/A Upside/Downside scenarios Cash and equivalents 21,167 21,167 21,167 21,167 0.0% Total assets 407,566 416,698 429,817 442,998 2.8% Short and long-term debt 48,099 37,157 28,600 14,630 -32.7% Net debt/(funds) 26,932 15,990 7,433 -6,537 N/A Other long-term liabilities 883 820 820 820 -2.4% Total liabilities 64,073 54,437 45,067 31,621 -21.0% Shareholders' equity 334,684 351,348 370,757 394,712 5.7% Change in working capital -6,175 5,104 8,178 9,398 N/A Cash flow from operations 1,633 13,385 18,178 22,479 139.7% Capital expenditure -126 -1,000 -1,000 -1,000 N/A Free cash flow 1,507 12,385 17,178 21,479 142.5% BVPS (HKD) 144.50 151.69 160.07 170.42 5.7%
Valuation and leverage metrics Average P/E (reported) (x) 8.8 10.1 10.4 8.9 9.5 P/E (adj) (x) 10.4 10.1 10.4 8.9 9.9 POINT® Quantitative Equity Scores NAV per share (HKD) 155.80 169.38 168.86 168.35 165.60 Value Premium/(discount) to NAV (%) -32.1 -27.7 -23.8 -19.8 -25.9 P/BV (x) 0.8 0.8 0.8 0.7 0.8 Dividend yield (%) 2.6 2.7 2.8 2.8 2.7 Quality Net debt/equity (%) 8.0 4.6 2.0 -1.7 3.2 Net debt/EBITDA (x) 2.3 1.1 0.7 -0.5 0.9 Total debt/capital (%) 12.1 9.2 6.9 3.4 7.9 Sentiment
Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 53 Barclays | Hong Kong Property
FIGURE 100 Cheung Kong – Financial Summary
Cheung Kong - Financial Summary Share price HKD 122.40 Ticker 1hk No. of shares mn 2,316 Year End 31-Dec Market Cap HKDmn 283,499 Free Float 57%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY11 FY12 FY13E FY14E FY15E Year ended FY11 FY12 FY13E FY14E FY15E Turnover 42,359 31,106 35,158 49,634 52,049 Profit from operating 48,092 33,758 32,711 30,296 35,663 Operating profit 12,840 11,650 15,214 10,434 13,515 +/- non cash gains -3,721 -6,426 0 0 0 Property sales 7782 5305 8300 5537 8464 +/- change in working capital -10,553 -6,175 5,104 8,178 9,398 Property rental 1,274 1,703 1,480 1,339 1,319 +/- associates -33,449 -19,131 -18,078 -20,508 -22,725 Others 3,784 4,642 5,434 3,557 3,732 +/- others -347 -393 -6,352 213 143 EBIT 12,840 11,650 15,214 10,434 13,515 Operating cash flow 22 1,633 13,385 18,178 22,479 Net interest (372) (496) (581) (646) (576) Capex -1,273 -126 -1,000 -1,000 -1,000 Profit before exceptional 12,468 11,154 14,633 9,787 12,938 Free cash flow -1,251 1,507 12,385 17,178 21,479 items Exceptionals 0 1,527 0 0 0 Sale of assets 2,048 1,987 5,849 0 0 Revaluation surplus/deficit 5,161 5,001 0 0 0 Acquisitions 0 0 0 0 0 Associates 32,193 18,458 18,078 20,508 22,725 Shares issue/buybacks 0 0 0 0 0 Profit before tax 49,822 36,140 32,711 30,296 35,663 Others -13,436 -538 -3,148 -3,000 -3,000 Tax -3,563 -3,616 -3,078 -2,348 -2,981 Cash flow after investing acts 2,956 15,086 14,178 18,479 0 MI -204 -372 -1,653 -593 -783 Net profit 46,055 32,152 27,980 27,354 31,899 Net interest paid/received -223 -120 -281 -346 -276 Underlying net profit 41,114 27,267 27,980 27,354 31,899 Dividends received 6,890 6,086 4,789 5,140 5,485 Dividends paid -7,179 -7,611 -7,435 -7,829 -7,944 Underlying EPS (HKD) 17.75 11.77 12.08 11.81 13.77 Tax -865 -2,220 -1,217 -2,586 -1,774 DPS (HKD) 3.16 3.16 3.33 3.43 3.43 Change in net debt -14,016 -909 10,942 8,557 13,970
Net debt - y/b 12,007 26,023 26,932 15,990 7,433 Balance sheet (HKDmn) Net debt -y/e 26,023 26,932 15,990 7,433 -6,537
Year ended FY11 FY12 FY13E FY14E FY15E
Non-current assets 281,180 303,221 317,457 338,754 361,333 NAV Breakdown Inv Prop and hotels 36,135 39,623 35,645 37,167 38,782 Current NAV End-15 NAV Associates and JVs 236,260 251,492 267,706 285,481 304,445 (Hutch at (Hutch at Others 8,785 12,106 14,106 16,106 18,106 (in HKD mn) Methodology 96.60) % NAV 103.46) % NAV HK Dev Prop DCF at 8% 77,740 20% 54,340 14% Current assets 92,006 104,345 99,241 91,063 81,665 PRC Dev Prop DCF at 8% 48,944 12% 57,089 15% Trading properties 68,932 80,088 74,984 66,806 57,408 HK Inv Prop 34,771 9% 28,481 7% Others 3,180 3,090 3,090 3,090 3,090 …Retail Cap rate at 4.75% 17,378 4% 14,190 4% Cash 19,894 21,167 21,167 21,167 21,167 …Office Cap rate at 4.75% 17,053 4% 13,924 4% …Others 340 0% 366 0% Total assets 373,186 407,566 416,698 429,817 442,998 Overseas - Inv Prop 3,685 1% 4,189 1% …Retail Cap rate at 7.75% 3,685 1% 4,189 1% Current liabilities 35,031 20,189 25,750 22,798 19,829 Hotels 32,098 8% 36,145 9% ST bank loans 22,897 5,098 9,289 7,150 3,657 Hutchison (MV) @HKD96.60/share 205,778 52% 220,383 57% Other listed Others 12,134 15,091 16,460 15,648 16,171 @ MV 10,487 3% 10,526 3% companies (MV) Infrastructure @ initial costs 17,558 4% 17,558 5% business Non-current liabilities 23,870 43,884 28,688 22,270 11,792 Treasury latest book value 3,450 1% 3,411 1% LT loans 23,020 43,001 27,868 21,450 10,972 Gross Assets 434,511 111% 432,121 111% Others 850 883 820 820 820 Net debt -27,341 -7% -27,341 -7% Other -14,862 -4% -14,862 -4% assets/liabilities MI + Perpetual securities 7,860 8,809 10,913 13,992 16,665 Total Net Asset 392,308 100% 389,917 100% Net assets 306,425 334,684 351,348 370,757 394,712 Shares in issue (mn) 2,316 2,316 NAV per share (HKD) 169.38 168.35 BVPS (HKD) 132.30 144.50 151.69 160.07 170.42 Discount/target discount -28% -20% Share price (HKD) 122.40 135.00
Source: CEIC, Company data, Barclays Research estimates
28 October 2013 54 Barclays | Hong Kong Property
FIGURE 101 FIGURE 102 GAV breakdown (as of Dec-13E) BVPS and gearing level
Dev Prop - 160 10% 9.5% 144.50 HK 132.30 9% 18% 140 116.42 8% 120 8.5% 104.95 8.0% 7% 100 Dev Prop - 6% China 80 5% 11% 4% 60 4.5% Other 3% assets Inv Prop - 40 2% 62% HK 8% 20 1% Inv Prop - 0 0% China FY09 FY10 FY11 FY12 1% BVPS (HKD) Net Debt/Equity (%) Source: Barclays Research estimates Source: Datastream, Barclays Research
FIGURE 103 FIGURE 104 HK development landbank HK investment properties breakdown (as of Dec-13E)
Landbank (mn sf) HK - Others 1% 5 4.1 4.1 4 4 3 2.7 2.4 3 2 2 1 HK-Retail HK - Office 50% 1 49% 0.0 0 Leftovers FY13 FY14 FY15 FY 16+
Source: Barclays Research estimates Source: Barclays Research estimates
FIGURE 105 FIGURE 106 Historical discount to NAV Trailing price-to-book ratio
20% 3.0 Average Disc.= -16% 10% 2.5
0% 2.0 -10% 1.5 -20% 1.0 -30% 0.5 -40% - -50% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
CK - NAV Discount Average Discount Cheung Kong (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 55 Barclays | Hong Kong Property
HENDERSON LAND (12 HK; EW; PT HKD46.70, +1%)
12 HK / 0012.HK Misunderstood at 0.53x P/B
Stock Rating We initiate coverage of Henderson Land (HLD) with an EW rating and a price target of EQUAL WEIGHT HKD46.70. Trading at 0.53x trailing P/B and a 48% discount to NAV, Henderson Land’s Industry View valuation is among the cheapest in our coverage universe. We believe its low P/B is NEGATIVE overly punitive considering: 1) the positive risk-reward balance of its old building Price Target redevelopment strategy; 2) active presales; 3) an estimated 37% of NAV being tied to HKD 46.70 HK & China Gas and China investment properties (IP); and 4) scope to unlock Price (23-Oct-2013) agricultural land value. However, until the visibility of its old building redevelopment HKD 46.45 progress improves, investors are unlikely to attribute a narrower target NAV discount to the stock. Our HKD46.70 price target offers only 1% upside, hence we rate HLD EW. Potential Upside/Downside +1% · Old building redevelopment strategy: Visibility suffering but risk is lower – HLD had
been pursuing a two-pronged development strategy in Hong Kong: old building redevelopment in urban areas and farmland conversion in rural areas. Since old building redevelopment tends to be small and hard to track, its low supply visibility has been a drag on HLD’s share price over the past few years. Nevertheless, we believe HLD’s urban redevelopment strategy has several merits. First, these projects tend to be small units favoured by first-time buyers. Second, with average land costs of HKD4,600psf and all- in costs below HKD9,000psf, the high embedded margin offers a higher cushion in a falling market. Third, as redevelopment projects can be launched once foundation work is done, their longer-dated presales should mean faster cash receipt and lower risk.
· HKD6.9bn in presales in 9M13, second only to SHKP – In the first nine months of 2013, we estimate HLD presold some HKD6.9bn of properties. Relative to its peers, HLD’s HKD6.9bn contract sales are second only to SHKP’s HKD12.0bn. However, with the exception of The Reach, since most projects are small single-block developments, visibility has been lacking to show that HLD is in fact actively monetising its portfolio.
· 37% of NAV tied to HK & China Gas and China IP – We estimate that HK & China Gas makes up 27% of HLD’s NAV while its China investment properties make up another 10%. If we were to further include HLD’s Hong Kong investment properties, which consist mostly of new town shopping centres, this would bring HLD’s recurrent asset base to 82% of NAV.
· Scope to unlock some value in agricultural landbank – Due to uncertainty over farmland conversion, our standard practice is to only include farmland at HKD300psf in our NAV estimate. With the government’s latest plans for the North East New Territories New Development Area, there is scope for some 1.8mn sf of HLD’s farmland to be resumed (ie, returned to the government). Based on the latest ex-gratia compensation rate of HKD969.6psf for resumed land, we see potential to unlock some value in HLD’s 42.8mn sf farmland portfolio.
Henderson Land Development Co., Ltd.(0012.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 2.41A 2.97A 3.10E 3.38E 3.49E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 2.19A 2.70A 3.23E 3.24E 3.52E P/E 19.3 15.6 15.0 13.7 13.3 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 56 Barclays | Hong Kong Property
Valuation methodology Our HKD46.70 price target is based on a 45% discount to our end-2015 NAV estimate of HKD84.92 per share. In light of our top-down view that the Hong Kong housing market is about to enter into its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, HLD has traded at an average discount of 23% with a one standard deviation swing of 20%; our target discount is broadly in line with historical average less one SD.
Key investment risks Downside risks to our price target include:
Agreeing land premium too early – Given our expectation that Hong Kong home prices are likely to correct by 30% in the next two years, there is a risk that developers would bargain- hunt for land too quickly, only to see their entry margins eroded by subsequent price falls. As Henderson Land has been working on various farmland conversions for some time, there is the risk that it may agree on land premium too early.
More regulation on redevelopment of old buildings – With the government recently relaxing the presales window for new developments from 20 months to 30 months, the launch window is now closer to that for old buildings. If the government were to tighten the regulations around old building redevelopment, this could potentially make HLD’s projects less competitive versus projects sold via land tender.
Upside risks to our price target include:
Scope for potential re-rating – Trading at 0.53x trailing P/B and a 48% discount to NAV, HLD’s current valuation is very depressed compared to its historical average P/B of 1.18x and 23% discount to NAV. If HLD is able to successfully speed up asset turnover, and if the local housing market manages a soft landing, HLD’s valuation multiple could potentially revert closer to its historical average.
Support from majority shareholder – Over the past two years, HLD’s chairman has consistently increased his stake in HLD, increasing it from 61.59% at the start of 2012 to 65.72% as of 2 October 2013. If HLD’s share price were to soften, we believe HLD’s chairman may increase his stake further, which could bring some support to the share price.
28 October 2013 57 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Henderson Land Development Co., Ltd. (0012.HK) Stock Rating: EQUAL WEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 46.45 Revenue 15,592 25,511 23,121 28,478 22.2% Price Target HKD 46.70 EBITDA N/A N/A N/A N/A N/A Why Equal Weight? HLD’s valuation is among the EBIT 5,335 6,593 7,735 8,538 17.0% cheapest in our coverage universe. While we believe Pre-tax income 21,337 9,983 10,945 11,582 -18.4% there is merit in its old building redevelopment Net income 20,208 7,908 9,072 9,369 -22.6% strategy and we see some scope for HLD to unlock EPS (reported) (HKD) 8.47 3.10 3.38 3.49 -25.6% value in its agricultural landbank, these will provide limited benefits in a housing downturn, in our view. Net income (adj) 7,098 7,908 9,072 9,369 9.7%
EPS (adj) (HKD) 2.97 3.10 3.38 3.49 5.5% Upside case HKD 63.69 Diluted shares N/A N/A N/A N/A N/A DPS (HKD) 1.06 1.06 1.06 1.06 0.0% An earlier-than-expected reversal of property cooling measures could allow the Hong Kong property stocks Profit growth (%) 27.7 11.4 14.7 3.3 -50.9% to trade back up to the mid-cycle discounts to NAV.
For HLD, this could potentially enable its discount to Margin and return data Average NAV to narrow to its mid-cycle average of 23%. EBITDA margin (%) N/A N/A N/A N/A N/A EBIT margin (%) 34.2 25.8 33.5 30.0 30.9 Downside case HKD 33.97 Pre-tax margin (%) 136.8 39.1 47.3 40.7 66.0 Should the decline in home prices trigger a greater Net margin (%) 129.6 31.0 39.2 32.9 58.2 follow-on impact on rents and the broader local Net (adj) margin (%) 45.5 31.0 39.2 32.9 37.2 economy, we believe property companies' discounts ROIC (%) N/A N/A N/A N/A N/A to NAV could widen further to the mid-cycle discount ROA (%) 2.6 2.7 2.9 3.0 2.8 minus 1.5-2.0SD. Our downside case for HLD factors ROE (%) 3.6 3.7 4.0 4.0 3.8 in a 60% discount to NAV.
Balance sheet and cash flow (HKDmn) CAGR Upside/Downside scenarios Tangible fixed assets 101,072 110,617 118,525 116,480 4.8% Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 14,390 15,000 15,000 15,000 1.4% Total assets 281,557 299,248 316,738 317,431 4.1% Short and long-term debt 42,164 50,726 57,056 55,740 9.8% Net debt/(funds) 27,228 35,180 41,510 40,194 13.9% Other long-term liabilities 13,369 13,369 13,369 13,369 0.0% Total liabilities 71,656 80,540 87,200 86,219 6.4% Shareholders' equity 205,212 219,543 233,400 237,601 5.0% Change in working capital -1,146 -4,590 -6,367 751 N/A Cash flow from operations 3,459 1,743 1,103 9,023 37.7% Capital expenditure -498 -278 -278 -278 N/A Free cash flow 2,961 1,465 825 8,745 43.5% BVPS (HKD) 84.98 81.81 86.97 88.54 1.4%
POINT® Quantitative Equity Scores Valuation and leverage metrics Average Value P/E (reported) (x) 5.5 15.0 13.7 13.3 11.9 P/E (adj) (x) 15.6 15.0 13.7 13.3 14.4 NAV per share (HKD) 92.03 89.68 87.30 84.92 88.48 Quality Premium/(discount) to NAV (%) -53.3 -48.2 -46.6 -45.0 -48.3 P/BV (x) 0.5 0.6 0.5 0.5 0.5 Dividend yield (%) 2.3 2.3 2.3 2.3 2.3 Sentiment Net debt/equity (%) 13.3 16.0 17.8 16.9 16.0 Net debt/EBITDA (x) 5.1 5.3 5.4 4.7 5.1 Total debt/capital (%) 15.2 16.9 17.8 17.2 16.8 Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 58 Barclays | Hong Kong Property
FIGURE 107 Henderson Land – Financial Summary
Henderson Land - Financial Summary Share price HKD 46.45 Ticker 12hk No. of shares mn 2,699 Year End 31-Dec Market Cap HKDmn 125,368 Free Float 35%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY11 FY12 FY13E FY14E FY15E Year ended FY11 FY12 FY13E FY14E FY15E Turnover 15,188 15,592 25,511 23,121 28,478 Profit from operating 18,981 21,337 9,983 10,945 11,582 Operating profit 4,548 5,335 6,593 7,735 8,538 +/- non cash gains -9,031 -9,066 0 0 0 Property sales 2,186 2,306 3,535 4,627 5,300 +/- change in working capital -4,286 -1,146 -4,590 -6,367 751 Property rental 2,620 3,107 3,694 3,805 4,002 +/- associates -6,635 -8,464 -4,563 -5,018 -4,995 Others -258 -78 -635 -696 -765 +/- others 990 798 913 1,544 1,684 EBIT 4,548 5,335 6,593 7,735 8,538 Operating cash flows 19 3,459 1,743 1,103 9,023 Net interest -1,169 -1,239 -1,173 -1,809 -1,950 Capex -471 -498 -278 -278 -278 Profit before exceptional 3,379 4,096 5,420 5,927 6,588 Free cash flow -452 2,961 1,465 825 8,745 items Exceptionals -1 -36 0 0 0 Sale of assets 1,747 1,356 0 0 0 Revaluation surplus/deficit 8,968 8,813 0 0 0 Acquisitions -1,287 -350 -3,012 0 0 Associates 6,635 8,464 4,563 5,018 4,995 Shares issue/buybacks 10,026 0 0 0 0 Profit before tax 18,981 21,337 9,983 10,945 11,582 Others -4,606 -3,606 -1,000 -1,000 -1,000 Tax -1,618 -1,005 -1,172 -1,322 -1,585 Cash flow after investing acts 5,428 361 -2,546 -175 7,745 MI -179 -124 -903 -551 -628 Net profit 17,184 20,208 7,908 9,072 9,369 Net interest paid/received -1,551 -1,619 -2,194 -2,700 -2,841 Underlying net profit 5,560 7,098 7,908 9,072 9,369 Dividends received 2,362 3,359 575 574 574 Dividends paid -1,655 -533 -2,702 -2,845 -2,845 Underlying EPS (HKD) 2.41 2.97 3.10 3.38 3.49 Tax -654 -1,003 -1,084 -1,185 -1,318 DPS (HKD) 1.00 1.06 1.06 1.06 1.06 Change in net debt 3,930 565 -7,952 -6,331 1,317
Net debt - y/b 31,723 27,793 27,228 35,180 41,510 Balance sheet (HKDmn) Net debt -y/e 27,793 27,228 35,180 41,510 40,194
Year ended FY11 FY12 FY13E FY14E FY15E
Non-current assets 161,974 179,305 191,474 202,268 203,376 NAV Breakdown
Investment properties 92,771 101,072 110,617 118,525 116,480 (HKD mn) Methodology Current % of NAV End-15E % of NAV
Associates and JVs 63,839 72,040 74,664 77,550 80,703 Dev Prop - HK DCF at 8% 34,641 14% 24,291 11% Others 5,364 6,193 6,193 6,193 6,193 HK IP under dev DCF at 8% 1,120 0% 1,844 1% HK- Inv Prop 111,571 46% 105,247 46% Current assets 100,496 102,252 107,774 114,470 114,055 ...office Cap rate = 5.00% 40,601 17% 35,517 16% Trading properties 68,204 76,403 81,086 87,548 86,894 ...retail Cap rate = 5.00% 57,912 24% 59,155 26% Others 12,928 11,459 11,688 11,922 12,160 ...residential Cap rate = 3.25% 8,428 4% 6,250 3% Cash 19,364 14,390 15,000 15,000 15,000 ...Industrial Cap rate = 7.25% 4,630 2% 4,325 2% Agricultural land @HKD300psf 12,840 5% 12,840 6% Total assets 262,470 281,557 299,248 316,738 317,431 Dev Prop - PRC DCF at 8% 16,619 7% 18,281 8% China Inv Properties Cap rate = 7.0% 22,976 10% 24,707 11% Current liabilities 29,527 19,495 24,224 27,320 27,656 Hotels 3,468 1% 3,468 2% ST bank loans 19,699 3,372 7,779 10,546 10,546 HK & C Gas (MV) @HKD18.16/share 65,753 27% 65,430 29% Others 9,828 16,123 16,445 16,774 17,110 Other listco (MV) 3,737 2% 3,686 2% Other assets Book value 4,661 2% 4,661 2% Non-current liabilities 43,018 52,161 56,316 59,879 58,563 Gross asset 278,426 116% 265,669 117% LT loans 27,458 38,792 42,947 46,510 45,194 Net debt -37,777 -16% -37,777 -17% Others 15,560 13,369 13,369 13,369 13,369 Net asset 240,649 100% 227,892 100% # of shares (mn) 2,684 2,684 MI 4,589 4,689 -835 -3,862 -6,389 NAV (HKD) 89.68 84.92 Net assets 185,336 205,212 219,543 233,400 237,601 Discount/target discount -48% -45% Share price (HKD) 46.45 46.70 BVPS (HKD) 78.23 84.98 81.81 86.97 88.54 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 59 Barclays | Hong Kong Property
FIGURE 108 FIGURE 109 GAV breakdown (as of Dec-13E) BVPS and gearing level Dev Prop - 90 84.98 25% HK 78.23 11.6% 80 73.09 Other 70 66.25 20% assets Dev Prop - 19.9% 32.5% China 60 6.9% 17.9% 15% 50 Inv Prop 15.0% Under Dev - 40 13.3% 10% PRC 30 0.4% 20 Inv Prop 5% Under Dev - Inv Prop - 10 HK Inv Prop - HK 0 0% 0.5% China 40.1% FY09 FY10 FY11 FY12 8.1% BVPS Net Debt/Equity (%)
Source: Barclays Research estimates Source: Datastream, Barclays Research
FIGURE 110 FIGURE 111 HK development landbank HK investment properties breakdown (as of Dec-13E) 5 Landbank (mn sf) 4.09 HK - Others HK - Res 4% 4 7% 4
3
3 HK-Retail 2 53% 1.56 HK - Office 2 36% 1.09 1 0.85
1 0.33
0 Leftovers FY13 FY14 FY15 FY 16+ HK-Retail HK - Office HK - Res HK - Others Source: Barclays Research estimates Source: Barclays Research estimates
FIGURE 112 FIGURE 113 Historical discount to NAV Trailing price-to-book ratio 40% 3.5 30% Average Disc. = -23% 3.0 20% 10% 2.5 0% 2.0 -10% -20% 1.5 -30% 1.0 -40% -50% 0.5 -60% - -70% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Hend Land - NAV Discount Average Discount Henderson Land (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 60 Barclays | Hong Kong Property
SUN HUNG KAI PROPERTIES (16 HK; UW; PT HKD84.00; -17%)
16 HK / 0016.HK Unfortunate leader in a declining market
Stock Rating We initiate coverage of Sun Hung Kai Properties (SHKP) with an UW rating and a price UNDERWEIGHT target of HKD84.00. Over the past few years, although SHKP has steadily built up its Industry View China business, Hong Kong properties still make up 81% of its NAV, on our estimates. NEGATIVE With 22% of NAV tied to local housing, 36% to retail and 23% to office, we believe SHKP Price Target would be significantly affected if our forecast 30% home price correction unfolds. HKD 84.00 Although SHKP’s 0.70x trailing P/B appears cheap relative to its historical average of Price (23-Oct-2013) 1.15x, it is still higher than the likes of HK Land (0.56x), Swire Properties (0.64x), Sino HKD 101.60 Land (0.63x) and Henderson Land (0.53x). Thus, while SHKP remains the sector leader in terms of scale, property quality and management, as the property market enters its Potential Upside/Downside -17% first downturn since 1998 we observe that the captain usually goes down with the ship.
· Rising China exposure, but not enough – Over the past five years, SHKP has made steady progress developing its China property business. The completion of the Shanghai IFC and Shanghai ICC complexes in 2011 and 2Q13 enlarged its China IP footprint, while China development contract sales rose to HKD10bn in FY ending Jun-13. The HKD27.6bn site acquisition in Xujiahui, Shanghai, in September 2013 should help SHKP diversify further. However, given its large asset base of HKD513bn, China exposure remains dwarfed by the Hong Kong business. We estimate that China properties make up only 23% of its NAV while Hong Kong makes up 81%. While we believe SHKP remains the sector leader in terms of scale, property quality and property management, these factors will likely provide little mitigation when home prices fall.
· Gearings vs absolute net debt – We estimate the HKD27.6bn for the recent Xujiahui acquisition will increase SHKP’s net-debt-to-equity ratio from 12.5% to 19.6% currently. While this is below SHKP’s target gearing of 20%, we estimate SHKP’s nominal net debt at HKD75.7bn after the acquisition. SHKP had HKD33.5bn in net debt as of June 2008 and this 126% increase is higher than the 84% increase in SHKP’s gross rents over the same period. As Hong Kong property sales are slowing this year, we believe SHKP should speed up asset sales to reduce its net debt exposure.
· HKD19bn in Hong Kong contract sales should be achievable – On a more positive note, we believe SHKP’s HKD19bn Hong Kong contract sales target for FY14 should be achievable. The recent re-launch of 181 units at Cullinan in West Kowloon should bring in an estimated HKD4bn, while Century Gateway II in Tuen Mun should bring in another HKD4-5bn. We expect these two projects to bring SHKP’s contract sales for FY14 to the halfway mark. Other projects slated for sale this year include Riva in Yuen Long, Imperial Kennedy in Western and Fanling Area 21.
Sun Hung Kai Properties Ltd.(0016.HK): Financial and Valuation Metrics HKD
FY Jun 2012 2013 2014 2015 2016
EPS 8.37A 7.05A 6.89E 7.17E 7.57E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 8.37A 7.05A 8.20E 8.12E 8.48E P/E 12.1 14.4 14.7 14.2 13.4 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 61 Barclays | Hong Kong Property
· Shanghai investment properties and Xujiahui – At Shanghai ICC, the first office tower has been fully let with a passing rent of Rmb200psm/month, while the retail mall, IAPM, is expected to make a full year contribution of about HKD700mn. Xujiahui is expected to be the next major development for SHKP in Shanghai, with total costs estimated by the company at around HKD40bn (including HKD27bn in land cost). Of the development’s four zones, SHKP expects to develop the first three zones (which have lower height restrictions) for sale and retain the area in zone four for long-term investment.
Valuation methodology Our HKD84 price target is based on a 45% discount to our end-2015 NAV estimate of HKD153.43 per share. In light of our top-down view that the Hong Kong housing market is about to enter into its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, SHKP has traded at an average discount of 11% with a one standard deviation swing of 20%. Our target NAV discount of 45% is 14pp wider than average minus one SD as we believe SHKP’s business model now resembles that of a traditional landlord and the discount also reflects the company’s higher absolute net debt level.
Key investment risks Upside risks to our price target include:
Government policy reversal – A pre-emptive move by the Hong Kong government to reverse the various property-cooling measures could help engineer a soft landing for the Hong Kong housing market. Under such a scenario, SHKP’s NAV discount could revert back to the landlords’ average of 30% from the current 39%.
Non-core asset sales could help lock in earnings and NAV– SHKP has traditionally adopted more conservative cap rate assumptions, compared with the consensus approach. It currently values its investment properties at a 5.0% cap rate (as we do). This should afford SHKP some buffer against the impact of rising US bond yields. If SHKP were to dispose of more non-core investment properties at yields below its cap rate, the resultant gains may help offset some profit shortfalls from the development business and could lock in part of the value of its NAV.
28 October 2013 62 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Sun Hung Kai Properties Ltd. (0016.HK) Stock Rating: UNDERWEIGHT
Income statement (HKDmn) 2013A 2014E 2015E 2016E CAGR Price (23-Oct-2013) HKD 101.60 Revenue 53,793 67,181 73,601 80,221 14.2% Price Target HKD 84.00 EBITDA N/A N/A N/A N/A N/A Why Underweight? Although SHKP has steadily built EBIT 19,300 24,072 24,907 25,488 9.7% up its China business, we estimate Hong Kong Pre-tax income 44,289 24,231 25,172 26,121 -16.1% properties still make up 81% of its NAV. Thus, while Net income 40,329 18,412 19,159 20,229 -20.5% SHKP remains the sector leader in terms of scale, EPS (reported) (HKD) 15.28 6.89 7.17 7.57 -20.9% property quality and management, this is likely to offer little protection against a property market Net income (adj) 18,619 18,412 19,159 20,229 2.8% correction, in our view. EPS (adj) (HKD) 7.05 6.89 7.17 7.57 2.4%
Diluted shares (mn) 2,640.1 2,671.0 2,671.0 2,671.0 0.4% Upside case HKD 115.08 DPS (HKD) 3.35 3.35 3.35 3.35 0.0% An earlier-than-expected reversal of property cooling Profit growth (%) -14.1 -1.1 4.1 5.6 N/A measures could allow the Hong Kong property stocks
to trade back up to the mid-cycle discounts to NAV. Margin and return data Average Given SHKP’s heavier emphasis on rentals, we use a EBITDA margin (%) N/A N/A N/A N/A N/A 25% discount to NAV, rather than the historical EBIT margin (%) 35.9 35.8 33.8 31.8 34.3 average of 11%. Pre-tax margin (%) 82.3 36.1 34.2 32.6 46.3 Net margin (%) 75.0 27.4 26.0 25.2 38.4 Downside case HKD 76.72 Net (adj) margin (%) 34.6 27.4 26.0 25.2 28.3 Should the decline in home prices trigger a greater ROIC (%) N/A N/A N/A N/A N/A follow-on impact on rents and the broader local ROA (%) 3.8 3.5 3.5 3.6 3.6 economy, we believe property companies' discounts ROE (%) 5.1 4.7 4.8 4.9 4.9 to NAV could widen further to the mid-cycle discount minus 1.5-2.0SD. Our downside case for SHKP factors in a 50% discount to NAV. Balance sheet and cash flow (HKDmn) CAGR
Tangible fixed assets 269,633 270,259 270,885 271,511 0.2% Upside/Downside scenarios Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 16,471 8,502 8,502 8,502 -19.8% Total assets 512,896 545,574 556,795 562,978 3.2% Short and long-term debt 64,630 87,130 75,598 76,456 5.8% Net debt/(funds) 48,159 78,628 67,096 67,954 12.2% Other long-term liabilities 14,480 14,413 14,413 14,413 -0.2% Total liabilities 122,367 147,056 148,087 141,328 4.9% Shareholders' equity 385,912 395,376 405,587 416,868 2.6% Change in working capital 1,655 -6,957 14,339 1,365 -6.2% Cash flow from operations 21,674 15,118 36,731 24,213 3.8% Capital expenditure -9,673 -34,480 -11,880 -11,880 N/A Free cash flow 12,001 -19,362 24,851 12,333 0.9% BVPS (HKD) 144.48 148.03 151.85 156.07 2.6%
Valuation and leverage metrics Average P/E (reported) (x) 6.7 14.7 14.2 13.4 12.2 POINT® Quantitative Equity Scores P/E (adj) (x) 14.4 14.7 14.2 13.4 14.2 Value NAV per share (HKD) 165.99 159.71 153.43 153.43 158.14 Premium/(discount) to NAV (%) -38.8 -41.9 -45.3 -45.3 -42.8 P/BV (x) 0.7 0.7 0.7 0.7 0.7 Quality Dividend yield (%) 3.3 3.3 3.3 3.3 3.3 Net debt/equity (%) 12.5 19.9 16.5 16.3 16.3 Net debt/EBITDA (x) 2.5 3.3 2.7 2.7 2.8 Sentiment Total debt/capital (%) 24.1 27.1 26.7 25.3 25.8
Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Jun
28 October 2013 63 Barclays | Hong Kong Property
FIGURE 114 Sun Hung Kai Properties – Financial Summary
SHKP - Financial Summary Share price HKD 101.60 Ticker 16hk No. of shares mn 2,671 Year End 30-Jun Market Cap HKDmn 271,369 Free Float 57%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY12 FY13 FY14E FY15E FY16E Year ended FY12 FY13 FY14E FY15E FY16E Turnover 68,400 53,793 67,181 73,601 80,221 Profit from operations 24,988 19,300 24,072 24,907 25,488 Operating profit 24,988 19,300 24,072 24,907 25,488 +/- non cash gains -25 -719 -719 -719 -719 Property sales 12,797 5,833 10,129 10,455 10547 +/- change in working capital -16,067 1,655 -6,957 14,339 1,365 Property rental 8,632 9,588 10,165 10,560 10,973 +/- associates 0 0 0 0 0 Others 3,559 3,879 3,779 3,892 3,968 +/- others 1,267 1,438 -1,278 -1,796 -1,921 EBIT 24,988 19,300 24,072 24,907 25,488 Operating cash flows 10,163 21,674 15,118 36,731 24,213 Net interest -1,532 -1,887 -2,296 -2,814 -2,939 Capex -6,138 -9,673 -34,480 -11,880 -11,880 Profit before exceptional items 23,456 17,413 21,776 22,093 22,549 Free cash flow 4,025 12,001 -19,362 24,851 12,333 Exceptionals 0 0 0 0 0 Sale of assets 1,288 2,143 2,143 2,143 2,143 Revaluation surplus/deficit 23,355 24,024 0 0 0 Acquisitions 0 -182 -182 -182 -182 Associates 2,282 2,852 2,456 3,079 3,572 Shares issue/buybacks 21 25 25 25 25 Profit before tax 49,093 44,289 24,231 25,172 26,121 Others -4,279 1,690 -1,472 -1,621 -1,407 Tax -5,284 -3,342 -4,412 -4,458 -4,551 Cash flow after investing acts 1,055 15,677 -18,849 25,216 12,912 MI -729 -618 -1,407 -1,556 -1,342 Net interest paid/received -1,581 -1,969 -2,590 -3,241 -3,347 Net profit 43,080 40,329 18,412 19,159 20,229 Dividends received 2,899 1,910 2,166 2,209 2,275 Underlying net proift 21,678 18,619 18,412 19,159 20,229 Dividends paid -4,750 -3,353 -8,948 -8,948 -8,948 Tax -2,014 -3,496 -2,249 -3,704 -3,750 Underlying EPS (HKD) 8.37 7.05 6.89 7.17 7.57 Change in net debt -4,391 8,769 -30,469 11,532 -858 DPS (HKD) 3.35 3.35 3.35 3.35 3.35 Net debt - y/b 52,537 56,928 48,159 78,628 67,096 Net debt -y/e 56,928 48,159 78,628 67,096 67,954
Balance sheet (HKDmn) NAV Breakdown Year ended FY12 FY13 FY14E FY15E FY16E (HKDmn) Methodology Current % of NAV Forward % of NAV Non-current assets 310,781 344,284 380,179 391,474 402,769 Development properties 127,807 29% 95,210 23% Investment properties 242,293 269,633 270,259 270,885 271,511 ...Hong Kong DCF at 8% 88,080 20% 52,305 13% Associates and JVs 49,515 53,534 60,534 65,534 70,534 ...China DCF at 8% 39,727 9% 42,905 10% Others 18,973 21,117 49,386 55,055 60,724 Agricultural land @HKD350psf 9,100 2% 9,100 2% Inv prop under dev DCF at 8% 31,039 7% 36,203 9% Current assets 156,789 168,612 165,395 165,321 160,209 Inv Prop - HK 271,245 61% 254,816 62% Trading properties 117,144 132,938 137,655 137,543 132,393 ...Retail @ Cap Rate = 5.0% 155,949 35% 160,960 39% Others 25,307 19,203 19,238 19,275 19,314 ...Office @ Cap Rate = 5.0% 103,626 23% 84,214 21% Cash 14,338 16,471 8,502 8,502 8,502 ...Residential @ Cap Rate = 4.3% 8,376 2% 6,412 2% ...Others @ Cap Rate = 0.0% 3,294 1% 3,230 1% Total assets 467,570 512,896 545,574 556,795 562,978 Inv Prop - China 35,253 8% 42,261 10% ...Retail @ Cap Rate = 7.5% 24,732 6% 28,207 7% Current liabilities 41,927 51,317 60,325 70,927 63,457 ...Office @ Cap Rate = 7.5% 9,732 2% 13,239 3% ST bank loans 9,801 8,060 14,812 12,852 12,997 ...Residential @ Cap Rate = 7.5% 789 0% 815 0% Others 32,126 43,257 45,512 58,076 50,459 Hotels 22,749 5% 25,508 6% Other business @10.00x P/E 20,847 5% 21,396 5% Non-current liabilities 74,684 71,050 86,731 77,159 77,871 Listed companies @ MV 13,594 3% 13,594 3% LT loans 61,465 56,570 72,318 62,746 63,458 Gross assets 531,634 120% 498,089 122% Others 13,219 14,480 14,413 14,413 14,413 Less: Net debt -80,745 -18% -80,745 -20% MI 4,400 4,617 3,142 3,121 4,782 Receivables less payables -7,530 -2% -7,530 -2% Net assets 346,559 385,912 395,376 405,587 416,868 Net assets 443,359 100% 409,814 100% # of shares (mn) 2,671 2,671 BVPS (HKD) 132.49 144.48 148.03 151.85 156.07 NAV per share (HKD) 165.99 153.43 Discount/target discount -39% -45% Share price (HKD) 101.60 84.00 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 64 Barclays | Hong Kong Property
FIGURE 115 FIGURE 116 GAV breakdown (as of end-13E) BVPS and gearing level
Other Dev Prop - 160 30.0% 144.48 Inv Prop assets HK 132.49 13% 140 Inv Prop Under Dev - 16% 119.43 25.0% PRC 102.41 Under Dev - 120 5% HK 17.1% 20.0% 1% 100 16.4% Dev Prop - 14.1% Inv Prop - China 80 12.5% 15.0% China 7% 7% 60 10.0% 40 5.0% 20
Inv Prop - 0 0.0% HK FY10 FY11 FY12 FY13 51% BVPS (HKD) Net Debt/Equity (%)
Source: Barclays Research estimates Source: Barclays Research
FIGURE 117 FIGURE 118 HK development landbank HK investment properties breakdown (as of end-13E)
9 8.51 Landbank (mn sf) HK - Res HK - Others 8 3% 1%
7
6 HK - Office 5 38% 3.77 4 HK-Retail 2.95 58% 3
2 1.62
1 0.36 0 HK-Retail HK - Office HK - Res HK - Others Leftovers FY14 FY15 FY16 FY 17+ Source: Barclays Research estimates Source: Barclays Research estimates
FIGURE 119 FIGURE 120 Historical discount to NAV Trailing price-to-book ratio
60% 2.5 Average Disc. = -10% 40% 2.0 20% 1.5 0%
-20% 1.0
-40% 0.5 -60% - -80% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 SHKP - NAV Discount Average Discount SHKP (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 65 Barclays | Hong Kong Property
NEW WORLD DEVELOPMENT (17 HK; UW; PT HKD8.52, -22%)
17 HK / 0017.HK Time is of the essence
Stock Rating We initiate coverage of New World Development (NWD) with an UW rating and a price UNDERWEIGHT target of HKD8.52. Over the past few years, NWD has been reinvigorated. The company Industry View has substantially improved its product branding as well as its asset turnover. This has NEGATIVE helped drive a re-rating of its stock price. Since it announced its 1-for-2 rights offer on Price Target 18 October 2011, NWD shares have gained 63% and outperformed the HSI’s 27% gain HKD 8.52 over the period. To the company’s credit, in our screen of locked-in development Price (23-Oct-2013) earnings discussed earlier in the report, its 38% lock-in ratio ranks highest among its HKD 10.96 peer group, even beating SHKP’s 32%. However, we believe there is still much to be done in order to prepare for the rough seas ahead. Our two key areas of concern for Potential Upside/Downside -22% NWD are: 1) its very high gearing level; and 2) the low embedded margin of its Hong Kong development portfolio. · HKD39.8bn net debt at head office level – Since June 2011, NWD’s consolidated net debt has risen from HKD35.0bn to HKD62.5bn as of June 2013. Even stripping out its listed subsidiaries’ debt position, NWD’s parent level net debt also rose from HKD28.5bn to HKD39.8bn. At the consolidated level, NWD’s net debt-to-total equity stands at 35.2% as of June 2013. Even stripping out its subsidiaries and comparing parent level net debt-to-shareholders’ funds, NWD’s 28.6% gearing is the second-highest among the developers (after Kerry’s 39.2%). While leverage can help to boost returns in a rising market, in a falling market, it can also exacerbate downward revaluations.
· Embedded development margin of 11% – With NWD having rebuilt much of its Hong Kong development landbank over the past 2-3 years, we believe its land costs are relatively high versus peers. We estimate its embedded development margin is only 11%, some 9pp lower than the likes of SHKP, CK and Sino Land. If home prices were to continue to rise, margins could be restored but, should prices stall or fall, unless construction costs were to drop, there would be a direct impact on margins.
· Redevelopment of New World Centre, Tsim Sha Tsui – The redevelopment of New World Centre in Tsim Sha Tsui is slated to be completed in the next 5-6 years. For FY14, capex related to the project is expected to be around HKD3.6bn according to management.
New World Development Co., Ltd.(0017.HK): Financial and Valuation Metrics HKD
FY Jun 2012 2013 2014 2015 2016
EPS 0.93A 1.02A 1.17E 1.12E 1.09E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 0.89A 1.22A 1.19E 1.24E 1.41E P/E 11.8 10.8 9.4 9.8 10.1 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 66 Barclays | Hong Kong Property
Valuation methodology Our HKD8.52 price target is based on a 55% discount to our end-2015 NAV estimate of HKD18.94 per share. In light of our top-down view that the Hong Kong housing market is about to enter into its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, NWD has traded at an average discount of 39% with a one standard deviation swing of 21%. We apply a slightly narrower target discount to reflect NWD’s improved transparency and product branding.
Key investment risks Upside risks to our price target include:
De-risking the balance sheet – NWD’s high gearing is the key reason for our 55% target discount to NAV. If NWD is able to successfully speed up its presales strategy and/or spin off its hotel division, the proceeds could help NWD de-gear and reduce its risk profile. That said, with parent level net debt at HKD39.8bn as of June 2013 the presales and listing proceeds would have to be considerable in order to reduce NWD’s gearing profile.
Continued re-rating of the company – Over the past two years, as NWD has increased its transparency and sped up its asset turnover, it has successfully narrowed its NAV discount from 65% to 45%. At the current 47% NAV discount and 0.50x trailing P/B, the shares are still cheap relative to peers. While we expect the housing market to correct 30% in the next two years, should the downturn take place later than expected, this could provide NWD with the necessary time to repair its balance sheet, while further boosting its asset turnover and transparency, and this could help sustain its re-rating.
28 October 2013 67 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
New World Development Co., Ltd. (0017.HK) Stock Rating: UNDERWEIGHT
Income statement (HKDmn) 2013A 2014E 2015E 2016E CAGR Price (23-Oct-2013) HKD 10.96 Revenue 46,780 51,403 62,755 64,133 11.1% Price Target HKD 8.52 EBITDA N/A N/A N/A N/A N/A Why Underweight? NWD has substantially improved EBIT 10,827 9,314 10,494 10,290 -1.7% its asset turnover and product branding over the past Pre-tax income 23,311 12,454 13,270 13,522 -16.6% few years. Although we view this as a positive, if our Net income 14,149 7,394 7,050 6,863 -21.4% forecast for a 30% correction in home prices EPS (reported) (HKD) 2.28 1.17 1.12 1.09 -21.8% materialises, we believe NWD’s high gearing and the low embedded margin of its Hong Kong development Net income (adj) 6,327 7,394 7,050 6,863 2.7% portfolio present risk. EPS (adj) (HKD) 1.02 1.17 1.12 1.09 2.2%
Diluted shares (mn) 6,483.1 6,580.7 6,580.7 6,580.7 0.5% Upside case HKD 12.31 DPS (HKD) 0.42 0.42 0.42 0.42 0.0% An earlier-than-expected reversal of property cooling Profit growth (%) 26.1 16.9 -4.7 -2.7 N/A measures could allow the Hong Kong property stocks
to trade back up to the mid-cycle discounts to NAV. Margin and return data Average NWD’s improved transparency and product branding EBITDA margin (%) N/A N/A N/A N/A N/A could potentially enable its discount to narrow to EBIT margin (%) 23.1 18.1 16.7 16.0 18.5 35%. Pre-tax margin (%) 49.8 24.2 21.1 21.1 29.1 Net margin (%) 30.2 14.4 11.2 10.7 16.6 Downside case HKD 6.63 Net (adj) margin (%) 13.5 14.4 11.2 10.7 12.5 Should the decline in home prices trigger a greater ROIC (%) N/A N/A N/A N/A N/A follow-on impact on rents and the broader local ROA (%) 2.0 2.2 2.0 1.9 2.0 economy, we believe property companies’ discounts ROE (%) 4.8 5.3 4.9 4.6 4.9 to NAV could widen further to the mid-cycle discount minus 1.5-2.0SD. Our downside case for NWD factors in a 65% discount to NAV. Balance sheet and cash flow (HKDmn) CAGR
Tangible fixed assets 76,990 77,140 77,290 77,440 0.2% Upside/Downside scenarios Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 40,260 43,824 57,046 71,423 21.1% Total assets 332,189 341,937 356,005 369,929 3.7% Short and long-term debt 102,755 112,755 122,755 132,755 8.9% Net debt/(funds) 66,153 72,589 69,367 64,990 -0.6% Other long-term liabilities 13,725 13,725 13,725 13,725 0.0% Total liabilities 154,444 163,793 176,011 188,058 6.8% Shareholders' equity 139,131 141,980 146,379 150,591 2.7% Change in working capital -4,180 -8,404 1,245 2,596 N/A Cash flow from operations 7,781 2,834 13,709 14,907 24.2% Capital expenditure -5,487 -3,834 -3,834 -3,834 N/A Free cash flow 2,293 -1,000 9,875 11,073 69.0% BVPS (HKD) 22.04 22.50 23.19 23.86 2.7%
Valuation and leverage metrics Average P/E (reported) (x) 4.8 9.4 9.8 10.1 8.5 POINT® Quantitative Equity Scores P/E (adj) (x) 10.8 9.4 9.8 10.1 10.0 Value NAV per share (HKD) 20.63 19.78 18.94 18.94 19.57 Premium/(discount) to NAV (%) -46.9 -50.8 -55.0 -55.0 -51.9 P/BV (x) 0.5 0.5 0.5 0.5 0.5 Quality Dividend yield (%) 3.8 3.8 3.8 3.8 3.8 Net debt/equity (%) 47.5 51.1 47.4 43.2 47.3 Net debt/EBITDA (x) 6.1 7.8 6.6 6.3 6.7 Sentiment Total debt/capital (%) 52.6 53.6 54.6 55.5 54.1
Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Jun
28 October 2013 68 Barclays | Hong Kong Property
FIGURE 121 New World Development– Financial Summary
New World Development - Financial Summary Share price HKD 10.96 Ticker 17hk No. of shares mn 6,312 Year End 30-Jun Market Cap HKDmn 69,177 Free Float 57%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY12 FY13 FY14E FY15E FY16E Year ended FY12 FY13 FY14E FY15E FY16E Turnover 35,620 46,780 51,403 62,755 64,133 Operating profit 15,602 18,592 7,932 8,942 8,570 Operating profit 9,288 10,827 9,314 10,494 10,290 +/- non cash gains -6,545 -7,717 0 0 0 ...Property sales 5,341 6,952 5,879 6,688 6,012 +/- change in working capital -23,667 -4,180 -8,404 1,245 2,596 ...Property rental 1,109 1,338 1,359 1,443 1,511 +/- associates 1 1 1 1 1 ...Others 2,839 2,537 2,076 2,362 2,767 +/- others 1,378 1,084 3,305 3,520 3,739 EBIT 9,288 10,827 9,314 10,494 10,290 Operating cash flows -13,231 7,781 2,834 13,709 14,907 Net interest -514 -695 -1,382 -1,551 -1,720 Capex -2,755 -5,487 -3,834 -3,834 -3,834 Operating profit 8,774 10,132 7,932 8,942 8,570 Free cash flow -15,986 2,293 -1,000 9,875 11,073 Exceptionals 1,925 999 0 0 0 Sale of assets 3,381 2,494 0 0 0 Revaluation surplus/deficit 4,903 7,461 0 0 0 Acquisitions -8,355 -213 0 0 0 Associates 3,120 4,720 4,523 4,328 4,951 Shares issue/buybacks 11,152 132 0 0 0 Profit before tax 18,722 23,311 12,454 13,270 13,522 Others -9,908 -5,022 -125 -213 -180 Tax -4,401 -4,795 -2,623 -3,087 -3,308 Cash flow after investing acts -19,716 -315 -1,125 9,661 10,893 MI -4,182 -4,368 -2,438 -3,134 -3,351 Net profit 10,139 14,149 7,394 7,050 6,863 Net interest paid/received -1,793 -2,489 -3,989 -4,402 -4,814 Underlying net profit 5,018 6,327 7,394 7,050 6,863 Dividends received 2,751 3,517 3,674 3,422 3,979 Dividends paid -1,694 -2,191 -2,372 -2,372 -2,372 Underlying EPS (HKD) 0.93 1.02 1.17 1.12 1.09 Tax -3,709 -3,996 -2,623 -3,087 -3,308 DPS (HKD) 0.38 0.42 0.42 0.42 0.42 Change in net debt -24,161 -5,474 -6,435 3,223 4,378
Net debt - y/b 36,516 60,678 66,153 72,589 69,367 Balance sheet (HKDmn) Net debt -y/e 60,678 66,153 72,589 69,367 64,990 Year ended FY12 FY13 FY14E FY15E FY16E Non-current assets 159,748 178,430 174,566 174,929 175,259 Investment properties 64,729 76,990 77,140 77,290 77,440 NAV Breakdown Associates and JVs 55,988 60,070 60,195 60,408 60,588 (HKDmn) Methodology Current % of NAV FY 15 % of NAV Others 39,032 41,370 37,231 37,231 37,231 Property development - HK DCF 46,840 36% 31,855 27% Agricultural land @HKD300 psf 5,700 4% 5,700 5% Current assets 126,623 153,759 167,371 181,075 194,669 Inv Prop - HK Cap rate = 4.5-8.5% 33,283 26% 32,542 27% Trading properties 78,511 91,076 100,045 99,394 97,422 ...Residential Cap rate = 4.0% 1,101 1% 838 1% Others 20,079 22,423 23,503 24,636 25,825 ...Office Cap rate = 5.0% 5,933 5% 4,870 4% Cash 28,033 40,260 43,824 57,046 71,423 ...Retail Cap rate = 5.0% 24,793 19% 25,325 21% ...Carparks Cap rate = 8.0% 1,455 1% 1,510 1% Total assets 286,372 332,189 341,937 356,005 369,929 Inv Prop Under Dev DCF @ 8% 14,522 11% 16,938 14% Hotel properties Cap rate = 6.0% 18,996 15% 18,996 16% Current liabilities 47,932 63,371 62,719 64,937 66,984 NWCL (0917.HK) MV @ HKD3.98 24,249 19% 24,249 20% NWS Holdings ST bank loans 18,107 25,407 25,407 25,407 25,407 MV @ HKD11.82 25,710 20% 28,277 24% (0659.HK) NW Dept Store Others 29,826 37,964 37,313 39,531 41,578 MV @ HKD4.53 5,522 4% 5,607 5% (0825.HK) Telecoms 1,771 1% 1,771 1% Non-current liabilities 80,399 91,073 101,073 111,073 121,073 Gross assets 176,592 136% 165,935 139% LT loans 67,703 77,348 87,348 97,348 107,348 Less: Net (debt) /cash - Parent co level -46,408 -36% -46,408 -39% Others 12,696 13,725 13,725 13,725 13,725 NAV (HKDmn) 130,184 100% 119,528 100% No of shares (mn) 6,312 6,312 MI 34,498 38,614 36,164 33,615 31,280 NAV per share (HKD) 20.63 18.94 Net assets 123,543 139,131 141,980 146,379 150,591 Discount/target discount -47% -55% Share price (HKD) 10.96 8.52 BVPS (HKD) 20.08 22.04 22.50 23.19 23.86 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 69 Barclays | Hong Kong Property
FIGURE 122 FIGURE 123 GAV breakdown (as of Dec-13E) BVPS and gearing level
30 60.0% 26.01 Dev Prop - 49.1% 47.5% Other HK 25 50.0% 26% 22.82 assets 20.08 22.04 33% 20 35.2% 40.0% 32.1% 15 30.0%
10 20.0% Dev Prop - Inv Prop China 5 10.0% Under Dev - 14% HK Inv Prop - 0 0.0% 8% HK FY10 FY11 FY12 FY13 19% BVPS (HKD) Net Debt/Equity (%)
Source: Barclays Research estimates Source: Datastream, Barclays Research
FIGURE 124 FIGURE 125 HK development landbank HK investment properties breakdown (as of Dec-13E)
Landbank (mn sf) HK - Res HK - Others 3 3% 4% 2.18 HK - Office 2 18% 1.50 1.50 2
1 0.77
1 0.33 HK-Retail 75%
0 Leftovers FY14 FY15 FY16 FY 17+ HK-Retail HK - Office HK - Res HK - Others Source: Barclays Research estimates Source: Barclays Research estimates
FIGURE 126 FIGURE 127 Historical discount to NAV Trailing price-to-book ratio
40% 2.5 Average Disc.= -39% 20% 2.0 0% 1.5 -20%
-40% 1.0
-60% 0.5 -80% - -100% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 New World - NAV Discount Average Discount NWD (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 70 Barclays | Hong Kong Property
SINO LAND (83 HK; UW; PT HKD9.69; -13%)
83 HK / 0083.HK Micro vs macro – First pain, then gain
Stock Rating We initiate coverage of Sino Land with an UW rating and a price target of HKD9.69. By UNDERWEIGHT virtue of having 90% of its NAV tied to the Hong Kong property market, and 36% of this Industry View linked to residential (on our estimates), Sino Land is often regarded as being the most NEGATIVE pure-play Hong Kong developer. This also makes it the most exposed to our expected Price Target 30% home price decline in Hong Kong in the next two years. However, we believe Sino HKD 9.69 Land has tried to prepare to withstand and potentially take advantage of the upcoming Price (23-Oct-2013) volatility by: 1) bringing its balance sheet to net cash; 2) tailoring its project pipeline to HKD 11.18 small units; and 3) maintaining strong financial discipline around land purchases. We believe these actions should help but, with such strong macro headwinds, it will likely Potential Upside/Downside -13% be hard for Sino Land to decouple from the overall market downtrend.
· Only developer in net cash position – While investors have traditionally viewed Sino Land as a high-beta developer, we believe the company has substantially de-risked its business model over the past 10 years. On the balance sheet side, Sino Land has reduced its gearing from 20.9% in June 2008 to net cash of 1.7% as at June 2013 (HKD12.3bn net debt to HKD1.75bn net cash). On the recurrent income side, Sino Land has grown its attributable rental income from HKD1,957mn in FY09 to HKD2,791mn in FY13 (ending June 2013). With strong financial resources on hand, we believe Sino Land is in a much better position to withstand upcoming market volatility than it was 13 years ago during the Asian Crisis.
· Project pipeline well tailored to market demand – With the exception of The Graces and the two other Pak Shek Kok sites, most of Sino Land’s developments are smaller units that are favoured by end-users. After the launch of The Graces this month, Sino Land is expected to launch Park Metropolitan in Kwun Tong, followed by The Avenue in Wanchai and then its Kau To Shan JV with Kerry. Further phases of Pak Shek Kok development will depend on reception of The Graces. For FY14, based on the launch schedule, we estimate Sino Land should generate around HKD8-11bn of contract sales.
· Strong discipline around land purchases – Sino Land has been very disciplined around land purchases and has only bought when its forecast project margins are very good (ie, Kau To Shan, Long Ping Station). We estimate Sino Land’s embedded development margin at 20%. Looking ahead, it expects better landbanking opportunities as many of the mid-cap developers appear to have exhausted their ammunition on recent land buys, while the big players have continued to stay away.
· China development starting to accelerate – On the China side, Sino Land is now starting to accelerate its development. Current contract sales are running at around HKD2bn per year, with the projects generating a net margin of around 15%. The rising China contribution, together with Sino’s HKD3.5bn recurrent income base, should take some pressure off Hong Kong property sales, in our view.
Sino Land Co., Ltd.(0083.HK): Financial and Valuation Metrics HKD
FY Jun 2012 2013 2014 2015 2016
EPS 0.91A 1.12A 0.91E 1.08E 0.97E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 0.83A 1.12A 0.83E 0.94E 1.03E P/E 12.3 10.0 12.2 10.4 11.5 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 71 Barclays | Hong Kong Property
· Non-core asset sales – Over the past two years, Sino Land has taken advantage of strong commercial demand to dispose of some non-core assets. With half of Exchange Tower in Kowloon Bay still left to dispose of, Sino Land could take advantage of low market yields to dispose of more non-core assets, if market demand is there. While some multinationals have continued to look to acquire property for their own occupation, commercial property sales have slowed since the Hong Kong government introduced the Double Stamp Duty in February 2013.
Valuation methodology Our HKD9.69 price target is based on a 40% discount to our end-2015 NAV estimate of HKD16.15 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, Sino Land has traded at an average discount of 32% with a one standard deviation swing of 22%. Our target discount for Sino Land is 14pp tighter than historical average minus one SD as we believe Sino Land’s risk profile has substantially improved over the past 10 years.
Key investment risks Upside risks to our price target include:
Pre-emptive rollback of government cooling measures – If the government were to pre- emptively remove the various property stamp duties, we believe Hong Kong property stocks could revert back to mid-cycle valuations, narrowing the discount to NAV.
Sino Land could be the first to rebound when property prices stabilise – With Sino Land’s healthy balance sheet and small-units project pipeline, if and when property prices start to stabilise, its shares could be among the first to rebound. Although its current 39% discount to NAV is only in line with its historical average, as it has substantially de-geared and grown its recurrent income base over the past 10 years, its NAV discount could potentially narrow further, to the long-term average among landlords of 30%, or even towards the developers’ long-term average of 15%.
Downside risks to our price target include:
Smaller capital base – Sino Land’s shareholders’ fund was HKD104.8bn as of June 2013. Relative to the likes of SHKP and Cheung Kong, which have shareholders’ funds of around HKD386bn and HKD344bn, respectively, Sino Land’s smaller capital base affords it less margin of error. While we expect Sino Land to maintain its strong financial discipline around landbanking, should the company over-commit itself with a multi-billion dollar land purchase, for instance, it could weaken its strong balance sheet.
28 October 2013 72 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Sino Land Co., Ltd. (0083.HK) Stock Rating: UNDERWEIGHT
Income statement (HKDmn) 2013A 2014E 2015E 2016E CAGR Price (23-Oct-2013) HKD 11.18 Revenue 7,819 10,277 16,031 16,095 27.2% Price Target HKD 9.69 EBITDA N/A N/A N/A N/A N/A Why Underweight? Although we are positive on Sino EBIT 3,289 4,888 5,180 5,501 18.7% Land’s net cash balance sheet and strong financial Pre-tax income 12,503 6,287 7,415 6,775 -18.5% discipline around land purchases, by having 90% of Net income 11,687 5,440 6,394 5,756 -21.0% its NAV tied to the Hong Kong property market it is EPS (reported) (HKD) 1.97 0.91 1.08 0.97 -21.1% the most exposed among the developers to our forecast 30% correction in home prices over the next Net income (adj) 6,636 5,440 6,394 5,756 -4.6% two years. EPS (adj) (HKD) 1.12 0.91 1.08 0.97 -4.7%
Diluted shares (mn) 5,947.8 5,947.8 5,947.8 5,947.8 0.0% Upside case HKD 12.11 DPS (HKD) 0.50 0.50 0.50 0.50 0.0% An earlier-than-expected reversal of property cooling Profit growth (%) 25.0 -18.0 17.5 -10.0 N/A measures could allow the Hong Kong property stocks
to trade back up to the mid-cycle discounts to NAV. Margin and return data Average Our upside case assumes Sino’s net cash position and EBITDA margin (%) N/A N/A N/A N/A N/A enlarged recurrent income base allow its discount to EBIT margin (%) 42.1 47.6 32.3 34.2 39.0 narrow to 25%. Pre-tax margin (%) 159.9 61.2 46.3 42.1 77.4 Net margin (%) 159.9 61.2 46.3 42.1 77.4 Downside case HKD 8.08 Net (adj) margin (%) 84.9 52.9 39.9 35.8 53.4 Should the decline in home prices trigger a greater ROIC (%) N/A N/A N/A N/A N/A follow-on impact on rents and the broader local ROA (%) 5.4 4.2 4.9 4.3 4.7 economy, we believe property companies' discounts ROE (%) 6.6 5.1 5.9 5.1 5.7 to NAV could widen further to the mid-cycle discount minus 1.5-2.0SD. Our downside case for Sino factors in a 50% discount to NAV. Balance sheet and cash flow (HKDmn) CAGR
Tangible fixed assets 56,355 57,447 58,551 60,647 2.5% Upside/Downside scenarios Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 11,943 5,600 8,600 10,600 -3.9% Total assets 129,263 128,382 131,912 136,145 1.7% Short and long-term debt 10,193 6,151 5,456 5,166 -20.3% Net debt/(funds) -1,750 551 -3,144 -5,434 N/A Other long-term liabilities 4,651 4,651 4,651 4,651 0.0% Total liabilities 23,278 19,322 18,715 18,514 -7.3% Shareholders' equity 104,806 107,273 110,693 114,452 3.0% Change in working capital -676 -4,057 896 190 N/A Cash flow from operations 2,105 867 6,111 5,727 39.6% Capital expenditure -335 -859 -864 -869 N/A Free cash flow 1,770 8 5,248 4,859 40.0% BVPS (HKD) 17.62 18.04 18.61 19.24 3.0%
Valuation and leverage metrics Average P/E (reported) (x) 5.7 12.2 10.4 11.5 9.9 POINT® Quantitative Equity Scores P/E (adj) (x) 10.0 12.2 10.4 11.5 11.0 Value NAV per share (HKD) 18.45 17.30 16.15 16.15 17.01 Premium/(discount) to NAV (%) -27.7 -33.5 -40.0 -40.0 -35.3 P/BV (x) 0.6 0.6 0.6 0.6 0.6 Quality Dividend yield (%) 4.5 4.5 4.5 4.5 4.5 Net debt/equity (%) -1.7 0.5 -2.8 -4.7 -2.2 Net debt/EBITDA (x) -0.5 0.1 -0.6 -1.0 -0.5 Sentiment Total debt/capital (%) 8.0 4.9 4.2 3.9 5.2
Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Jun
28 October 2013 73 Barclays | Hong Kong Property
FIGURE 128 Sino Land – Financial Summary
Sino Land - Financial Summary Share price HKD 11.18 Ticker 83hk No. of shares mn 5,948 Year End 30-Jun Market Cap HKDmn 66,497 Free Float 50%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY12 FY13 FY14E FY15E FY16E Year ended FY12 FY13 FY14E FY15E FY16E Turnover 8,396 7,819 10,277 16,031 16,095 Profit before tax 11,430 12,503 6,287 7,415 6,775 Operating profit 4,525 3,289 4,888 5,180 5,501 +/- non cash gains -5,194 -4,609 0 0 0 Property sales 1,706 426 1,848 2,004 2,205 +/- change in working capital 77 -676 -4,057 896 190 Property rental 2,029 2,210 2,374 2,496 2,603 +/- associates -2,348 -4,973 -1,150 -1,941 -923 Others 790 653 667 679 692 +/- others -21 -140 -213 -258 -315 EBIT 4,525 3,289 4,888 5,180 5,501 Operating cash flows 3,944 2,105 867 6,111 5,727 Net interest 117 237 249 294 351 Capex -260 -335 -859 -864 -869 Profit before exceptional items 4,642 3,526 5,137 5,474 5,852 Free cash flow 3,684 1,770 8 5,248 4,859 Exceptionals -31 85 0 0 0 Sale of assets 2,118 2,144 0 0 0 Revaluation surplus/deficit 4,471 3,919 0 0 0 Acquisitions -9 -14 0 0 0 Associates 2,348 4,973 1,150 1,941 923 Shares issue/buybacks -113 -47 0 0 0 Profit before tax 11,430 12,503 6,287 7,415 6,775 Others -3,461 4,539 -19 -19 -19 Tax -687 -661 -771 -821 -878 Cash flow after investing acts 2,219 8,393 -11 5,229 4,840 MI -71 -156 -76 -200 -141 Net profit 10,673 11,687 5,440 6,394 5,756 Net interest paid/received -21 -18 249 294 351 Underlying net profit 5,311 6,636 5,440 6,394 5,756 Dividends received 1,891 162 1,150 1,941 923 Dividends paid -1,167 -2,341 -2,974 -2,974 -2,974 Underlying EPS (HKD) 0.91 1.12 0.91 1.08 0.97 Tax -497 -497 -716 -796 -849 DPS (HKD) 0.46 0.50 0.50 0.50 0.50 Change in net debt 2,423 5,699 -2,302 3,695 2,290
Net debt - y/b 6,372 3,949 -1,750 551 -3,144 Balance sheet (HKDmn) Net debt -y/e 3,949 -1,750 551 -3,144 -5,434 Year ended FY12 FY13 FY14E FY15E FY16E Non-current assets 78,925 88,487 89,807 91,145 93,479 Investment properties 53,253 56,355 57,447 58,551 60,647 NAV Breakdown Associates and JVs 23,370 29,600 29,600 29,600 29,600 (in HKDmn) Methodology Current % of NAV Forward % of NAV Others 2,301 2,532 2,761 2,994 3,232 Dev Prop (incl assoc) DCF at 8% 49,756 45% 38,769 40% ...HK DCF at 8% 38,022 35% 26,097 27% Current assets 35,348 40,776 38,575 40,767 42,666 ...China DCF at 8% 11,734 11% 12,673 13% Trading properties 23,389 26,374 30,473 29,621 29,474 Inv Prop (incl assoc) 60,520 55% 57,803 60% Others 6,237 2,459 2,501 2,546 2,592 ...Office Cap rate at 5.00% 16,188 15% 13,281 14% Cash 5,722 11,943 5,600 8,600 10,600 ...Retail Cap rate at 5.25% 37,304 34% 38,254 40% ...Residential Cap rate at 3.50% 1,781 2% 1,333 1% Total assets 114,272 129,263 128,382 131,912 136,145 ...Car Park Cap rate at 7.00% 972 1% 944 1% ...Industrial Cap rate at 7.00% 4,275 4% 3,990 4% Current liabilities 7,312 12,987 10,058 9,972 9,988 Inv Prop under dev DCF at 8% 760 1% 760 1% ST bank loans 1,847 4,553 1,538 1,364 1,291 Hotel @HKD7.9mn/room 6,083 6% 6,083 6% Others 5,465 8,434 8,520 8,607 8,697 Investment securities 1,482 1% 1,525 2% Gross assets 118,600 108% 104,940 109% Non-current liabilities 11,352 10,291 9,264 8,743 8,526 Net debt 1,580 1% 1,580 2% Receivables less LT loans 7,824 5,640 4,613 4,092 3,874 -7,005 -6% -7,005 -7% payables Others 3,528 4,651 4,651 4,651 4,651 Associate debt -3,455 -3% -3,455 -4% NAV 109,720 100% 96,060 100% MI 822 1,179 1,787 2,504 3,179 # of shares (mn) 5,948 5,948 Net assets 94,786 104,806 107,273 110,693 114,452 NAV per share (HKD) 18.45 16.15 Discount/target discount -39% -40% BVPS (HKD) 16.03 17.62 18.04 18.61 19.24 Share price (HKD) 11.18 9.69 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 74 Barclays | Hong Kong Property
FIGURE 129 FIGURE 130 GAV breakdown (as of Dec-13E) BVPS and gearing level
Inv Prop Other 20 40% assets 17.62 Under Dev - 18 36% 6% 16.03 HK Dev Prop - 16.10 1% 16 32% HK 13.32 32% 14 28% 12 24% 21.5% 10 20% 8 16% 6 12% Inv Prop - HK 4 7.5% 8% 51% Dev Prop - 2 4.2% 4% China 0 0% 10% -1.7% -2 FY10 FY11 FY12 FY13 -4% BVPS (HKD) Net Debt/Equity (%)
Source: Barclays Research estimates Source Datastream, Barclays Research:
FIGURE 131 FIGURE 132 HK development landbank HK investment properties breakdown (as of Dec-13E) Landbank (mn sf) 3 HK - Others 2.75 HK - Res 9% 3 3%
2
HK - Office 2 27% HK-Retail 1 61% 0.54 0.54 1 0.36 0.38
0 Leftovers FY14 FY15 FY16 FY17+ HK-Retail HK - Office HK - Res HK - Others
Source: Barclays Research estimates Source: Barclays Research estimates
FIGURE 133 FIGURE 134 Historical discount to NAV Trailing price-to-book ratio
60% 2.5 Average Disc.= -32% 40% 2.0 20% 1.5 0%
-20% 1.0
-40% 0.5 -60% - -80% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sino Land - NAV Discount Average Discount Sino Land (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 75 Barclays | Hong Kong Property
HANG LUNG PROPERTIES (101 HK; OW; PT HKD27.95; +9%)
101 HK / 0101.HK A little bit better goes a long way
Stock Rating We initiate coverage of Hang Lung Properties with an OW rating and a price target of OVERWEIGHT HKD27.95. HLP is one of only two OW rated stocks in our Hong Kong property coverage. Industry View We believe HLP is well positioned to face the first real downturn in the Hong Kong
NEGATIVE property market since 1998 for three reasons: 1) organic growth of its China retail Price Target portfolio; 2) highest embedded development margin among peers; and 3) very low net HKD 27.95 debt, with gearing at 0.3%. We believe these three characteristics should provide HLP Price (23-Oct-2013) with flexibility to weather, and potentially take advantage of, the downturn to come. HKD 25.55 · Organic growth of its China retail portfolio – Over the past three years, with the Potential Upside/Downside opening of Shenyang Palace 66, Jinan Parc 66 and Shenyang Forum 66, HLP has grown +9% its China rental turnover outside Shanghai by HKD0.6bn. While Palace 66 had not
performed as well as the market hoped, its contribution, although small, is still positive. Malls Wuxi Center 66 (opened in September 2013), Tianjin Riverside 66 (set to open in September 2014) and Dalian Olympia 66 (opening in late 2015) should each add around HKD200-300mn of income to HLP’s rent roll. Other investment properties under development, such as office towers in Wuxi and Shenyang, should also make incremental contributions as they are completed in 2014 and 2015.
· Highest embedded development margin among Hong Kong developers – Having acquired the sites for Harbourside at Kowloon Station and Long Beach in West Kowloon in 1999 and 2000, we estimate HLP has the highest embedded development margin among its peers at 75%. While HLP’s HKD21.2bn of inventory at Long Beach and Harbourside will not be immune from an overall market correction, we believe HLP has a lot more flexibility in its sales strategy because of its high embedded margin. We expect HLP to turn active in selling the Long Beach in the coming 12 months.
· Nearly no debt on balance sheet – At June 2013, HLP’s net debt was only HKD327mn and its net-debt-to-equity was only 0.3%. Although this is lower than the HKD4.7bn net cash that HLP had back in June 2008, 0.3% net debt is still very healthy relative to peers, especially considering the potential cash to be returned once HLP finally monetises its Hong Kong development assets. We believe HLP’s balance sheet should be able to easily fund the HKD6bn of annual capex over the next three years related to its China investment properties under development.
· No rush for land in Hong Kong – Although land prices have fallen slightly, HLP believes they are still too high. Taking the September 2013 Kau To Shan land tender as an example, the HKD6,837psf land costs paid by another developer still suggest that land costs make up nearly 80% of total development costs (based on our estimate of HKD6,837psf land costs plus HKD2,000psf construction costs). This leaves little margin for error. We expect HLP will continue to wait for more attractive opportunities before making new land purchases in Hong Kong.
Hang Lung Properties Ltd.(0101.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 1.00A 1.38A 0.88E 1.58E 1.71E Previous EPS N/A N/A N/A N/A N/A Consensus EPS N/A 1.37A 1.11E 1.33E 1.56E P/E 25.6 18.5 29.0 16.2 14.9 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 76 Barclays | Hong Kong Property
Valuation methodology Our HKD27.95 price target is based on a 20% discount to our end-2015 NAV estimate of HKD34.93 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, since HLP moved from being a landlord to a developer in 2000, the shares have traded at an average discount of 12% with a one standard deviation swing of 20%. Our 20% target discount is 12pp narrower than mid-cycle minus one SD due to HLP’s three defensive characteristics mentioned above.
Key investment risks Downside risks to our price target include:
Shanghai Plaza 66 and Grand Gateway 66 – Rental growth at HLP’s Shanghai portfolio slowed to 6-7% y/y in 1H13. Slower macro growth, anti-corruption measures as well as a high base effect (maturity of the mall) have all contributed to the slower growth rate as compared to previous years. We see risk of a continued slowdown in rental growth given many new office buildings completing and competing for tenants, which may cause vacancy rates to rise as office tenants tend to be less loyal compared with retail tenants.
Timing of Long Beach sales – Our earnings forecasts expect HLP to sell half of its remaining 1,126 units of The Long Beach in each of 2014 and 2015. Due to the high margin of this project, sales timing could have a material impact on our earnings estimates. For 2014 and 2015, property development contributes 44% and 42% of our EBIT estimates, respectively.
28 October 2013 77 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Hang Lung Properties Ltd. (0101.HK) Stock Rating: OVERWEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 25.55 Revenue 7,372 6,888 12,824 13,924 23.6% Price Target HKD 27.95 EBITDA N/A N/A N/A N/A N/A Why Overweight? We believe HLP is well positioned EBIT 5,116 5,009 8,994 9,840 24.4% to face the first real downturn in the Hong Kong Pre-tax income 10,169 5,414 9,277 10,036 -0.4% housing market since 1998. Its near net cash balance Net income 8,395 3,945 7,070 7,675 -2.9% sheet, organic growth outside Hong Kong and highest EPS (reported) (HKD) 1.88 0.88 1.58 1.71 -3.0% embedded development margin among developer peers should provide HLP with flexibility to weather Net income (adj) 6,178 3,945 7,070 7,675 7.5% the downturn. EPS (adj) (HKD) 1.38 0.88 1.58 1.71 7.5%
Diluted shares (mn) 4,496.0 4,477.0 4,477.0 4,477.0 -0.1% Upside case HKD 30.74 DPS (HKD) 0.74 0.74 0.74 0.74 0.0% An earlier-than-expected reversal of property cooling Profit growth (%) 40.7 -36.1 79.2 8.6 -40.5% measures could allow the Hong Kong property stocks
to trade back up to the mid-cycle discounts to NAV. Margin and return data Average This could potentially enable HLP’s discount to EBITDA margin (%) N/A N/A N/A N/A N/A narrow to 12%, its mid-cycle average. EBIT margin (%) 69.4 72.7 70.1 70.7 70.7 Pre-tax margin (%) 137.9 78.6 72.3 72.1 90.2 Downside case HKD 20.96 Net margin (%) 113.9 57.3 55.1 55.1 70.4 Should the decline in home prices trigger a greater Net (adj) margin (%) 83.8 57.3 55.1 55.1 62.8 follow-on impact on rents and the broader local ROIC (%) N/A N/A N/A N/A N/A economy, we believe property companies' discounts ROA (%) 3.9 2.3 3.9 4.0 3.5 to NAV could widen further to the mid-cycle discount ROE (%) 5.4 3.3 5.5 5.6 4.9 minus 1.5-2.0SD. For HLP, we assume a 40% discount to NAV in our downside case. Balance sheet and cash flow (HKDmn) CAGR Tangible fixed assets 98,223 103,134 108,291 113,705 5.0% Upside/Downside scenarios Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 36,025 30,000 30,000 30,000 -5.9% Total assets 167,864 175,111 184,269 196,738 5.4% Short and long-term debt 29,736 31,188 30,527 32,807 3.3% Net debt/(funds) -6,289 1,188 527 2,807 N/A Other long-term liabilities 8,947 9,806 10,709 11,656 9.2% Total liabilities 43,886 47,032 48,240 51,873 5.7% Shareholders' equity 117,928 123,472 132,385 142,162 6.4% Change in working capital 606 251 1,966 2,007 49.1% Cash flow from operations 6,006 5,260 10,960 11,848 25.4% Capital expenditure -5,328 -8,280 -5,636 -8,697 N/A Free cash flow 678 -3,020 5,324 3,150 66.9% BVPS (HKD) 26.34 27.58 29.57 31.75 6.4%
Valuation and leverage metrics Average POINT® Quantitative Equity Scores P/E (reported) (x) 13.6 29.0 16.2 14.9 18.4 Value P/E (adj) (x) 18.5 29.0 16.2 14.9 19.7 NAV per share (HKD) 36.34 36.11 35.52 34.93 35.73 Premium/(discount) to NAV (%) -25.2 -29.4 -24.8 -20.0 -24.8 Quality P/BV (x) 1.0 0.9 0.9 0.8 0.9 Dividend yield (%) 2.9 2.9 2.9 2.9 2.9 Net debt/equity (%) -5.3 1.0 0.4 2.0 -0.5 Sentiment Net debt/EBITDA (x) -1.2 0.2 0.1 0.3 -0.2 Total debt/capital (%) 27.1 27.6 26.7 26.7 27.0
Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 78 Barclays | Hong Kong Property
FIGURE 135 Hang Lung Properties – Financial Summary
Hang Lung Properties - Financial Summary Share price HKD 25.55 Ticker 101hk No. of shares mn 4,479 Year End 31-Dec Market Cap HKDmn 114,433 Free Float 48%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY11 FY12 FY13E FY14E FY15E Year ended FY11 FY12 FY13E FY14E FY15E Turnover 8,233 7,372 6,888 12,824 13,924 Profit before tax 6,088 5,394 5,330 9,190 9,946 Operating profit 5,877 5,116 5,009 8,994 9,840 +/- non cash gains 217 244 0 0 0 Property sales 152 846 293 3,969 4,144 +/- change in working capital 577 606 251 1,966 2,007 Property rental 6,495 4,896 5,342 5,714 6,454 +/- associates 0 0 0 0 0 Others -770 -626 -626 -689 -757 +/- others -162 -238 -321 -196 -106 EBIT 5,877 5,116 5,009 8,994 9,840 Operating cash flows 6,720 6,006 5,260 10,960 11,848 Net interest 211 278 321 196 106 Capex -13,268 -5,328 -8,280 -5,636 -8,697 Operating profit 6,088 5,394 5,330 9,190 9,946 Free cash flow -6,548 678 -3,020 5,324 3,150 Exceptionals 0 2,148 0 0 0 Sale of assets 4 5,170 0 0 0 Revaluation surplus/deficit 4,313 2,522 0 0 0 Acquisitions 0 0 0 0 0 Associates 140 105 84 87 89 Shares issue/buybacks 11,248 60 0 0 0 Profit before tax 10,541 10,169 5,414 9,277 10,036 Others 506 1,006 0 0 0 Tax -1,564 -1,249 -986 -1,700 -1,840 Cash flow after investing acts 5,210 6,914 -3,020 5,324 3,150 MI -669 -525 -483 -507 -520 Net profit 8,308 8,395 3,945 7,070 7,675 Net interest paid/received -65 -283 -200 -392 -446 Underlying net profit 4,391 6,178 3,945 7,070 7,675 Dividends received 54 36 29 29 29 Dividends paid -5,432 -2,403 -3,313 -3,313 -3,313 Underlying EPS (HKD) 1.00 1.38 0.88 1.58 1.71 Tax -1,846 -973 -973 -986 -1,700 DPS (HKD) 1.07 0.74 0.74 0.74 0.74 Change in net debt -2,079 3,291 -7,477 662 -2,280
Net debt/(Net cash) - y/b -5,077 -2,998 -6,289 1,188 527 Balance sheet (HKDmn) Net debt -y/e -2,998 -6,289 1,188 527 2,807 Year ended FY11 FY12 FY13E FY14E FY15E Non-current assets 118,932 124,008 137,225 148,044 162,182 Investment properties 93,610 98,223 103,134 108,291 113,705 NAV Breakdown
Associates and JVs 0 0 0 0 0 (HKDmn) Methodology Current % of NAV End-15 % of NAV
Others 25,322 25,785 34,090 39,753 48,477 Inv Properties 119,050 74% 114,878 73% ...Office Cap rate = 5.0% 16,829 10% 13,814 9% Current assets 31,731 43,856 37,887 36,225 34,556 ...Retail Cap rate = 5.0% 36,284 22% 37,063 24% Trading properties 6,114 6,109 6,101 4,373 2,634 ...Residential Cap rate = 4.0% 10,370 6% 8,319 5% Others 1,885 1,722 1,786 1,852 1,922 ...Industrial Cap rate = 7.0% 378 0% 389 0% Cash 23,732 36,025 30,000 30,000 30,000 ...CP Cap rate = 7.5% 2,571 2% 2,410 2% ...Shanghai Cap rate = 6.0% 32,525 20% 33,297 21% Total assets 150,663 167,864 175,111 184,269 196,738 ...Shenyang Palace Cap rate = 5.0% 3,092 2% 2,976 2% ...Jinan Parc 66 Cap rate = 5.0% 6,986 4% 6,724 4% Current liabilities 8,915 6,316 6,338 7,304 7,709 ...Shenyang Forum Cap rate = 5.0% 4,895 3% 4,712 3% ST bank loans 4,700 1,113 300 300 300 ...Wuxi Centre 66 Cap rate = 5.0% 5,121 3% 5,176 3% Others 4,215 5,203 6,038 7,004 7,409 Inv Prop Under Dev NPV 21,717 4% 25,331 4% Trading properties Market Value 21,225 13% 16,500 11% Non-current liabilities 24,730 37,570 40,695 40,936 44,163 Total assets 161,992 100% 156,708 100% LT loans 16,034 28,623 30,888 30,227 32,507 Net debt -327 0% -327 0% Others 8,696 8,947 9,806 10,709 11,656 Other liabilities 0 0% 0 0% Net assets 161,665 100% 156,381 100% MI 5,556 6,050 4,607 3,644 2,703 No. of shares (mn) 4,477 4,477 Net assets 111,462 117,928 123,472 132,385 142,162 NAV/share (HKD) 36.11 34.93 Discount/target discount -29% -20% BVPS (HKD) 24.92 26.34 27.58 29.57 31.75 Share price (HKD) 25.55 27.95 Note: As a result of the change of the financial year end date from 30 June to 31 December in 2011, FY11 financial summary presents an 18-month period ended 31 December 2011. Source: CEIC, Company data, Barclays Research estimates
28 October 2013 79 Barclays | Hong Kong Property
FIGURE 136 FIGURE 137 GAV breakdown (as of Dec-13E) BVPS and gearing level
Inv Prop Dev Prop - 30 26.34 30.0% Under Dev - 24.92 HK 22.39 25.0% PRC 13% 13% 20 17.34 20.0%
15.0%
10 10.0%
Inv Prop - 5.0% China 0 0.0% 33% Inv Prop - HK -5.0% 41% -3.9% -2.7% -5.5% -5.3% -10 -10.0% FY09 FY10 FY11 FY12 BVPS (HKD) Net Debt/Equity (%) Source: Barclays Research estimates Source: Datastream, Barclays Research Note: HLP remained net cash position at year end from FY09 to FY12.
FIGURE 138 FIGURE 139 HK investment properties breakdown (as of Dec-13E) China investment properties breakdown (as of Dec-13E)
HK - Others China- 4% HK - Res Office 16% 22%
HK-Retail 55% HK - Office 25% China-Retail 78%
HK-Retail HK - Office HK - Res HK - Others China-Retail China-Office Source: Barclays Research estimates Source: Barclays Research estimates
FIGURE 140 FIGURE 141 Historical discount to NAV Trailing price-to-book ratio
100% 3.0 Average Disc.= -19% 80% Average Disc. since 2000 = -12% 2.5 60% 40% 2.0 20% 1.5 0% -20% 1.0 -40% 0.5 -60% -80% - 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 HLP - NAV Discount Average Discount Hang Lung Properties (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 80 Barclays | Hong Kong Property
KERRY PROPERTIES (683 HK; UW; PT HKD28.06; -16%)
683 HK / 0683.HK Need to de-gear and de-risk
Stock Rating We initiate coverage of Kerry Properties with an UW rating and a PT of HKD28.06. In our UNDERWEIGHT screen of defensive qualities discussed earlier in the report, Kerry only scores on its Industry View overseas exposure as China property make up 48% of its estimated NAV. However, with NEGATIVE gearing of 39.2%, 43% NAV exposure to the Hong Kong residential market and an Price Target embedded development margin of only 13%, based on our estimates, Kerry is very HKD 28.06 vulnerable in the event of a local property market downturn, in our opinion. We believe near-term priorities for the company should be to speed up property sales and repair its Price (23-Oct-2013) HKD 33.30 balance sheet. Potential Upside/Downside · De-gearing is now a priority – Following Kerry’s HKD11.7bn acquisition of a land site in -16% Homantin in March 2013, the company’s net debt rose from HKD15.9bn (as of Dec-12)
to HKD27.5bn (as of Jun-13). Its net-debt-to-shareholders’ fund ratio of 39.2% is the highest among our covered companies. Given our belief that the Hong Kong housing market is about to enter its first real downturn since 1998, we believe de-gearing is a priority and Kerry must either speed up its residential sales or successfully spin off its logistics division.
· Highest exposure to Hong Kong residential market – Hong Kong residential properties make up 32% of Kerry’s GAV and 43% of its spot NAV. Proportionally, this 43% is even higher than Sino Land’s 37% NAV exposure to the local residential market. Of this 43%, roughly one-third is made up of its luxury residential rental properties in the Mid-Levels, with development assets making up the remainder. For the coming year, successful sales of projects like Hing Hon Road, Ede Road and Kau To Shan could help Kerry repair its balance sheet. With de-gearing as a priority, we believe Kerry should target property sales in excess of its capex needs.
· China investment properties – Leasing commitment at Jing’An Kerry Centre in Shanghai has risen since its opening. The office and retail portions are now 75% and 91% let, respectively. On the office side, average rent is around Rmb11-12psm per day (effective). As for Shenyang, the company’s latest plans are to try to selling the office portion via strata-title sales.
· Interim cut in dividend reflects payout ratio – Kerry was among one of two companies to cut its interim dividend this past reporting season. Kerry reduced its 1H13 dividend by 12% to HKD0.35 from HKD0.40 as its underlying EPS declined by 22% y/y. As Kerry tries to maintain a payout ratio of 30-40%, future swings in earnings could result in Kerry’s dividend rising or falling. Based on our estimate of a 7% decline in earnings in 2013, we expect Kerry’s full year DPS to be reduced by 5% to HKD0.90.
Kerry Properties Ltd.(0683.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 2.54A 3.26A 3.02E 2.31E 2.56E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 2.46A 3.24A 3.12E 2.93E 3.09E P/E 13.1 10.2 11.0 14.4 13.0 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 81 Barclays | Hong Kong Property
Valuation methodology Our HKD28.06 price target is based on a 55% discount to our end-2015 NAV estimate of HKD62.35 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, Kerry has traded at an average discount of 38% with a one standard deviation swing of 18%. Kerry, with its high gearing and high domestic property exposure, should be among the more vulnerable stocks in our coverage. Our target discount of 55% is broadly in line with mid-cycle minus one SD.
Key investment risks Upside risks to our price target include:
Spin off of Kerry Logistics – On 19 August 2013, Kerry announced that it has submitted a proposal to the Hong Kong Stock Exchange to spin off Kerry Logistics Network (KLN). On 24 September 2013, Kerry announced that a listing application form (Form A1) has been submitted to the Hong Kong Stock Exchange. We believe a successful spin-off of Kerry Logistics would help Kerry reduce its gearing and risk exposure. However, at this stage, it is unclear what is the structure of the spin-off or the use of proceeds. Based on the announcement that KLN is expected to cease to be a subsidiary of the company, we expect that any debt related to KLN may then be carved out and would help to reduce Kerry’s own debt level.
Successful presales of its projects – While we believe the macro headwinds facing Kerry are strong, to the company’s credit, it has managed to execute property sales well over the past two years. Its most recent project, The Bayview in To Kwa Wan sold quickly, with 170 and 175 units cleared within months of launch generating HKD2bn in sales proceeds. Should Kerry successfully market and sell other key projects, like Hing Hon Road and Kau To Shan, the sales proceeds could quickly reduce the company’s gearing.
28 October 2013 82 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Kerry Properties Ltd. (0683.HK) Stock Rating: UNDERWEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 33.30 Revenue (mn) 34,513.0 35,152.1 33,741.2 38,606.4 3.8% Price Target HKD 28.06 EBITDA N/A N/A N/A N/A N/A Why Underweight? With gearing of 39.2% and Hong EBIT 6,650 6,117 4,877 4,665 -11.1% Kong residential making up 43% of its estimated NAV, Pre-tax income 9,899 6,264 5,102 5,535 -17.6% Kerry is very vulnerable in the event of a local property Net income 6,960 4,351 3,321 3,688 -19.1% market downturn, in our view. We believe near-term EPS (reported) (HKD) 4.84 3.02 2.31 2.56 -19.1% priorities for Kerry should be to speed up property sales and repair its balance sheet. Net income (adj) 4,695 4,351 3,321 3,688 -7.7%
EPS (adj) (HKD) 3.26 3.02 2.31 2.56 -7.8% Upside case HKD 40.53 Diluted shares (mn) 1,448.2 1,449.0 1,449.4 1,449.4 0.0% DPS (HKD) 0.95 0.90 0.90 0.90 -1.8% An earlier-than-expected reversal of property cooling measures could allow the Hong Kong property stocks Profit growth (%) 28.4 -7.3 -23.7 11.1 -27.0% to trade back up to the mid-cycle discounts to NAV.
This could potentially enable Kerry’s discount to Margin and return data Average narrow to 35%, near its mid-cycle average of 38%. EBITDA margin (%) N/A N/A N/A N/A N/A EBIT margin (%) 19.3 17.4 14.5 12.1 15.8 Downside case HKD 21.82 Pre-tax margin (%) 28.7 17.8 15.1 14.3 19.0 Should the decline in home prices trigger a greater Net margin (%) 20.2 12.4 9.8 9.6 13.0 follow-on impact on rents and the broader local Net (adj) margin (%) 13.6 12.4 9.8 9.6 11.3 economy, we believe property companies' discounts ROIC (%) N/A N/A N/A N/A N/A to NAV could widen further to the mid-cycle discount ROA (%) 3.6 3.1 2.3 2.5 2.9 minus 1.5-2.0SD. Our downside case for Kerry factors ROE (%) 7.0 5.8 4.2 4.7 5.4 in a 65% discount to NAV.
Balance sheet and cash flow (HKDmn) CAGR Upside/Downside scenarios Tangible fixed assets 47,484 53,410 50,780 48,411 0.6% Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 16,066 8,348 5,656 7,111 -23.8% Total assets 137,130 147,489 145,688 144,473 1.8% Short and long-term debt 31,932 33,932 31,932 31,932 0.0% Net debt/(funds) 15,867 25,584 26,277 24,821 16.1% Other long-term liabilities 7,208 7,208 7,208 7,208 0.0% Total liabilities 52,776 55,682 55,626 55,626 1.8% Shareholders' equity 70,792 79,773 79,168 79,192 3.8% Change in working capital 6,185 1,727 397 2,276 -28.3% Cash flow from operations 13,151 8,213 5,663 7,351 -17.6% Capital expenditure -1,530 -1,530 -1,000 -500 N/A Free cash flow 11,621 6,683 4,663 6,851 -16.2% BVPS (HKD) 49.19 55.40 54.98 55.00 3.8%
POINT® Quantitative Equity Scores Valuation and leverage metrics Average Value P/E (reported) (x) 6.9 11.0 14.4 13.0 11.3 P/E (adj) (x) 10.2 11.0 14.4 13.0 12.2 NAV per share (HKD) 63.29 66.64 64.49 62.35 64.19 Quality Premium/(discount) to NAV (%) -44.0 -49.5 -52.2 -55.0 -50.2 P/BV (x) 0.7 0.6 0.6 0.6 0.6 Dividend yield (%) 2.9 2.7 2.7 2.7 2.7 Sentiment Net debt/equity (%) 22.4 32.1 33.2 31.3 29.8 Net debt/EBITDA (x) 2.4 4.2 5.4 5.3 4.3 Total debt/capital (%) 31.1 29.8 28.7 28.7 29.6 Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 83 Barclays | Hong Kong Property
FIGURE 142 Kerry Properties – Financial Summary
Kerry Properties - Financial Summary Share price HKD 33.30 Ticker 683hk No. of shares mn 1,443 Year End 31-Dec Market Cap HKDmn 48,045 Free Float 44%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY11 FY12 FY13E FY14E FY15E Year ended FY11 FY12 FY13E FY14E FY15E Turnover 20,660 34,513 35,152 33,741 38,606 Profit before tax 7,103 9,899 6,264 5,102 5,535 Operating profit 3,600 7,079 6,565 5,347 5,156 +/- non cash gains -1,390 -2,360 749 906 911 Property sales 1,295 4,474 4,224 2,229 1,823 +/- change in working capital 252 6,185 1,727 397 2,276 Property rental 902 972 1,201 1,383 1,466 +/- associates -2,355 -573 -528 -743 -1,371 Others 1,050 1,204 692 1,264 1,376 +/- others 0 0 0 0 0 EBIT 3,248 6,650 6,117 4,877 4,665 Operating cash flows 3,610 13,151 8,213 5,663 7,351 Net interest -105 -267 -381 -517 -501 Capex -1,323 -1,530 -1,530 -1,000 -500 Profit before exceptional items 3,142 6,383 5,736 4,360 4,164 Free cash flow 2,287 11,621 6,683 4,663 6,851 Exceptionals 0 0 0 0 0 Sale of assets 2,381 1,436 0 0 0 Revaluation surplus/deficit 1,606 2,943 0 0 0 Acquisitions -4,844 -14,438 -13,000 -2,000 -2,000 Associates 2,355 573 528 743 1,371 Shares issue/buybacks 41 14 0 0 0 Profit before tax 7,103 9,899 6,264 5,102 5,535 Others -1,000 209 0 0 0 Tax -1,234 -1,791 -1,282 -1,037 -1,113 Cash flow after investing acts -1,135 -1,158 -6,317 2,663 4,851 MI -521 -1,148 -631 -744 -733 Net profit 5,348 6,960 4,351 3,321 3,688 Net interest paid/received -433 -749 -1,201 -1,402 -1,365 Underlying net profit 3,657 4,695 4,351 3,321 3,688 Dividends received 2,398 379 379 379 379 Dividends paid -1,461 -1,490 -1,296 -1,296 -1,296 Underlying EPS (HKD) 2.54 3.26 3.02 2.31 2.56 Tax -1,214 -928 -1,282 -1,037 -1,113 DPS (HKD) 0.87 0.95 0.90 0.90 0.90 Change in net debt -1,845 -3,945 -9,717 -693 1,455
Net debt - y/b 10,076 11,921 15,867 25,584 26,277 Net debt -y/e 11,921 15,867 25,584 26,277 24,821
Balance sheet (HKDmn) NAV Breakdown Year ended FY11 FY12 FY13E FY14E FY15E (in HKD mn) Methodology Current % of NAV End-15 % of NAV Non-current assets 86,267 101,906 107,832 105,202 102,833 Dev. properties. - HK DCF at 8% 27,622 29% 18,464 21% Investment properties 42,330 47,484 53,410 50,780 48,411 Inv. properties - HK 33,989 35% 29,778 33% Associates and JVs 11,717 12,423 12,423 12,423 12,423 ...Office Cap rate at 5.00% 6,040 6% 4,956 6% Others 32,220 41,999 41,999 41,999 41,999 ...Retail Cap rate at 5.00% 7,765 8% 7,932 9% ...Residential Cap rate at 3.00% 12,939 13% 9,490 11% Current assets 37,102 35,224 39,658 40,486 41,641 …Others Cap rate at 7.00% 7,244 1% 599 1% Trading properties 2,700 5,063 5,063 5,063 5,063 Dev. properties - China DCF at 8% 11,831 12% 13,800 15% Others 16,828 14,095 26,247 29,767 29,467 Inv. properties - China 26,072 27% 27,034 30% Cash 17,574 16,066 8,348 5,656 7,111 ...Office Cap rate at 7.50% 13,976 15% 14,446 16% ...Retail Cap rate at 7.50% 6,723 7% 6,949 8% Total assets 123,369 137,130 147,489 145,688 144,473 ...Residential Cap rate at 5.00% 5,012 5% 5,263 6% ...Car Park Cap rate at 9.00% 360 0% 376 0% Current liabilities 20,491 16,201 17,108 19,051 19,051 IP under dev in China DCF at 8% 6,165 6% 7,191 8% ST bank loans 8,112 2,565 2,565 2,565 2,565 Overseas Properties 2,563 3% 2,738 3% Others 12,379 13,636 14,542 16,486 16,486 Hotel 3,660 4% 4,352 5% Kerry Logistics 15.0x P/E 15,193 16% 17,584 20% Non-current liabilities 28,429 36,575 38,575 36,575 36,575 Investment securities 667 1% 640 1% LT loans 21,383 29,367 31,367 29,367 29,367 Gross assets 127,762 133% 121,582 135% Others 7,046 7,208 7,208 7,208 7,208 Net debt -26,513 -28% -26,513 -30% Other liabilities -5,296 -3% -5,296 -3% MI 10,527 13,562 12,034 10,893 9,656 NAV 95,953 100% 89,774 100% Net assets 63,922 70,792 79,773 79,168 79,192 # of shares (mn) 1,440 1,440 NAV per share (HKD) 66.64 62.35 BVPS (HKD) 44.44 49.19 55.40 54.98 55.00 Discount/target discount -50% -55% Share price (HKD) 33.30 28.06 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 84 Barclays | Hong Kong Property
FIGURE 143 FIGURE 144 GAV breakdown (as of Dec-13E) BVPS and gearing level
Other 60 35.0% assets Dev Prop - 49.19 HK 15% 30.0% Inv Prop 22% 50 44.44 Under Dev - 40.86 25.0% PRC 40 5% 35.46 22.4% 20.0% 30 Dev Prop - 18.6% 15.0% China 17.9% 17.2% Inv Prop - 20 10% 10.0% China 21% 10 5.0%
Inv Prop - 0 0.0% HK FY09 FY10 FY11 FY12 27% BVPS (HKD) Net Debt/Equity (%) Source: Barclays Research estimates Source: Datastream, Barclays Research
FIGURE 145 FIGURE 146 HK development landbank HK investment properties breakdown (as of Dec-13E)
3 Landbank (mn sf) HK - Others HK-Retail 2.43 3 21% 23%
2
2
1 HK - Office 18% 0.45 0.49 1 0.26 HK - Res 0.04 38% 0 Leftovers FY13 FY14 FY15 FY 16+ HK-Retail HK - Office HK - Res HK - Others Source: Barclays Research estimates Source: Barclays Research estimates
FIGURE 147 FIGURE 148 Historical discount to NAV Trailing price-to-book ratio
40% 2.5 Average Disc. = -38% 20% 2.0 0% 1.5 -20%
-40% 1.0
-60% 0.5 -80%
-100% - 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kerry Prop - NAV Discount Average Discount Kerry (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 85 Barclays | Hong Kong Property
MIDLAND HOLDINGS (1200 HK; UW; PT HKD2.25; -26%)
1200 HK / 1200.HK Not out of the woods yet
Stock Rating We initiate coverage of real estate agency Midland Holdings with an UW rating and a UNDERWEIGHT price target of HKD2.25. Despite Midland’s share price falling 18% so far this year (vs Industry View the HSI’s gain of 2.0%), we believe value has yet to emerge as the company still has a NEGATIVE long road to recovery. While we expect volumes to rebound in 2014, the continued Price Target reduction in average sale size means overall property sales are unlikely to rebound HKD 2.25 sufficiently to restore Midland’s profitability, in our opinion. Unless Midland accelerates Price (23-Oct-2013) its cost reduction programme, we expect it to continue to make a loss in 2014, albeit a HKD 3.05 smaller one than in 2013E. We believe a more meaningful earnings recovery is likely in 2016. In our view, the turn will be marked by a more significant fall in asset prices, Potential Upside/Downside -26% which should then usher in a period of market consolidation, cost cutting and roll-back of government measures. If this happens, we would expect profitability to be restored due to a rebound in volumes on a lower breakeven point.
· Transaction volumes – In the secondary market, unless the government removes the various cooling measures that are in place, we expect secondary volumes in 2014 to remain much the same as in 2013. In the primary market, although transaction volumes are likely to rise as developers try to catch up on sales, we estimate the primary transaction value will rebound only 11% y/y in 2014 as average ticket size is likely to remain low. In 2013, the average primary sales value has dropped from HKD9.3mn/transaction in 1H13 to HKD7.9mn/transaction in 2H13 so far. In September 2013, the average primary transaction size was only HKD5.6mn. The overall market outlook remains challenging, in our view, on light volumes.
· Commission rates – The 1H13 pick-up in primary market agency commission rates to 3.12% from 2.56% in 2H12 was unusual, in our view, as developers were intent on clearing old leftover stock ahead of the introduction of new primary sales rules. We expect primary commission rates to normalise around 2.5% in 2014. In the secondary market, the slight drop in 1H13 commission rates to 1.46% from 1.55% in 2H12 is representative of slow market activity as agents lower their commissions in order to bridge the bid-ask spread.
· Cost control – Unlike the situation during the crisis periods in 1998 and 2008, we believe it has been more difficult for Midland to rationalise costs this year as developers require agencies to show a strong presence for primary sales. Furthermore, with many small agencies still operating, Midland has had to maintain higher-than-optimal branch and staff levels. If and when its competitors start to trim, we expect Midland will also cut costs in order not to lose market share. On the company’s own rental costs, of the 36% y/y increase in 1H13, we attribute some 11% to rental reversion, with the 2012 branch expansion accounting for the remainder.
Midland Holdings Ltd.(1200.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 0.18A 0.31A -0.35E -0.05E 0.02E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 0.19A 0.35A -0.08E 0.17E 0.30E P/E 16.6 9.9 N/A N/A 179.4 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 86 Barclays | Hong Kong Property
· Commercial and industrial – Although Midland’s commercial and industrial division reported revenue growth of 8% y/y in 1H13, this does not reflect the current market environment, in our view. In January and February, the strata-title market was still very active but since the Double Stamp Duty was announced on 22 February 2013, strata- title commercial sales have fallen sharply. There were only 6,084 non-residential transactions between April and September 2013, which is down 74% compared to the previous six months between October 2012 and March 2013. As the high base effect from January and February starts to wane, we expect to see Midland’s commercial and industrial revenues in 2H13 start to reflect the market’s reduced volumes.
Valuation methodology Midland Holdings has traded at an average trailing P/E of 8.7x and an average trailing P/B of 2.13x since 1996. With a beta of 1.4, Midland shares have seen big swings in valuation; we estimate a one SD swing could change Midland’s P/E by 4.74x and its P/B by 1.09x.
As we expect Midland to report losses in both 2013 and 2014 and only marginal profits in 2015, a P/E-based valuation methodology is less useful, in our view. Instead, we prefer to use trailing P/B to value the shares.
Our HKD2.25 price target is based on a 1.25x trailing P/B target multiple, roughly 0.8 SD below Midland’s historical average P/B. While our overall sector approach is to apply mid- cycle minus one SD, considering Midland’s one SD is 1.09x and it only traded down to 0.95SD during the 2008 Credit Crisis, we believe 0.8SD is appropriate.
Key investment risks Upside risks to our price target include:
Pre-emptive cost-cutting programme – If Midland were to embark on a more aggressive cost-cutting exercise, this could help lower its break-even point and allow it to return to profitability and positive free cash flow at an earlier date than we currently expect.
Net cash of HKD1bn or HKD1.49/share – As of June 2013, Midland had net cash of HKD1bn or HKD1.49/share. We note that this could theoretically offer some support to the share price, however, we believe this is unlikely as we expect Midland to remain loss making and in a negative free cash flow position for the next two years.
28 October 2013 87 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Midland Holdings Ltd. (1200.HK) Stock Rating: UNDERWEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 3.05 Revenue 3,911 3,192 3,305 3,392 -4.6% Price Target HKD 2.25 EBITDA 363 -262 -4 61 -44.7% Why Underweight? Despite the sharp share price EBIT 315 -313 -60 2 -81.8% correction ytd, we believe value for Midland has yet to Pre-tax income 358 -274 -19 44 -50.3% emerge. While we expect transaction volumes to Net income 250 -251 -39 13 -63.1% rebound in 2014, the continued reduction in average EPS (reported) (HKD) 0.35 -0.35 -0.05 0.02 -63.2% sale size means overall sales value is unlikely to rebound sufficiently to restore profitability. Net income (adj) 221 -251 -39 13 -61.6%
EPS (adj) (HKD) 0.31 -0.35 -0.05 0.02 -61.6% Upside case HKD 4.00 Diluted shares (mn) 717.5 718.7 718.0 718.0 0.0% DPS (HKD) 0.24 0.00 0.00 0.01 -62.3% An earlier-than-expected reversal of property cooling measures might help engineer a soft landing for the Profit growth (%) 66.2 -213.5 -84.3 -131.8 N/A Hong Kong property market. If volumes rebound and
prices stabilise, we assume Midland trades back to Margin and return data Average 2.0x P/B. EBITDA margin (%) 9.3 -8.2 -0.1 1.8 0.7 EBIT margin (%) 8.1 -9.8 -1.8 0.1 -0.9 Downside case HKD 1.80 Pre-tax margin (%) 9.1 -8.6 -0.6 1.3 0.3 Should the decline in home prices trigger a greater Net margin (%) 6.4 -7.9 -1.2 0.4 -0.6 follow-on impact on rents and the broader local Net (adj) margin (%) 5.7 -7.9 -1.2 0.4 -0.8 economy, we believe property companies’ discounts ROIC (%) N/A N/A N/A N/A N/A to NAV could widen further to the mid-cycle discount ROA (%) 7.1 -7.8 -1.4 0.4 -0.4 minus 1.5-2.0SD. This could result in Midland’s P/B ROE (%) 14.2 -17.3 -3.1 1.0 -1.3 falling below 1.0x.
Balance sheet and cash flow (HKDmn) CAGR Upside/Downside scenarios Tangible fixed assets 282 279 275 271 -1.4% Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 1,290 1,013 868 850 -13.0% Total assets 3,489 2,900 2,812 2,837 -6.7% Short and long-term debt 11 13 13 13 5.0% Net debt/(funds) -1,279 -1,000 -856 -837 N/A Other long-term liabilities 2 2 2 2 0.0% Total liabilities 1,695 1,416 1,355 1,360 -7.1% Shareholders' equity 1,611 1,288 1,249 1,256 -7.9% Change in working capital N/A N/A N/A N/A N/A Cash flow from operations 259 -235 -127 17 -59.3% Capital expenditure -61 -48 -52 -55 N/A Free cash flow 199 -283 -179 -38 N/A BVPS (HKD) 2.24 1.79 1.74 1.75 -7.9%
POINT® Quantitative Equity Scores Valuation and leverage metrics Average Value P/E (reported) (x) 8.7 N/A N/A 179.4 94.0 P/E (adj) (x) 9.9 N/A N/A 179.4 94.7 NAV per share N/A N/A N/A N/A N/A Quality Premium/(discount) to NAV (%) N/A N/A N/A N/A N/A P/BV (x) 1.4 1.7 1.8 1.7 1.6 Dividend yield (%) 8.0 0.0 0.0 0.4 2.1 Sentiment Net debt/equity (%) -79.4 -77.7 -68.5 -66.6 -73.1 Net debt/EBITDA (x) N/A N/A N/A N/A N/A Total debt/capital (%) 0.7 1.0 1.0 1.0 0.9 Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 88 Barclays | Hong Kong Property
FIGURE 149 Midland Holdings – Financial Summary
Midland Holdings - Financial Summary Share price HKD 3.05 Ticker 1200hk No. of shares mn 718 Year End 31-Dec Market Cap HKDmn 2,190 Free Float 89%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended 2011A 2012A 2013E 2014E 2015E Year ended 2011A 2012A 2013E 2014E 2015E Turnover 3,398 3,911 3,192 3,305 3,392 Operating profit 224 363 -262 -4 61 EBITDA 224 363 -262 -4 61 +/- non cash gains 0 0 0 0 0 Depreciation and amortisation -48 -48 -52 -55 -60 +/- change in working capital -34 -110 27 -123 -44 EBIT 176 315 -313 -60 2 +/- associates 0 0 0 0 0 Net interest 12 12 13 15 16 +/- others 19 6 0 0 0 Pre-tax income 212 358 -274 -19 44 Operating cash flows 210 259 -235 -127 17 Tax -53 -60 48 4 -6 Capex -62 -61 -48 -52 -55 IM -25 -48 -25 -25 -25 Free cash flow 148 199 -283 -179 -38 Net income 134 250 -251 -39 13 Sale of assets 2 0 0 0 0 Underlying profits 133 221 -251 -39 13 Acquisitions -3 -5 0 0 0 Shares issue/buybacks -37 7 0 0 0 Underlying EPS (HKD) 0.18 0.31 -0.35 -0.05 0.02 Others 53 6 0 0 0 DPS (HKD) 0.31 0.24 0.00 0.00 0.01 Cash flow after investing acts 163 206 -283 -179 -38
Balance sheet (HKDmn) Net interest paid/received 12 12 13 15 16 Year ended 2011A 2012A 2013E 2014E 2015E Dividends received 18 12 12 12 12 Non-current assets 341 376 379 383 385 Dividends paid -393 -163 -72 0 -5 Fixed assets 254 282 279 275 271 Tax -104 -25 51 8 -3 Associates and JVs 58 54 61 68 75 Change in net debt -304 42 -279 -145 -18 Others 29 40 40 40 40 Net debt/(cash) -y/b -1,541 -1,237 -1,279 -1,000 -856 Current assets 2,435 3,113 2,521 2,429 2,452 Net debt/(cash) -y/e -1,237 -1,279 -1,000 -856 -837 Cash 1,249 1,290 1,013 868 850 Accounts receivable 1,168 1,823 1,507 1,561 1,602 Others 18 0 0 0 0 Key ratio Year ended 2011A 2012A 2013E 2014E 2015E Total assets 2,777 3,489 2,900 2,812 2,837 EBIT Margin 5.2% 8.1% -9.8% -1.8% 0.1% Underlying profit margin 3.9% 5.7% -7.9% -1.2% 0.4% Current liabilities 1,133 1,692 1,412 1,351 1,356 Profit growth (%) -73.2% 66.2% -213.5% -84.3% -131.8% ST bank loans 12 11 11 11 11 Others 1,121 1,681 1,401 1,340 1,345 Net Debt/Equity (%) -82.1% -79.4% -77.7% -68.5% -66.6% Interest cover (x) (14.3) (27.0) 23.4 4.1 (0.1) Non-current liabilities 1 2 4 4 4 LT loans 0 0 2 2 2 Others 1 2 2 2 2
MI 136 184 196 208 221 Net assets 1,507 1,611 1,288 1,249 1,256
BVPS (HKD) 2.10 2.24 1.79 1.74 1.75 Source: CEIC, Company data, Barclays Research estimates
FIGURE 150 FIGURE 151 BVPS and net cash level DPS and dividend payout ratio
3.5 2,000 0.90 180% 0.81 167% 1,800 0.80 160% 1,541 3.0 1,455 1,600 0.70 140% 1,237 1,279 1,400 0.59 2.5 0.60 120% 2.45 1,200 2.40 0.50 88% 86% 100% 2.0 2.24 1,000 79% 2.10 0.40 80% 800 0.31 1.5 0.30 0.24 60% 600 0.20 40% 400 1.0 200 0.10 20% 0.5 0 0.00 0% 2009A 2010A 2011A 2012A 2009A 2010A 2011A 2012A BVPS (HKD) Net Cash (HKDmn) DPS (HKD) Dividend payout ratio
Source: Company data, Barclays Research Source: Company data, Barclays Research
28 October 2013 89 Barclays | Hong Kong Property
WHARF HOLDINGS (4 HK; UW; PT HKD59.50; -12%)
4 HK / 0004.HK Great expectations, but are these priced in? Stock Rating We initiate coverage of Wharf with an UW rating and a price target of HKD59.50. UNDERWEIGHT Qualitatively, we believe Wharf has made good progress in its Hong Kong asset Industry View enhancement initiatives, China investment properties, and China development business. NEGATIVE In our view, the investment case is more a question of what expectations are already Price Target reflected in the current share price. In terms of valuation, Wharf’s 0.78x trailing P/B and HKD 59.50 35% discount to NAV are in line with their historical average, but relative to its peer Price (23-Oct-2013) group, these are one SD tighter. Furthermore, with Wharf’s share price up 12% ytd (vs HKD 67.65 the HSI’s 2% gain), we believe the good qualitative aspects of Wharf have already been Potential Upside/Downside priced in, hence our UW rating. -12% · AEI: 17% of Times Square to come back online – Over the past 15 years, Wharf has
been one of the most active managers of its retail property portfolio, with regular asset enhancement initiatives (AEIs). With the Times Square AEIs now drawing to a close, we estimate the release of 17% of the GFA previously under AEI would add HKD200mn annual rental to this property.
· International Finance Square – The mall at Chengdu IFS is slated to open in January 2014. Leasing commitment has increased from 92% in August 2013 to 95% currently. Upon full opening, we estimate that Chengdu IFS would add Rmb500mn of rental income. On the office side, pre-leasing has commenced with three leases signed.
· China development sales – Up to end-August 2013, Wharf’s China contracts sales were at Rmb15bn, up 47% y/y and 75% of the company’s full-year target. While China contract sales targets for 2014 have yet to be released, we expect steady growth in 2014 due to the company’s plan to increase its China development completions from 1.4mn sqm in 2013 to 2.1mn sqm in 2014.
· Peak portfolio and Mount Nicholson – Despite slow primary and luxury home sales year to date, there is no change to Wharf’s plans for its Peak portfolio and the Mount Nicholson development in Hong Kong. The redevelopment of No. 1 and No. 11 Plantation Road, No. 77 Peak Road and the development of Mount Nicholson are underway, with Mount Nicholson’s presales expected to start in 2014.
· Valuation vs expectations – While Wharf’s operations appear to be progressing well, with its key Chengdu IFS project scheduled to open in January 2014, we are mindful of the gap between valuations and expectations. Drawing from Hang Lung Properties’ experience, in the three years before and after the opening of its Shenyang Palace 66 project, its valuation swung from a 4% premium to NAV to an 11% discount as expectations were normalised. This keeps us cautious.
Wharf (Holdings) Ltd.(0004.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 2.70A 3.64A 3.74E 3.80E 4.86E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 2.67A 3.64A 3.89E 4.43E 5.38E P/E 25.0 18.6 18.1 17.8 13.9 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 90 Barclays | Hong Kong Property
Valuation methodology Our HKD59.50 price target is based on a 45% discount to our end-2015 NAV estimate of HKD108.23 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, Wharf has traded at an average discount of 31% with a one standard deviation swing of 13%. Our target discount of 45% is broadly in line with mid-cycle minus one SD.
Key investment risks Upside risks to our price target include:
Faster asset realisation to unlock BVPS growth – Wharf’s BVPS has grown strongly, from HKD59.22 as of December 2010 to HKD86.83 as of June 2013. A potential upside risk to our price target would be if Wharf were able to sustain this level of BVPS growth either by way of: 1) faster realisation of its China investment properties under development; or 2) continued strong growth of its Hong Kong retail properties.
China contract sales news flow – Contract sales newsflow has traditionally influenced short-term share price performance for China developers. With Wharf’s contract sales to end-August already up 47% y/y and at 75% of the 2013 full-year target, contract sales figures for the rest of 2013 might result in short-term swings in Wharf’s share price performance.
28 October 2013 91 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Wharf (Holdings) Ltd. (0004.HK) Stock Rating: UNDERWEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 67.65 Revenue 30,856 31,477 43,315 46,270 14.5% Price Target HKD 59.50 EBITDA N/A N/A N/A N/A N/A Why Underweight? We believe Wharf has made good EBIT 14,170 12,117 14,858 18,230 8.8% progress in its Hong Kong asset enhancement Pre-tax income 52,579 14,049 16,086 20,147 -27.4% initiatives, China investment properties, and China Net income 47,263 11,323 11,503 14,717 -32.2% development business. While Wharf’s operations EPS (reported) (HKD) 15.60 3.74 3.80 4.86 -32.2% appear on track, we believe this is already reflected in its current valuation, which stands at one SD above its Net income (adj) 11,040 11,323 11,503 14,717 10.1% peers. EPS (adj) (HKD) 3.64 3.74 3.80 4.86 10.1%
Diluted shares (mn) 3,098.0 3,098.0 3,098.0 3,098.0 0.0% Upside case HKD 75.76 DPS (HKD) 1.65 1.75 1.85 2.15 9.2% An earlier-than-expected reversal of property cooling Profit growth (%) 36.6 2.6 1.6 27.9 -8.6% measures could allow the Hong Kong property stocks
to trade back up to the mid-cycle discounts to NAV. Margin and return data Average This could potentially enable Wharf’s discount to EBITDA margin (%) N/A N/A N/A N/A N/A narrow to 30%, close to its mid-cycle average EBIT margin (%) 45.9 38.5 34.3 39.4 39.5 discount of 31%. Pre-tax margin (%) 170.4 44.6 37.1 43.5 73.9 Net margin (%) 153.2 36.0 26.6 31.8 61.9 Downside case HKD 48.70 Net (adj) margin (%) 35.8 36.0 26.6 31.8 32.5 Should the decline in home prices trigger a greater ROIC (%) N/A N/A N/A N/A N/A follow-on impact on rents and the broader local ROA (%) 3.2 3.0 2.9 3.7 3.2 economy, we believe property companies' discounts ROE (%) 4.9 4.4 4.2 5.2 4.7 to NAV could widen further to the mid-cycle discount minus 1.5-2.0SD. Our downside case for Wharf factors in a 55% discount to NAV. Balance sheet and cash flow (HKDmn) CAGR
Tangible fixed assets 231,522 250,044 252,544 255,070 3.3% Upside/Downside scenarios Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 18,795 18,795 18,795 18,795 0.0% Total assets 368,998 392,275 399,534 406,818 3.3% Short and long-term debt 74,420 75,516 75,688 74,100 -0.1% Net debt/(funds) 55,625 56,721 56,893 55,305 -0.2% Other long-term liabilities 10,022 10,022 10,022 10,022 0.0% Total liabilities 112,092 114,588 116,410 116,911 1.4% Shareholders' equity 248,501 269,803 277,765 288,053 5.0% Change in working capital 1,860 -1,304 -1,553 -1,989 N/A Cash flow from operations 11,809 11,832 14,323 17,348 13.7% Capital expenditure -14,809 -5,095 -5,095 -5,095 N/A Free cash flow -3,000 6,737 9,228 12,253 N/A BVPS (HKD) 82.03 89.07 91.69 95.09 5.0%
Valuation and leverage metrics Average P/E (reported) (x) 4.3 18.1 17.8 13.9 13.5 POINT® Quantitative Equity Scores P/E (adj) (x) 18.6 18.1 17.8 13.9 17.1 Value NAV per share (HKD) 80.75 104.74 106.48 108.23 100.05 Premium/(discount) to NAV (%) -41.4 -35.4 -40.3 -45.0 -40.5 P/BV (x) 0.8 0.8 0.7 0.7 0.8 Quality Dividend yield (%) 2.4 2.6 2.7 3.2 2.7 Net debt/equity (%) 22.4 21.0 20.5 19.2 20.8 Net debt/EBITDA (x) 3.9 4.7 3.8 3.0 3.9 Sentiment Total debt/capital (%) 23.0 21.9 21.4 20.5 21.7
Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 92 Barclays | Hong Kong Property
FIGURE 152 Wharf – Financial Summary
Wharf Holdings - Financial Summary Share price HKD 67.65 Ticker 4hk No. of shares mn 3,030 Year End 31-Dec Market Cap HKDmn 204,981 Free Float 48%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY11 FY12 FY13E FY14E FY15E Year ended FY11 FY12 FY13E FY14E FY15E Turnover 24,004 30,856 31,477 43,315 46,270 Operating profit 11,388 14,170 12,117 14,858 18,230 Operating profit 11,388 14,170 12,117 14,858 18,230 +/- non cash gains 75 56 0 0 0 Property sales 2,274 4,869 1,707 3,312 5,744 +/- change in working capital -9,610 1,860 -1,304 -1,553 -1,989 Property rental 7,320 8,187 9,088 10,109 11,111 +/- associates -4,937 -5,125 0 0 0 Others 1,794 1,114 1,322 1,437 1,374 +/- others 985 848 1,018 1,018 1,108 EBIT 11,388 14,170 12,117 14,858 18,230 Operating cash flows -2,099 11,809 11,832 14,323 17,348 Net interest -2,567 -939 -788 -1,890 -2,059 Capex -12,030 -14,809 -5,095 -5,095 -5,095 Profit before exceptional items 8,821 13,231 11,329 12,968 16,171 Free cash flow -14,129 -3,000 6,737 9,228 12,253 Exceptionals 457 2,483 0 0 0 Sale of assets 56 2,049 0 0 0 Revaluation surplus/(deficit) 24,968 34,751 0 0 0 Acquisitions 0 0 0 0 0 Associates 395 2,114 2,719 3,118 3,977 Shares issue/buybacks 9,999 167 0 0 0 Profit before tax 34,641 52,579 14,049 16,086 20,147 Others 13 -3,684 -362 -362 -362 Tax -3,304 -4,215 -2,227 -3,949 -4,713 Cash flow after investing acts -4,061 -4,468 6,375 8,866 11,891 MI -769 -1,101 -498 -634 -717 Net profit 30,568 47,263 11,323 11,503 14,717 Net interest paid/received -1,285 -1,550 -393 -1,401 -1,475 Underlying net profit 8,083 11,040 11,323 11,503 14,717 Dividends received 539 563 563 563 563 Dividends paid -3,837 -4,117 -5,546 -5,801 -6,319 Underlying EPS (HKD) 2.70 3.64 3.74 3.80 4.86 Tax -2,132 -2,588 -2,096 -2,399 -3,072 DPS (HKD) 1.06 1.65 1.75 1.85 2.15 Change in net debt -10,776 -12,160 -1,096 -171 1,588
Net debt - y/b 32,689 43,465 55,625 56,721 56,893 Balance sheet (HKDmn) Net debt -y/e 43,465 55,625 56,721 56,893 55,305 Year ended FY11 FY12 FY13E FY14E FY15E Non-current assets 234,159 296,008 316,642 321,255 325,892 NAV Breakdown Investment properties 184,057 231,522 250,044 252,544 255,070 (HKDmn) Methodology Current % of NAV Forward % of NAV Associates and JVs 27,132 36,203 36,203 36,203 36,203 Inv Prop in HK 204,017 64% 192,853 59% Others 22,970 28,283 30,395 32,508 34,620 ....Retail Cap rate = 5.0% 131,330 41% 134,638 41% ....Office Cap rate = 4.5% 55,893 18% 45,399 14% Current assets 83,814 72,990 75,633 78,279 80,926 ....Residential Cap rate = 4.5% 16,217 5% 12,221 4% Trading properties 47,511 48,915 51,463 54,010 56,558 ....Industrial Cap rate = 7.3% 577 0% 595 0% Others 3,775 5,280 5,376 5,474 5,574 HK Dev Prop DCF at 8% 11,614 4% 9,364 3% Cash 32,528 18,795 18,795 18,795 18,795 HK Hotels @HKD3.9-5.3mn/room 6,748 2% 6,748 2% China Dev Prop DCF at 10% 70,643 22% 82,397 25% Total assets 317,973 368,998 392,275 399,534 406,818 China Inv Prop Cap rate = 7.0 - 8.1% 21,305 7% 44,110 13% China Inv Prop Under Cap rate = 7.0 - 8.1% 27,889 9% 15,161 5% Construction China Hotel Under Current liabilities 30,756 32,980 40,377 42,053 43,904 @HKD1.8mn/room 228 0% 246 0% Construction
ST bank loans 8,903 5,330 11,327 11,353 11,115 Modern Terminals At 8.0x P/E 4,869 2% 5,828 2% Others 21,853 27,650 29,049 30,700 32,789 Listco @ MV 21,851 7% 21,851 7% Other business 3,666 1% 4,816 1% Long Term Non-current liabilities 76,343 79,112 74,211 74,356 73,007 At book value 3,868 1% 3,868 1% Investment LT loans 67,090 69,090 64,189 64,334 62,985 Gross assets 376,698 119% 387,243 118% Others 9,253 10,022 10,022 10,022 10,022 Net Liabilities -59,403 -19% -59,403 -18% Total net assets 317,295 100% 327,840 100% MI 7,617 8,405 7,884 5,359 1,855 No of Shares (mn) 3,029 3,029 Net assets 203,257 248,501 269,803 277,765 288,053 NAV per share (HKD) 104.74 108.23 Discount/target discount (%) -35% -45% BVPS (HKD) 67.10 82.03 89.07 91.69 95.09 Share price (HKD) 67.65 59.50 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 93 Barclays | Hong Kong Property
FIGURE 153 FIGURE 154 GAV breakdown (as of Dec-13E) BVPS and gearing level Dev Prop - Other 90.00 82.03 40% assets HK 80.00 35% 11% 3% Dev Prop - Inv Prop 67.10 Under Dev - China 70.00 30% 19% 59.22 PRC 60.00 22% 25% 7% 46.68 21% 50.00 20% Inv Prop - 20% 17% China 40.00 15% 6% 30.00 20.00 10% 10.00 5% 0.00 0% Inv Prop - HK FY09 FY10 FY11 FY12 54% BVPS (HKD) Net Debt/Equity (%)
Source: Barclays Research estimates Source: Barclays Research
FIGURE 155 FIGURE 156 DPS and payout ratio HK investment properties breakdown (as of Dec-13E)
1.80 1.65 80% HK - Others HK - Res 1.60 0.3% 70% 7.9% 1.40 60% 1.20 1.06 1.00 1.00 45% 50% 1.00 HK - Office 39% 35% 35% 40% 27.4% 0.80 30% 0.60 0.40 20% HK - Retail 64.4% 0.20 10% 0.00 0% FY09 FY10 FY11 FY12
DPS (HKD) Dividend payout ratio HK - Retail HK - Office HK - Res HK - Others Source: Barclays Research Source: Barclays Research estimates
FIGURE 157 FIGURE 158 Historical discount to NAV Trailing price-to-book ratio
10% Average Disc.= -31% 1.4 0% 1.2 -10% 1.0 -20% 0.8 -30% -40% 0.6 -50% 0.4 -60% 0.2 -70% - -80% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Wharf - NAV Discount Average Discount Wharf (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 94 Barclays | Hong Kong Property
HYSAN DEVELOPMENT (14 HK; EW; PT HKD33.32; -7%)
14 HK / 0014.HK Steady hand at the helm
Stock Rating We initiate coverage of Hysan Development with an EW rating and a price target of EQUAL WEIGHT HKD33.32. Owing to Hysan’s strong balance sheet and prudent debt management, the Industry View company appears well prepared for potential headwinds in the property market. NEGATIVE Although we believe the commercial sector is unlikely to be immune if the housing Price Target market enters a real downturn, we also believe Hysan’s cautious strategy warrants a HKD 33.32 tighter NAV discount than its peers. Thus, instead of a target discount of one standard Price (23-Oct-2013) deviation below the mid-cycle average that we set for most of its peers, our target HKD 35.85 discount of 45% for Hysan is 9ppt narrower than its one standard deviation below mid- cycle level. Hysan is trading at a 44% discount to its current NAV and at a trailing P/B of Potential Upside/Downside -7% 0.63x, in line with its historical average of a 42% discount to NAV and 0.61x P/B. Hysan Place leasing progress – Although the leasing progress for the office portion of Hysan Place in Hong Kong was slow initially, this overhang has been removed. As of 1 October 2013, the office floors have been fully let and should begin to make a full-year rental contribution in 2014. With monthly rents ranging from the high-HKD50s to the high- HKD60s per square foot, the blended rents are now at HKD60, compared with the mid-to-high HKD60s at Lee Garden One (LGI) and Lee Garden Two (LGII).
Sunning Plaza redevelopment – After Hysan Place, all eyes are now on Hysan’s next Hong Kong redevelopment project, Sunning Plaza. With completion set for 2018, Hysan estimates the total floor area at 450,000 sf and the capex on this project at HKD2.0- 2.5bn. Unlike Hysan Place, the retail portion will comprise only 20-30% of total GFA, with the remaining space being office floors. The new ground floor shops at Sunning Plaza are likely to be an extension of the luxury retail concept at LGI and LGII. We believe the experience of the redevelopment of Hysan Place should reduce the perceived execution risk for Sunning Plaza.
Strong balance sheet and prudent debt management – Hysan’s net debt-to-equity ratio was only 6.2% as of June 2013. This is the lowest in among the Hong Kong landlords. Furthermore, since the start of 2013, Hysan has increased its fixed-rate debt proportion from 53.0% to 63.5%. We believe this positions the company well for potential market volatility.
Hysan Development Co., Ltd.(0014.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 1.24A 1.53A 1.93E 2.03E 2.11E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 1.24A 1.53A 1.92E 2.03E 2.13E P/E 28.9 23.5 18.6 17.7 17.0 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 95 Barclays | Hong Kong Property
Valuation methodology Our price target of HKD33.32 is based on a 45% discount to our end-2015 NAV estimate of HKD60.57 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-them average. Hysan has traded at an average discount of 42% with a one standard deviation swing of 12% since 1989. Reflecting its strong balance sheet and the increased diversification benefit from Hysan Place and other recent AEI, our target NAV discount of 45% is 9ppt narrower than Hysan’s mid-cycle minus one standard deviation level.
Key investment risks Downside risks to our price target include:
A slowdown in Hong Kong retail sales – The negative wealth effect from a housing market correction results in a slowdown in local spending. Also, if Hong Kong becomes less attractive as a shopping destination for mainland consumers, the performance of shopping malls such as LG I and II, that have a luxury goods focus, would be affected.
Re-development of Sunning Plaza – The redevelopment of Sunning Plaza is expected to last until 2018 and cost HKD2.0-2.5bn. As with most major construction projects, it could be susceptible to rising construction costs or potential delays. If the redevelopment of Sunning were delayed, this could reduce the project’s IRR and the potential NPV gain.
Upside risks to our price target include:
Support from the financial sector – If the financial services sector were to recover, this could boost demand for Hysan’s residential and office leasing business.
Narrowing the NAV discount gap – Historically, Hysan’s mid-cycle NAV discount of 42% has been 12pp wider than the landlords’ average of 30%. This partly reflects the 1998-2003 period when Hysan was in balance sheet repair mode and faced slower organic growth of its investment property portfolio. As Hysan has now de-geared and continues to uplift the positioning of its Causeway Bay portfolio, there is potential scope for its valuation multiple to re-rate upwards.
28 October 2013 96 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Hysan Development Co., Ltd. (0014.HK) Stock Rating: EQUAL WEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 35.85 Revenue 2,486 3,049 3,176 3,287 9.8% Price Target HKD 33.32 EBITDA N/A N/A N/A N/A N/A Why Equal Weight? Although Hysan is nearly 100% EBIT 1,949 2,440 2,566 2,678 11.2% exposed to the Hong Kong property market, we Pre-tax income 10,660 2,478 2,607 2,705 -36.7% believe its strong balance sheet and prudent debt Net income 9,955 2,053 2,160 2,242 -39.2% management position it well for a potential downturn. EPS (reported) (HKD) 9.38 1.93 2.03 2.11 -39.2% Hysan’s gearing is only 6.3%, with 63.5% of its debt on fixed-rate terms. Net income (adj) 1,622 2,053 2,160 2,242 11.4%
EPS (adj) (HKD) 1.53 1.93 2.03 2.11 11.3% Upside case HKD 42.40 Diluted shares (mn) 1,063.0 1,063.6 1,063.6 1,063.6 0.0% DPS (HKD) 0.95 1.17 1.23 1.28 10.4% We assume an absence of tapering or additional easing measures in the US would help sustain Profit growth (%) 23.8 26.6 5.2 3.8 -45.7% property yields in Hong Kong at current low levels.
Our upside case assumes Hysan trades at a 30% Margin and return data Average discount to NAV, close to the mid-cycle average of EBITDA margin (%) N/A N/A N/A N/A N/A 30% for Hong Kong landlords. EBIT margin (%) 78.4 80.0 80.8 81.5 80.2 Pre-tax margin (%) 428.8 81.3 82.1 82.3 168.6 Downside case HKD 24.23 Net margin (%) 400.4 67.3 68.0 68.2 151.0 Our downside case assumes the correction in the Net (adj) margin (%) 65.2 67.3 68.0 68.2 67.2 residential market has a larger-than-expected knock- ROIC (%) N/A N/A N/A N/A N/A on effect on the broader economy. We assume ROA (%) 2.5 3.0 3.1 3.2 3.0 Hysan’s discount to NAV widens to 60%, close to its ROE (%) 3.0 3.5 3.6 3.7 3.5 mid-cycle discount minus one SD level.
Balance sheet and cash flow (HKDmn) CAGR Upside/Downside scenarios Tangible fixed assets 60,022 60,822 61,622 62,422 1.3% Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 2,311 2,326 2,343 2,362 0.7% Total assets 68,423 69,257 70,067 70,879 1.2% Short and long-term debt 5,941 5,742 5,677 5,705 -1.3% Net debt/(funds) 3,630 3,416 3,333 3,343 -2.7% Other long-term liabilities 967 1,088 1,115 1,139 5.6% Total liabilities 7,976 8,086 8,165 8,241 1.1% Shareholders' equity 58,123 58,932 59,783 60,664 1.4% Change in working capital 681 140 97 5 -80.9% Cash flow from operations 2,568 2,531 2,601 2,609 0.5% Capital expenditure -1,626 -800 -800 -800 N/A Free cash flow 942 1,731 1,801 1,809 24.3% BVPS (HKD) 54.68 55.41 56.21 57.03 1.4%
POINT® Quantitative Equity Scores Valuation and leverage metrics Average Value P/E (reported) (x) 3.8 18.6 17.7 17.0 14.3 P/E (adj) (x) 23.5 18.6 17.7 17.0 19.2 NAV per share (HKD) 58.81 64.32 62.44 60.57 61.54 Quality Premium/(discount) to NAV (%) -5.9 -43.9 -44.5 -45.0 -34.8 P/BV (x) 0.7 0.6 0.6 0.6 0.6 Dividend yield (%) 2.6 3.3 3.4 3.6 3.2 Sentiment Net debt/equity (%) 6.2 5.8 5.6 5.5 5.8 Net debt/EBITDA (x) 1.9 1.4 1.3 1.2 1.5 Total debt/capital (%) 9.3 8.9 8.7 8.6 8.9 Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 97 Barclays | Hong Kong Property
FIGURE 159 Hysan Development – Financial Summary
Hysan Development - Financial Summary Share price HKD 35.85 Ticker 14hk No. of shares mn 1,064 Year End 31-Dec Market Cap HKDmn 38,131 Free Float 54%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY11 FY12 FY13E FY14E FY15E Year ended FY11 FY12 FY13E FY14E FY15E Turnover 1,922 2,486 3,049 3,176 3,287 Operating profit 1,543 1,949 2,440 2,566 2,678 Operating profit 1,543 1,949 2,440 2,566 2,678 +/- non cash gains 42 -7 11 11 11 Property sales 0 0 0 0 0 +/- change in working capital 90 681 140 97 5 Property rental 1,660 2,063 2,576 2,700 2,810 +/- associates 139 0 0 0 0 Others -117 -114 -136 -134 -132 +/- others -83 -55 -60 -72 -84 EBIT 1,543 1,949 2,440 2,566 2,678 Operating cash flows 1,731 2,568 2,531 2,601 2,609 Net interest -122 -156 -184 -191 -217 Capex -1,528 -1,626 -800 -800 -800 Profit before exceptional 1,421 1,793 2,256 2,375 2,461 Free cash flow 203 942 1,731 1,801 1,809 items Exceptionals 0 0 0 0 0 Sale of assets 40 76 0 0 0 Revaluation surplus/(deficit) 7,532 8,533 0 0 0 Acquisitions -185 265 0 0 0 Associates 254 334 222 233 244 Shares issue/buybacks 0 0 0 0 0 Profit before tax 9,207 10,660 2,478 2,607 2,705 Others -233 -17 0 0 0 Tax -217 -289 -329 -345 -356 Cash flow after investing acts -175 1,266 1,731 1,801 1,809 MI -445 -416 -96 -102 -106 Net profit 8,545 9,955 2,053 2,160 2,242 Net interest paid/received -102 -118 -124 -119 -133 Underlying profits 1,310 1,622 2,053 2,160 2,242 Dividends received 54 3 0 0 0 Dividends paid -700 -852 -1,064 -1,255 -1,330 Underlying EPS (HKD) 1.24 1.53 1.93 2.03 2.11 Tax -185 -227 -329 -345 -356 DPS (HKD) 0.79 0.95 1.17 1.23 1.28 Change in net debt -1,108 72 214 82 -10
Balance sheet (HKDmn) Net debt - y/b 2,594 3,702 3,630 3,416 3,333 Year ended FY11 FY12 FY13E FY14E FY15E Net debt - y/e 3,702 3,630 3,416 3,333 3,343 Non-current assets 55,766 65,349 66,120 66,892 67,666 Investment properties 49,969 60,022 60,822 61,622 62,422 Associates and JVs 3,423 3,759 3,759 3,759 3,759 Others 2,374 1,568 1,539 1,511 1,485 NAV Breakdown
(HKDmn) Methodology Current % of NAV End-15 % of NAV Current assets 3,602 3,074 3,137 3,174 3,213 ...Office Cap rate = 5.25% 24,205 35% 20,288 31% Trading properties 0 0 0 0 0 ...Retail Cap rate = 5.25% 34,035 50% 36,022 56% Others 641 763 811 831 851 ...Residential Cap rate = 4.00% 8,920 13% 6,784 11% Cash 2,961 2,311 2,326 2,343 2,362 ...Car Park Cap rate = 7.00% 511 1% 496 1% ...China Cap rate = 7.50% 2,984 4% 3,084 5% Investment Total assets 59,368 68,423 69,257 70,067 70,879 70,654 103% 66,674 103% properties Treasury portfolio 1,588 2% 1,588 2% Current liabilities 2,628 1,767 2,256 2,373 2,398 Gross Assets 73,989 108% 70,009 109% ST bank loans 1,507 699 1,000 1,000 1,000 Net Debt -4,362 -6% -4,362 -7% Others 1,121 1,068 1,256 1,373 1,398 Other liabilities -1,220 -2% -1,220 -2% Net Assets 68,407 100% 64,427 100% Non-current liabilities 5,996 6,209 5,830 5,792 5,843 No. of shares (mn) 1,064 1,064 LT loans 5,156 5,242 4,742 4,677 4,705 NAV (HKD) 64.32 60.57 Others 840 967 1,088 1,115 1,139 Discount/target discount -44% -45% Share price (HKD) 35.85 33.32 MI 1,991 2,324 2,240 2,119 1,974 Net assets 48,753 58,123 58,932 59,783 60,664
BVPS (HKD) 46.00 54.68 55.41 56.21 57.03 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 98 Barclays | Hong Kong Property
FIGURE 160 FIGURE 161 GAV breakdown (as of Dec-13E) BVPS and gearing level
60.00 54.68 12.0% Inv Prop - HK Inv Prop - 50.00 46.00 10.0% 92% China 38.61 4% 40.00 35.42 8.0% Inv Prop 7.6% Under Dev - 6.4% 6.2% HK 30.00 6.0% 2% 5.1% Other 20.00 4.0% assets 2% 10.00 2.0%
0.00 0.0% FY09 FY10 FY11 FY12 BVPS (HKD) Net Debt/Equity (%) Source: Barclays Research estimates Source: Datastream, Barclays Research
FIGURE 162 FIGURE 163 DPS and payout ratio HK investment properties breakdown (as of Dec-13E)
1.00 0.95 75% HK - Others HK - Res 0.90 1% 0.79 13% 0.80 0.74 0.68 70% 0.70 67.8% 0.60
0.50 65% HK-Retail 63.9% 63.8% 0.40 50% 62.2% 0.30 60% HK - Office 0.20 36% 0.10 0.00 55% FY09 FY10 FY11 FY12
DPS (HKD) Dividend payout ratio HK-Retail HK - Office HK - Res HK - Others Source: Barclays Research Source: Barclays Research estimates
FIGURE 164 FIGURE 165 Historical discount to NAV Trailing price-to-book ratio
0% 1.2 -10% Average Disc. = -42% 1.0 -20% -30% 0.8 -40% 0.6 -50% -60% 0.4
-70% 0.2 -80% - -90% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Hysan - NAV Discount Average Discount Hysan (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 99 Barclays | Hong Kong Property
SWIRE PROPERTIES (1972 HK; UW; PT HKD18.65; -13%)
1972 HK / 1972.HK Luxury residential could be a drag
Stock Rating We initiate coverage of Swire Properties with an UW rating and a price target of UNDERWEIGHT HKD18.65. Following a 50% rally in 2012, Swire Properties’ share price has fallen 17% Industry View ytd (vs a 2% rise in the HSI). Although the correction is greater than those of peers HK NEGATIVE Land (-10%), Wharf (+12%) and Hysan (-4%), Swire Properties’ current NAV discount of Price Target 43% is only in line with HK Land’s 43% and Hysan’s 44%. Furthermore, while Hong Kong HKD 18.65 residential property comprises only 6% of Swire Properties’ estimated NAV, we estimate Price (23-Oct-2013) its contribution to EBIT will be higher at 19% and 26% in 2014 and 2015. In line with our HKD 21.45 overall sector approach of applying mid-cycle minus one standard valuation to derive a target NAV discount, our 45% target discount to our end-2015 NAV estimate for Swire Potential Upside/Downside -13% implies a price target of HKD18.65.
· Slowdown in residential sales results in a dividend cut – Swire Properties cut its dividend for 1H13 by 9.1% y/y to HKD0.2 per share due to sluggish sales of its luxury residential units in Hong Kong. As demonstrated by the recent sales strategy at luxury projects such as The Cullinan and The Austin in West Kowloon, if Swire Properties were to try to speed up sales at luxury projects such as Azura, Argenta and at its Seymour Road development, this may have to come at the expense of lower prices and therefore lower development profits.
· Office leasing market – According to Colliers International, rents in Hong Kong’s Central district have fallen 18% since 2Q11. Although this has made Central rents more competitive, demand has remained weak and office rents at One and Two Pacific Place in Admiralty have softened slightly to HKD95-110psf as of June 2013. By comparison, Island East had been a bright spot as tight vacancies have continued to push rents up. However, with rents in Kowloon East now facing downward pressure from strata-title office owners, this could be a drag on Island East rents.
· China investment properties – Swire Properties’ rental income from China increased 20.2% y/y in 1H13 due to improved performances from Taikoo Hui in Guangzhou and Sanlitun in Beijing. For projects under development, 65% of the retail space at Daci Temple Mall in Chengdu has been committed so far, with management expecting at least a 75% commitment by end-2013.
Swire Properties Ltd.(1972.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 0.77A 1.18A 0.97E 1.13E 1.35E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 0.77A 1.18A 1.04E 1.13E 1.22E P/E 27.9 18.1 22.2 19.0 15.9 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 100 Barclays | Hong Kong Property
Valuation methodology Our price target of HKD18.65 is based on a 45% discount to our end-2015 NAV estimate of HKD33.90 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Given Swire Properties was only spun off from Swire Pacific (19 HK, not rated) in January 2012, we have based Swire Properties’ valuation on both peer HK Land and also Swire Pacific’s historical NAV discount, which shows an average discount of 28% with a one standard deviation swing of 13% since 1994.
Key investment risks Upside risks to our price target include:
Decentralisation theme continuing – According to the 4Q13 Hudson Report, Hong Kong’s overall net hiring expectation fell to 28% in 4Q13 from 42% in 1Q13. Although the gap between office rental rates in Central and decentralised areas has narrowed, it could narrow further as firms continue to reduce costs in order to restore profits. We believe this could potentially boost leasing demand for Swire Properties’ Island East portfolio.
Soft landing for Hong Kong property market – If the government were able to successfully engineer a soft landing for Hong Kong’s property market, this could allow property companies’ NAV discounts to return to mid-cycle levels. For Swire Properties, we believe this could help bring its NAV discount to 30%, from 40% currently.
28 October 2013 101 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Swire Properties Ltd. (1972.HK) Stock Rating: UNDERWEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 21.45 Revenue 14,052 11,833 18,883 18,252 9.1% Price Target HKD 18.65 EBITDA N/A N/A N/A N/A N/A Why Underweight? While Hong Kong residential EBIT 9,195 7,778 9,236 10,412 4.2% property comprises only 6% of Swire’s estimated Pre-tax income 20,962 6,800 8,337 9,736 -22.6% NAV, we estimate its contribution to EBIT in 2014-15 Net income 18,763 5,653 6,598 7,876 -25.1% will be higher and could be affected by our forecast EPS (reported) (HKD) 3.21 0.97 1.13 1.35 -25.1% for a 30% correction in home prices. Net income (adj) 6,932 5,653 6,598 7,876 4.3% EPS (adj) (HKD) 1.18 0.97 1.13 1.35 4.3% Upside case HKD 25.43 Diluted shares (mn) 5,850.0 5,850.0 5,850.0 5,850.0 0.0% We assume an absence of tapering or additional DPS (HKD) 0.60 0.52 0.56 0.60 0.0% easing measures in the US would help sustain property yields in Hong Kong at current low levels. Profit growth (%) 58.6 -18.5 16.7 19.4 -30.8% Our upside case assumes Swire Properties trades at a
25% discount to its NAV, close to Swire Prop/Swire Margin and return data Average Pac’s mid-cycle discount of 28%. EBITDA margin (%) N/A N/A N/A N/A N/A EBIT margin (%) 65.4 65.7 48.9 57.0 59.3 Downside case HKD 15.26 Pre-tax margin (%) 149.2 57.5 44.2 53.3 76.0 Our downside case assumes the correction in the Net margin (%) 133.5 47.8 34.9 43.2 64.8 residential market has a larger-than-expected knock- Net (adj) margin (%) 49.3 47.8 34.9 43.2 43.8 on effect on the broader economy. We assume Swire ROIC (%) N/A N/A N/A N/A N/A Properties’ discount to NAV widens to 55%, which is ROA (%) 3.0 2.3 2.6 3.1 2.8 close to Swire Prop/Swire Pac’s mid-cycle discount ROE (%) 3.8 2.8 3.2 3.7 3.4 minus 1.5SD.
Balance sheet and cash flow (HKDmn) CAGR Upside/Downside scenarios Tangible fixed assets 209,321 221,522 224,722 227,922 2.9% Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 1,940 2,500 2,500 2,500 8.8% Total assets 237,060 252,204 251,943 252,917 2.2% Short and long-term debt 30,861 34,389 30,109 26,403 -5.1% Net debt/(funds) 28,921 31,889 27,609 23,903 -6.2% Other long-term liabilities 5,078 5,078 5,078 5,078 0.0% Total liabilities 43,804 47,476 43,341 39,784 -3.2% Shareholders' equity 192,614 204,375 207,931 212,531 3.3% Change in working capital -1,447 -1,741 3,858 2,374 N/A Cash flow from operations 8,116 6,330 13,386 13,078 17.2% Capital expenditure -3,009 -2,900 -3,400 -3,400 N/A Free cash flow 5,107 3,430 9,986 9,678 23.7% BVPS (HKD) 32.93 34.94 35.54 36.33 3.3%
POINT® Quantitative Equity Scores Valuation and leverage metrics Average Value P/E (reported) (x) 6.7 22.2 19.0 15.9 15.9 P/E (adj) (x) 18.1 22.2 19.0 15.9 18.8 NAV per share (HKD) 33.42 37.32 35.61 33.90 35.06 Quality Premium/(discount) to NAV (%) -18.7 -40.3 -42.5 -45.0 -36.6 P/BV (x) 0.7 0.6 0.6 0.6 0.6 Dividend yield (%) 2.8 2.4 2.6 2.8 2.7 Sentiment Net debt/equity (%) 15.0 15.6 13.3 11.2 13.8 Net debt/EBITDA (x) 3.1 4.1 3.0 2.3 3.1 Total debt/capital (%) 13.8 14.4 12.6 11.1 13.0 Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 102 Barclays | Hong Kong Property
FIGURE 166 Swire Properties – Financial Summary
Swire Properties - Financial Summary Share price HKD 21.45 Ticker 1972hk No. of shares mn 5,850 Year End 31-Dec Market Cap HKDmn 125,482 Free Float 18%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended FY11 FY12 FY13E FY14E FY15E Year ended FY11 FY12 FY13E FY14E FY15E Turnover 9,581 14,052 11,833 18,883 18,252 Operating profit 25,468 20,141 6,372 7,826 9,181 Operating proHit 6,088 9,195 7,778 9,236 10,412 +/- non cash gains -19,002 -10,578 1,699 1,702 1,523 Property sales 14 2,712 798 1,766 2,675 +/- change in working capital 930 -1,447 -1,741 3,858 2,374 Property rental 7,040 7,423 7,866 8,358 8,628 +/- associates 0 0 0 0 0 Others -966 -940 -885 -888 -891 +/- others 0 0 0 0 0 EBIT 6,088 9,195 7,778 9,236 10,412 Operating cash flows 7,396 8,116 6,330 13,386 13,078 Net interest -1,477 -1,367 -1,407 -1,410 -1,231 Capex -5,270 -3,009 -2,900 -3,400 -3,400 Profit before exceptional items 4,611 7,828 6,372 7,826 9,181 Free cash flow 2,126 5,107 3,430 9,986 9,678
Exceptionals 512 40 0 0 0 Sale of assets 18,306 16 0 0 0 Revaluation surplus/deficit 20,345 12,273 0 0 0 Acquisitions 0 0 0 0 0 Associates 1,007 821 428 511 555 Shares issue/buybacks 4,500 0 0 0 0 Profit before tax 26,475 20,962 6,800 8,337 9,736 Others -1,649 -1,506 -115 -115 -115 Tax -1,296 -1,863 -956 -1,174 -1,377 Cash flow after investing acts 23,283 3,617 3,315 9,871 9,563 MI -53 -336 -191 -565 -482 Net profit 25,126 18,763 5,653 6,598 7,876 Net interest paid/received -1,626 -1,549 -1,407 -1,410 -1,231 Underlying net profit 4,372 6,932 5,653 6,598 7,876 Dividends received 415 153 153 153 153 Dividends paid -12,451 -2,567 -3,620 -3,269 -3,503 Underlying EPS (HKD) 0.77 1.18 0.97 1.13 1.35 Tax -485 -875 -1,409 -1,065 -1,276 DPS (HKD) 1.94 0.60 0.52 0.56 0.60 Change in net debt 9,136 -1,221 -2,968 4,280 3,706
Net debt - y/b 36,836 27,700 28,921 31,889 27,609
Balance sheet (HKDmn) Net debt -y/e 27,700 28,921 31,889 27,609 23,903 Year ended FY11 FY12 FY13E FY14E FY15E Non-current assets 208,050 225,122 237,823 241,273 244,473 Investment properties 194,230 209,321 221,522 224,722 227,922 NAV Breakdown Associates and JVs 13,639 15,599 16,099 16,349 16,349 (HKDmn) Methodology Current % NAV End-15 % NAV Others 181 202 202 202 202 HK Inv. Prop 182,755 84% 157,782 80% ...Office Cap rate = 4.25% 123,642 57% 99,841 50% Current assets 10,184 11,938 14,382 10,670 8,445 ...Retail Cap rate = 5.00% 48,246 22% 49,281 25% Trading properties 6,917 7,017 8,842 5,071 2,784 ...Residential Cap rate = 3.00% 10,867 5% 8,660 4% Others 2,087 2,981 3,040 3,099 3,160 HK Dev. Prop DCF at 8% 12,667 6% 8,489 4% Cash 1,180 1,940 2,500 2,500 2,500 Other land 5,936 3% 5,936 3% China Inv Prop 25,369 12% 30,277 15% Total assets 218,234 237,060 252,204 251,943 252,917 ...Retail Cap rate = 6.8% 18,801 9% 22,471 11% ...Office Cap rate = 6.3% 6,544 3% 7,779 4% Current liabilities 17,163 12,529 16,605 15,681 14,904 ...Residential Cap rate = 4.8% 23 0% 27 0% ST bank loans 8,630 4,664 8,597 7,527 6,601 China IP Under dev DCF at 10% 10,382 5% 12,109 6% Others 8,533 7,865 8,008 8,154 8,303 Hotel At HKD4.7mn/room 9,525 4% 11,914 6% Overseas assets 678 0% 791 0% Non-current liabilities 24,496 31,275 30,870 27,660 24,880 Gross Asset Value 247,312 113% 227,299 115% LT loans 20,250 26,197 25,792 22,582 19,802 Net Debt -28,976 -13% -28,976 -15% Others 4,246 5,078 5,078 5,078 5,078 Net Asset Value 218,336 100% 198,323 100%
MI 532 642 354 670 602 No. of shares (mn) 5,850 5,850 Net assets 176,043 192,614 204,375 207,931 212,531 NAV per share (HKD) 37.32 33.90
Discount/target -43% -45% discount BVPS (HKD) 30.09 32.93 34.94 35.54 36.33 Price (HKD) 21.45 18.65 Source: CEIC Company data, Barclays Research estimates
28 October 2013 103 Barclays | Hong Kong Property
FIGURE 167 FIGURE 168 GAV breakdown (as of Dec-13E) BVPS and gearing level Inv Prop Other 34.00 35.0% Under Dev - 32.93 Inv Prop assets Dev Prop - 33.00 PRC 30.0% Under Dev - 4% HK HK 4% 5% 32.00 3% 25.0% 31.00 23.3% 30.09 30.00 20.0% Inv Prop - 15.7% 15.0% China 29.00 15.0% 27.75 10% 28.00 10.0% 27.00 5.0% 26.00 Inv Prop - HK 25.00 0.0% 74% FY10 FY11 FY12 BVPS (HKD) Net Debt/Equity (%)
Source: Barclays Research estimates Source: Barclays Research
FIGURE 169 FIGURE 170 DPS and payout ratio HK investment properties breakdown (as of Dec-13E)
3.00 300% HK - Res 252.5% 6% 2.50 250% HK-Retail 26% 2.00 1.94 200%
1.50 150%
1.00 100% 0.60 0.43 0.50 50.7% 50.6% 50% HK - Office 0.00 0% 68% FY10 FY11 FY12
DPS (HKD) Dividend payout ratio HK-Retail HK - Office HK - Res
Source: Datastream, Barclays Research Source: Barclays Research estimates
FIGURE 171 FIGURE 172 Historical discount to NAV Trailing price-to-book ratio 0% 1.8 1.6 -10% 1.4 -20% 1.2 -30% 1.0 0.8 -40% 0.6 -50% 0.4
-60% Average Disc.= -28% 0.2 - -70% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Swire Prop/Pac - NAV Discount Average Discount Swire Prop/Pac (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 104 Barclays | Hong Kong Property
HONGKONG LAND (HKLD.SI; UW; PT USD5.59; -11%)
HKL SP / HKLD.SI We like Central but cap rates a concern
Stock Rating We initiate coverage of Hongkong Land (HK Land) with an UW rating and a price target UNDERWEIGHT of USD5.59. With Central Grade A office the only asset class that has experienced a Industry View rental decline over the past two years, we believe it should be the most competitive and NEGATIVE closest to end-user support points. While this should, in theory, favour HK Land, which Price Target has 60% of its NAV tied to Central office space, we are concerned about potential cap USD 5.59 rate expansion and also second-round knock-on effects from our forecast for a housing Price (23-Oct-2013) downturn. In keeping with our valuation approach for the sector, we set our target NAV USD 6.26 discount for HK Land at one standard deviation below the historical average. Based on a target discount of 45% to our end-2015 NAV estimate, our USD5.59 price target implies Potential Upside/Downside -11% 11% potential downside.
· Central office should be the most competitive but demand is still weak – Since peaking at HKD116 psf in 3Q08, Central office rents have fallen 25%, while residential and retail rents have risen 31% and 45%, respectively, over the same period. With no new supply and rents already down, we believe Central offices rents should theoretically be closer to end-user support points. That said, demand remains weak. According to property consultant Savills Research & Consultancy, in the first seven months of 2013, Central experienced negative take-up of approximately 396,000 sf as firms continued to give back space. Compared to the overall market, HK Land defended its portfolio relatively well in 1H13. Although its Central office vacancy rate rose from 3.4% to 5.6% during this period, its average passing rents continued to benefit from positive rental reversions, rising from HKD89.3 psf to HKD96.6 psf.
· Concerned about potential knock-on effect from housing downturn – With the latest 4Q13 Hudson Report highlighting that 36.7% of banks and financial service companies expect to increase headcount, Central rents may be close to stabilising, in our view. However, we are concerned about the potential knock-on effects from a housing downturn. Historically, Central office rents have been most leveraged to changes in GDP growth. Based our regression analysis, we estimate that every 1% revision to GDP could result in an 8.6% swing in rents.
· Cap rates at 4.0-4.5% only offer some cushion against rising bond yields – As at June 2013, HK Land’s indicative cap rates for its office and retail properties were 4.0% and 4.5%, respectively. While HK Land’s office cap rate still offers a 135bp spread against the current 10-year bond yield of 2.65%, this would narrow to 50bp by 3Q14 based on Barclays forecast 10-year US Treasuries yield of 3.5% by that time. With HK Land’s Hong Kong commercial portfolio already suffering its first negative change in fair value in 1H13, at –USD39.9mn, we believe there is little margin against either further rental weakness or a potential increase in cap rates.
Hongkong Land Holdings Ltd.(HKLD.SI): Financial and Valuation Metrics USD
FY Dec 2011 2012 2013 2014 2015
EPS 0.30A 0.33A 0.40E 0.39E 0.37E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 0.30A 0.33A 0.38E 0.36E 0.37E P/E 20.7 18.9 15.5 16.3 17.1 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 105 Barclays | Hong Kong Property
Valuation methodology Our USD5.59 price target is based on a target discount of 45% to our end-2015 NAV estimate for HK Land of USD10.16. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks’ discounts to NAV to widen to one standard deviation below their long-term average. Historically, HK Land has traded at an average discount of 30% with a one standard deviation swing of 14%. Our target discount of 45% is broadly in line with mid- cycle minus one SD.
Key investment risks Upside risks to our price target include:
Recovery of financial services sector – We believe the weakness in the Central office market over the past two years has been driven by weak demand rather than excess supply, as banks and financial service firms have continued to reduce their space requirements. We believe the outlook remains challenging, with Citibank Plaza in Central dealing with a 16% vacancy rate as well as the relocation of a major tenant in 2014. However, if the financial markets were to rebound significantly and firms began to expand, this could shorten the adjustment process and we believe HK Land’s NAV discount could potentially narrow from the current 43% to the mid-cycle level of 30%.
36% of NAV tied to overseas properties – Outside of Central, we estimate that HK Land has 36% of its NAV tied to overseas properties, such as China residential developments, Singapore Grade A offices and Singapore residential developments. If these markets are able to decouple from Hong Kong’s property market, the diversification benefit could help mitigate the downside risks to HK Land and potentially reduce its NAV discount.
28 October 2013 106 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Hongkong Land Holdings Ltd. (HKLD.SI) Stock Rating: UNDERWEIGHT
Income statement ($mn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) USD 6.26 Revenue 1,115 1,752 2,218 2,094 23.4% Price Target USD 5.59 EBITDA N/A N/A N/A N/A N/A Why Underweight? With Central rents down 25% EBIT 800 987 1,121 1,097 11.1% from their peak, we believe Central Grade A office Pre-tax income 1,574 1,118 1,133 1,086 -11.6% rents should be closest to end-user support points. Net income 1,439 952 907 865 -15.6% That said, demand remains weak. Our main concerns EPS (reported) ($) 0.61 0.40 0.39 0.37 -15.7% are: 1) potential knock-on effects from a housing downturn; and 2) the risk of cap rate expansion. Net income (adj) 777 952 907 865 3.6%
EPS (adj) ($) 0.33 0.40 0.39 0.37 3.5% Upside case USD 7.11 Diluted shares (mn) 2,344.5 2,352.8 2,352.8 2,352.8 0.1% DPS ($) 0.17 0.18 0.18 0.18 1.9% An earlier-than-expected reversal of property cooling measures could allow the Hong Kong property stocks Profit growth (%) 10.5 22.5 -4.7 -4.6 N/A to trade back up to the mid-cycle discounts to NAV.
For HK Land, this could potentially enable its discount Margin and return data Average to narrow to its mid-cycle average of 30%. EBITDA margin (%) N/A N/A N/A N/A N/A EBIT margin (%) 71.8 56.3 50.5 52.4 57.8 Downside case USD 4.06 Pre-tax margin (%) 141.2 63.8 51.1 51.9 77.0 Should the decline in home prices trigger a greater Net margin (%) 141.2 63.8 51.1 51.9 77.0 follow-on impact on rents and the broader local Net (adj) margin (%) 69.7 54.3 40.9 41.3 51.5 economy, we believe property companies' discounts ROIC (%) N/A N/A N/A N/A N/A to NAV could widen further to the mid-cycle discount ROA (%) 2.6 2.9 2.8 2.7 2.8 minus 1.5-2SD. Our downside case for HK Land ROE (%) 3.1 3.6 3.5 3.4 3.4 factors in a 60% discount to NAV.
Balance sheet and cash flow ($mn) CAGR Upside/Downside scenarios Tangible fixed assets 23,494 24,185 22,969 22,067 -2.1% Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 982 950 950 950 -1.1% Total assets 31,785 32,880 31,979 31,427 -0.4% Short and long-term debt 4,256 4,677 4,991 5,371 8.1% Net debt/(funds) 3,273 3,727 4,041 4,421 10.5% Other long-term liabilities 143 229 -19 -212 N/A Total liabilities 5,601 6,130 6,227 6,412 4.6% Shareholders' equity 26,148 26,709 25,710 24,971 -1.5% Change in working capital -454 -50 31 -13 N/A Cash flow from operations 341 939 1,154 1,086 47.2% Capital expenditure -563 -520 -520 -520 N/A Free cash flow -222 419 634 566 N/A BVPS ($) 11.11 11.35 10.93 10.61 -1.5%
POINT® Quantitative Equity Scores Valuation and leverage metrics Average Value P/E (reported) (x) 10.2 15.5 16.3 17.1 14.8 P/E (adj) (x) 18.9 15.5 16.3 17.1 17.0 NAV per share ($) 9.84 11.01 10.58 10.16 10.40 Quality Premium/(discount) to NAV (%) -39.6 -42.0 -43.4 -45.0 -42.5 P/BV (x) 0.6 0.6 0.6 0.6 0.6 Dividend yield (%) 2.7 2.9 2.9 2.9 2.8 Sentiment Net debt/equity (%) 12.5 14.0 15.7 17.7 15.0 Net debt/EBITDA (x) 4.1 3.8 3.6 4.0 3.9 Total debt/capital (%) 13.4 14.2 15.6 17.1 15.1 Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 107 Barclays | Hong Kong Property
FIGURE 173 Hongkong Land – Financial Summary
Hongkong Land - Financial Summary Share price USD 6.26 Ticker HKL SP No. of shares mn 2,353 Year End 31-Dec Market Cap USDmn 14,729 Free Float 50%
Profit and loss (USDmn) Cash flow (USDmn) Year ended FY11 FY12 FY13E FY14E FY15E Year ended FY11 FY12 FY13E FY14E FY15E Turnover 1,224 1,115 1,752 2,218 2,094 Operating profit 5,436 1,469 987 1,121 1,097 Operating profit 832 800 987 1,121 1,097 +/- non cash gains -4,604 -669 0 0 0 Property sales 209 140 277 359 314 +/- change in working capital -336 -454 -50 31 -13 Property rental 673 720 769 828 852 +/- associates 0 0 0 0 0 Others -51 -60 -60 -66 -69 +/- others -43 -5 2 2 2 EBIT 832 800 987 1,121 1,097 Operating cash flows 453 341 939 1,154 1,086 Net interest -67 -61 -102 -130 -143 Capex -89 -563 -520 -520 -520 Operating profit 765 739 885 990 954 Free cash flow 364 -222 419 634 566 Exceptionals 0 0 0 0 0 Sale of assets 0 -105 0 0 0 Revaluation surplus/(deficit) 4,604 669 0 0 0 Acquisitions 0 0 0 0 0 Associates 76 166 233 142 132 Shares issue/buybacks 0 0 0 0 0 Profit before tax 5,446 1,574 1,118 1,133 1,086 Others 123 -170 -386 -347 -337 Tax -135 -124 -163 -224 -219 Cash flow after investing acts 487 -497 33 287 229 MI -5 -12 -4 -2 -2 Net profit 5,306 1,439 952 907 865 Net interest paid/received -57 -34 -64 -93 -106 Underlying net profits 703 777 952 907 865 Dividends received 58 140 140 140 140 Dividends paid -372 -375 -400 -424 -424 Underlying EPS (USD) 0.30 0.33 0.40 0.39 0.37 Tax -117 -147 -163 -224 -219 DPS (USD) 0.16 0.17 0.18 0.18 0.18 Change in net debt -1 -914 -454 -314 -380
Net debt - y/b 2,358 2,359 3,273 3,727 4,041 Net debt -y/e 2,359 3,273 3,727 4,041 4,421 Balance sheet (USDmn)
Year ended FY11 FY12 FY13E FY14E FY15E NAV Breakdown Non-current assets 26,220 27,931 29,009 28,140 27,574 (USDmn) Methodology Current % of NAV End-15 % of NAV Investment properties 22,530 23,494 24,185 22,969 22,067 HK investment properties 19,948 77% 16,976 71% Associates and JVs 3,552 4,270 4,657 5,003 5,340 Office Cap rate = 4.25% 15,364 59% 12,552 53% Others 138 167 167 167 167 Retail Cap rate = 4.50% 4,584 18% 4,424 19% Overseas investment properties 5,071 20% 5,475 23% Current assets 2,804 3,854 3,871 3,840 3,853 Office Cap rate=3.8%-7.5% 4,458 17% 4,800 20% Trading properties 1,521 2,513 2,556 2,517 2,523 Retail Cap rate=5.3%-8.0% 603 2% 666 3% Others 315 358 365 373 380 Others 10 0% 10 0% Cash 968 982 950 950 950 Development properties 2,923 11% 2,608 11% Residential - HK DCF 45 0% 0 0% Total assets 29,024 31,785 32,880 31,979 31,427 Residential - China DCF 2,648 10% 2,421 10% Residential - Macau DCF 0 0% 0 0% Current liabilities 887 1,567 1,458 1,504 1,521 Residential - S'pore DCF 200 1% 151 1% ST bank loans 58 365 234 250 269 Others DCF 31 0% 36 0% Others 829 1,202 1,224 1,255 1,252 Inv Prop Under Dev NPV 1,507 6% 2,391 10% Landmark Mandarin @ USD2.31/room 261 1% 261 1% Non-current liabilities 3,373 4,034 4,672 4,723 4,891 Other Investments 6 0% 6 0% LT loans 3,269 3,891 4,443 4,742 5,103 Gross Assets 29,716 115% 27,717 116% Others 104 143 229 -19 -212 Net Debts -3,816 -15% -3,816 -16% Net Assets 25,900 100% 23,901 100% MI 25 37 40 42 44 Shares in Issue 2,353 2,353 Net assets 24,739 26,148 26,709 25,710 24,971 NAV per Share (USD) 11.01 10.16 Discount/target discount -43% -45% BVPS (USD) 10.58 11.11 11.35 10.93 10.61 Share Price (USD) 6.26 5.59 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 108 Barclays | Hong Kong Property
FIGURE 174 FIGURE 175 GAV Breakdown (as of Dec-13E) BVPS and gearing level
Inv Prop Other 12.00 11.11 18% Dev Prop - 10.58 Under Dev - assets 16% 16% Overseas 1% Overseas 10.00 5% 10% 8.64 14% Inv Prop - 8.00 12% 13% 12% Overseas 6.64 17% 10% 6.00 10% 8% 4.00 6% 4% 2.00 2%
Inv Prop - 0.00 0% HK FY09 FY10 FY11 FY12 67% BVPS (USD) Net Debt/Equity (%) Source: Barclays Research estimates Source: Datastream, Barclays Research
FIGURE 176 FIGURE 177 Dividend and payout ratio HK investment properties breakdown (as of Dec-13E)
0.25 60% 53% 51% HK - Retail 46% 50% 0.20 44% 23% 0.17 0.16 0.16 0.16 40% 0.15 30% 0.10 20%
0.05 10% HK - Office 0.00 0% 77% FY09 FY10 FY11 FY12
DPS (USD) Dividend payout ratio HK - Retail HK - Office Source: Datastream, Barclays Research Source: Barclays Research estimates
FIGURE 178 FIGURE 179 Historical discount to NAV Trailing price-to-book ratio
30% 1.4 20% Average Disc.= -30% 1.2 10% 0% 1.0 -10% 0.8 -20% 0.6 -30% -40% 0.4 -50% 0.2 -60% - -70% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 HK Land - NAV Discount Average Discount HK Land (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 109 Barclays | Hong Kong Property
LINK REIT (823 HK; EW; PT HKD37.94; -2%)
823 HK / 0823.HK Maximum defensiveness
Stock Rating We initiate coverage of Link REIT with an EW rating and a price target of HKD37.94. EQUAL WEIGHT While its estimated FY14 distribution yield of 4.09% does not appear cheap, we consider Industry View Link REIT one of the most defensive stocks among the Hong Kong property companies NEGATIVE due to: 1) its exposure to staples and public housing; 2) high 70% of net debt tied to Price Target fixed rates; and 3) the continued churn benefit from previous AEIs. While a rising bond HKD 37.94 yield would compress Link REIT’s yield spread, we estimate the 4.58% March 2016 distribution would still offer a 108bp premium should 10-year US Treasuries rise to Price (23-Oct-2013) HKD 38.90 3.50%. This is only 30bp tighter than Link REIT’s historical yield spread of 138bp. Potential Upside/Downside · Benefits of AEI continue – Since its listing in 2006, Link REIT has completed 30 Asset -2% Enhancement Initiatives (AEI) worth HKD2.7bn. Although the AEIs currently underway
(eight projects) and future AEIs (five pending approval and >13 at the planning stage) may not offer as much benefit as the first round of AEI given the low base of comparison, we believe the benefits of the first round of AEI are ongoing. Having adjusted the tenant mix of its portfolio, Link REIT now has greater flexibility to adjust its tenant mix to cater to market needs. This should continue to support positive rental reversions as Link REIT moves from the mass market non-discretionary to the mid- market non-discretionary segment.
· 62% of rents tied to staples and public housing – As at 31 March 2013, 56.9% of Link REIT’s internal floor area (IFA) and 62.1% of its monthly rents were tied to Food & Beverage (24.9%), Supermarkets (23.1%) and Markets/Cooked Stalls (14.1%). These daily necessity trades should be relatively resilient during a market downturn. Furthermore, while Hong Kong’s private income growth stalled in 2Q13 according to data from the Census & Statistics Department, public household incomes have continued to rise. We believe the combination of public housing households and its high exposure to staples should make Link REIT’s rent roll more defensive compared with its peers.
· 69.7% of net debt tied to fixed rates – Of Link REIT’s net debt of HKD10bn as at March 2013 (comprising HKD13bn gross debt and HKD3bn cash on hand), 69.7% or HKD7.12bn is tied to fixed-rate debt. With the average life of fixed-rate debt at 6.0 years, we believe Link REIT is well positioned to withstand possible higher rates in future.
· Historical yield spreads – Since its listing in 2006, Link REIT has traded at an average distribution yield spread of 138bp to 10-year US Treasuries. During the first two years of listing, Link REIT’s distribution yield was negative as the market anticipated faster rental growth following the completion of its AEI programmes.
Link REIT(0823.HK): Financial and Valuation Metrics HKD
FY Mar 2012 2013 2014 2015 2016
EPS 1.30A 1.47A 1.58E 1.69E 1.78E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 1.47A 1.70A 1.60E 1.73E 1.86E P/E 29.9 26.5 24.6 23.0 21.8 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 110 Barclays | Hong Kong Property
Valuation methodology Our HKD37.94 price target is based on a 10-year Dividend Discount Model (DDM) using a terminal cap rate of 5.75% and beta of 0.5. Our HKD37.94 price target implies a FY14E and FY15E distribution yield of 4.18% and 4.45%. Historically, Link REIT’s distribution yield has traded at a 138bp premium to 10-year US Treasury yields. On our estimates, the premium is currently at 108bp, making the shares fairly valued, in our opinion.
Key investment risks Downside risks to our price target include:
Potential expansion of cap rates – As of March 2013, Link’s retail space and car parks were valued at cap rates of 5.2% and 6.42%, respectively. Although these are higher than those of its peers (i.e. HK Land at 4.0% for office and 4.5% for retail, SHKP at 5.0% for office and retail), they are down from cap rates of 5.92% for its retail space and 7.63% for its car parks just two years ago. Should bond yields rise faster or by more than we expect, pressure could grow on Link REIT’s share price and valuation.
Property operating expense control – Over the past two years, Link REIT has successfully controlled its property operating expenses despite a general rise in wages and other costs. This helped to improve its net rental margin from 68.1% in FY11 to 70.1% in FY13. Faster cost increases relative to rental growth could negatively impact Link REIT’s DPU, and therefore its share price.
Upside risks to our price target include:
Yield-accretive acquisitions or divestments – Link REIT continually reviews its investment property portfolio with the aim of making yield-accretive acquisitions and divestments. Although any purchase or sale is difficult to time, since it is subject to market conditions, over the past two years Link REIT has successfully acquired two shopping centres in Hong Kong. If Link REIT is able to make a yield-accretive acquisition or divestment, this could provide a boost to its DPU.
28 October 2013 111 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Link REIT (0823.HK) Stock Rating: EQUAL WEIGHT
Income statement (HKDmn) 2013A 2014E 2015E 2016E CAGR Price (23-Oct-2013) HKD 38.90 Revenue 6,506 7,065 7,459 7,794 6.2% Price Target HKD 37.94 EBITDA N/A N/A N/A N/A N/A Why Equal Weight? We consider Link REIT one of the EBIT 4,616 4,977 5,272 5,522 6.2% most defensive of the Hong Kong property companies Pre-tax income 21,696 4,338 4,626 4,874 -39.2% given: 1) its exposure to staples and public housing; Net income 21,062 3,625 3,867 4,075 -42.2% 2) high percentage of fixed-rate debt (70%); and 3) EPS (reported) (HKD) 9.25 1.58 1.69 1.78 -42.2% the continued churn benefit from previous asset enhancement initiatives. Net income (adj) 3,349 3,625 3,867 4,075 6.8%
EPS (adj) (HKD) 1.47 1.58 1.69 1.78 6.6% Upside case HKD 43.54 Diluted shares N/A N/A N/A N/A N/A DPS (HKD) 1.46 1.58 1.69 1.78 6.8% Our upside case assumes a soft landing scenario for the local property market in which global interest Profit growth (%) 14.61 8.24 6.67 5.38 -28.3% rates remain low for a sustained period of time. We
factor a tighter 60bp spread (Link’s mid-cycle average Margin and return data Average minus one SD) to 10-year Treasuries into our upside EBITDA margin (%) N/A N/A N/A N/A N/A case. EBIT margin (%) 70.9 70.4 70.7 70.8 70.7 Pre-tax margin (%) 470.0 87.2 87.7 88.3 183.3 Downside case HKD 31.41 Net margin (%) 323.7 51.3 51.8 52.3 119.8 Should the decline in home prices trigger a greater Net (adj) margin (%) 51.5 51.3 51.8 52.3 51.7 follow-on impact on rents and the broader local ROIC (%) N/A N/A N/A N/A N/A economy, we believe REITs’ yield spread could further ROA (%) 3.7 3.6 3.7 3.8 3.7 widen. We factor a 217bp spread (Link’s mid-cycle ROE (%) 4.6 4.4 4.5 4.6 4.5 average plus one SD) to 10-year Treasuries into our downside case. Balance sheet and cash flow (HKDmn) CAGR Tangible fixed assets 95,366 98,964 102,671 106,490 3.7% Upside/Downside scenarios Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 3,152 3,152 3,152 3,152 0.0% Total assets 99,423 103,021 106,728 110,547 3.6% Short and long-term debt 13,535 14,119 14,701 15,303 4.2% Net debt/(funds) 10,383 10,967 11,549 12,151 5.4% Other long-term liabilities N/A N/A N/A N/A N/A Total liabilities 17,781 18,365 18,947 19,549 3.2% Shareholders' equity 81,642 84,656 87,781 90,999 3.7% Change in working capital 79 0 0 0 -100.0% Cash flow from operations 4,621 4,749 5,041 5,288 4.6% Capital expenditure -896 -700 -700 -700 N/A Free cash flow 3,725 4,049 4,341 4,588 7.2% BVPS (HKD) 35.68 37.00 38.36 39.77 3.7%
Valuation and leverage metrics Average POINT® Quantitative Equity Scores P/E (reported) (x) 4.2 24.6 23.0 21.8 18.4 Value P/E (adj) (x) 26.5 24.6 23.0 21.8 24.0 NAV per share (HKD) 35.68 37.00 38.36 39.77 37.70 Premium/(discount) to NAV (%) 1.8 4.6 -1.1 -4.6 0.2 Quality P/BV (x) 1.1 1.1 1.0 1.0 1.0 Dividend yield (%) 3.8 4.1 4.3 4.6 4.2 Net debt/equity (%) 12.7 13.0 13.2 13.4 13.0 Sentiment Net debt/EBITDA (x) 2.2 2.2 2.2 2.2 2.2 Total debt/capital (%) 16.6 16.7 16.7 16.8 16.7
Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Mar
28 October 2013 112 Barclays | Hong Kong Property
FIGURE 180 Link REIT – Financial Summary
Link REIT - Financial Summary
Share price HKD 38.90 Ticker 823hk No. of shares mn 2,311 Year End 31-Mar Market Cap HKDmn 89,894 Free Float 89%
Valuation Summary Year ended Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E Distribution per unit 1.292 1.464 1.584 1.690 1.781 ...growth 16.9% 13.3% 8.2% 6.7% 5.4%
Distribution yield - on book NAV 3.62% 4.10% 4.44% 4.74% 4.99% Distribution yield - on current price 3.32% 3.76% 4.07% 4.34% 4.58% Distribution yield - on fair value 3.40% 3.86% 4.18% 4.45% 4.69%
Differential - on book NAV (bps) 103 151 185 215 240 Differential - Current price (bps) 73 117 148 176 199 Differential - Fair price (bps) 82 127 159 187 211
CAPM Fair value Key valuation statistics Terminal Yield 5.75% DDM 37.94 Current Price 38.90 Long run risk free rate 3.75% Prem/(Disc) to DDM 0% Book NAV 35.68 Market risk premium 5.50% Fair Value 37.94 Price/NAV 1.09 Estimated beta 0.50 Growth rate: 2013-18E 5.99% Equity Risk Premium 2.75% PV of terminal value 23.20 Upside/Downside -2% Cost of Equity 6.50% Terminal value % of DDM 61% Dividend yield 4.07% 10-Yr UST bond yield 2.59% IRR 6.1% Total Return 1.61%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E Year ended Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E Base Rental 4,451 4,872 5,295 5,631 5,935 Profit before tax 10,198 21,696 4,338 4,626 4,874 Other Revenues 1,481 1,634 1,770 1,828 1,859 +/- non cash gains -6,590 -17,556 0 0 0 Total Revenues 5,932 6,506 7,065 7,459 7,794 +/- change in working capital 98 79 0 0 0 Property Expenses -1,747 -1,890 -2,088 -2,188 -2,272 +/- associates 0 0 0 0 0 Net Property Income 4,185 4,616 4,977 5,272 5,522 +/- others 398 402 412 415 414 Net interest -398 -402 -412 -415 -414 Operating cash flows 4,104 4,621 4,749 5,041 5,288 Operating profit 3,787 4,214 4,565 4,856 5,107 Capex -885 -896 -700 -700 -700 Head office expense -182 -200 -202 -204 -207 Free cash flow 3,219 3,725 4,049 4,341 4,588 Other Trust Expenses -87 -23 -25 -26 -27 Sale of assets 0 0 0 0 0 Revaluation Surplus/deficit 6,680 17,705 0 0 0 Acquisitions -1,748 0 0 0 0 Profit before tax 10,198 21,696 4,338 4,626 4,874 Shares issue/buybacks 0 0 0 0 0 Tax -596 -634 -713 -759 -799 Others -160 -46 0 0 0 Net income 9,602 21,062 3,625 3,867 4,075 Investing activities 1,311 3,679 4,049 4,341 4,588 Adj: Prop reval. net of def tax -6,680 -17,713 0 0 0 Net interest paid/received -402 -413 -412 -415 -414 Net Income before reval. 2,922 3,349 3,625 3,867 4,075 Dividends received 0 0 0 0 0 Adjustments 0 0 0 0 0 Dividends paid -1,932 -2,344 -3,509 -3,749 -3,976 Distributable income 2,922 3,349 3,625 3,867 4,075 Tax -334 -422 -713 -759 -799 Change in net debt -1,357 500 -584 -582 -601 Basic EPU (HKD) 4.27 9.25 1.58 1.69 1.78 Adjusted EPU (HKD) 1.30 1.47 1.58 1.69 1.78 Net debt - y/b 9,526 10,883 10,383 10,967 11,549 DPU (HKD) 1.29 1.46 1.58 1.69 1.78 Net debt -y/e 10,883 10,383 10,967 11,549 12,151
Balance sheet (HKDmn) Key ratio Year ended Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E Year ended Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E Assets Rental growth 14.8% 10.3% 7.8% 5.9% 4.7% Investment properties 76,672 95,366 98,964 102,671 106,490 DPU growth 16.9% 13.3% 8.2% 6.7% 5.4% Others 841 905 905 905 905 NPI margin 70.5% 70.9% 70.4% 70.7% 70.8% Cash 1,712 3,152 3,152 3,152 3,152 Net passing yield (NPI / IP) 5.5% 4.8% 5.0% 5.1% 5.2% Total assets 79,225 99,423 103,021 106,728 110,547 Total debt/total asset 15.9% 13.6% 13.7% 13.8% 13.8%
Liabilities Security Deposit 2,015 2,231 2,231 2,231 2,231 Loans 12,595 13,535 14,119 14,701 15,303 Others 1,880 2,015 2,015 2,015 2,015 Total liabilities 16,490 17,781 18,365 18,947 19,549
Net assets 62,735 81,642 84,656 87,781 90,999 Unitholders' funds 62,735 81,642 84,656 87,781 90,999
BVPS (HKD) 27.73 35.68 37.00 38.36 39.77 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 113 Barclays | Hong Kong Property
FIGURE 181 FIGURE 182 Investment properties breakdown (as of Mar-2013) DPU and DPU Growth
1.60 1.46 25.0% Cap Park 16% 1.40 1.29 20.0% 1.20 1.10 0.97 1.00 16.9% 15.0% 15.9% 0.80 13.4% 13.3% 0.60 10.0%
0.40 5.0% 0.20 Retail 0.00 0.0% 84% 2010 2011 2012 2013 DPU (HKD) DPU growth Source: Company data, Barclays Research Source: Company data, Barclays Research
FIGURE 183 FIGURE 184 BVPS and gearing level Rental growth and net passing yield
40.0 30% 20.0% 7.0% 35.7 6.2% 35.0 18.0% 25% 18.6% 5.4% 5.5% 6.0% 16.0% 30.0 27.7 4.8% 24.3% 14.0% 5.0% 24.6 20% 25.0 14.8% 12.0% 4.0% 18.7 20.0 17.3% 17.3% 15% 10.0% 10.3% 3.0% 15.0 8.0% 9.5% 12.7% 10% 6.0% 2.0% 10.0 4.0% 5% 1.0% 5.0 2.0% 0.0 0% 0.0% 0.0% 2010 2011 2012 2013 2010 2011 2012 2013 BVPS (HKD) Net Debt/Equity (%) Net passing yield (NPI / IP) (RHS) Rental growth (LHS)
Source: Company data, Barclays Research Source: Company data, Barclays Research
FIGURE 185 FIGURE 186 Historical yield spread Trailing price-to-book ratio
(bps) 1.8 450 1.6 400 1.4 350 300 1.2 250 1.0 200 0.8 150 0.6 100 50 0.4 - 0.2 -50 - -100 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Link REIT - Yield spread Avg +1SD -1SD Link REIT (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 114 Barclays | Hong Kong Property
CHAMPION REIT (2778 HK; EW; PT HKD3.31; -5%)
2778 HK / 2778.HK A lot of wood to chop, probably better to wait
Stock Rating We initiate coverage of Champion REIT with an EW rating and a price target of HKD3.31. EQUAL WEIGHT Despite Champion’s cheap valuation at 0.44x trailing P/B and a FY14E distribution yield Industry View of 4.96%, we believe it is too early to bargain hunt and we see several key challenges NEGATIVE ahead for Champion. We recommend investors stay on the sidelines and keep an eye on: Price Target 1) re-leasing progress at Citibank Plaza; 2) re-financing of its HKD7bn loan in 2014; 3) HKD 3.31 potential impact from rising cap rates.
Price (23-Oct-2013) · Lots of space to fill at Citibank Plaza – Taking into consideration the four floors newly HKD 3.47 acquired by Champion, Citibank Plaza’s (CBP) current vacancy is around 16%. While Potential Upside/Downside successful letting of this space could potentially provide a boost to Champion’s income, -5% the increased occupancy would likely be at the expense of lower rental rates. For 2014,
in addition to the existing 16% vacant space, there is the additional challenge of Bank of America Merrill Lynch moving out (15% of CBP space) and ICBC’s lease expiry (12% of CBP space). Since the average rent for 2014 lease expiry is HKD96psf and current market rates are in the HKD70s, overall rental contribution from CBP is likely to come down.
· Higher wage costs impacting rental margins – In 1H13, operating expenses rose at 10.5% y/y, faster than gross revenue growth of 4.7%. The increase in building management fees was not able to fully offset higher building management expenses from higher wage costs. As a result, Champion’s overall net rental margin declined from 82.1% to 81.1%. With Citibank Plaza’s overall rentals likely to come down as a result of negative rental reversions, Champion’s net rental margins are likely to remain under pressure.
· Interest cost to rise upon refinancing – HKD7bn of Champion’s HKD14.7bn total debt matures around May 2014. While liquidity conditions have improved compared to a year ago, the current going interest rate of Hibor plus 1.5% is still higher than the current blended rate of Hibor +1.14%. Even if liquidity conditions were to remain unchanged, we expect Champion’s interest expense to increase. Should liquidity conditions deteriorate between now and then, Champion may end up refinancing at a higher rate, putting further downward pressure on DPU.
· Cap rates: 3.3% for CBP, 4.0% for Langham – Although revaluation gains/losses do not affect DPU, they do have an impact on BVPS. As of June 2013, CBP was valued with a cap rate of 3.3% and Langham Place office and retail were valued at 4.0%. While cap rates are in some ways tied to open market valuations, we believe they are also tied to bond yields (risk free rate) and rental growth prospects (risk premium). With Champion’s cap rates ranging between 3.3% and 4.0%, there is less of a buffer against rising bond yields.
Champion REIT(2778.HK): Financial and Valuation Metrics HKD
FY Dec 2011 2012 2013 2014 2015
EPS 0.39A 0.15A 0.23E 0.16E 0.15E Previous EPS N/A N/A N/A N/A N/A Consensus EPS 0.17A 0.20A 0.18E 0.17E 0.17E P/E 8.9 23.6 15.1 21.2 23.6 Source: Barclays Research. Consensus numbers are from Thomson Reuters
28 October 2013 115 Barclays | Hong Kong Property
Valuation methodology We value Champion REIT using a 10-year DDM model, assuming a terminal yield of 5.25% and a cost of equity of 7.6%. Our HKD3.31 price target implies a 5.20% DPU yield for FY14E, representing a 252bps spread against 10-year US Treasury yields. Historically, since its listing on 29 May 2006, Champion REIT’s trailing distribution yield has traded at a 561bp premium to 10-year US Treasury yields, on average. We believe this partly reflected some of the previous dividend waivers and interest rate arrangements that were in place that had artificially boosted Champion’s DPU. As its dividend yield is now based purely on rentals, we believe the implied spread of 252bps is fairly valued.
Key investment risks Upside risks to our price target include:
Recovery of financial services sector – We believe the weakness in the Central office market over the past two years has been driven by weak demand rather than excess supply, as banks and financial service firms have continued to reduce their space requirements. We believe the outlook remains challenging, with Citibank Plaza in Central dealing with a 16% vacancy rate as well as the relocation of a major tenant in 2014. However, if the financial markets were to rebound significantly and firms began to expand, this could shorten the adjustment process and occupancy improvement could boost Champion’s DPU and hence our DDM fair value.
Decline in 10-year US bond yields to sustain current cap rates and distribution yield – While Barclays expects 10-year US bond yields to reach 3.5% by 3Q14, if yields were to drop as a result of a delay in US tapering or additional stimulus, this could help sustain the current low cap rates and distribution yields. Champion’s 4.96% FY14 distribution yield could start to look generous.
Downside risks to our price target include:
Negative wealth effect from anticipated housing market correction – Langham Place mall has been a relative bright spot for Champion REIT, with 1H13 tenant sales up 10% y/y. If our forecast for a housing downturn were to result in a decline in local consumption, this could negatively affect Langham Place mall’s performance. This would initially impact turnover rents, which were HKD22.54psf in 1H13 vs base rent of HKD118.71psf, but could also eventually spill over into base rent reversions as well.
Occupancy risk at CBP – Our current earnings forecast expects Citibank Plaza’s occupancy to drop from June 2013’s 88% to 85% by June 2014 and bottom out at 81.6% by December 2014. Should the re-letting of vacant space prove more difficult or more time consuming, this could negatively affect our earnings forecast and DPU estimates.
28 October 2013 116 Barclays | Hong Kong Property
Asia ex-Japan Real Estate Industry View: NEGATIVE
Champion REIT (2778.HK) Stock Rating: EQUAL WEIGHT
Income statement (HKDmn) 2012A 2013E 2014E 2015E CAGR Price (23-Oct-2013) HKD 3.47 Revenue 2,059 2,149 2,148 2,185 2.0% Price Target HKD 3.31 EBITDA N/A N/A N/A N/A N/A Why Equal Weight? With a FY14E distribution yield of EBIT 1,666 1,732 1,717 1,782 2.3% 4.96%, Champion’s valuation does not appear Pre-tax income 4,380 2,154 1,125 1,010 -38.7% expensive. However, with a c16% vacancy rate at Net income 4,160 2,032 939 844 -41.2% Citibank Plaza, two major leases expiring in 2014 and EPS (reported) (HKD) 0.80 0.36 0.16 0.15 -43.1% HKD7bn of debt to be re-financed in 2014, we believe there are still significant challenges ahead. Net income (adj) 770 1,307 939 844 3.1%
EPS (adj) (HKD) 0.15 0.23 0.16 0.15 -0.2% Upside case HKD 4.12 Diluted shares (mn) 6,313.5 5,692.6 5,729.1 5,758.1 -3.0% DPS (HKD) 0.21 0.19 0.17 0.16 -9.5% Our upside case assumes a soft landing for the Hong Kong property market. We assume the Central office Profit growth (%) -60.1 69.7 -28.1 -10.2 N/A rents to rise 7.5% in each of 2014 and 2015 and retail
rents to increase 10% in each of 2014 and 2015, Margin and return data Average driving our upside case of HKD4.12. EBITDA margin (%) N/A N/A N/A N/A N/A EBIT margin (%) 80.9 80.6 79.9 81.6 80.7 Downside case HKD 2.91 Pre-tax margin (%) 262.9 124.3 65.5 56.7 127.4 The decline in home prices may trigger a greater Net margin (%) 202.0 94.6 43.7 38.6 94.7 follow-on impact on rents and the broader local Net (adj) margin (%) 37.4 60.8 43.7 38.6 45.1 economy. Our downside case assume the Central ROIC (%) N/A N/A N/A N/A N/A office rents to drop 10% in each of 2014 and 2015 ROA (%) 1.3 2.1 1.5 1.4 1.6 and retail rents to stay flat in 2014 and 2015, driving ROE (%) 1.9 2.9 2.2 2.0 2.2 our downside case of HKD2.91.
Balance sheet and cash flow (HKDmn) CAGR Upside/Downside scenarios Tangible fixed assets 58,297 60,495 58,774 57,147 -0.7% Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 1,397 829 887 955 -11.9% Total assets 59,892 61,827 60,165 58,605 -0.7% Short and long-term debt 12,976 14,652 14,700 14,749 4.4% Net debt/(funds) 11,579 13,824 13,813 13,794 6.0% Other long-term liabilities N/A N/A N/A N/A N/A Total liabilities 15,639 17,328 17,375 17,424 3.7% Shareholders' equity 44,252 44,500 42,789 41,181 -2.4% Change in working capital -1 -306 0 0 N/A Cash flow from operations 1,564 1,615 1,586 1,647 1.7% Capital expenditure -4 -2,203 -48 -49 N/A Free cash flow 1,560 -589 1,538 1,599 0.8% BVPS (HKD) 7.80 7.79 7.45 7.13 -2.9%
POINT® Quantitative Equity Scores Valuation and leverage metrics Average Value P/E (reported) (x) 4.4 9.7 21.2 23.6 14.7 P/E (adj) (x) 23.6 15.1 21.2 23.6 20.9 NAV per share (HKD) 7.80 7.79 7.45 7.13 7.54 Quality Premium/(discount) to NAV (%) -56.4 -55.4 -55.6 -53.6 -55.3 P/BV (x) 0.4 0.4 0.5 0.5 0.5 Dividend yield (%) 6.0 5.5 5.0 4.5 5.2 Sentiment Net debt/equity (%) 26.2 31.1 32.3 33.5 30.8 Net debt/EBITDA (x) 7.0 8.0 8.0 7.7 7.7 Total debt/capital (%) 29.3 32.9 34.4 35.8 33.1 Low High Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.
Source: Company data, Barclays Research Note: FY End Dec
28 October 2013 117 Barclays | Hong Kong Property
FIGURE 187 Champion REIT – Financial Summary
Champion REIT- Financial Summary Share price HKD 3.47 Ticker 2778hk No. of shares mn 5,714 Year End 31-Dec Market Cap HKDmn 19,827 Free Float 41%
Valuation Summary Year ended Dec-11 Dec-12 Dec-13E Dec-14E Dec-15E Distribution per unit 0.224 0.209 0.191 0.172 0.156 ...growth 3.5% -6.6% -8.7% -10.0% -9.6%
Distribution yield - on book NAV 2.83% 2.64% 2.41% 2.17% 1.96% Distribution yield - on current price 6.47% 6.04% 5.51% 4.96% 4.48% Distribution yield - on fair value 6.78% 6.33% 5.78% 5.20% 4.70%
Differential - on book NAV (bps) 24 5 (18) (42) (63) Differential - Current price (bps) 388 345 292 237 189 Differential - Fair price (bps) 419 374 319 261 211
CAPM Fair Value Key valuation statistics Terminal Yield 5.25% DDM 3.31 Current Price 3.47 Long run risk free rate 3.75% Book NAV 7.94 Market risk premium 5.50% Price/Book NAV (0.56) Estimated beta 0.70 Growth rate 2011-16F 0.80% Equity Risk Premium 3.85% PV of terminal value 1.96 Upside/Downside -5% Cost of Equity 7.60% Terminal value % of DDM 59% 2013F Dividend yield 5.51% 10-Yr UST bond yield 2.59% IRR 6.8% Total Return 0.90%
Profit and loss (HKDmn) Cash flow (HKDmn) Year ended Dec-11 Dec-12 Dec-13E Dec-14E Dec-15E Year ended Dec-11 Dec-12 Dec-13E Dec-14E Dec-15E Base Rental 1,728 1,831 1,913 1,918 1,944 Profit before tax 6,677 4,380 2,154 1,125 1,010 Other Revenues 212 228 237 230 240 +/- non cash gains -5,206 -2,815 -233 461 638 Total Revenues 1,940 2,059 2,149 2,148 2,185 +/- change in working capital -20 -1 -306 0 0 Property Expenses -378 -393 -417 -431 -403 +/- associates 0 0 0 0 0 Net Property Income 1,562 1,666 1,732 1,717 1,782 +/- others 0 0 0 0 0 Net interest -565 -397 -361 -358 -531 Operating cash flows 1,451 1,564 1,615 1,586 1,647 Operating profit 998 1,268 1,371 1,359 1,251 Capex 0 -4 -2,203 -48 -49 Managers' fees -187 -200 -253 -206 -214 Free cash flow 1,451 1,560 -589 1,538 1,599 Other Trust Expenses -16 -21 0 -28 -27 Sale of assets 0 0 0 0 0 Revaluation Surplus/deficit 5,883 3,333 1,036 0 0 Acquisitions 0 0 0 0 0 Profit before tax 6,677 4,380 2,154 1,125 1,010 Shares issue/buybacks 0 2,340 0 0 0 Tax -184 -220 -121 -186 -166 Others 1,001 -298 0 0 0 Net income 6,493 4,160 2,032 939 844 Investing activities 2,452 3,602 -589 1,538 1,599 Adj: Prop reval. net of def tax -4,563 -3,390 -725 0 0 Net Income before reval. 1,930 770 1,307 939 844 Net interest paid/received -196 -136 -361 -358 -531 Adjustments -760 484 -158 103 107 Dividends received 0 0 0 0 0 Distributable income 1,170 1,254 1,149 1,042 951 Dividends paid -1,055 -1,170 -1,146 -984 -883 Tax -46 -127 -148 -186 -166 Basic EPU (HKD) 1.31 0.80 0.36 0.16 0.15 Change in net debt 1,156 2,168 -2,245 10 19 Underlying EPU (HKD) 0.39 0.15 0.23 0.16 0.15 DPU (HKD) 0.22 0.21 0.19 0.17 0.16 Net debt - y/b 14,904 13,747 11,579 13,824 13,813 Net debt -y/e 13,747 11,579 13,824 13,813 13,794
Balance sheet (HKDmn) Key ratio Year ended Dec-11 Dec-12 Dec-13E Dec-14E Dec-15E Year ended Dec-11 Dec-12 Dec-13E Dec-14E Dec-15E Assets Rental growth 3.6% 6.6% 4.0% -0.9% 3.8% Investment properties 54,857 58,297 60,495 58,774 57,147 DPU growth 3.5% -6.6% -8.7% -10.0% -9.6% Others 182 198 503 503 503 NPI margin 80.4% 80.5% 80.9% 80.6% 79.9% Cash 1,293 1,397 829 887 955 Net passing yield (NPI / IP) 2.8% 2.9% 2.9% 2.9% 3.1% Total assets 56,332 59,892 61,827 60,165 58,605 Total debt/total asset (%) 26.7% 21.7% 23.7% 24.4% 25.2%
Liabilities Security Deposit 405 426 426 426 426 Loans 15,040 12,976 14,652 14,700 14,749 Others 2,131 2,237 2,249 2,249 2,249 Total liabilities 17,576 15,639 17,328 17,375 17,424
Net assets 38,756 44,252 44,500 42,789 41,181 Unitholders' funds 38,756 44,252 44,500 42,789 41,181
BVPS (HKD) 7.82 7.80 7.79 7.45 7.13 Source: CEIC, Company data, Barclays Research estimates
28 October 2013 118 Barclays | Hong Kong Property
FIGURE 188 FIGURE 189 Investment properties breakdown (as of Jun-2013) DPU and DPU growth
Citibank Others Langham 0.30 15% Plaza Retail 2% Office 0.26 1% 12% 10% 0.25 0.22 0.22 0.21 3.5% 5% 0.20 0% Langham 0.15 Retail -6.6% -5% 25% 0.10 Citibank -10% Plaza Office 0.05 60% -17.4% -17.5% -15% 0.00 -20% 2009 2010 2011 2012 DPU (HKD) DPU growth
Source: Company data, Barclays Research Source: Company data, Barclays Research
FIGURE 190 FIGURE 191 BVPS and gearing level Rental growth and net passing yield
9.00 40% Net passing yield (NPI / IP) (RHS) 7.82 7.80 8.00 34% 35.0% Rental growth (LHS) 7.0% 32% 35% 30.0% 7.00 30% 28.1% 5.67 27% 25.0% 5.0% 6.00 3.9% 6.72 25% 22% 20.0% 5.00 3.0% 2.8% 2.9% 20% 15.0% 3.0% 4.00 15% 10.0% 3.00 5.0% 6.6% 1.0% 3.6% 2.00 10% 0.0% 5% 1.00 -5.0% -1.0% 0.00 0% -10.0% 2009 2010 2011 2012 -11.7% -15.0% -3.0% BVPS (HKD) Total debt/total asset (%) 2009 2010 2011 2012
Source: Company data, Barclays Research Source: Company data, Barclays Research
FIGURE 192 FIGURE 193 Historical yield spread Trailing price-to-book ratio
(bps) 1.0 2,500 0.9 0.8 2,000 0.7 0.6 1,500 0.5 0.4 1,000 0.3 0.2 500 0.1 - - Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13
Champion - Yield spread Avg +1SD -1SD Champion REIT (P/B) Avg +1SD -1SD
Source: Datastream, Barclays Research Source: Datastream, Barclays Research
28 October 2013 119 Barclays | Hong Kong Property
Appendix
APPENDIX
28 October 2013 120 Barclays | Hong Kong Property
FIGURE 194 Asia ex-Japan property: Valuation comparison
Bberg Mkt Cap Curr Share Price Upside/ Rating P/B P/E (x) Dividend Yield Net debt/equity
Tickers (USDmn) Price Target Downside FY2012A FY2012A FY2013A/E FY2014A/E FY2012A FY2013A/E FY2014A/E FY2012A
Hong Kong property companies Cheung Kong 1 HK 36,567 HKD 122.40 135.00 10% OW 0.8 10.4 10.1 10.4 2.6% 2.7% 2.8% 8% Henderson Land 12 HK 16,171 HKD 46.45 46.70 1% EW 0.5 15.6 15.0 13.7 2.3% 2.3% 2.3% 14% SHKP 16 HK 35,003 HKD 101.60 84.00 -17% UW 0.8 12.1 14.4 14.7 3.3% 3.3% 3.3% 16% New World Dev 17 HK 8,923 HKD 10.96 8.52 -22% UW 0.5 11.8 10.8 9.4 3.5% 3.8% 3.8% 47% Sino Land 83 HK 8,577 HKD 11.18 9.69 -13% UW 0.7 12.3 10.0 12.2 4.1% 4.5% 4.5% 4% Hang Lung Properties 101 HK 14,760 HKD 25.55 27.95 9% OW 1.0 18.5 29.0 16.2 2.9% 2.9% 2.9% 7% Kerry Properties 683 HK 6,197 HKD 33.30 28.06 -16% UW 0.7 10.2 11.0 14.4 2.9% 2.7% 2.7% 22% Midland 1200 HK 282 HKD 3.05 2.25 -26% UW 1.4 9.9 -8.7 -55.7 8.0% 0.0% 0.0% -79% Wharf 4 HK 26,439 HKD 67.65 59.50 -12% UW 0.8 18.6 18.1 17.8 2.4% 2.6% 2.7% 22% Hysan 14 HK 4,918 HKD 35.85 33.32 -7% EW 0.7 28.9 23.5 18.6 2.6% 3.3% 3.4% 6% Swire Properties 1972 HK 16,185 HKD 21.45 18.65 -13% UW 0.7 18.1 22.2 19.0 2.8% 2.4% 2.6% 15% HK Land (USD) HKL SP 14,682 USD 6.25 5.59 -11% UW 0.6 18.9 15.5 16.2 2.7% 2.9% 2.9% 13% Singapore property companies CapitaLand CAPL SP 10,959 SGD 3.18 4.42 39% OW 0.9 36.6 20.5 16.9 2.2% 2.5% 2.5% 45% CapitaMalls Asia CMA SP 6,470 SGD 2.06 2.23 8% EW 1.2 48.0 33.6 26.9 1.6% 1.6% 1.6% 31% City Dev CIT SP 7,675 SGD 10.47 9.12 -13% UW 1.1 15.6 20.5 17.5 1.2% 1.6% 1.4% 25% Keppel Land Ltd. KPLD SP 4,603 SGD 3.69 3.30 -10% UW 0.8 6.7 15.8 14.7 3.3% 2.1% 2.2% 22% Taiwan property companies Prince 2511 TT 849 TWD 19.00 23.30 23% EW 1.3 12.7 13.9 11.7 2.6% 3.1% 5.7% 85% Kindom 2520 TT 639 TWD 37.70 50.50 34% OW 1.8 18.3 17.5 4.6 2.7% 2.9% 9.8% 161% Hung Poo 2536 TT 332 TWD 30.60 43.70 43% OW 1.0 9.0 7.6 6.2 0.0% 7.9% 9.6% 70% Huaku 2548 TT 812 TWD 86.30 108.50 26% OW 2.0 14.2 6.5 7.7 5.8% 7.7% 8.4% 65% Farglory 5522 TT 1,409 TWD 53.70 61.80 15% EW 1.3 13.9 5.9 7.9 6.6% 4.7% 6.0% 47% Chong Hong 5534 TT 813 TWD 96.60 94.90 -2% EW 2.9 45.9 5.7 13.0 1.3% 11.5% 5.0% 30% China property companies COGO 81 HK 2,679 HKD 9.10 NA NA NR 2.6 8.8 7.3 5.9 1.2% 1.6% 2.0% 14% Poly (HK) 119 HK 2,205 HKD 4.69 NA NA NR 0.6 4.8 6.2 5.2 4.6% 4.7% 5.4% 107% Shui On Land 272 HK 2,673 HKD 2.59 NA NA NR 0.5 -33.2 19.6 15.4 1.7% 2.3% 2.3% 83% China Overseas Land 688 HK 24,930 HKD 23.65 NA NA NR 2.2 10.5 9.8 8.3 1.6% 2.0% 2.3% 21% Shimao Properties 813 HK 8,376 HKD 18.70 NA NA NR 1.8 13.6 10.1 8.1 2.3% 3.0% 3.7% 61% Longfor Properties 960 HK 9,054 HKD 12.90 NA NA NR 2.3 14.4 11.2 9.6 1.6% 1.8% 2.1% 44% China Resources Land 1109 HK 16,391 HKD 21.80 NA NA NR 1.8 15.4 13.8 11.1 1.5% 1.9% 2.3% 40% KWG Properties 1813 HK 1,851 HKD 4.96 NA NA NR 0.9 5.8 6.1 5.2 3.0% 3.9% 4.5% 73% Country Garden 2007 HK 12,737 HKD 5.35 NA NA NR 2.6 11.8 11.8 9.7 2.6% 3.0% 3.7% 65% Guangzhou R&F 2777 HK 5,279 HKD 12.70 NA NA NR 1.5 8.0 7.4 6.5 4.7% 5.2% 5.7% 107% Sino-Ocean Land 3377 HK 3,679 HKD 4.79 NA NA NR 0.7 6.8 10.7 9.0 3.9% 3.8% 4.2% 51% Agile Properties 3383 HK 4,077 HKD 9.17 NA NA NR 1.2 6.6 6.6 6.0 3.4% 3.6% 4.0% 78% Everygrande 3333 HK 6,929 HKD 3.35 NA NA NR 1.3 8.1 6.0 5.4 0.0% 3.0% 3.9% 102% Greentown 3900 HK 4,174 HKD 15.00 NA NA NR 1.5 7.3 5.9 5.1 3.3% 3.4% 3.9% 55% Yue Xiu 123 HK 2,595 HKD 2.16 NA NA NR 0.9 6.9 11.1 8.9 2.4% 3.2% 4.0% 123% Soho China 410 HK 4,213 HKD 6.73 NA NA NR 1.1 7.1 10.0 16.0 3.7% 3.7% 3.5% 10% Hong Kong REITs Link REIT 823 HK 11,595 HKD 38.90 37.94 -2% EW 1.4 29.9 26.5 24.6 3.3% 3.8% 4.1% 16% Champion REIT 2778 HK 2,557 HKD 3.47 3.31 -5% EW 0.4 23.5 15.1 21.2 6.0% 5.5% 5.0% 22% Singapore REITs CapitaMall Trust CT SP 5,567 SGD 2.00 2.30 16% EW 1.2 24.4 21.2 19.3 4.7% 5.0% 5.2% 37% Ascendas REIT AREIT SP 4,475 SGD 2.32 2.58 11% OW 1.3 18.8 16.8 16.6 5.8% 5.9% 6.0% 37% CapitaCommercial Trust CCT SP 3,354 SGD 1.45 1.87 29% OW 1.0 21.3 21.3 20.7 5.6% 5.5% 5.7% 31% Keppel REIT KREIT SP 2,671 SGD 1.19 1.55 30% OW 0.9 27.1 22.5 21.6 6.5% 6.7% 6.8% 39% Mapletree Industrial MINT SP 1,841 SGD 1.37 1.50 9% OW 1.3 17.0 15.5 15.2 6.1% 6.7% 6.8% 38% Mapletree Logistics MLT SP 2,126 SGD 1.08 1.17 9% EW 1.0 13.5 16.4 15.7 7.6% 6.3% 6.5% 35% Suntec REIT SUN SP 3,111 SGD 1.71 1.74 2% EW 0.9 14.7 27.9 24.6 5.6% 5.3% 5.6% 37% Notes: Prices as of the market close on 23 October 2013. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight; NR: Not Rated. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Real Estate industry view is Negative. Bloomberg consensus estimates for NR companies. “Upside/downside” refers to potential upside or downside % to Price Target. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates
28 October 2013 121 Barclays | Hong Kong Property
FIGURE 195 Hong Kong property – our estimates vs consensus
Underlying Our estimate Consensus Variance
Net Profit (HKD mn) FY13E FY14E FY15E FY16E FY13E FY14E FY15E FY16E FY13E FY14E FY15E FY16E Cheung Kong 27,980 27,354 31,899 NA 27,562 30,140 31,640 NA 2% -9% 1% NA Henderson Land 7,908 9,072 9,369 NA 7,901 8,430 9,116 NA 0% 8% 3% NA SHKP NA 18,412 19,159 20,229 NA 21,604 21,412 22,328 NA -15% -11% -9% New World Dev NA 7,394 7,050 6,863 NA 7,455 7,984 8,662 NA -1% -12% -21% Sino Land NA 5,440 6,394 5,756 NA 5,107 5,624 6,141 NA 7% 14% -6% Hang Lung Properties 3,945 7,070 7,675 NA 4,065 5,637 6,798 NA -3% 25% 13% NA Kerry Properties 4,351 3,321 3,688 NA 4,436 4,213 4,483 NA -2% -21% -18% NA Wharf 11,323 11,503 14,717 NA 11,669 13,355 16,082 NA -3% -14% -8% NA Hysan 2,053 2,160 2,242 NA 2,038 2,164 2,300 NA 1% 0% -3% NA Swire Properties 5,653 6,598 7,876 NA 6,053 6,590 7,213 NA -7% 0% 9% NA HK Land (USDmn) 952 907 865 NA 908 837 865 NA 5% 8% 0% NA Midland (251) (39) 13 NA (43) 104 217 NA NA NA -94% NA Link REIT NA 3,867 4,075 4,279 NA 3,670 4,004 4,317 NA 5% 2% -1% Champion REIT 1,149 1,042 951 NA 1,109 1,044 1,042 NA 4% 0% -9% NA Average 0% -5% -2% -10% 71,487 110,221 121,809 37,126 71,823 115,997 124,617 41,448 EPS (HKD) Our estimate Consensus Variance
FY13E FY14E FY15E FY16E FY13E FY14E FY15E FY16 FY13E FY14E FY15E FY16E Cheung Kong 12.08 11.81 13.77 NA 11.88 13.02 13.71 NA 2% -9% 0% NA Henderson Land 3.10 3.38 3.49 NA 3.04 3.23 3.47 NA 2% 5% 1% NA SHKP NA 6.89 7.17 7.57 NA 8.17 8.15 8.53 NA -16% -12% -11% New World Dev NA 1.17 1.12 1.09 NA 1.20 1.25 1.39 NA -3% -11% -22% Sino Land NA 0.91 1.08 0.97 NA 0.85 0.97 1.04 NA 7% 11% -7% Hang Lung Properties 0.88 1.58 1.71 NA 0.94 1.27 1.52 NA -6% 25% 13% NA Kerry Properties 3.02 2.31 2.56 NA 3.10 2.95 3.14 NA -3% -22% -18% NA Wharf 3.74 3.80 4.86 NA 4.39 4.40 5.29 NA -15% -14% -8% NA Hysan 1.93 2.03 2.11 NA 1.92 2.05 2.17 NA 0% -1% -3% NA Swire Properties 0.97 1.13 1.35 NA 1.08 1.13 1.23 NA -11% 0% 9% NA HK Land (USD) 0.40 0.39 0.37 NA 0.38 0.36 0.37 NA 6% 8% 0% NA Midland (0.35) (0.05) 0.02 NA (0.06) 0.14 0.30 NA NA NA -94% NA Link REIT NA 1.69 1.78 1.87 NA 1.60 1.73 1.86 NA 6% 3% 1% Champion REIT 0.23 0.16 0.15 NA 0.20 0.18 0.17 NA 13% -7% -16% NA Average -2% -7% -4% -10% 29 40 44 11 29 43 46 13 DPS (HKD) Our estimate Consensus Variance
FY13E FY14E FY15E FY16E FY13E FY14E FY15E FY16 FY13E FY14E FY15E FY16E Cheung Kong 3.33 3.43 3.43 NA 3.25 3.38 3.45 NA 2% 1% -1% NA Henderson Land 1.06 1.06 1.06 NA 1.08 1.11 1.15 NA -2% -4% -8% NA SHKP NA 3.35 3.35 3.35 NA 3.47 3.43 3.51 NA -4% -2% -5% New World Dev NA 0.42 0.42 0.42 NA 0.43 0.43 0.43 NA -1% -3% -3% Sino Land NA 0.50 0.50 0.50 NA 0.49 0.50 0.51 NA 2% 1% -2% Hang Lung Properties 0.74 0.74 0.74 NA 0.74 0.75 0.76 NA 0% -1% -2% NA Kerry Properties 0.90 0.90 0.90 NA 0.93 0.95 0.96 NA -3% -6% -6% NA Wharf 1.75 1.85 2.15 NA 1.73 1.93 2.18 NA 1% -4% -2% NA Hysan 1.17 1.23 1.28 NA 1.18 1.27 1.34 NA -1% -3% -5% NA Swire Properties 0.52 0.56 0.60 NA 0.51 0.56 0.61 NA 1% 1% -1% NA HK Land (USD) 0.18 0.18 0.18 NA 0.17 0.18 0.18 NA 3% 3% 1% NA Midland - - 0.01 NA 0.06 0.12 0.22 NA NA NA -94% NA Link REIT NA 1.69 1.78 1.87 NA 1.59 1.73 1.85 NA 6% 3% 1% Champion REIT 0.19 0.17 0.16 NA 0.20 0.19 0.19 NA -3% -7% -17% NA Average 0% -2% -3% -3% 11 17 18 6 11 18 18 6 Source: Bloomberg consensus estimates as of 23 October 2013, Barclays Research estimates
28 October 2013 122 Barclays | Hong Kong Property
FIGURE 196 Hong Kong property developers– upcoming project presales
Project Location Units Developer Kwelin St, Yee Kuk St Sham Shui Po 402 Cheung Kong / URA Mont Vest, Fung Yuen project Tai Po 1,071 Cheung Kong City Point, Tsuen Wan Station Area 7 Tsuen Wan 1,717 Cheung Kong /MTRC Lohas Park Package 3 Tseung Kwan O 1,648 Cheung Kong /MTRC No 2 Cape Drive Chung Hom Kok 7 China Overseas The Nova, 88 Third St Sheung Wan 255 China Overseas / URA Double Cove Phase 2 Ma On Shan 865 Henderson/NWD Harmony Place, Shau Kei Wan Shau Kei Wan 274 HK Housing Society Heya Delight, 392-410 Castle Peak Rd Sham Shui Po 130 HK Housing Society Heya Star, 346-370 Castle Peak Rd Sham Shui Po 175 HK Housing Society Phase 15 Discovery Bay Discovery Bay 102 HKR Int'l/ CITIC Pacific No 1 & 3 Ede Rd Kowloon Tong 41 Kerry Kau To Shan Shatin 970 Kerry / Sino Land / Manhattan Hing Hon Road Sheung Wan 168 Kerry Shan Kwong Rd Happy Valley 106 Kerry MacPherson Place, 10 Yim Po Fong St, KIL11050 Mongkok 293 Kowloon Development Tsing Lung Road, Area 58, Siu Lam Tuen Mun 75 Manhattan Area 55B, Tung Chung Tung Chung 1,419 Nan Fung 7-10 Kwai Fong Street, Happy Valley Happy Valley 152 NWD
Park Villa, Ph 1 - Site B, Lot 2131, DD121, Tong Yan San Tsuen Yuen Long 51 NWD
76-92 Tuen Mun Heung Sze Wui Road Tuen Mun 100 NWD The Woodside, Hung Shui Kiu, Lot 421 in DD 127 Yuen Long 98 NWD Austin Station Ph 1, 8 Wui Cheung Rd West Kowloon 576 NWD/Wheelock/MTR Twelve Peaks, 12 Mt Kellet Rd The Peak 12 SHKP Shouson Peak, No. 9 Shouson Hill Deep Water Bay 31 SHKP Lam Tei, TMTL 461 Tuen Mun 32 SHKP Castle Peak Road, TLTL 68 Tsing Lung Tau 4 SHKP Century Gateway II, Tuen Mun Station Tuen Mun 1,075 SHKP Pak Shek Kok, TPTL 201 Tai Po 546 Sino Land/K. Wah Pak Shek Kok, TPTL 200 Tai Po 545 Sino Land The Avenue Ph1, Site B, McGregor Street, IL 9018 Wan Chai 179 Sino/Hopewell The Avenue Ph 2, Site A, Lee Tung Street, IL 9018 Wan Chai 1,096 Sino/Hopewell Park Metropolitan, 8 Yuet Wah St, Kowloon Kwun Tong 299 Sino/URA Lot 245 in DD 331 Cheung Sha, Lantau Island Cheung Sha 16 Sino Mount Parker Residence, 1-10 Sai Wan Terrace Shau Kei Wan 92 Swire Properties/Henderson Mount Nicholson Phase 1 The Peak 19 Wharf / Nan Fung Mount Nicholson Phase 2 The Peak 24 Wharf / Nan Fung Mount Nicholson Phase 3 The Peak 24 Wharf / Nan Fung 14,689 Source: Lands Department, Barclays Research estimates
28 October 2013 123 Barclays | Hong Kong Property
FIGURE 197 Hong Kong housing supply and demand
40,000 8.0
35,000 7.0
30,000 6.0
25,000 5.0
20,000 4.0
15,000 3.0
10,000 2.0
5,000 1.0
0 0.0 1990 1991 1992 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1993 1994 1995 2013E 2014E 2015E 2016E 2017E Net supply (units) (LHS) Take-up (units) (LHS) Vacancy (%) (RHS)
Source: Rating & Valuation Department, Barclays Research
FIGURE 198 HK Grade A office supply and demand
8.0 24% Net Supply (mn sf) (LHS) Take-up (mn sf) (LHS) Vacancy (RHS) 7.0 21%
6.0 18%
5.0 15%
4.0 12%
3.0 9%
2.0 6%
1.0 3%
0.0 0%
-1.0 -3% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E
Source: Rating & Valuations Department, Savills, Barclays Research estimates
28 October 2013 124 Barclays | Hong Kong Property
FIGURE 199 Hong Kong property – Gearing and net debt profile, June 2013 vs June 2008
Gearing (%)* Net Debt
Jun-13 Jun-08 Change Jun-13 Jun-08 Change
(%) (%) (%) (HKDmn) (HKDmn) (%)
Developers CK 6.0% 15.1% -9.1% 20,801 35,176 -40.9% HLD 11.0% 16.3% -5.3% 23,444 19,797 18.4% SHKP ** 19.6% 15.3% 4.3% 75,746 33,507 126.1% NWD 47.5% 40.6% 6.9% 66,153 29,401 125.0% Sino Land -1.7% 20.9% -22.6% -1,750 12,285 NA HLP 0.3% -7.0% 7.3% 327 -4,659 NA Kerry Props 39.2% 32.2% 7.0% 29,762 14,937 99.2% Midland -74.1% -66.1% -8.0% -1,071 -1,046 2.4% Landlords Wharf 20.3% 20.9% -0.6% 53,303 21,600 146.8% Hysan 6.3% 6.4% -0.2% 3,791 2,188 73.3% Great Eagle 15.6% -1.4% 17.0% 7,601 -336 NA Swire Prop 14.7% NA NA 28,976 NA NA HK Land 12.6% 19.3% -6.7% 25,709 19,933 29.0% REITs Link REIT 13.7% 24.2% -10.5% 10,470 10,315 1.5% Champion REIT** 23.7% 30.0% -6.3% 13,638 13,382 1.9% Overall Developers 15.4% 17.0% -1.6% 213,412 139,398 53.1% Landlords 15.7% 16.4% -0.7% 90,404 43,384 108.4% REITs 14.9% 23.9% -9.0% 24,108 23,697 1.7% Note: *Gearing for the REITs is total debt/total assets, ** SHKP and Champion REIT net debt adjusted to reflect recent Xujiahui and FSI acquisitions. Source: Company data, Barclays Research
28 October 2013 125 Barclays | Hong Kong Property
FIGURE 200 Hong Kong property – chronology of property cooling measures since 2009
Date Measure Government body Policy details Warning of aggressive Concerns over banks' aggressive mortgage rates (as low as P-3.25%) without taking 17-Sep-09 HKMA lending into account associated risks appropriately Expect banks to set their mortgage rates based on the long-term average Prime- HIBOR spread of 390bp instead of the current 500bp spread Require some HK banks to demonstrate that their current pricing is reasonable and sustainable 23-Oct-09 Lowering luxury home HKMA Reduce the LTV for properties >HKD20mn from 70% to 60% LTV Cap the max mortgage amount for homes Transport and Housing Require developers to provide in their websites and sales offices information on the 20-Nov-09 Pre-sale disclosure rules Bureau ASPs within five working days after the signing of the preliminary S&P agreements Require developers to show flat prices on a per-square-foot basis based on useable area on price lists Require developers to set out the floor numbering information clearly in the front part of the sales brochure Warning to banks on use Concern over banks' use of cash rebates and urged banks to stick to the guidelines 11-Jan-10 HKMA of cash rebates that cash rebates should be limited to 1% of the mortgage amount HK Budget Speech with (1) Increase in land supply via Application List, MTR, URA and revitalisation of 24-Feb-10 Financial Secretary four property measures secondary HOS market (2) Increase stamp duty for homes >HKD20mn from 3.75% to 4.25% and deferral of stamp duty for homes >HKD20mn also no longer allowed (3) Increase property market transparency (4) Prevent excessive expansion in mortgage lending Transport and Housing New Application List for 2010/11 with six urban sites earmarked for Government- 25-Feb-10 New Application List Bureau initiated sale to ensure steady supply of land Guidelines on mortgage HKMA setting guidelines that mortgage pricing should not be lower than 05-Mar-10 HK Monetary Authority pricing Hibor+70bps and/or Prime-3.1%. Guidelines becomes effective May 2010 9 measures & 12 (1) Nine measures to increase transparency in primary sales market including: a) 21-Apr-10 initiatives introduced at Financial Secretary release of sales brochure 7 days before, (b) price list 3 days prior, (c) first price list to LegCo session include minimum of 30%/50% of total units, etc. (2) Government to trigger two prime luxury sites in Homantin and Mt. Nicholson for auction in June and July. Reiteration of effort to increase land and housing supply (3) Stamp duty could be increased and deferred stamp duty payments for transactions valued at HKD20mn or below forbidden (4) HKMA to consider including mortgage data in positive credit data-sharing agreement Two additional measures Transport & Housing (1) Disclosure of completion data within 5 working days and (2) immediate Mid-July 2010 on presale regulations Bureau disclosure of cancelled transactions Potential curbing of Government may release new regulations to cap GFA inflation. Regulation expected Mid-July 2010 Discussed excessive GFA to be announced by end-2010 and to be put in place by April 2011 Measures to stabilise Further increase land supply with three small sites set for Gov't initiated land auction 13-Aug-10 Financial Secretary property prices plus accelerate conversion of 20ha of industrial land to residential Ban all confirmor transactions in the primary market before completion Forfeited deposit raised to 10% from 5% in case of cancellation of property sale Lowering LTV for properties >HKD12mn from 70% to 60% with max loan amount 13-Aug-10 Lower LTV for properties HKMA capped at HKD7.2mn >HKD12mn All non-self-use properties LTV lowered from 70% to 60% Debt-servicing ratio guideline lowered to 50% from 50-60% Stress test on new mortgage applicants factoring in 2% rate hike with DSR cap at 60% 13-Aug-10 Lower max LTV with HK Mortgage Corp Lower max LTV to 90% and max loan amount to HKD7.2mn MIP to 90% Adopt same DSR as HKMA Source: Hong Kong Government, Barclays Research 28 October 2013 126 Barclays | Hong Kong Property FIGURE 200 (CONT’D) Hong Kong property – chronology of property cooling measures since 2009 Date Measure Government body Policy details Transport and Housing Provide 5,000 units under the "My Home Purchase Plan" for the sandwich class with 13-Oct-10 My Home Purchase Plan Bureau tenancy of up to five years at market rent Tenants will receive a subsidy equivalent to half of the net rental paid for the down HK Housing Society payment when they purchase a flat from the third year of leasing to two years after moving out Applicants are subject to income and asset caps at HKD39,000 and HKD600,000 for households (HKD23,000 and HKD300,000 for individuals) respectively and cannot have home purchase records in the past ten years. Implementation of a10% overall cap on GFA concessions for available green and 13-Oct-10 GFA concession cap Development Bureau amenity features Do away with GFA concessions for features such as prestigious entrances GFA concession for carparks set at 100% for underground ones and 50% for above ground ones Revisions to the Capital Temporary removal of real estate from the investment asset classes under the 13-Oct-10 Investment Entrant Financial Secretary scheme with investment amount raised from HKD6.5mn to HKD10mn Scheme SSD applied to residential properties re-transacted within 24 mths on top of current 19-Nov-10 Special Stamp Duty Financial Secretary stamp duty; within 6 mths-15%, 6-12 mths-10%, 12-24 mths-5% Abolition of deferral of stamp duty for all properties 19-Nov-10 LTV adjustments HKMA LTV for all properties >HKD8mn lowered from 70% to 60% LTV for all properties >HKD12mn lowered from 60% to 50% LTV for all non-self use, commercial and corporate held properties lowered from 60% to 50% 10-Jun-11 LTV adjustments HKMA 50% LTV for all homes above HKD10mn (previously HKD12mn) 60% LTV for all homes between HKD7-10mn (previously HKD8-12mn) 70% LTV for all homes below HKD7mn (previously HKD8mn) LTV lowered by 10% if principal income of applicant is not derived from HK Cut LTV for properties under net worth-based mortgage from 50% to 40%. 36 sites originally zoned for Gov't & Community use will be converted to residential 30-Aug-12 10 supply-side measures Chief Executive use "My Home Purchase Plan" will be converted from rent-to-buy to outright sale Formation of Long Term Housing Development Steering Committee Introduction of "HK Property for HK People" measures with two sites (1,100 units) in 06-Sep-12 HK Property for HK People Chief Executive Kai Tak earmarked for the scheme. For 30 years after the initial sale, only HK permanent residents are allowed to buy in the resale market. DSR for second homes lowered from 50% to 40%. Max stressed DSR also lowered 14-Sep-12 DSR and LTV adjustments HKMA from 60% TO 50% For mortgage based on net worth, LTV cap cut from 40% to 30% For non-HK based income, LTV further lowered by 20pp instead of 10pp Maximum loan tenor capped at 30 years SSD raised by 5% across the three regressive levels. Applicable period for SSD also 26-Oct-12 Special Stamp Duty Financial Secretary extended from two years to three years. Within 6 mths - 20%, 6-12 mths - 15%, 12- 36mths - 10% 15% BSD charged on all residential properties acquired by non-permanent residents 26-Oct-12 Buyer Stamp Duty Financial Secretary including corporate Stamp duty doubled for all properties except for HK permanent residents buying 22-Feb-13 Double Stamp Duty Financial Secretary their first home. Stamp duty for non-residential properties can no longer be deferred and must be paid upon purchase rather than conveyancing 22-Feb-13 LTV adjustments HKMA LTV ratio for all commercial and industrial properties lowered by 10pp Stress test now consider a 300bps hike in mortgage rates from 200bps Max LTV on car parks set at 40% and loan tenor limited to 15 years Introduce higher 15% risk weighting for all new residential mortgage Only properties 28 October 2013 127 Barclays | Hong Kong Property FIGURE 201 Hong Kong property – physical market performance since 1984 Price Indices Rent Indices Residential Retail Office Residential Retail Office 1984 -6.9% -11.6% -26.7% -5.4% -7.3% -10.8% 1985 8.2% 8.0% 1.0% 5.0% 2.6% -0.9% 1986 13.1% 14.5% 7.5% 8.6% 5.1% 16.9% 1987 22.0% 20.1% 33.1% 9.3% 13.1% 25.9% 1988 20.8% 33.3% 48.2% 16.1% 16.6% 27.4% 1989 28.1% 35.1% 70.8% 27.4% 24.5% 62.1% 1990 11.4% 11.9% -1.5% 11.0% 12.4% 6.5% 1991 33.6% 25.7% 0.4% 7.5% 12.4% -6.3% 1992 45.8% 40.4% 34.8% 9.8% 17.7% 5.1% 1993 10.5% 23.8% 21.6% 7.4% 12.7% 9.3% 1994 23.8% 17.4% 38.5% 20.4% 14.5% 20.1% 1995 -4.9% -1.8% -10.9% 4.9% 1.6% 2.0% 1996 6.9% 2.6% -4.6% -2.4% -0.4% -15.1% 1997 36.1% 26.1% 9.2% 13.4% 5.6% 2.3% 1998 -27.6% -26.2% -37.1% -16.0% -9.9% -13.2% 1999 -13.1% -19.8% -23.3% -10.6% -9.8% -25.8% 2000 -10.4% -6.3% -10.1% -1.9% 1.2% -1.3% 2001 -12.0% -7.2% -12.5% -2.8% -1.8% 2.7% 2002 -11.1% -2.0% -12.9% -12.6% -6.5% -15.4% 2003 -12.0% 0.0% -8.5% -11.7% -6.7% -12.0% 2004 27.3% 40.7% 59.1% 5.8% 7.2% 4.1% 2005 18.3% 25.9% 34.6% 11.3% 8.3% 23.4% 2006 0.8% 2.9% 5.0% 5.9% 3.8% 22.0% 2007 11.7% 12.4% 18.7% 11.1% 7.2% 12.4% 2008 17.3% 12.1% 22.1% 14.0% 4.1% 17.9% 2009 1.5% 1.5% -8.5% -12.7% -4.6% -12.5% 2010 24.7% 33.9% 28.9% 19.3% 10.9% 8.9% 2011 20.9% 27.5% 29.6% 12.1% 9.2% 15.0% 2012 13.2% 28.1% 12.3% 6.4% 12.7% 11.0% Source: CEIC, Barclays Research 28 October 2013 128 Barclays | Hong Kong Property Valuation Methodology and Risks Asia ex-Japan Real Estate Champion REIT (2778 HK / 2778.HK) Valuation Methodology: We value Champion REIT using a 10-year DDM model, assuming a terminal yield of 5.25% and a cost of equity of 7.6%. Our HKD3.31 price target implies a 5.20% DPU yield for FY14E, representing a 252bps spread against 10-year US Treasury yields. Historically, since its listing on 29 May 2006, Champion REIT's trailing distribution yield has traded at a 561bp premium to 10-year US Treasury yields, on average. We believe this partly reflected some of the previous dividend waivers and interest rate arrangements that were in place that had artificially boosted Champion's DPU. As its dividend yield is now based purely on rentals, we believe the implied spread of 252bps is fairly valued. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) an earlier recovery of the financial services sector, which could boost rental demand and boost Citibank Plaza's occupancy and rental rate outlook; and 2) a decline in 10- year US bond yields, which could help sustain current cap rates and distribution yield. Key downside risks include: 1) a negative wealth effect from anticipated housing market correction, which could impact Langham Place mall's performance; and 2) continued weak office demand, which could result in Citibank Plaza's occupancy coming in below our forecast 85% by June 2014 and 81.6% by December 2014. Cheung Kong (Holdings) Ltd. (1 HK / 0001.HK) Valuation Methodology: Our HKD135 price target is based on a 20% discount to our end-2015 NAV estimate of HKD168.35 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, Cheung Kong has traded at an average discount of 16% with a one standard deviation swing of 10%. Our 20% discount is approximately 6pp narrower than mid-cycle minus one SD, and reflects Cheung Kong's strong defensive characteristics. Risks which May Impede the Achievement of the Barclays Research Price Target: Key downside risks include: 1) change in valuation for Cheung Kong's 49.9% associate Hutchison Whampoa as it makes up 52% of Cheung Kong's estimated NAV; 2) a sharper-than-expected decline in home prices. Although we believe CK is more defensive versus sector peers, it is not immune to a drop in local property prices. Hang Lung Properties Ltd. (101 HK / 0101.HK) Valuation Methodology: Our HKD27.95 price target is based on a 20% discount to our end-2015 NAV estimate of HKD34.93 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, since HLP moved from being a landlord to a developer in 2000, the shares have traded at an average discount of 12% with a one standard deviation swing of 20%. Our 20% target discount is 12pp narrower than mid-cycle minus one SD due to HLP's three defensive characteristics. Risks which May Impede the Achievement of the Barclays Research Price Target: Key downside risks include: 1) A continued deceleration of HLP's Shanghai rental portfolio, which saw 1H13 rental growth of only 6-7%. 2) A change in timing on Hong Kong property launches. Our earnings forecasts expect HLP to sell half of its remaining 1,126 units of The Long Beach in each of 2014 and 2015. Due to the high margin of this project, sales timing could have a material impact on our earnings estimates. Henderson Land Development Co., Ltd. (12 HK / 0012.HK) Valuation Methodology: Our HKD46.70 price target is based on a 45% discount to our end-2015 NAV estimate of HKD84.92 per share. In light of our top-down view that the Hong Kong housing market is about to enter into its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, HLD has traded at an average discount of 23% with a one standard deviation swing of 20%. Risks which May Impede the Achievement of the Barclays Research Price Target: Key downside risks include: 1) HLD agreeing on land premium too early only to see entry margins eroded by subsequent home price declines; 2) potential regulations on the redevelopment of old buildings, which could impact sales timing. Key upside risks include: 1) possible upward re-rating of HLD's NAV discount as increased asset turnover could boost earnings visibility; and 2) potential stake increase by majority shareholder. Hongkong Land Holdings Ltd. (HKL SP / HKLD.SI) Valuation Methodology: Our USD5.59 price target is based on a target discount of 45% to our end-2015 NAV estimate for HK Land of USD10.16. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, HK Land has traded at an average discount of 30% with a one standard deviation swing of 14%. Our target discount of 45% is broadly in line with mid-cycle minus one SD. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) an earlier recovery of the financial services sector could boost demand for Central offices and benefit HK Land's Central portfolio, in terms of both occupancy and rental rates; and 2) stronger-than-expected performance from HK Land's overseas properties (at 36% of estimated NAV), to mitigate the downside risks from a local property market correction. Hysan Development Co., Ltd. (14 HK / 0014.HK) Valuation Methodology: Our price target of HKD33.32 is based on a 45% discount to our end-2015 NAV estimate of HKD60.57 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-them average. Hysan has traded at an average discount of 42% with a one standard deviation swing of 12% since 1989. Reflecting its strong balance sheet and the increased diversification benefit from Hysan Place and other recent AEI, our target NAV discount of 45% is 9ppt narrower than Hysan's mid-cycle minus one standard deviation level. 28 October 2013 129 Barclays | Hong Kong Property Valuation Methodology and Risks Risks which May Impede the Achievement of the Barclays Research Price Target: Key downside risks include: 1) possible negative wealth effect from housing market correction to impact local consumption and Hysan's retail portfolio; and 2) changes in timing or cost estimate for the redevelopment of Sunning Plaza could impact the project's IRR and the related NPV gains. Key upside risks include: 1) an earlier recovery of the financial services sector could boost demand for Hysan's residential and office portfolios; and 2) re-rating of Hysan's discount to NAV to reflect its more active growth and lower gearing profile than in the past. Kerry Properties Ltd. (683 HK / 0683.HK) Valuation Methodology: Our HKD28.06 price target is based on a 55% discount to our end-2015 NAV estimate of HKD62.35 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, Kerry has traded at an average discount of 38% with a one standard deviation swing of 18%. Kerry, with its high gearing and high domestic property exposure, should be among the more vulnerable stocks in our coverage. Our target discount of 55% is broadly in line with mid-cycle minus one SD. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) an earlier or larger spin off of Kerry Logistics Network; and 2) faster presales of Hong Kong development properties. Both events could help Kerry Properties reduce its gearing from the current 39.2% and reduce its risk profile. Link REIT (823 HK / 0823.HK) Valuation Methodology: Our HKD37.94 price target is based on a 10-year Dividend Discount Model (DDM) using a terminal cap rate of 5.75% and beta of 0.5. Our HKD37.94 price target implies a FY14E and FY15E distribution yield of 4.18% and 4.45%. Historically, Link REIT's distribution yield has traded at a 138bp premium to 10-year US Treasury yields. On our estimates, the premium is currently at 108bp, making the shares fairly valued, in our opinion. Risks which May Impede the Achievement of the Barclays Research Price Target: Key downside risks include: 1) potential expansion of cap rates; and 2) operating margin changes. Over the past two years, Link has successfully managed costs and improved its margin from 68.1% in FY11 to 70.1% in FY13A; changes to operating costs represents both an upside and downside risk for Link. A key upside risk includes: 1) yield-accretive acquisitions or divestments that could boost Link's DPU. Midland Holdings Ltd. (1200 HK / 1200.HK) Valuation Methodology: We use trailing P/B to value the shares. Our HKD2.25 price target is based on a 1.25x trailing P/B target multiple, roughly 0.8 SD below Midland's historical average P/B. While our overall sector approach is to apply midcycle minus one SD, considering Midland one SD is 1.09x and it only traded down to 0.95SD during the 2008 Credit Crisis, we believe 0.8SD is appropriate. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) a pre-emptive cost-cutting programme could lower Midland's breakeven point and allow it to return to profitability earlier than expected; and 2) Midland currently has net cash of HKD1bn or HKD1.49/share, which could theoretically offer some support to its share price. New World Development Co., Ltd. (17 HK / 0017.HK) Valuation Methodology: Our HKD8.52 price target is based on a 55% discount to our end-2015 NAV estimate of HKD18.94 per share. In light of our top-down view that the Hong Kong housing market is about to enter into its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, NWD has traded at an average discount of 39% with a one standard deviation swing of 21%. We apply a slightly narrower 55% target discount due to NWD recent transparency improvement and product branding. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) a significant acceleration of NWD's asset sales plan to help de-gear and reduce its risk profile, which could help narrow its discount to NAV; and 2) continued increase in corporate transparency and asset turnover helping the shares to re-rate. Sino Land Co., Ltd. (83 HK / 0083.HK) Valuation Methodology: Our HKD9.69 price target is based on a 40% discount to our end-2015 NAV estimate of HKD16.15 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, Sino Land has traded at an average discount of 32% with a one standard deviation swing of 22%. Our target discount for Sino Land is 14pp tighter than historical average minus one SD as we believe Sino Land's risk profile has substantially improved over the past 10 years. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) a pre-emptive move by the Hong Kong government to reverse the various property cooling measures could help engineer a soft landing for the housing market ; 2) with a healthy balance sheet and a small unit project pipeline, Sino Land could be the first property stock to rebound once property prices stabilise. Sun Hung Kai Properties Ltd. (16 HK / 0016.HK) Valuation Methodology: Our HKD84 price target is based on a 45% discount to our end-2015 NAV estimate of HKD153.43 per share. In light of our top-down view that the Hong Kong housing market is about to enter into its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, SHKP has traded at an average discount of 11% with a one standard deviation swing of 20%. Our target NAV discount of 45% is 14pp wider than average minus one SD as we believe SHKP's business model now resembles that of a traditional landlord and the discount also reflects the company's higher absolute net debt level. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) a pre-emptive move by the Hong Kong government to reverse the various property-cooling measures, which could help engineer a soft landing for the Hong Kong housing market; and 2) a potential acceleration of non-core asset sales by SHKP to help boost earnings visibility and also to realise asset values. Swire Properties Ltd. (1972 HK / 1972.HK) 28 October 2013 130 Barclays | Hong Kong Property Valuation Methodology and Risks Valuation Methodology: Our price target of HKD18.65 is based on a 45% discount to our end-2015 NAV estimate of HKD33.90 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Given Swire Properties was only spun off from Swire Pacific (19 HK, not rated) in January 2012, we have based Swire Properties' valuation on both peer HK Land and also Swire Pacific's historical NAV discount, which shows an average discount of 28% with a one standard deviation swing of 13% since 1994. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) continuation of office decentralisation theme to boost rents in Swire Properties' Island East portfolio; and 2) a pre-emptive move by the Hong Kong government to reverse its previous property cooling measures, which could engineer a soft landing for the local housing market and benefit Swire's Hong Kong development properties. Wharf (Holdings) Ltd. (4 HK / 0004.HK) Valuation Methodology: Our HKD59.50 price target is based on a 45% discount to our end-2015 NAV estimate of HKD108.23 per share. In light of our top-down view that the Hong Kong housing market is about to enter its first real downturn since 1998, we expect most property stocks' discounts to NAV to widen to one standard deviation below their long-term average. Historically, Wharf has traded at an average discount of 31% with a one standard deviation swing of 13%. Our target discount of 45% is broadly in line with mid-cycle minus one SD. Risks which May Impede the Achievement of the Barclays Research Price Target: Key upside risks include: 1) a faster realisation of its China investment properties under development, or continued strong growth of Wharf's Hong Kong retail properties to sustain Wharf's BVPS growth; and 2) stronger-than-expected China contract sales news, which could potentially influence Wharf's short-term share price performance. Source: Barclays Research. 28 October 2013 131 Barclays | Hong Kong Property ANALYST(S) CERTIFICATION(S): I, Paul Louie, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The POINT® Quantitative Equity Scores (POINT Scores) referenced herein are produced by the firm’s POINT quantitative model and Barclays hereby certifies that (1) the views expressed in this research report accurately reflect the firm's POINT Scores model and (2) no part of the firm's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. IMPORTANT DISCLOSURES CONTINUED Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 14th Floor, New York, NY 10019 or refer to http://publicresearch.barclays.com or call 212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. In order to access Barclays Research Conflict Management Policy Statement, please refer to: http://group.barclays.com/corporates-and-institutions/research/research-policy. The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Primary Stocks (Ticker, Date, Price) Champion REIT (2778.HK, 23-Oct-2013, HKD 3.47), Equal Weight/Negative, E/J/L Cheung Kong (Holdings) Ltd. (0001.HK, 23-Oct-2013, HKD 122.40), Overweight/Negative, A/C/D/J/K/L/M/N Hang Lung Properties Ltd. (0101.HK, 23-Oct-2013, HKD 25.55), Overweight/Negative, J Henderson Land Development Co., Ltd. (0012.HK, 23-Oct-2013, HKD 46.45), Equal Weight/Negative, J Hongkong Land Holdings Ltd. (HKLD.SI, 23-Oct-2013, USD 6.26), Underweight/Negative, D/J/K/L/N Hysan Development Co., Ltd. (0014.HK, 23-Oct-2013, HKD 35.85), Equal Weight/Negative, J Kerry Properties Ltd. (0683.HK, 23-Oct-2013, HKD 33.30), Underweight/Negative, J/K/N Link REIT (0823.HK, 23-Oct-2013, HKD 38.90), Equal Weight/Negative, J Midland Holdings Ltd. (1200.HK, 23-Oct-2013, HKD 3.05), Underweight/Negative, J New World Development Co., Ltd. (0017.HK, 23-Oct-2013, HKD 10.96), Underweight/Negative, J Sino Land Co., Ltd. (0083.HK, 23-Oct-2013, HKD 11.18), Underweight/Negative, J Sun Hung Kai Properties Ltd. (0016.HK, 23-Oct-2013, HKD 101.60), Underweight/Negative, C/J Swire Properties Ltd. (1972.HK, 23-Oct-2013, HKD 21.45), Underweight/Negative, D/E/J/K/L/M/N Wharf (Holdings) Ltd. (0004.HK, 23-Oct-2013, HKD 67.65), Underweight/Negative, C/J Other Material Conflicts The Corporate and Investment Banking Division of Barclays Bank PLC is providing investment banking services to Telefonica SA on the sale of o2 Ireland to Hutchison Whampoa. Disclosure Legend: A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in the previous 12 months. B: An employee of Barclays Bank PLC and/or an affiliate is a director of this issuer. C: Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by this issuer or one of its affiliates. 28 October 2013 132 Barclays | Hong Kong Property IMPORTANT DISCLOSURES CONTINUED D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer within the next 3 months. F: Barclays Bank PLC and/or an affiliate beneficially owned 1% or more of a class of equity securities of the issuer as of the end of the month prior to the research report's issuance. G: One of the analysts on the coverage team (or a member of his or her household) owns shares of the common stock of this issuer. H: This issuer beneficially owns 5% or more of any class of common equity securities of Barclays Bank PLC. I: Barclays Bank PLC and/or an affiliate has a significant financial interest in the securities of this issuer. J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of this issuer. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from this issuer within the past 12 months. L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. O: Barclays Capital Inc., through Barclays Market Makers, is a Designated Market Maker in this issuer's stock, which is listed on the New York Stock Exchange. At any given time, its associated Designated Market Maker may have "long" or "short" inventory position in the stock; and its associated Designated Market Maker may be on the opposite side of orders executed on the floor of the New York Stock Exchange in the stock. P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for remuneration, other than normal course investment advisory or trade execution services. Q: The Corporate and Investment Banking division of Barclays Bank PLC, is a Corporate Broker to this issuer. R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. S: Barclays Capital Canada Inc. is a market-maker in an equity or equity related security issued by this issuer. Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe"). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12- month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking Division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "industry coverage universe": Asia ex-Japan Real Estate Ananda Development PCL (ANAN.BK) Ascendas REIT (AEMN.SI) CapitaCommercial Trust (CACT.SI) CapitaLand (CATL.SI) CapitaMall Trust (CMLT.SI) CapitaMalls Asia (CMAL.SI) Champion REIT (2778.HK) Cheung Kong (Holdings) Ltd. (0001.HK) Chong Hong Construction Co. (5534.TW) 28 October 2013 133 Barclays | Hong Kong Property IMPORTANT DISCLOSURES CONTINUED City Developments (CTDM.SI) Far Eastern New Century Corp. (1402.TW) Farglory Land Development Co., Ltd. (5522.TW) Hang Lung Properties Ltd. (0101.HK) Henderson Land Development Co., Ltd. (0012.HK) Hongkong Land Holdings Ltd. (HKLD.SI) Huaku Development Co., Ltd. (2548.TW) Hung Poo Real Estate Development Corp. Hysan Development Co., Ltd. (0014.HK) (2536.TW) Keppel Land (KLAN.SI) Keppel REIT (KASA.SI) Kerry Properties Ltd. (0683.HK) Kindom Construction (2520.TW) Link REIT (0823.HK) Mapletree Industrial Trust (MAPI.SI) Mapletree Logistics Trust (MAPL.SI) Midland Holdings Ltd. (1200.HK) New World Development Co., Ltd. (0017.HK) Prince Housing & Development Corp. Sino Land Co., Ltd. (0083.HK) Sun Hung Kai Properties Ltd. (0016.HK) (2511.TW) Suntec REIT (SUNT.SI) Swire Properties Ltd. (1972.HK) Taiwan Fertilizer Co., Ltd. (1722.TW) Wharf (Holdings) Ltd. (0004.HK) Distribution of Ratings: Barclays Equity Research has 2461 companies under coverage. 44% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 50% of companies with this rating are investment banking clients of the Firm. 39% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 45% of companies with this rating are investment banking clients of the Firm. 14% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 41% of companies with this rating are investment banking clients of the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Guide to the POINT® Quantitative Equity Scores: The POINT Quantitative Equity Scores (POINT Scores) are based on consensus historical data and are independent of the Barclays fundamental analysts’ views. Each score is composed of a number of standard industry metrics. A high/low Value score indicates attractive/unattractive valuation. Measures of value include P/E, EV/EBITDA and Free Cash Flow. A high/low Quality score indicates financial statement strength/weakness. Measures of quality include ROIC and corporate default probability. A high/low Sentiment score indicates bullish/bearish market sentiment. Measures of sentiment include price momentum and earnings revisions. These scores are valid as of the date of this report. To view the latest scores, which are updated monthly, click here. 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