Equities REMD
June 2019 By: Michelle Kwok, Pratik Ray and Raymond Liu www.research.hsbc.com
SPOTLIGHT Asia Real Estate Co-working Why hot desks are such hot property
Co-working has evolved from a market that did not exist a few short years ago to one that is growing exponentially today
Select real estate developers have made a head start by establishing their own co-working brands, which reflects their constructive view on the co-working market
We see developers including SOHO China (Upgrade to Buy), Shimao (Hold), COLI (Buy), Champion REIT (Hold), Swire Properties (Buy), Hongkong Land (Buy), Capitaland (Buy) and Frasers Property (Buy) as best positioned to benefit from the trend
Play interview with Michelle Kwok and Raymond Liu
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Equities ● REMD June 2019
Why read this report?
We analyse how the fast-growing regional co-working market will likely evolve over the next few years
We think co-working is complementary to the traditional real estate market – they can share different slices of the same pie
We identify winners that appear well positioned to ride the positive momentum; some may have long-term aspirations for spin-offs
The key messages
Hot desks, hip-hop soundtrack and a pool table in the communal area, great wi-fi, printers that work, yoga classes, great location, and, most importantly, low rents … these are all the ingredients you need for a really cool, co-working office.
Michelle Kwok* We first wrote about this hot topic last year after it became apparent that this new phenomenon Head of Real Estate Research, Asia Pacific was becoming the talk of the real estate industry (Primer on co-working, 20 November 2018). The Hongkong and Shanghai Since then, the buzz has only become louder. What’s interesting is that this is not just about Banking Corporation Limited [email protected] start-ups and freelancers anymore. Larger companies and even multinationals are getting +852 2996 6918 involved in co-working as they want to shake up their corporate structures and working routines.
* Employed by a non-US affiliate of HSBC In our view, co-working, which did not exist only a few years ago, is here to stay. In the long term, it Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations has the potential to play a significant role in the leasing of traditional office space. And no one in the industry wants to miss out. Recognising the wide-ranging implications for the commercial real estate market, property companies and landlords in the region have already started to dip their toes into the market. Some have got a head start by establishing their own co-working brands.
This report takes a more regional approach, looking at the co-working market in Hong Kong, leading cities in China, as well as Singapore. We analyse how the co-working office market will likely evolve in these markets in the next few years, explain why the new phenomenon is complementary rather than disruptive to the traditional office market, and identify the likely winners among our coverage.
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Facts and figures about the co-working industry
Global The number of co-working tenants and spaces worldwide is expected to reach 3.8m and 24,306 in 2020, up 627% and 211% from 2015 levels, according to Emergent Research.
Asia Pacific Flexible workspace in Asia Pacific surged 150% from 2014 to 2017 and the number of major flexi workplace operators has more than doubled in the region during the period, according to JLL.
Greater China Three markets (Beijing, Shanghai and Hong Kong) and three operators (UCommune, Naked Hub (which merged with WeWork in April 2018), and WeWork) dominate China’s co-working industry, jointly accounting for one-fifth of co-working office locations in these cities.
The estimated number of Chinese (including Hong Kong) unicorns and start-ups, a major driver of co-working office demand, has grown 41-fold from two in 2013 to 93 in January 2019, according to CB Insights.
China Co-working office turnover surged 87% y-o-y in 2018, significantly above the 42% y-o-y growth for the overall sharing economy turnover, according to the State Information Center.
Domestic operators account for 79% of market share in co-working offices in tier-1 cities.
Hong Kong More than 90% of the top 200 occupiers in Hong Kong are considering making flexible workspace part of their real estate strategy in 2017, according to Colliers.
Hong Kong co-working office space is expensive versus other major cities in Asia Pacific. Average cost per desk reached USD1,100/month, representing 1.7x the average cost per desk in Singapore, 1.9x for Beijing, 3.4x for Shanghai and 2.2x that of Sydney.
Singapore Singapore had 36 co-working operators operating out of 120 locations as of July 2018, almost 2x the number of operators and locations from four years ago, representing c20% CAGR over this period on both counts.
Co-working operators make up c20% of gross take-up in the office market in Singapore’s CBD, although operator occupancy remains less than 4% of total CBD office stock (2017: less than 2.5%), according to Colliers.
Corporate actions WeWork, the largest global co-working space operator, reportedly valued at USD47bn (2013: USD318m), has recently filed for an IPO. In 1H18, WeWork has opened 87 new locations in 12 new cities and five new countries since the start of 2018, while total memberships were up 110% y-o-y during the period. In 2019, it plans to open 5 to 15 co-working offices in China each month and expand to over 10 cities from the current 8 cities.
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Contents
Why read this report? 1 Hong Kong 23 The key messages 1 The co-working market 23 Facts and figures about the Co-working opportunities 23 co-working industry 2 Risks 24 Opportunities for Hong Kong Hot desks, hot property 4 property companies 25 Major deals across Hong Kong 26 Related research 5 China (tier-1 cities) 27 Hot desks, hot property 8 Co-working in China – enormous Co-working beckons 8 room to grow 27 Past (non-existent), present Opportunities for co-working (booming) & future (consolidation) 8 operators in China 27 The linkages: co-working Risks involved in the business and real estate 9 model 29 Quantifying the size of regional Co-working office turnover to grow markets 9 quickly in the next few years 30 Our view on co-working 12 Developers are stepping into the Winners in the region 12 co-working market 31 Rating change: SOHO China 15 Co-working deals across cities 33 Risks associated with co-working 16 Singapore 34 Quantifying the size of the Vibrant environment for start-ups co-working market 17 and small businesses 34 How fast can the co-working Co-working landscape 36 market grow? 17 Opportunities and winners 37 A booming market: 34% CAGR Potential risks related to co-working 39 (2018-21e) in co-working turnover 18 Valuation and risks 41 ESG considerations 21 Contributing to the Sustainable Financials & valuation 43 Development Goals 21 Disclosure appendix 57
Disclaimer 60
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Hot desks, hot property
Co-working office (CBD) projected turnover CAGR 2018-2021e Regional winners: developer office exposure (gross asset value)
China Shenzhen SOHO China 72% 74% Shimao 19% (1.0% co-working office COLI (HKD) 11% penetration rate 2018) China SCE 9% Joy City 9% Sino-Ocean 9% Singapore China Jinmao 8% 29% Yanlord 7% (3.9%) CRL 3% KWG 2% GZ R&F 2% Hong Kong Agile 1% 17% CIFI 1% (3.0%) SZ Investment 0% Longfor 0% Beijing Logan 0% 41% CG 0% (2.9%) Hong Kong Guangzhou Champion 70% 38% Swire Prop 54% HKL 48% (2.0%) Hysan 43% W-REIC 28% Shanghai SHKP 20% 15% Wheelock 19% (8.0%) HLD 17% HLP 14% Sino 13% Number of co-office/flexible workspace (CBD) CKA 10% MTRC 5% 11 285 45 46 113 Link REIT 5% Kerry 4% Shenzhen Shanghai Beijing HK Singapore Wharf 4% Langham 0% MNACT 0% Flexible workspace in Average cost per desk per month in HX REIT 0% Asia Pacific surged Asia Pacific (USD 2018) 1,100 Singapore 150% CapitaLand CT 95% Keppel REIT 85% from 2014 to 2017 648 500 Suntec REIT 56% 320 Mapletree CT 26% CapitaLand 19% Frasers Property 14% Hong Kong Singapore Sydney Shanghai CapitaLand MT 10%
Source: Colliers, JLL, Company data, HSBC estimates
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Related research
Recommended reading...
Primer on co-working 20 Nov 2018
Co-working – Takeaways from investor lunch with WeWork 23 Nov 2018
How big’s the gig 10 key questions on the gig economy 24 Apr 2019
The future of cities – Tech solutions to five urban challenges 19 Sept 2018
Sustainability engaged An investor engagement guide to the UN’s SDGs 15 Mar 2019
Powering the data revolution Powering the data revolution 30 May 2019
Leapfrog technologies How space-based tech can help EM 9 Oct 2018
The Nomadic Investor Unbundling the City: Beyond Urbanisation 2 May 2017
The Nomadic Investor Transport shock: autonomous today, virtual tomorrow 19 Oct 2016
The Nomadic Investor AI: the new collective super-mind 6 Jun 2016
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Figure 1: Co-office/flexible workspace centres in major cities
Space occupied by Flexible Workspace (%) 2018 3.0% 3.9% 8.0% 2.9% 8.0% 1.0% 1.9% 2.5% 2.6% 1.6% 4.0% 17.6% 17.6% 2017 2.8% 2.4% 5.8% 2.3% - - - 2.0% 2.0% - - 2.0% 2.0% Vacancy rate (%) 2.2% 8.1% 13.9% 8.7% 24.6% 15.6% 16.7% 5.0% 5.9% 6.4% 15.0% 3.9% 3.9%
Average rent Grade A $190 $74 $54 $36 $22 $45 $33 $21 $56 $45 $51 $26 $26 (USD/sq ft/annum)
Source: Colliers, HSBC
6
Figure 2: Co-office/flexible workspace centres in major cities BEIJING 45
9 CHENGDU
SHANGHAI 285 11 SHENZHEN $580
HONG KONG 46 $190 $320 27 DELHI $210 $680 $1,100 11 MUMBAI $40 MANILA 80
$210 27 BENGALURU $350 SINGAPORE 113
$648 JAKARTA 80
$187
$ Average desk cost (USD/month)
Number of Flexible Workspace centres SYDNEY 52
$500
$575
MELBOURNE 47
June 2019 June
Equities Source: Colliers, HSBC PUBLIC
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Hot desks, hot property
Our previous proprietary analysis of China’s residential property market was based around a central theme – migration-driven housing demand. We believe the movement of talent offer insights into underlying housing demand as population flows imply the need for home purchases. The same logic applies to the commercial real estate market in Asia. Specifically, co-working attracts highly mobile professionals who want greater flexibility in terms of their working lives and office space. This offers an opportunity for real estate companies to adjust their business approach to maximise revenue as the co-working industry gathers steam in the office leasing market. From a regional perspective, we maintain our view that the large property groups are best placed to ride this wave.
Co-working beckons
In previous thematic reports, we explored China’s residential property market through a central theme – how demand for housing is driven by internal migration of professionals. We believe the movement of talent offer insights into underlying housing demand as population flows imply the need for home purchases. The same logic applies to the commercial real estate in Asia.
In this report, we deepen our discussion of co-working office space by taking a regional perspective. Last year, we wrote about the Singapore market, highlighting that co-working was an evolving and fast-growing segment in the commercial real estate market (see Primer on co- working, 20 November 2018). The same is true in Hong Kong and major cities in China, which we have included in our discussion to broaden the scope of our analysis.
Co-working is a hot topic and recently made headlines news when US-based WeWork filed for an IPO. It’s the world’s largest global co-working company valued at US47bn, according to a news article published by Thomson Reuters. The planned listing is raising the level of investor interest in this new business at a time when the market is assessing the merits and longer-term demand drivers of shared office space.
Past (non-existent), present (booming) & future (consolidation)
Co-working, which did not exist as a concept only a few years ago, is now highly visible and growing rapidly. In the long term, we think it has the potential to play a significant role in the leasing of traditional office space. And no one in the industry wants to miss out. Recognising the potential wide-ranging implications for the commercial real estate market, property companies and landlords in the region have already started to dip their toes in the water. Specifically, a select few developers have taken a head start by establishing their own co-working brands.
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For instance, COLI has established its Officezip co-working brand in China; Hong Kong’s Swire Properties has introduced its Blueprint co-working office brand; and in Singapore, Mapletree Investment has launched Coqoons. In our view, this proactive investment approach reflects the real estate developers’ constructive view on the co-working market and the need to secure first mover advantage. Moving ahead, the more competitive market dynamics in the shared office space will inevitably lead to further market consolidation, with the large players better positioned to gain further dominance. Indeed, WeWork’s well-established co-working platform was in part facilitated by its acquisition of Naked Hub in April 2018 for USD400m.
The linkages: co-working and real estate
From a real estate perspective, the market perceives that co-working has the potential to be a disruptive force which could lead to longer-term structural changes to the commercial real estate market globally. That said, we are not sure it is as clear cut as that. We also believe co-working has qualities that are complementary to the office leasing market, for example by offering more flexible lease terms to a niche group of operators.
From a supply/demand perspective, it is clear that there is rising demand from a wide variety of tenants, including start-ups, freelancers as well as large corporates. The popularity of co-working stems from the lower-cost structure, the rise of the millennial workforce and start-ups. Looking at the bigger picture, co-working is part of the shift to a shared economy, innovative approaches to business and the relentless pace of improvements in technology. See House of Tech (22 January 2018), where our proprietary analysis revealed the 14 second-tier cities that we believe are well positioned to attract tech talent.
In terms of real estate developers and landlords, co-working has opened doors and broadened investment options. While large companies generally prefer Grade A office buildings, they are also starting to test the use of co-working spaces. Given that co-working involves tight cost control in terms of rent, most operators have opted for properties outside the Grade A bracket.
As of the end of 1Q18, 75% of all large co-working centres were located in non-Grade A office buildings in the six major city markets in the Greater China regions, according to Cushman & Wakefield. This should benefit rental and capital value trends in the non-Grade A office segment, where in the past it has proved difficult to improve rental yields.
Quantifying the size of regional markets
Figure 3: Co-working across key cities in Asia (ex Japan) HK Shanghai Beijing Guangzhou Shenzhen Singapore Sydney Melbourne Jakarta No. of flexible workspace centres in CBD 46 285 45 40 11 113 52 47 80 Co-working (% of CBD stock) (2017) 2.80% 5.80% 2.30% - - 2.40% 2.00% - - Co-working (% of CBD stock) (2018*) 3.00% 8.00% 2.90% 2.0% 1.00% 3.90% 2.60% 1.60% 1.90% CBD vacancy rate (%) 2.20% 13.90% 8.70% 6.5% 15.60% 8.10% 5.90% 6.40% 16.70% Average desk cost (USD per month) 1,100 320 580 - 680 648 500 575 187 Average Grade-A rents (USD per month) 15.8 4.5 3 - 3.8 6.2 4.7 3.8 2.8 % of space taken up by co-working (2017) 15% 18% 20% - 2.60% 1% 26% 27% 19% Source: Colliers, HSBC. Note: *Colliers estimate
We quantify the size of the regional co-working markets (Hong Kong, China (tier-1 cities) and Singapore) by projecting their respective future turnover trend and implied growth rate. Our analysis reveals strong but divergent co-working turnover growth rates across different regions, with a 33% average CAGR during 2018-21e across the six markets being studied. Not
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surprisingly, the divergence is most meaningful within the four tier-1 Chinese cities – Beijing, Shanghai, Guangzhou and Shenzhen. Among these, Shenzhen and Beijing are seen to have the highest potential, with projected co-working turnover CAGRs at 74% and 41% during 2018-2021e, on our estimates, much higher than Guangzhou (38% CAGR) and Shanghai (15% CAGR) during the same period. We see the developed markets, Hong Kong and Singapore, growing at 17% and 29% CAGRs in 2018-21e, respectively.
Figure 4: Co-office turnover and CAGR summary RMBbn 5.0 80% 74% 4.3 4.5 4.1 70% 4.0 60% 3.5 2.8 3.0 2.5 50% 2.5 41% 38% 40% 29% 2.0 30% 1.5 1.2 0.9 1.0 20% 1.0 17% 0.4 0.5 0.5 15% 0.5 0.2 0.2 10% 0.0 0% Shenzhen Beijing Guangzhou Singapore Hong Kong Shanghai 2018 CBD co-office turnover 2021 CBD co-office turnover CAGR (2018-2021) (RHS)
Source: HSBC estimates
Figure 5: Co-working space penetration rate and size in CBD sqm m 1.00 20.0% 10.5% 0.80 15.0% 0.60 6.4% 10.0% 0.40 5.4% 5.5% 8.0% 4.5% 5.0% 0.20 3.5% 3.9% 2.9% 3.0% 2.0% 1.0% - 0.0% Shenzhen Beijing Guangzhou Singapore Hong Kong Shanghai 2018 Co-office space (sqm m) 2021 Co-office space (sqm m) 2018 penetration rate (RHS) 2021 penetration rate (RHS)
Source: JLL, Cushman and Wakefield, HSBC estimates
Figure 6: Summary of co-working office space, penetration and CAGR 2018 Co-office size in 2018 Co-office turnover Co-working office Co-working office CBD (sqm m) in CBD (RMBm) penetration rate 2018 turnover CAGR 2018-21e Shenzhen 0.07 176 1.0% 74% Beijing 0.05 366 2.9% 41% Singapore 0.10 549 3.9% 29% Guangzhou 0.07 209 2.0% 38% Hong Kong 0.27 2,531 3.0% 17% Shanghai 0.53 2,843 8.0% 15% Average 3.5% 36% Source: Colliers, JLL, Cushman and Wakefield, HSBC estimates
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Sensitivity analysis We understand that our co-working turnover projections have the highest sensitivity to new office supply in each market. As such, we have applied the same incremental co-working penetration rate assumption across each market, regardless of existing penetration rate.
We find that for every 0.25ppt increase in penetration rate (over the base case) in each year during the forecast period (2019e-21e), co-working sector turnover CAGR (2018-21e) would increase by 5.1%. Shenzhen is the most sensitive city with respect to changes in penetration rate, given the low base effect where the end-2018 co-working penetration rate stood at just 1%. On average, Shenzhen 2018-21e CAGR would increase by 11.7ppt for a 0.25ppt increase in penetration rate (over the base case) for each year in 2019e-21e, vs a 5.1% average for all cities, on our estimates.
Figure 7: Sensitivity of changes in penetration rate in 2019e-2021e ______Change in penetration rate (ppt) ______-1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 Beijing 7 17 26 34 41 47 52 58 63 2018-2021e Guangzhou -5 9 20 30 38 45 52 58 63 co-working Shanghai 3 6 9 12 15 18 20 23 25 turnover Shenzhen -9 24 45 61 74 86 97 106 114 CAGR (ppt) Hong Kong -10 -1 6 12 17 23 27 32 36 Singapore 5 12 18 24 29 34 39 43 47 Average -1 11 21 29 36 42 48 53 58 Source: Company data, HSBC
Figure 8: Sensitivity of changes in penetration rate in 2019e-2021e ______Change in penetration rate (ppt) ______-1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 Beijing -33.3 -23.1 -14.4 -6.8 0.0 6.2 12.0 17.3 22.3 Change in Guangzhou -42.2 -28.4 -17.4 -8.1 0.0 7.3 13.9 19.9 25.6 2018-2021e Shanghai -12.2 -8.9 -5.8 -2.8 0.0 2.7 5.2 7.7 10.1 turnover CAGR Shenzhen -83.3 -50.7 -29.7 -13.5 0.0 11.7 22.0 31.4 40.0 relative to Hong Kong -27.1 -18.9 -11.8 -5.6 0.0 5.1 9.8 14.2 18.3 base case (ppt) Singapore -24.6 -17.4 -11.0 -5.3 0.0 4.9 9.4 13.7 17.7 Average -32.0 -21.2 -13.0 -6.1 0.0 5.4 10.4 15.0 19.3 Source: Company data, HSBC
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Our view on co-working
The rise of the co-working segment in the office industry is a structural and longer-term trend that we think is here to stay. It satisfies the needs of corporates and start-ups looking for a self-contained workplace with more flexible lease terms than for traditional office space. Overall, we don’t think co-working will be a major disruptive force. As mentioned earlier, it has complementary qualities such as helping tenants looking for more flexible lease terms.
That said, well-established and large enterprises are likely to maintain their preference for traditional multi-year office leases which facilitate long-term planning. Even so, we note that some of these large corporates have allocated a small proportion of total leased GFA in the co- working segment in order to cater to business segments that require more flexible staff mobility.
Over time, we expect the co-working market to consolidate, driven by mergers and acquisitions. We also think the penetration rate will continue to pick up steadily. The key to survival depends on innovation in services to enhance the stickiness of users, monetising the businesses apart from purely rental income, and being able to cater for the specific needs of different companies. For example, some co-working operators provide a wide range of wellness courses, including yoga, dance classes and body combat lessons. This enables members to achieve a more balanced style of work and, in turn, increase user stickiness.
In summary, we believe co-working space is complementary to traditional office space, sharing a slice of the pie in the overall office leasing market. Against this backdrop, we believe it makes sense for developers to devote a portion of their resources to co-working. In the long run, co- working space will create synergies for real estate companies, drawing conventional office tenants to co-share common areas and facilities offered by the co-working operator on the same premises.
Winners in the region
China: COLI, Shimao and SOHO We believe Chinese developers are in a good position to compete with pure co-working office operators due to strong cash flow from their property development business and the presence of sizable investment property portfolios. In fact, many developers are actively exploring the co- working business model. Among stocks in our coverage universe, SOHO China (72% GAV exposure), Shimao (19%) and COLI (11%) are best positioned to benefit from the rise of this trend.
All three companies have their own co-working brand. SOHO China has established SOHO 3Q, while COLI and Shimao launched Officezip and MWorks, respectively. Although the contribution to total revenue remains small, we believe there is upside potential as developers ride on the increasingly popular co-working office wave. With their solid financial liquidity, developers may also capitalize on co-working M&A opportunities to broaden their presence, driving co-working sector consolidation.
In the long run, developers could grow their co-working businesses sufficiently to be large enough for possible spin-offs or separate listings, which would help unlock value from their overall property portfolios. Indeed, SOHO has signalled a potential spin-off plan for its SOHO 3Q co-working brand but we believe it would be unlikely to happen in the next 12 months.
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Figure 9: China: Office exposure in terms of GAV SOHO China 72% Shimao 19% COLI (HKD) 11% China SCE 9% Joy City 9% Sino-Ocean 9% China Jinmao 8% Yanlord 7% CRL 3% KWG 2% GZ R&F 2% Agile 1% CIFI 1% SZ Investment 0% Longfor 0% Logan 0% CG 0%
0% 10% 20% 30% 40% 50% 60% 70% 80% Source: Company data, HSBC estimates Note: Longfor has only minimal office exposure and they have not separately disclosed the exposure. Some of their co-working office is light asset operating model and therefore no separate valuation is provided by the company.
Figure 10: Summary of developers’ involvement in co-working space Relationship with the Developer Brand developer Remarks Longfor Easywork Own brand Shanghai only. 800 seats in Hongqiao Paradise Walk SOHO SOHO 3Q Own brand 31 centres with c30k seats in seven cities in China CRL CR Union Own brand CR Union is a new office brand launched in 2019. It will launch six projects during the year including some co-working offices. COLI Officezip Own brand 12 centres in 6 cities in China CIFI Workingdom Partnership Launching three co-working office centres in 2019 in Beijing Shimao MWORKS Own Brand Opened MWORKS in Nanjing Software Valley with 3,500sqm GFA Country Garden Fountown Partnership Entered into strategic partnership agreement in various area including co-working. The first project was launched in Shanghai in mid-2018. Gemdale WeWork Partnership Entered a revenue sharing agreement with WeWork. Converting its own office into a new co-working centre in Shenzhen. Sino-Ocean WeWork Partnership WeWork entered first real estate strategic partnership with Sino- Ocean, which now has 6 co-working locations in co-operation with WeWork across Beijing, Shanghai, Chengdu and Shenzhen. Nashwork Investment Participated in a financing (series B+ round) with Beijing-based Nashwork in June 2018. OKspace Own brand Presence in Hangzhou and Beijing China SCE Funwork Investment Established by chairman’s son. China SCE has a stake. Source: Local media, company data, HSBC
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Hong Kong: Champion REIT, Swire Properties and Hongkong Land We believe office landlords are in a good position to collaborate with the pure co-office operators, as they are a new source of demand for office space. This could provide an incremental rental uplift in the medium term. Champion REIT, Swire Properties and Hongkong Land have good exposure to the office market in Hong Kong, which will allow them to ride this wave of new demand.
Swire Properties is one of the few major companies to launch a co-working brand – “Blueprint” – in Quarry Bay. The company sees it as a way to add value and diversity to their office buildings.
Figure 11: Hong Kong property – HK office exposure (% of total GAV) 80% 70% 60% 50% 40% 30% 20% 10%
0%
HKL HLP
HLD Sino
CKA
Kerry
Wharf
SHKP
Hysan
MTRC
MNACT
W-REIC
HX REIT HX
Wheelock REIT Link
Langham
Champion Swire Prop Swire
Source: Company data, HSBC estimates
Singapore: Capitaland and Frasers Property Some of the largest property groups in Singapore are among the best placed to ride the co- working wave. They have office exposure through their office REITs and have themselves invested in co-working operators or collaborated with them in one way or the other. In the listed space, these include large property groups such as CapitaLand and Frasers Property.
Large office landlords in Singapore could benefit from co-working demand. Many of these landlords are office REITs, which are sponsored by the large property groups.
Lastly, if there are positive implications for commercial real estate (offices and shopping malls) in cities like Singapore, then the large property groups and their listed subsidiaries and associates, including their sponsored REITs, would be the go-to names for investors seeking exposure to commercial real estate in Singapore through listed proxies.
Figure 12: Prominent property groups with exposure to co-working Date Property group Country Property assets Operator Co-working related investment Oct-18 CapitaLand Singapore cSGD93bn (group managed The Work Project SGD27m (USD19.7m) real estate assets) Kingdom May-18 City Developments Singapore cSGD20bn (total assets) Distrii RMB102m (USD14.8m) May-18 Frasers Property Singapore cSGD32bn (total group assets) JustGroup Holdings USD60m Feb-18 CapitaLand Singapore cSGD93bn (group managed Flexi-Suites Flexi-Suites is CapitaLand’s real estate assets) co-working offering Nov-17 Keppel Corp Singapore cSGD29bn (assets under KLOUD KLOUD is Keppel’s management) co-working offering Dec-17 Mapletree Singapore cSGD46bn (assets under CoQoons CoQoons is a subsidiary of Investments management) Mapletree Oct-15 Keppel Corp Singapore cSGD29bn (assets under Workspace Workspace is Keppel’s management) co-working offering Source: Company announcements, HSBC
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Figure 13: Singapore property: Office exposure (% of total GAV)
CapitaLand Commercial Trust 95%
Keppel REIT 85%
Suntec REIT 56%
Mapletree Commercial Trust 26%
CapitaLand 19%
Frasers Property 14%
CapitaLand Mall Trust 10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Company data, HSBC estimates
Rating change: SOHO China
With this report, we upgrade SOHO China to Buy from Hold, mainly due to the company’s attractive valuation. The stock has corrected c20% since end-March and is now trading at a 76% discount to our NAV estimate and 0.34x price-to-book, both at around 1.5 SD below the historical mean. While we contend that while SOHO’s business model is relatively more passive and lacks excitement from a growth perspective, it is uniquely positioned as a stable commercial real estate player and enjoys first mover advantage as a co-working office operator in China. Operationally, completion of two new commercial properties − SOHO Leeza in the Lize District in Beijing and Gubei SOHO in the Changning District in Shanghai − is set to strengthen its recurrent income stream, enhancing SOHO’s ability to pay a stable dividend in the longer term.
We keep our target price unchanged at HKD3.30, based on an unchanged target NAV discount of 70% (1 SD below mean since 2012), applied to our unchanged NAV estimate of HKD10.90 per share. With 27% implied upside to our TP, we upgrade SOHO from a Hold to a Buy rating. Key downside risks include: 1) uncertainties related to SOHO 3Q; 2) slower-than-expected lease-up progress and rental of new offices; 3) uncertainties in dividend outlook; and 4) macro and property policy uncertainties in China, especially in the commercial property market.
Figure 14: SOHO NAV discount Figure 15: SOHO trailing PB
-20% 1.0 -30% -40% 0.8 -50% 0.5 -60% -70% 0.3 -80% -90% 0.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2013 2014 2018 2019 2015 2016 2017 % to NAV +1 SD 2012 Trailing PB (x) +1SD Mean -1 SD Mean -1SD
Source: Company data, Bloomberg, Refinitiv, HSBC estimates Source: Company data, Bloomberg, Refinitiv, HSBC estimates
SOHO aside, we have left our ratings and earnings estimates of all other stocks under our coverage universe unchanged in this report.
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Risks associated with co-working
Hong Kong Hong Kong has seen a rapid expansion in co-working spaces in the last few years as the number of operators has increased. Savills believes that the HK co-working market has become too crowded and that demand is not catching up with the investments made. The market will continue to grow but the competition is going to be intense due to a price war. As a result, Savills thinks the number of operators who are heavily reliant on funds from venture capitalists will come down.
China With low entry barriers, it’s relatively easy for co-working operators with limited experience in commercial real estate to set foot in the market, resulting in a surge in the number of operators in recent years. Many operators attempted to replicate the business model and office design of existing operators. Based on the experience of other shared economic industries in China, such as bikes and mobile chargers, it could easily develop into a vicious cycle of price competition which exerts downward pressure on profitability. Without the support of stable earnings, operators may find it difficult to sustain the current mode of operation if the macro environment deteriorates, impacting overall investment sentiment and office space demand from smaller enterprises.
Singapore As most co-working firms have emerged only in the past few years, they have not been around long enough to have experienced a recession. In Singapore, there are more than a hundred different companies in the co-working space, most of which are small. We think it is likely that many of these firms would go bankrupt in the event of a recession, if and when it occurs.
Given the impact a recession, if and when it occurs, could have on co-working operators, it is only natural that market participants would factor in more conservative assumptions around cash flows, cash flow volatility, and/or valuation cap rates for assets that have a substantial proportion of tenants as co-working operators. As such, while co-working may boost investment demand for commercial assets for the overall market, assets that have a very high proportion of co-working tenants could be viewed adversely. However, the extent to which such perceptions may impact valuations and the thresholds that may trigger such adverse perceptions remain unclear.
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Quantifying the size of the co-working market
We quantify the size of the regional co-working markets by projecting their future turnover trend
We project an average CAGR of 33% in co-working turnover during 2018-21e across the six markets being studied
Our analysis reveals a divergence in the turnover growth rate across different regions, most notably in the four tier-1 cities in China
How fast can the co-working market grow?
In this section, we quantify the size of the regional co-working markets (Hong Kong, China (tier-1 cities) and Singapore) by projecting their respective future turnover trend and implied growth rate. Our analysis is based on three input metrics for calculation of annual office turnover:
CBD office stock data (GFA)
Current effective rent
Vacancy rate
In terms of key assumptions, the key variables are property consultants’ future property stock projection (2019-23) and future co-working penetration rate. The data for the co-working segment is fragmented and limited, while current penetration rates range from just 1% in Shenzhen to 8% in Shanghai. On the other hand, developed markets such as Hong Kong and Singapore have a fairly consistent co-working penetration rate at 3-4%, according to Colliers.
Methodology Calculate total office turnover in each region in 2019-23, based on the three inputs as highlighted above and the respective annual office new supply
Calculate co-working space turnover in 2019-23, based on the applicable penetration rate and assumed annual increase in co-working penetration
Calculate the implied growth in co-working space turnover over 2019-23
Shortcomings of our analysis: Our analysis uses CBD office stock data as the core input for calculation, due to limited data availability on the overall office market in each region
Assumption of future co-working penetration rate is arbitrary, where the annual incremental increase is the same across region at 1% y-o-y through 2020 and 0.5% y-o-y in 2021.
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A booming market: 34% CAGR (2018-21e) in co-working turnover
Our analysis reveals strong but divergent co-working turnover growth rate across different regions, with a 34% CAGR during 2018-20 across the six markets being studied. Not surprisingly, the divergence is actually most meaningful within the four tier-1 Chinese cities – Beijing, Shanghai, Guangzhou and Shenzhen. Among these, Shenzhen and Beijing are seen to have the highest potential, with projected co-working turnover CAGR at 75% and 41% during 2018-2021e, much higher than Guangzhou (38% CAGR) and Shanghai (15% CAGR) during the same period. The developed markets, Hong Kong and Singapore, are projected to grow at 17-29% CAGR in 2018-22e.
Figure 16: Co-office turnover and CAGR summary RMBbn 5.0 80% 74% 4.3 4.5 4.1 70% 4.0 60% 3.5 2.8 3.0 2.5 50% 2.5 41% 38% 40% 29% 2.0 30% 1.5 1.2 0.9 1.0 20% 1.0 17% 0.4 0.5 0.5 15% 0.5 0.2 0.2 10% 0.0 0% Shenzhen Beijing Guangzhou Singapore Hong Kong Shanghai 2018 CBD co-office turnover 2021 CBD co-office turnover CAGR (2018-2021) (RHS)
Source: HSBC estimates
Figure 17: Co-working space penetration rate and size in CBD sqm m 1.00 20.0% 10.5% 0.80 15.0% 0.60 6.4% 10.0% 0.40 5.4% 5.5% 8.0% 4.5% 5.0% 0.20 3.5% 3.9% 2.9% 3.0% 2.0% 1.0% - 0.0% Shenzhen Beijing Guangzhou Singapore Hong Kong Shanghai 2018 Co-office space (sqm m) 2021 Co-office space (sqm m) 2018 penetration rate (RHS) 2021 penetration rate (RHS)
Source: JLL, Cushman and Wakefield, HSBC estimates
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Figure 18: Co-working market size forecast 2018 2019e 2020e 2021e CBD stock GFA (sqm) (A) Beijing 1,824,223 2,452,223 2,692,223 2,692,223 Guangzhou 3,358,557 3,582,428 3,582,428 4,004,272 Shanghai 6,681,606 7,012,487 7,143,487 7,472,247 Shenzhen 6,883,000 8,637,000 10,622,000 11,773,000 Hong Kong 8,945,836 9,223,513 9,245,615 9,434,552 Singapore 2,610,575 2,685,084 2,786,812 2,845,806
Effective rent (RMB/sqm/month) (B) Beijing 608 629 630 644 Guangzhou 277 277 280 287 Shanghai 496 491 497 511 Shenzhen 250 240 230 230 Hong Kong 820 838 812 699 Singapore (SGD/sqm) 103 114 116 119
Annual office turnover (RMBm) (C= A x B x (1-vacancy rate)) Beijing 12,632 16,065 18,168 18,828 Guangzhou 10,427 10,850 11,145 12,106 Shanghai 35,537 36,604 38,503 41,208 Shenzhen 17,552 19,651 22,867 26,645 Hong Kong 84,371 87,576 85,040 74,507 Singapore (SGDm) 2,807 3,276 3,488 3,701
Co-working office penetration into CBD stocks (D) Beijing 2.9% 3.9% 4.9% 5.4% Guangzhou 2.0% 3.0% 4.0% 4.5% Shanghai 8.0% 9.0% 10.0% 10.5% Shenzhen 1.0% 2.0% 3.0% 3.5% Hong Kong 3.0% 4.0% 5.0% 5.5% Singapore 3.9% 4.9% 5.9% 6.4%
Co-working space in CBD (sqm) Beijing 52,902 95,637 131,919 145,380 Guangzhou 67,171 107,473 143,297 180,192 Shanghai 534,528 631,124 714,349 784,586 Shenzhen 68,830 172,740 318,660 412,055 Hong Kong 268,375 368,941 462,281 518,900 Singapore 101,812 131,569 164,422 182,132
Total co-working space turnover in CBD (RMBm) (E = C x D) Beijing 366 627 890 1,017 Guangzhou 209 326 446 545 Shanghai 2,843 3,294 3,850 4,327 Shenzhen 176 393 686 933 Hong Kong 2,531 3,503 4,252 4,098 Singapore 548.62 804.58 1,031.32 1,187.05 Singapore (SGDm) 109 161 206 237
Total co-working space turnover growth (CBD) Implied growth CAGR 2021e vs 2018 2018-2021e Beijing 143% 41% Guangzhou 114% 38% Shanghai 35% 15% Shenzhen 291% 74% Hong Kong 68% 17% Singapore 88% 29% Average 123% 36% Source: Colliers, JLL, Cushman and Wakefield, HSBC estimates
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Sensitivity analysis We understand that our co-working turnover projection has the highest sensitivity to new office supply in each market. We have applied the same incremental co-working penetration rate assumption across each market, regardless of the existing penetration rate.
We find that for every 0.25ppt increase in penetration rate (over the base case) in each year during the forecast period (2019e-21e), co-working sector turnover CAGR (2018-21e) would increase by 5.1%. Shenzhen is the most sensitive city with respect to changes in penetration rate, given the low base effect where at end-2018 the co-working penetration rate stood at just 1%. On average, Shenzhen 2018-21e CAGR would increase by 11.7ppt for every 0.25ppt increase in penetration rate (over the base case) for each year in 2019e-21e, on our estimates, vs 5.1% on average for all cities.
Figure 19: Sensitivity of changes in penetration rate in 2019e-2021e ______Change in penetration rate (ppt) ______-1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 Beijing 7 17 26 34 41 47 52 58 63 2018-2021e Guangzhou -5 9 20 30 38 45 52 58 63 co-working Shanghai 3 6 9 12 15 18 20 23 25 turnover Shenzhen -9 24 45 61 74 86 97 106 114 CAGR (ppt) Hong Kong -10 -1 6 12 17 23 27 32 36 Singapore 5 12 18 24 29 34 39 43 47 Average -1 11 21 29 36 42 48 53 58 Source: Company data, HSBC
Figure 20: Sensitivity of changes in penetration rate in 2019e-2021e ______Change in penetration rate (ppt) ______-1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 Beijing -33.3 -23.1 -14.4 -6.8 0.0 6.2 12.0 17.3 22.3 Change in Guangzhou -42.2 -28.4 -17.4 -8.1 0.0 7.3 13.9 19.9 25.6 2018-2021e Shanghai -12.2 -8.9 -5.8 -2.8 0.0 2.7 5.2 7.7 10.1 turnover CAGR Shenzhen -83.3 -50.7 -29.7 -13.5 0.0 11.7 22.0 31.4 40.0 relative to Hong Kong -27.1 -18.9 -11.8 -5.6 0.0 5.1 9.8 14.2 18.3 base case (ppt) Singapore -24.6 -17.4 -11.0 -5.3 0.0 4.9 9.4 13.7 17.7 Average -32.0 -21.2 -13.0 -6.1 0.0 5.4 10.4 15.0 19.3 Source: Company data, HSBC
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ESG considerations
Our analysis of different property companies across the region reveals that co-working offices generate substantial “environmental benefits” which is a key ESG consideration. They provide the ability to work remotely or in flexible locations, while co-working offices also have other sustainable development attributes.
Environmental benefits associated with co-working Buildings are collectively one of the largest contributors to global greenhouse gases through their energy and heating requirements. The traditional model of one company requiring permanent office space has led to a massive increase in building stock. The co-working model, in theory, means fewer overall buildings are required – and that the actual buildings are shared.
In the set-up of co-working offices, equipment, supplies, resources, and common facilities/amenities are shared. This can help to improve resource efficiency – for example, individual and collective energy consumption and wastage – as well as encourage and enable more recycling. At the same time, many of the users of co-working offices are attracted by the flexibility in the lease terms.
Such users could be associated with the so-called “gig economy” where there is much more emphasis on individuals or a small group of people rather than large companies and corporations (see How big’s the gig?, 24 April 2019). These users tend to have lower requirements in terms of interior decoration. That is, they are just looking for a place to work from, which tends to lead to relatively less materials and energy usage from renovation, compared to traditional offices.
Co-working often reduces the number of commutes as the co-working offices are usually set up in multiple locations – this can have a significant environmental benefit as users tend to choose the location closest to where they reside. With fewer (and perhaps shorter) commutes, overall carbon emissions are lower, and fewer localised air pollutants are produced. The extent of the reduction in carbon emissions can vary across locations, and is dependent on the mode of transport as well as availability of public transport infrastructure.
Contributing to the Sustainable Development Goals
We believe the concept of co-working offices can contribute towards some of the UN’s Sustainable Development Goals (SDGs) as follows:
Good health and well-being (SDG 3); Decent work and economic growth (SDG 8) Co-working offices put considerable focus on providing decent working conditions for their users. In addition, many co-working operators try to promote a healthy work-life balance and introduce various classes and events to enhance the well-being of the tenants. These include yoga classes, wine tastings, workshops and social gatherings. These help towards combatting the loneliness that is sometimes found in gig economy or individual workers. In the long term, co-working spaces could enhance productivity and the overall well-being of individuals. According to a survey by WeWork, 78% of its enterprise members believe that WeWork has helped them to attract and retain talent. Some 80% of members say their productivity increased since joining WeWork. The presence of a wide range of start-ups and companies from different industries in a co-working office also creates opportunities for collaboration.
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Industry, innovation, and infrastructure (SDG 9) The use of co-working office space is an innovation on the traditional office model. In some more sophisticated co-working office operators, we see the adoption of AI and Internet of things to analyse the office usage and traffic which helps to optimise the design of the offices. The sharing of meeting rooms, cafeterias, furniture and fixtures as well as various office equipment by tenants can help to reduce fixed asset investment and increase resource efficiency. Selected foreign operators have brought over a co-working business model from a more developed office market, which will help to lift overall standards. In general, co-working office spaces reduce the overall number of buildings required.
Sustainable cities and communities (SDG 11) Co-working offices are usually sited at convenient and accessible locations. The sizable co- working operators even have multiple locations across cities. This provides flexibility to both start-ups and large enterprises in terms of choosing their office locations, with a relatively lower capital commitment versus the traditional office. This contributes to sustainable cities by bringing the (shared) office closer to residential areas and communities. For example, in Beijing, WeWork has used a historical site, Beijing Fun, as a co-working office. It also helps to enhance the usage of the cultural heritage.
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Hong Kong
Hong Kong co-working demand is being driven by start-ups
Deeper partnership between landlords and operators needed for co- working to be beneficial
HK property companies like Hysan, SHKP and Wharf REIC are collaborating with external operators to leverage their advantages
Raymond Liu*, CFA The co-working market Analyst The Hongkong and Shanghai Banking Corporation Limited According to Cushman & Wakefield (C&W), a property consultant, Hong Kong had 68 co-working [email protected] operators as of June 2018, 70% more than in 2016, implying a CAGR of c30%. The rapid growth +852 2996 6743 is being driven by demand from start-ups, fintech companies, freelancers and large corporates. US-based WeWork, China’s Naked Hub and Amsterdam-based Spaces are the major operators in * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ Hong Kong. qualified pursuant to FINRA regulations Hong Kong fintech start-ups raised USD188m in 2018, down 66% from 2017. However, the
number of deals has gone up by 27% y-o-y to 19. In our view, the increased number of deals in the start-up ecosystem is driving up the demand for co-working space.
Figure 21: Fintech funding (VC, PE and M&A activity) in Hong Kong 600.0 22
500.0 20 400.0
300.0 18
200.0 16 100.0
0.0 14 2014 2015 2016 2017 2018 Deal value (USDm, LHS) Number of deals closed (RHS)
Source: FinTech Global, SCMP, HSBC
Co-working opportunities
According to Savills, co-working space operators currently occupy c2.2m sqft in Hong Kong, around double the size at the end of 2017. And according to Colliers, around 3% of total central business district (CBD) stock is estimated to be occupied by co-working operators as of end-2018 and about 15% of total office market take-up was leased by co-working operators as of end-2017. The proportion of new take-up has increased from 25% in 2016 to 29% in 2017. According to Colliers, the take up by co-working operators was 613,000 sqft in 2018 vs 350,000 sqft in 2017.
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The tight vacancy environment in the Hong Kong office market is driving rents up, so the arrival of co-working space operators presents an interesting opportunity for corporates and start-ups alike. Although the original target was start-ups, an increasing number of large corporates are also looking at co-working as they look to save costs, increase the flexibility of their office portfolios, and also leverage the entrepreneurial spirit of co-working environments.
If we look at Asia, China remains the top destination. Shanghai has the highest number of co- working centres, at 285. Its percentage of co-working space is the highest at c8% of its CBD across Asia (according to Colliers). In Hong Kong, the CBD vacancy rate is only 2.2% which means the average desk cost is the highest in Asia at USD1,100 per month.
Figure 22: CBD vacancy rate (%)
18% 16.7% 16% 13.9% 14% 12%
10% 8.7% 8.1% 8% 6.4% 5.9% 6% 5.0% 4% 2.2% 2% 0% Jakarta Shanghai Beijing Singapore Melbourne Sydney Manila Hong Kong
Source: Colliers, HSBC
Risks
Hong Kong has seen a rapid expansion in co-working spaces in the last few years as the number of operators has increased. Savills believes that the HK co-working market has become too crowded and that demand is not catching up with the investments made. The market will continue to grow but the competition is going to be intense due to a price war. The better managed operators will get the funding and thus will survive, according to Savills.
As a result, the number of operators who are heavily reliant on funds from venture capitalists will come down. For example, China-based Kr Space is holding back its expansion plans and evaluating the profitability of each individual project. Kr Space also gave up seven floors (total: 83,000 sqft) pre-leased at One Hennessy in Wan Chai. Chinachem Group, the developer of One Hennessy, has sued Kr Space for not executing the lease agreement, according to SCMP on 10 April 2019.
According to Colliers, there needs to be a strong partnership between co-working space operators and landlords in order to be successful in the long haul. Through better integration, both should strive to give a holistic offering to the tenant. This will enable them to tap what is a huge opportunity.
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Opportunities for Hong Kong property companies
Among Hong Kong property companies, Champion REIT has the highest level of office exposure in Hong Kong (70% of GAV), followed by Swire Properties (54%), Hong Kong Land (48%), Hysan (43%), Wharf REIC (28%) and Sun Hung Kai Properties (20%). For these major companies, adding co-working space to their office portfolios can help enhance the occupancy of floors and provide a better user experience to its occupiers.
These companies are increasingly looking at innovative ways to leverage the advantages of including co-working spaces in their office portfolios. They are embracing this theme either through their in-house concepts or external operators.
Figure 23: Hong Kong property – HK office exposure (% of total GAV) 80% 70% 60% 50% 40% 30% 20% 10%
0%
HKL HLP
HLD Sino
CKA
Kerry
Wharf
SHKP
Hysan
MTRC
MNACT
W-REIC
HX REIT HX
Wheelock REIT Link
Langham
Champion Swire Prop Swire
Source: Company data, HSBC estimates
Beneficial for both landlords and operators Landlords could benefit more if they directly leased small units to occupiers. However, running a big chunk of space is labour intensive and landlords do not have the economies of scale to make this type of operation work efficiently. On the other hand, operators have expertise in leasing office spaces to the occupiers and providing a good design mix as well as community features. Thus, we expect the partnership between landlords and operators to have many benefits, such as economies of scale, the ability for end-users to access multiple sites, and consistency across a portfolio.
Swire Properties leading the way with its “Blueprint” concept Swire Properties is one of first property companies in the Hong Kong to embrace co-working. Its “Blueprint” concept not only provides flexible spaces at its Taikoo Place but also provides value- added amenities like training rooms and auditoriums to its occupiers. Other property companies like Hysan, SHKP and Wharf REIC are collaborating with external operators to leverage the advantages of co-working.
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Major deals across Hong Kong
In the major deal of 2019, WeWork leased six floors (c150,000 sqft) at The Gateway in Tsim Sha Tsui at a monthly rent of HKD60psf. This is the first time WeWork has leased office space in Tsim Sha Tsui. WeWork has also leased several office spaces in Causeway Bay and Wan Chai. The largest deal in 2018 was the leasing of three floors (c77,000 sqft) at The Harbourfront Landmark in Hung Hom for a monthly rent of HKD30psf by local operator Campfire.
The major Hong Kong property companies with good exposure to office sub-segments, like Swire Properties, Hysan, SHKP and Wharf REIC, are collaborating with external operators to leverage the advantages of co-working. Examples include:
Wharf REIC: In 2019, WeWork leased six floors (c150,000 sqft) at Wharf REIC’s The Gateway in Tsim Sha Tsui at a monthly rent of HKD60psf.
Swire Properties: In 2018, The Great Room, a Singaporean co-working space operator, leased a floor (c21, 000 sqft) at One Taikoo Place in Quarry Bay at an estimated monthly rent of cHKD60psf.
Hysan Development: In 2018, WeWork leased a total of 80,000 sqft of space in two office buildings of Hysan’s portfolio in Causeway Bay – 48,000 sqft at Lee Garden One at cHKD80psf per month, and 32,000 sqft at Hysan Place at cHKD90psf per month.
Sun Hung Kai Properties and Henderson Land: In 2016, Flexible office space operator The Executive Centre (TEC) leased a total of 17,000 sqft of space at SHKP/HLD’s Two International Finance Centre in (IFC 2) Central.
Figure 24: Major co-working deals in Hong Kong’s office market Year Operator District Buildings Size (sf) 2019 Victory Offices Central The Center 25,000 2019 WeWork Tsimshatsui The Gateway 150,000 2018 The Great Room Quarry Bay One Taikoo Place 21,000 2018 WeWork Causeway Bay Lee Garden One 48,000 2018 WeWork Causeway Bay Hysan Place 32,000 2018 Campfire Hung Hom The Harbourfront Landmark 77,000 2018 naked Hub Kwun Tong Two Harbour Square 58,000 2018 UR Work Sheung Wan Grand Millennium Plaza 15,000 2017 Spaces Central Sun House 77,000 2017 naked Hub Sheung Wan Bonham Circus 55,000 2017 Spaces Causeway Bay Lee Garden Three 40,000 2017 Campfire Causeway Bay V Point 38,000 2017 Spaces Ngau Tau Kok 133 Wai Yip Street 37,500 2017 Regus Mong Kok 700 Nathan Road 24,000 2017 theDesk Causeway Bay Leighton Centre 17,000 2017 UR Work Sheung Wan One8One Queen’s Road Central 15,500 2017 naked Hub Sheung Wan New Street 13,000 2016 WeWork Causeway Bay Tower 535 90,000 2016 naked Hub Sheung Wan Bonham Circus 60,000 2016 WeWork Wan Chai MassMutual Tower 60,000 2016 The Work Project Causeway Bay Midtown 30,000 2016 TEC Central IFC 2 17,000 Source: Colliers, various newspapers, HSBC
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China (tier-1 cities)
Co-working office space accounts for less than 1% of China’s shared economy, indicating substantial room to grow
Chinese developers are starting to tap into the co-working market
Developers are competitive players in the co-working market due to their strong cash flow and experience in managing rental properties
Michelle Kwok* Co-working in China – enormous room to grow Head of Real Estate Research, Asia Pacific The Hongkong and Shanghai China’s shared economy has been surging over the past few years, as shown in the table Banking Corporation Limited below. Co-working space is a rising trend relevant to the shared economy but it accounts for [email protected] +852 2996 6918 less than 1% of shared economy turnover, so has substantial room to grow.
Albert Tam* Analyst The Hongkong and Shanghai Figure 25: Shared economy turnover breakdown Banking Corporation Limited [email protected] RMB bn 2017 2018 y-o-y Proportion 2017 Proportion 2018 +852 2822 4395 Transport sharing 201 248 23% 9.7% 8.4% House sharing 12 17 38% 0.6% 0.6% Simon Sin* Knowledge and skills sharing 138 235 70% 6.7% 8.0% Associate Living service sharing 1,292 1,589 23% 62.2% 54.0% The Hongkong and Shanghai Banking Corporation Limited Medicare sharing 6 9 57% 0.3% 0.3% [email protected] Co-working office 11 21 87% 0.5% 0.7% +852 2996 6514 Production capacity sharing 417 824 98% 20.1% 28.0% Total 2,077 2,942 42% 100% 100% Max Liang* Source: Company data, HSBC Associate The Hongkong and Shanghai Banking Corporation Limited [email protected] Opportunities for co-working operators in China +852 2996 6629
Based on C&W data, Greater China’s co-working office has surged from a few sizeable venues * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ a few years ago to more than 500 locations in key cities as of end-Q1 2018. Many view co- qualified pursuant to FINRA regulations working as one of the major emerging trends of the knowledge economy. Colliers believes that flexible workspace is no longer a disruption to conventional office space. Indeed, the consultancy cited co-working as a fundamental part of the commercial real estate market and a standalone sector that is important for landlords and occupiers.
Proliferation of startups has boosted demand This trend is highly correlated with the proliferation of start-ups in China, supported by an influx of capital from corporates and venture capital firms. According to Hurun, China has 202 unicorns (start-ups with a value of over USD1bn) as of end-2018, which is the second highest number in the world and is almost 10 times the number in India.
Those at the top of the list include companies such as Ant Financial, Toutiao, Didi, Cai Niao and DJI. Most unicorns are relatively young companies with an average operating history of seven years (70% have an average age of 5.2 years). This trend coincides with the rise of millennials, born in the 1980s and 1990s, who are taking the lead in innovation and entrepreneurial enterprises. KPMG has pointed out that the financial sector has stepped up the promotion of big data technologies in China. Big data, finance and insurance technologies are ranked as the top three financial technologies in the list of top fintech companies it compiled.
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Figure 26: Fintech funding (VC, PE and M&A activity) in China USDm 16,000 45 14,000 40 12,000 35 30 10,000 25 8,000 20 6,000 15 4,000 10 2,000 5
0 0
4Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18
Deal value (USDm) Number of deals closed (RHS)
Source: KPMG, HSBC
Technology advancement has made new ways of co-working possible Given elevated office costs, a number of multinationals are searching for flexible lease terms and cost-saving options provided by co-working operators. At the same time, advancements in technology have made new ways of co-working possible. Colliers has discussed a city campus leasing model that allows businesses with a mobile workforce to access drop-down space across a city. It enables staff mobility with the aid of a digital platform that gives easy access to hot desks or office space across different locations within a co-working operator’s portfolio.
Figure 27: Comparison of co-working office space and traditional office space in China Co-working Traditional office Rent period Flexible, typically 1 month or above Relatively rigid, at least one year Minimum size No GFA requirement, one desk or more At least 100-500 sqm Additional cost No renovation, furniture and utilities Renovation cost, property management and utilities Environment Includes both open/sharing area and private office area. Traditional office space, limited recreation facilities, limited Focus on community and collaboration. Selected operators consideration for community and collaboration. provide gym, swimming pool or other interest classes. Source: Askci Corporation
Enhancing the user experience to create stickiness Colliers describes co-working workspace as a business with low entry barriers. Therefore operators have to strive to maintain user stickiness to maintain occupancy levels, which drives profitability. Bigger operators with a larger end-user base can afford to invest more heavily in shared facilities, which enhances the user experience. For example, Naked Hub has a swimming pool in select locations and offers regular yoga classes to users in all locations. Ucommune offers theatres and cafés in some locations.
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Figure 28: Major co-working office operators No Operator Locations Amenities 1 SOHO 3Q Cities such as Beijing, Shanghai, Hangzhou, Meeting rooms, coffee bar Shenzhen 2 Ucommune 40 cities including Beijing, Shanghai, Nanjing, Meeting rooms, cafe, libraries, gyms, and game rooms. Xi’an, Yantai, Tianjin, and Shenzhen 3 People Squared Beijing, Shanghai, Shenzhen, Ningbo, Meeting rooms, offices, lounges, Hangzhou, Taipei 4 W+COWORK Guangzhou, Beijing, Shanghai, Tianjin, Meeting rooms, booths, water bar, telephone booths, Shenzhen, Suzhou, Qingdao, Ningbo, Xi'an, recreational facilities Chengdu, Urumqi, and Hangzhou 5 SimplyWork Shenzhen Private offices, meeting rooms, lounge, kitchen, coffee bar, smoking areas, telephone booths, gyms 6 TechTemple Beijing, Shenzhen, and Shanghai Meeting rooms and coffee bar 7 Agora Space Shanghai Meeting rooms, private offices, multimedia, storage room, coffee and tea, beers, private garden Source: Company data, HSBC
Risks involved in the business model
With low entry barriers, it is relatively easy for co-working operators with limited experience in commercial real estate to set foot in the market. In China, this has resulted in a surge in the number of operators in recent years. Given that many operators do not have a unique selling point or business model, they often attempt to replicate the business model and office design of existing operators. Based on the experience of other shared economic industries in China, such as bikes and mobile chargers, it could easily develop into a vicious cycle of price competition which exerts downward pressure on profitability.
Co-working office operators have been in expansion mode in China, backed by financing from venture capital and private investors. Operators with strong financial support are starting to take over smaller players. In 2018, WeWork acquired Naked Hub. Another major operator, Ucommune, has acquired four operators – Woo Space, WeDo, New Space and Workingdom. A rise in M&A activity has led to intense competition and sector consolidation. Currently, many players are still in an investment phase. Even industry leader WeWork disclosed that it made an operating loss in FY18 after being in operation for nine years.
Without the support of stable earnings, operators may find it difficult to sustain the current mode of operation if the macro environment deteriorates, impacting overall investment sentiment and office space demand from smaller enterprises.
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Co-working office turnover to grow quickly in the next few years
As discussed in the previous section, there is still ample room for the co-working office segment to grow. However, this is still an evolving segment where limited data is available, so our forecasts are focused on the CBDs of key cities.
Shanghai has the largest supply of offices in the CBD area at 6.7m sqm, which is roughly 3.7x that of Beijing, 2.0x Guangzhou and 1.3x Shenzhen. With a well-developed office market and the presence of numerous multinationals and financial institutions, Shanghai has the largest co- working office penetration rate at 8% as of 2018, versus 1-3% in other tier-1 cities, according to Colliers. We estimate the size (in terms of turnover) of the co-working market at RMB2.8bn, RMB209m, RMB366m and RMB176m in the CBDs of Shanghai, Guangzhou, Beijing and Shenzhen in 2018, respectively.
Our assumption is that the penetration rate of the co-working market will increase by 1ppt per year in 2019-20e and 0.5ppt in 2021e. Higher penetration rates will help drive co-working office turnover in the market – Shenzhen (2018-21e CAGR at 74%), Beijing (41%), Guangzhou (38%) and Shanghai (15%). We expect Shenzhen to see the highest growth due to its current low penetration rate, followed by Beijing, which has a concentrated presence of start-ups. For reference, Beijing has the highest number of unicorns and potential unicorns in China – 82 unicorns in 2018, almost double the number in Shanghai, according to Hurun.
Figure 29: Summary of co-working office space, penetration and CAGR 2018 Co-office size in 2018 Co-office turnover in Co-working office Co-working office turnover CBD (sqm m) CBD (RMBm) penetration rate 2018 CAGR 2018-2021e Shenzhen 0.07 176 1.0% 74% Beijing 0.05 366 2.9% 41% Guangzhou 0.07 209 2.0% 38% Shanghai 0.53 2,843 8.0% 15% Average 3.5% 36% Source: Colliers, JLL, Cushman and Wakefield, HSBC estimates
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Developers are stepping into the co-working market
Developers are jumping on the bandwagon and have either established their own brands or collaborated with existing co-working space operators. Chinese developers are backed by strong cash inflows from their existing property development business and can benefit from more diverse funding channels.
A handful of developers have established their own co-working brands, including COLI, Longfor, Sino-Ocean and SOHO. They can leverage on their existing office properties to test the feasibility of this business model.
For developers that didn’t allocate resources to launch a co-working brand, they have collaborated with other pure co-working operations in order to establish a presence in this business segment, allowing them to learn from other more established market players. These developers include Gemdale, Sino-Ocean and Country Garden.
Among stocks in our coverage universe, SOHO China is the purest commercial and co-working player, while Sino-Ocean has also stepped up in its co-working initiatives. Specifically, Sino- Ocean has collaborated with WeWork and has set up co-working offices in six locations across four top-tier cities in China. In addition, it has also established its own co-working brand OKspace and invested in Beijing-based operator Nashwork.
Based on the online news media HK01 and kknews, the sons of the chairmen of China SCE and Agile have separately developed their own co-working brands, called Funwork and ATLAS, respectively. We see potential for developers to invest in these platforms. For instance, China SCE acquired a 25% stake in Funwork from the chairman’s son in January 2019.
Figure 30: Summary of developers’ involvement in co-working space Developer Brand Relationship with the Remarks developer Longfor Easywork Own brand Shanghai only. 800 seats in Hongqiao Paradise Walk SOHO SOHO 3Q Own brand 31 centres with c30k seats in seven cities in China CRL CR Union Own brand CR Union is a new office brand launched in 2019. It will launch six projects during the year including some co-working offices. COLI Officezip Own brand 12 centres in 6 cities in China CIFI Workingdom Partnership Launching three co-working office centres in 2019 in Beijing Shimao MWORKS Own Brand Opened MWORKS in Nanjing Software Valley with 3,500sqm GFA Country Garden Fountown Partnership Entered into strategic partnership agreement in various area including co-working. The first project was launched in Shanghai in mid-2018. Gemdale WeWork Partnership Entered a revenue sharing agreement with WeWork. Converting its own office into a new co-working centre in Shenzhen. Sino-Ocean WeWork Partnership WeWork entered first real estate strategic partnership with Sino- Ocean, which now has 6 co-working locations in co-operation with WeWork across Beijing, Shanghai, Chengdu and Shenzhen. Nashwork Investment Participated in a financing (series B+ round) with Beijing-based Nashwork in June 2018. OKspace Own brand Presence in Hangzhou and Beijing China SCE Funwork Investment Established by chairman’s son. China SCE has a stake. Source: Local media, company data, HSBC
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Case study – SOHO 3Q SOHO China is one of the few listed developers that has been focusing on the co-working space business. SOHO launched its co-working brand, SOHO 3Q, in February 2015 with an initial focus in Beijing and Shanghai, where SOHO’s portfolio of investment properties are located. Started originally in SOHO’s own commercial properties, SOHO 3Q now also runs at third party buildings. As of end-2018, SOHO 3Q spanned seven cities – Beijing, Shanghai, Shenzhen, Hangzhou, Chengdu, Chongqing, and Nanjing, with 31 centres and just above 30,000 seats. Guanghualu SOHO 3Q, located in Guanghualu SOHO II, is the flagship 3Q centre with over 3,000 seats.
While SOHO’s management has had a target to achieve over 50,000 co-working seats by 2018, actual completion fell short of this target due to fierce and “unhealthy” competition in the segment, according to SOHO. While we note that the company had earlier indicated a plan for a spin-off for its co-working business (South China Morning Post, 20 June 2018), the company has more recently said that its near-term focus is on maintaining profitability of the business in 2019, instead of scale expansion.
Figure 31: The short development history of SOHO 3Q 2015 2016 2017 2018 Number of cities 2 2 5 7 Number of centres 11 19 26 31 Number of seats 10,000 17,000 26,000 30,673 Average occupancy n.a. 85% 87% 87% Remarks Located in Beijing and Located in Beijing and Located in Beijing, Located in Beijing, Shanghai Shanghai Shanghai, Shenzhen, Shanghai, Shenzhen, Hangzhou and Nanjing Hangzhou, Chengdu, Chongqing and Nanjing Source: Company data, HSBC
Indeed, the share price of SOHO China de-rated in the beginning of 2015, reflecting the change in business focus but also other factors like the uncertainty associated with SOHO’s dividend policy.
Figure 32: SOHO’s NAV discount -20%
-30%
-40%
-50%
-60%
-70%
-80%
-90% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % to NAV +1 SD Mean -1 SD
Source: Company data, Refinitiv, HSBC estimates
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Co-working deals across cities
The top tier cities are seeing rising demand for the co-working space. Beijing is China’s science and technology centre, which attracts numerous tech companies the city. At the same time, the development of Zhongguancun, which is referred as “China’s Silicon Valley”, is home to many new tech companies. In 2018 Kr Space leased 3,500 sqm of office space in China Overseas Plaza for its co-working business.
In Shanghai, Cushman and Wakefield indicated that the co-working office market has become a significant contributor to Grade A office absorption. With rising demand for flexible work space, C&W described Shanghai as a key battleground for market share among both domestic and overseas operators. In particular, WeWork has leased 27,000 sqm at the China Overseas International Center. Developers are also expanding their presence in the city. SOHO has been operating “SOHO 3Q” and Longfor has established its “Easywork” co-working office brand.
In Shenzhen, the rapid development of the technology segment and the presence of multinationals provides some of the best opportunities for co-working space development. WeWork and naked Hub have been very active in the city.
Figure 33: Major deals in co-working space City Company District Building Size (sqm) Beijing 5L meet CBD Traders Hotel 39,999 Beijing naked Hub Sanlitun Pacific Century Place 5,500 Beijing WeWork Sanlitun Taikoo Li 3,000 Beijing WeWork Wangfujing Spot on WFJ 13,000 Beijing Fountown Others Yinyuan Building 11,338 Beijing Kr Space Others Straits International Plaza 10,300 Beijing Kr Space CBD China Overseas Plaza 3,500 Beijing naked Hub CBD Gongxiao International Building 2,850 Shanghai naked Hub Changning Loushanguan Lu 12,077 Shanghai WeWork Huangpu Yunnan Lu 10,219 Shanghai Atlas Huangpu Gopher Center 7,432 Shanghai WeWork Xuhui ITC 6,503 Shanghai We+ Luijiazui Shanghai Tower 3,716 Shanghai WeWork Huangpu China Overseas International Center 27,000 Shanghai WeWork Lujiazui Fuhui Plaza 14,000 Shanghai naked Hub Hongkou Landmark Center 10,000 Shanghai Distrii Core Xuhui Grand Gateway 6,500 Shanghai WeWork Core Xuhui ITC Phase I 6,000 Guangzhou Atlas Zhujiang New Town Agile Center 11,000 Guangzhou Chirk-up Tianhe Sports Center Citic Plaza 10,000 Guangzhou Worldunion Space Tianhe Sports Center Hongfa Building 4,115 Guangzhou Bee+ Zhujiang New Town Guangzhou IFC 2,991 Guangzhou Kr Space Haizhu T.I.T Business Park 2,662 Shenzhen WeWork Nanshan CR Land Building 26,999 Shenzhen Nashwork Futian Excellence Century Center 2,000 Shenzhen Regus Futian Ping An Building 1,900 Shenzhen Atlas Futian Dinghe Tower 10,000 Shenzhen Atlas Nanshan SZ Aerospace Science and Tech Sq 13,000 Shenzhen Atlas Futian Shenzhen Gemdale Center 5,700 Shenzhen Regus Futian Ping’an Financial Center 3,500 Source: Cushman and Wakefield, Colliers, HSBC
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Singapore
The co-working market has been growing rapidly
Large office landlords could benefit from co-working demand
Positive implications for commercial assets in Singapore could benefit some SREITs
Pratik Ray*, CFA Vibrant environment for start-ups and small businesses Senior Property Analyst, ASEAN The Hongkong and Shanghai Banking Corporation Limited, Singapore’s start-up environment has become vibrant in recent years, with the city-state aiming to Singapore Branch become a top regional and global fintech hub, supported by government initiatives. According to [email protected] +65 6658 0611 EY, there are more than 400 fintech firms in Singapore and several more are slated to be added
Derek Chang* each year. Furthermore, Singapore’s Smart Nation initiative has also given the start-up scene a Property Analyst boost. The policy initiative, aimed at guiding Singapore’s digital transformation, is expected to The Hongkong and Shanghai Banking Corporation Limited, leverage off technology and big data analytics and create opportunities for prospective start-ups. Singapore Branch [email protected] In general, the government has been encouraging the development of an ecosystem that allows +65 6658 0624 new entrepreneurs to find the required training, help and funding – these entrepreneurs then in turn help their peers and the next generation of entrepreneurs. There are signs of progress, with * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ an increased number of individuals emerging as independent workers, entrepreneurs and qualified pursuant to FINRA regulations freelancers. This group, in particular the millennials, generally prefer flexible work arrangements and this has been driving demand for co-working in Singapore’s office market.
Figure 34: Fintech funding (VC, PE and M&A activity) in Singapore
160.0 20 140.0 18 16 120.0 14 100.0 12 80.0 10 60.0 8 6 40.0 4 20.0 2 0.0 0 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Deal value (USDm) Number of deals closed (RHS)
Source: KPMG, HSBC
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Figure 35: Count of SMEs (thousand) Figure 36: Nominal value added by SMEs (SGDbn)
265 262.6 230.0 220.0 260 212.0 255 252.8 210.0 200.0 197.0 250 246.1 245.2 187.0 245 242.9 190.0 179.0 178.0 240 180.0 235 170.0 230 160.0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Count of SMEs (Thousand) Nominal value added by SMEs (SGDbn)
Source: Ministry of Manpower, HSBC Source: Ministry of Manpower, HSBC
Large corporations are setting up their own innovation centres Alongside start-ups, many large corporates have also realised the importance of innovation and creativity in the workplace. This is driven by multiple factors: 1) to address competition from disruptive technologies in various industries; 2) seeking to leverage government initiatives around developing Singapore into a smart nation; and 3) keeping employees engaged and making it a part of the company’s talent retention strategy, in particular for millennials. To achieve this, many firms have set up incubators that work outside of the conventional office set-up, such as co-working spaces. These incubators, which bring together technology and analytical data professionals and form specialised teams to work on special projects, are also driving demand for co-working in Singapore’s office market.
Figure 37: Innovation centres by corporates in Singapore Corporation Industry Innovation Centre Objective Dell Tech Internet of Things (IoT) Lab Develop and test Dell and Intel solutions, allow for scalability testing DBS Banking & Finance Life Analytics Lab Process data from social media platforms to generate new digital innovations and sales leads MetLife Insurance LumenLab Develop disruptive new business models in areas such as wellness, wealth and retirement HSBC Banking & Finance HSBC Singapore Support the development and testing of digital and mobile banking innovation Innovation Lab Accenture Management Accenture Analytics Develop new approaches for use of analytics in key areas of services, such as public safety, service Consulting Services Innovation Center delivery, workforce effectiveness, etc. PayPal Banking & Finance Paypal Innovation Lab Explore opportunities in the areas of cybernetic authentication tokens, AI-powered know-your-customer (KYC) processes and cryptography technology, such as post-quantum cryptography to future-proof PayPal’s risk and security management systems Mastercard Banking & Finance Mastercard Innovation Innovate newer ways of making payments, such as by taking a selfie through an app with biometric Showcase authentication, and purchasing items in a vending machine via a mobile application among others Citibank Banking & Finance Citi Innovation Lab Use new web, mobile, supply chain and analytics technologies to engage Citi’s institutional clients more innovatively and to create the most effective solutions and products for them KPMG Management KPMG Digital Village Bring corporates, start-ups, investors, and government bodies together in a collaborative ecosystem to Consulting Services drive the adoption and integration of innovative solutions focusing on fintech, healthtech and logistics Refinitiv Media Refinitiv Labs Collaborate with customers, tech start-ups, universities and Singapore’s government to roll out products and solutions for professional markets in Asia Pacific Expedia Travel Expedia Innovation Lab Use proprietary scientific methods to further understand Asia consumer online and app travel search and booking behaviour to inform its innovation and technology developments globally Microsoft Tech Microsoft Technology A place for collaborative workshops for Microsoft customers, where they can engage with MTC staff Centre (MTC) in briefings, sessions and other technical courses IBM Tech IBM Studios Develop individualised experiences through a combination of cognitive capabilities and experience design Standard Chartered Banking & Finance SCB - eXellerator Work closely with the business units within the bank and explore the use of emerging technologies Bank and data science for sustainable business solutions MUFG Bank Banking & Finance MUFG Innovation Lab Experiment with fintech and innovative business solutions BNP Paribas Banking & Finance BNP Paribas Innovation Enrich the customer experience, and develop close collaboration between a select group of clients, Lab fintechs and in-house wealth management specialists OCBC Banking & Finance The Open Vault Collaborate with external fintech firms to rapidly test and validate new ideas and solutions – before bringing prototypes quickly to the market and make banking simpler UOB Banking & Finance The FinLab Business accelerator that propels the growth of technology companies and catalyses the digital transformation of businesses Source: Company announcements, Cushman & Wakefield, Medium, HSBC
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Co-working landscape
As of July 2018, Singapore had 36 co-working operators operating out of 120 locations, almost 2x the number four years ago, implying a c20% CAGR for both categories over this period. The sector has seen expansion from local operators, such as JustCo and The Great Room, while Chinese operators like Distrii as well as US-based WeWork have also entered the market.
Figure 38: Singapore: Number of co-working operators and centres
140 120 120 100 82 87 80 66 70 60 36 40 26 19 18 22 20 0 2014 2015 2016 2017 YTD Jul 2018 Number of operators Number of centres
Source: Cushman & Wakefield, HSBC
Increasingly a growing influence in the office leasing market Co-working operators have become more influential in Singapore’s office leasing market as traditional occupiers from sectors such as banking & finance have moderated their expansion plans. According to Colliers, co-working operators now make up c20% of the gross take-up in the office market in Singapore’s CBD. In our view, the net take-up proportion is substantially higher. However, given this is off a low base, Colliers estimates that co-working operators occupy less than 4% of the total CBD office stock in Singapore (2017: less than 2.5%). The pick-up in number of operators and centres has sustained in 2019 and with it co-working-led leasing activity in the market.
Figure 39: Major co-working deals in Singapore’s office market Date Operator Building Size (sf) May-19 JustCo 20 Collyer Quay 16,800 Nov-18 WeWork Suntec City Tower 5 30,000 Oct-18 JustCo China Square Central 34,500 Oct-18 Campfire 139 Cecil Street 85,000 Jun-18 Space&Co. 8 Exhibition Street, Melbourne 16,872 Jun-18 WeWork 71 Robinson Road 64,583 May-18 Distrii Republic Plaza 62,000 Apr-18 Spaces TripleOne Somerset 35,000 Mar-18 Spaces One Raffles Place 35,000 Mar-18 Spaces Paya Lebar Quarter 50,000 Mar-18 The Great Room Centennial Tower, Temasek Avenue 36,000 Mar-18 WeWork China Square Central 26,700 Feb-18 Ucommnue Suntec City 13,800 Dec-17 WeWork Funan's North Office Block 40,000 Jun-17 The Work Project OUE Downtown 21,000 Jan-17 The Working Capitol 140 Robinson Road 55,000 Jun-16 Collective Works 12th floor of Capital Tower 22,000 Jun-16 The Great Room One George Street 24,000 Mar-15 The Working Capitol 1 Keong Saik Road 33,000 Source: Company announcements, HSBC
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Opportunities and winners
Some of the largest property groups in the region are the best placed Some of the largest property groups in Singapore have been quick to realise that co-working as a model is here to stay. They have responded by investing in operators or collaborating with them in one way or the other. The most active and the early adopters have been the large property groups such as CapitaLand, Frasers Property and Mapletree Investments.
Figure 40: Prominent property groups with exposure to co-working Date Property group Country Property assets Operator Co-working related investment Oct-18 CapitaLand Singapore cSGD93bn (group managed The Work Project SGD27m (USD19.7m) real estate assets) Kingdom May-18 City Developments Singapore cSGD20bn (total assets) Distrii RMB102m (USD14.8m) May-18 Frasers Property Singapore cSGD32bn (total group assets) JustGroup Holdings USD60m Feb-18 CapitaLand Singapore cSGD93bn (group managed Flexi-Suites Flexi-Suites is CapitaLand’s real estate assets) co-working offering Nov-17 Keppel Corp Singapore cSGD29bn (assets under KLOUD KLOUD is Keppel’s co- management) working offering Dec-17 Mapletree Singapore cSGD46bn (assets under CoQoons CoQoons is a subsidiary of Investments management) Mapletree Oct-15 Keppel Corp Singapore cSGD29bn (assets under Workspace Workspace is Keppel’s co- management) working offering Source: Company announcements, HSBC
Figure 41: Prominent property groups with exposure to co-working Property group Currency Price Market Cap Trading PB (x) ROE (%) PE (x) EPS Dividend (USDm) Liquidity (2019e) (2019e) Growth (%) Yield (%) (USDm) (2019-20e) (2019e) CapitaLand* SGD 3.54 10,920 21.5 0.78 5.2% 14.7 18.7% 3.4% Frasers Property* SGD 1.80 3,948 0.4 0.72 7.0% 10.3 -12.1% 4.7% Total/Simple average 14,868 21.9 0.75 6.1% 12.5 3.3% 4.0% Source: Bloomberg consensus for non-covered (not rated) companies, HSBC estimates for covered (rated) companies. *HSBC covered (rated) stock. Priced as of 24 June 2019
Large office landlords in Singapore could benefit from co-working demand Large office landlords in Singapore could benefit from co-working demand. Singapore, as the only gateway city in Southeast Asia, is likely to be the choice destination for regional and global multinationals seeking space in a co-working set-up in Southeast Asia. The government has also been proactive in attempting to develop an ecosystem that offers entrepreneurs, freelancers, and small businesses an environment in which they can thrive. Many of these landlords are office REITs, which are sponsored by the large property groups – this further substantiates our view that such groups are well placed to ride the co-working wave.
Figure 42: Office REITs in Singapore Price Market cap Trading PB DPU DPU DPU (SGD) (USDm) liquidity (x) yield (%) yield (%) yield (%) (USDm) (2019e) (2020e) (2021e) CapitaLand Commercial Trust* 2.14 5,929 20.4 1.18 4.1% 4.1% 4.1% Keppel REIT* 1.27 3,192 5.9 0.92 4.5% 4.6% 4.7% OUE Commercial Trust 0.51 1,069 0.4 0.70 6.8% 7.0% 7.0% Frasers Commercial Trust 1.58 1,057 2.4 1.01 6.2% 6.2% 6.2% Total/Simple average 11,247 29.1 0.95 5.4% 5.5% 5.5% Source: Bloomberg consensus for non-covered (not rated) companies, HSBC estimates for covered (rated) companies. *HSBC covered (rated) stock. Priced as of 24 June 2019
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Positive implications for commercial assets in Singapore could benefit some SREITs If there are positive implications for commercial real estate (office and shopping mall), then the large property groups in Singapore and their listed subsidiaries and associates, including their sponsored REITs, would be the go-to names for investors seeking exposure to commercial real estate in Singapore through listed proxies.
Figure 43: Retail, office and mixed REITs in Singapore by sponsor Segment Price Market cap Trading PB DPU yield DPU yield DPU yield (SGD) (USDm) liquidity (x) (%) (%) (%) (USDm) (2019e) (2020e) (2021e) CapitaLand CapitaLand Mall Trust* Retail 2.6 7,085 18.4 1.27 4.6% 4.9% 5.0% CapitaLand Commercial Trust* Office 2.14 5,929 20.4 1.18 4.1% 4.1% 4.1%
Mapletree Mapletree Commercial Trust* Retail/Office 2.06 4,405 11.9 1.29 4.5% 4.6% 4.7%
Keppel Keppel REIT* Office 1.27 3,192 5.9 0.92 4.5% 4.6% 4.7%
Frasers Property Frasers Centrepoint Trust* Retail 2.59 2,131 4.2 1.24 4.8% 5.0% 5.2% Frasers Commercial Trust Office 1.58 1,057 2.4 1.01 6.2% 6.2% 6.2%
OUE OUE Commercial Trust Office 0.51 1,069 0.4 0.70 6.8% 7.0% 7.0%
Others Suntec REIT* Retail/Office 1.94 4,006 14.1 0.93 5.3% 5.4% 5.5% SPH REIT Retail 1.07 2,045 0.8 1.14 5.3% 5.5% 5.6% Starhill Global REIT Retail/Office 0.78 1,257 1.6 0.86 6.1% 6.2% 6.1% Source: Bloomberg consensus for non-covered (not rated) companies, HSBC estimates for covered (rated) companies. *HSBC covered (rated) stock. Priced as of 24 June 2019
Figure 44: Singapore property: Office exposures (% of total GAV)
CapitaLand Commercial Trust 95%
Keppel REIT 85%
Suntec REIT 56%
Mapletree Commercial Trust 26%
CapitaLand 19%
Frasers Property 14%
CapitaLand Mall Trust 10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Company data, HSBC estimates
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Potential risks related to co-working
Co-working operators have yet to experience a major recession As most co-working firms have emerged only in the past few years, they have not been around long enough to have experienced a recession. In Singapore, there are more than a hundred different companies in the co-working space, most of which are small. It is possible that many of these firms would go bankrupt in the event of a recession, if and when it occurs.
Perception issues around assets substantially leased to co-working operators Given the impact a recession, if and when it occurs, could have on co-working operators, it is only natural that market participants would factor in more conservative assumptions around cash flows, cash flow volatility, and/or valuation cap rates for assets that have a substantial proportion of tenants as co-working operators. As such, while co-working may boost investment demand for commercial assets for the overall market, assets that have a very high proportion of co-working tenants could be viewed adversely. However, the extent to which such perceptions may impact valuations and the thresholds that may trigger such adverse perceptions remains unclear. Consultants like Cushman & Wakefield have cited a 15-30% threshold (in terms of leasing to co-working operators without any adverse impact with regard to perception), but we think these conclusions are preliminary as transactional evidence is thin.
39 Equities ● REMD June 2019
Figure 45: Regional valuation summary
Company Ticker Rating Price Target Upside Mkt Cap 3M ADTV NAV (Disc)/ FY18a FY19e FY20e FY19e FY18a FY19e Net (HKD) Price /(D’nside) (USDbn) (USDm) (HKD/shr) Prem (%) PE (x) PE (x) PE (x) Yield (%) PB (x) gearing (HKD) (%) HK developers CK Asset 1113 HK Buy 61.30 76.40 24.6 29.0 57.8 123.2 (50) 9.4 8.0 8.5 3.5 0.7 5 HLP 101 HK Buy 18.50 23.30 25.9 10.6 12.7 34.7 (47) 20.3 19.3 16.3 4.1 0.6 22 Henderson 12 HK Hold 43.45 47.55 9.4 26.9 44.4 83.4 (53) 9.7 11.2 11.2 4.3 0.6 27 HKLand (USD) HKL SP Buy 6.69 8.40 25.6 15.7 10.5 12.5 (46) 15.1 14.3 13.8 3.4 0.4 8 Hysan 14 HK Hold 40.50 44.20 9.1 5.4 6.0 83.3 (51) 16.7 15.4 15.0 3.8 0.6 6 Kerry 683 HK Hold 32.75 34.70 6.0 6.1 6.2 77.0 (57) 14.2 8.0 7.5 4.3 0.5 49 Sino Land 83 HK Buy 13.50 17.40 28.9 11.8 10.1 28.5 (53) 16.1 16.9 14.8 4.1 0.6 net cash SHKP 16 HK Buy 134.50 163.20 21.3 49.9 80.5 229.9 (41) 12.8 12.1 10.0 3.8 0.7 14 Swire Prop 1972 HK Buy 32.60 38.20 17.2 24.4 8.8 57.1 (43) 18.8 14.8 20.8 2.7 0.7 5 Wharf 4 HK Reduce 20.65 19.20 (7.0) 8.1 9.9 54.7 (62) 9.7 9.5 8.9 3.4 0.5 10 Wharf REIC 1997 HK Buy 55.60 66.30 19.2 21.6 20.1 93.4 (40) 16.8 15.5 14.3 4.2 0.8 16 Wheelock 20 HK Buy 55.75 79.30 42.2 14.6 9.1 130.0 (57) 8.6 7.6 7.1 3.0 0.5 16 Average (45) 15.6 14.2 13.5 3.7 0.7 18 REITs & Trusts Champion REIT] 2778 HK Hold 6.68 6.90 3.3 5.0 3.1 6.9 (3) 25.5 22.6 20.3 4.4 0.6 18 Hui Xian REIT (RMB) 87001 HK Buy 3.36 3.80 13.1 2.8 1.6 n.a. n.a. 12.7 12.4 12.0 8.0 0.7 22 Jinmao Hotel 6139 HK Buy 4.37 6.00 37.3 1.1 0.0 7.5 (42) 13.1 12.4 12.0 8.1 1.5 41 Link REIT 823 HK Hold 97.25 99.50 2.3 26.3 53.7 99.5 (2) 38.9 35.8 32.4 2.8 1.2 11 Average (13) 20.7 19.3 18.1 6.0 0.9 27 China Props Agile 3383 HK Hold 10.44 10.40 (0.4) 5.2 11.4 34.8 (70) 5.2 4.4 3.8 11.5 0.7 145 COLI 688 HK Buy 27.80 40.00 43.9 39.0 49.8 44.4 (37) 8.2 6.8 5.7 4.0 1.1 36 CRL 1109 HK Buy 34.75 40.60 16.8 30.8 50.4 50.8 (32) 10.8 8.3 7.0 4.2 1.7 50 China SCE 1966 HK Buy 3.70 4.70 27.0 2.0 4.9 11.8 (69) 5.6 4.1 3.1 7.8 0.8 133 CIFI 884 HK Buy 5.05 6.80 34.7 5.0 13.1 13.7 (63) 6.1 4.9 4.0 6.9 1.3 150 CG 2007 HK Hold 11.96 12.00 0.3 33.2 62.4 15.0 (20) 6.5 5.2 4.7 5.9 1.8 79 China Jinmao 817 HK Hold 4.79 5.50 14.8 7.1 34.5 11.0 (56) 9.4 7.0 5.5 5.7 1.5 162 GZ R&F 2777 HK Buy 14.72 18.70 27.0 6.1 13.7 53.3 (72) 4.5 3.2 2.7 12.5 0.6 210 Joy City 207 HK Buy 0.95 1.50 57.9 1.7 0.5 3.7 (74) 8.0 7.9 6.4 5.0 0.4 89 KWG 1813 HK Buy 7.88 12.20 54.8 3.2 10.8 40.6 (81) 5.7 4.4 3.9 8.2 0.7 83 Logan 3380 HK Buy 12.32 14.60 18.5 8.6 8.1 26.6 (54) 7.2 5.8 4.2 5.9 2.2 114 Longfor 960 HK Hold 29.65 27.60 (6.9) 22.6 26.5 46.0 (36) 11.9 9.3 7.6 4.3 0.3 90 Shimao 813 HK Hold 24.25 23.90 (1.4) 10.2 20.7 39.8 (39) 8.2 6.5 5.4 5.4 1.2 123 Sino-Ocean 3377 HK Buy 3.27 4.00 22.3 3.2 6.3 13.3 (75) 8.2 6.1 4.3 6.6 0.4 105 SOHO China 410 HK Buy 2.60 3.30 26.9 1.7 1.4 10.9 (76) 10.6 25.0 19.3 1.6 0.3 43 SZ Investment 604 HK Hold 2.90 2.80 (3.4) 3.1 2.9 6.9 (58) 7.5 7.3 6.4 4.8 0.6 44 Yanlord (SGD) YLLG SP Hold 1.30 1.28 (1.5) 1.9 2.3 3.7 (65) 3.9 3.6 3.1 5.5 0.5 99 Avg ex Joy City and SOHO** (55) 7.3 5.8 4.7 6.6 1.0 108 Singapore developers CapitaLand CAPL SP Buy 3.54 4.15 17.2 10.9 21.5 4.9 (28) 14.7 14.7 12.4 3.4 0.8 63 Frasers Prop FPL SP Buy 1.83 2.25 23.0 3.9 0.4 3.0 (39) 12.7 10.3 11.7 4.7 0.7 90 Average (34) 13.7 12.5 12.1 4.0 0.8 76 ASEAN (ex-Sing. dev) SM Prime SMPH PM Hold 38.45 35.00 (9.0) 21.6 6.1 35.0 10 34.5 30.7 28.3 1.0 3.9 71 Ayala Land ALI PM Buy 51.80 54.40 5.0 14.9 13.6 54.4 (5) 26.1 22.5 19.7 1.0 4.0 80 Robinsons Land RLC PM Buy 26.50 28.95 9.2 2.7 1.1 36.2 (27) 20.4 19.0 16.0 1.1 1.1 49 Central Pattana CPN TB Hold 75.75 76.60 1.1 11.1 23.0 76.6 (1) 27.9 24.2 22.7 1.7 4.5 15 Land & Houses LH TB Buy 11.10 12.85 15.8 4.3 21.3 13.5 (18) 12.7 13.1 12.8 6.8 2.6 97 Pruksa PSH TB Buy 21.00 24.30 15.7 1.5 1.8 27.0 (22) 7.6 7.5 7.1 7.4 1.1 56 Bumi Serpong BSDE IJ Buy 1,520.00 2,000.16 31.6 2.1 1.5 2,222.4 (32) 22.6 13.2 12.4 0.4 1.1 21 Pakuwon Jati PWON IJ Buy 740.00 808.00 9.2 2.5 2.1 808.4 (8) 14.0 14.0 13.0 0.6 2.8 8 Ciputra Dev CTRA IJ Buy 1,125.00 1,500.00 33.3 1.5 2.7 1,500.5 (25) 18.1 19.3 18.7 0.5 1.4 33 Lippo Karawaci LPKR IJ Buy 290.00 543.00 87.3 0.5 1.6 603.4 (52) 10.9 6.8 6.2 1.4 0.2 37 Vinhomes VHM VM Buy 79,500.00 105,000.00 32.1 11.4 4.7 105,000.0 (24) 17.5 14.8 9.9 0.4 6.1 40 Average (17) 20.4 19.1 17.3 1.8 2.5 49 Sinagpore REITs Ascendas REIT AREIT SP Hold 3.01 2.80 (7.0) 6.9 26.3 2.6 18 18.6 19.1 18.8 5.6 1.4 35 CapitaLand Mall Trust CT SP Hold 2.60 2.50 (3.8) 7.1 18.4 2.3 14 19.4 21.1 19.9 4.6 1.2 31 CapitaLand Comm. CCT SP Hold 2.14 1.95 (8.9) 5.9 20.4 2.0 7 23.8 25.8 25.5 4.1 1.1 28 Suntec REIT SUN SP Buy 1.94 2.05 5.7 4.0 14.1 2.0 (5) 24.3 27.6 25.9 5.2 0.9 38 MCT MCT SP Hold 2.06 1.90 (7.8) 4.4 11.9 1.8 17 24.2 23.6 23.0 4.5 1.2 33 Keppel REIT KREIT SP Buy 1.27 1.35 6.3 3.2 5.9 1.4 (12) 38.2 27.3 24.7 4.5 0.8 33 MLT MLT SP Hold 1.57 1.40 (10.8) 4.2 16.6 1.2 34 26.3 21.1 20.2 5.2 1.3 36 Frasers Centrepoint FCT SP Hold 2.59 2.50 (3.5) 2.1 4.2 2.2 19 22.9 22.6 20.5 4.8 1.2 29 CDL Hospitality CDREIT SP Hold 1.62 1.68 3.7 1.4 2.0 1.5 8 27.8 20.5 19.3 5.7 1.0 34 Keppel DC REIT KDCREIT SP Hold 1.64 1.45 (11.6) 1.6 4.7 1.1 47 18.5 19.0 18.3 4.7 1.5 31 Far East Hosp. FEHT SP Buy 0.68 0.75 11.1 1.0 1.2 0.8 (13) 20.1 18.7 17.7 6.3 0.7 39 Cache Logistics CACHE SP Hold 0.80 0.72 (10.0) 0.6 1.4 0.7 7 20.3 15.0 14.6 7.6 1.2 36 Average 12 23.7 21.8 20.7 5.2 1.1 34 ASEAN (ex-Sing) REITs and prop funds Tesco Lotus TLGF TB Hold 20.80 18.80 (9.6) 1.6 0.8 16.5 26 21.6 20.6 19.7 4.4 1.5 8 IGB REIT IGBREIT MK Buy 1.86 2.00 7.5 1.6 0.7 1.8 2 19.6 20.9 20.3 5.1 1.7 25 Average 14 20.6 20.7 20.0 4.7 1.6 16 Source: Company data, Bloomberg, HSBC estimates. Note: Priced as at 24 Jun 2019
40 Equities ● REMD June 2019
Valuation and risks
Valuation Risks
Current price: We derive our fair value target price of HKD40.00 based on an Key downside risks include slower-than-expected COLI HKD27.80 unchanged target discount of 10% (+0.5 SD above the historical contracted sales momentum; achieving lower-than-expected 688 HK Target price: mean) applied to our unchanged NAV estimate of HKD44.40 per ASPs; uncertainties associated with the recent management
HKD40.00 share. With our TP implying 44% upside from current levels, we changes; and uncertainties related to macro and property- maintain our Buy rating on COLI for its quality land bank, execution specific policies. Buy Up/downside: track record, balance sheet strength and potential increase in +44% dividend payout.
Michelle Kwok* | [email protected] | +852 2996 6918
Current price: We derive our fair value target price of HKD23.90 based on our Key upside risks include faster-than-expected growth in Shimao HKD24.25 unchanged target discount of 40% (historical mean) applied to our sales, higher-than-expected ASPs and margin, share
813 HK Target price: unchanged NAV estimate of HKD39.80/share. Our TP implies repurchase by the company and policy relaxation.
downside of 1% and we maintain our Hold rating. HKD23.90 Key downside risks include an inability to sustain strong sales momentum; lower-than-expected ASPs; overspending Hold Up/downside: on land acquisitions; and uncertainty related to macro and -1%
property-specific policies. Michelle Kwok* | [email protected] | +852 2996 6918
Current price: We derive our fair value target price of HKD3.30 based on our Key downside risks include uncertainties related to SOHO SOHO HKD2.60 unchanged target discount of 70% (1 SD below mean) applied to 3Q; slower-than-expected lease-up progress and rental of
410 HK Target price: our unchanged NAV estimate of HKD10.90/share. Our TP implies new offices; uncertainties in dividend outlook; and macro
HKD3.30 upside of 27% and we upgrade SOHO from a Hold to a Buy rating. and property policy uncertainties in China, especially in the commercial property market
Buy Upside: 27%
Michelle Kwok* | [email protected] | +852 2996 6918
Current price: We derive our unchanged target price of HKD6.90, on par with our Upside risks: Successful project acquisitions, stronger- Champion REIT HKD6.68 DDM-based fair value, assuming an unchanged cost of equity of than-expected DPU growth and faster-than-expected 2778 HK Target price: 5.8%, a beta of 0.71 and terminal growth rate of 0.5%. Our target recovery in HK retail sales which should help stronger retail price implies c3% upside from current levels. We rate Champion rental at Langham Place. HKD6.90 REIT Hold given that its 4.4% FY19e dividend yield implies around Downside risks: Lower-than-expected Central office rental, Hold Up/downside: 290/240bp spread over the Hong Kong/US 10-year yield, which is rising long-term US bond yields and interest rate hikes. +3% narrower than the historical average of 457/389bp.
Raymond Liu*, CFA | [email protected] | +852 2996 6743
Hongkong Current price: We derive our fair value target price of USD8.40 based on an Downside risks include rising Hong Kong commercial cap Land USD6.69 unchanged target discount of 33% (0.5SD below mean) applied to rates, lower-than-expected rentals, disappointing sales HKL SP Target price: our unchanged NAV estimate of USD12.50/share. Our target price performance or weaker-than-expected profitability in its implies c.26% upside from current levels. We have a Buy rating on China property development business. USD8.40 the stock as we think it should benefit from a shortage of quality
Buy Up/downside: office space in Hong Kong, which should help boost its rental +26% income. Positive catalysts could come from a sustainable pick-up in
Central office rentals. Raymond Liu*, CFA | [email protected] | +852 2996 6743
Swire Current price: We derive our unchanged target price of HKD38.20 based on an Downside risks include lower-than-expected rentals Properties HKD32.60 unchanged target discount of 33% applied to our unchanged NAV achieved and slower-than expected completion and ramp-up 1972 HK Target price: estimate of HKD57.10/share. Our discount is benchmarked against of new projects.
HKD38.20 Hongkong Land’s NAV discount at 0.5SD below historical average, given the short trading history of Swire Properties. Our target price
Buy Up/downside: implies c17% upside. We rate the stock Buy due to improved +17% performance at the Pacific Place mall and sustainable office rental
growth in Hong Kong. Raymond Liu*, CFA | [email protected] | +852 2996 6743
41 Equities ● REMD June 2019
Valuation Risks
Hysan Current price: We derive our unchanged target price of HKD44.20 based on an Upside risks include more resilient-than-expected retail Development HKD40.50 unchanged target discount of 47% (0.75SD below mean) applied to our rental growth in Hong Kong and sales of its commercial 14 HK Target price: unchanged NAV estimate of HKD83.30/share. Our target price implies buildings in Causeway Bay. c9% upside from current levels. We see limited share price catalysts in HKD44.20 Downside risks include rising Hong Kong commercial cap the next 12 months given moderating retail sales growth and no new rates and/or lower-than-expected retail rental achieved. Hold Up/downside: project completions; therefore, we maintain our Hold rating on the stock. +9%
Raymond Liu*, CFA | [email protected] | +852 2996 6743
Current price: We derive our target price of HKD66.30 based on an unchanged target Downside risks include lower tourist arrivals, Wharf REIC HKD55.60 discount of 29% applied to our unchanged NAV estimate of concentration risk in Hong Kong, weaker-than-expected
1997 HK Target price: HKD93.40/share. We benchmark this against Hongkong Land’s (HKL lease renewals with tenants and weaker economic growth in
HKD66.30 SP, CMP USD6.69, Buy) NAV discount at 0.25 SD below the historical Hong Kong. average, given the short trading history of Wharf REIC. Our target price Buy Up/downside: implies c19% upside from the current share price. We rate the stock +19% Buy as we believe its FY19-21e dividend yield of 4.3-4.9% looks attractive and provides downside protection, while we note some signs
of a recovery from short-term weakness in the Hong Kong retail market. Raymond Liu*, CFA | [email protected] | +852 2996 6743
Current price: Our sum-of-the-parts (SOTP)-based RNAV is SGD4.90 per share. In Downside risks: A hard landing for the property market in CapitaLand SGD3.54 arriving at our RNAV, we have estimated the gross assets of the Singapore or China, as a result of a recession, sharply higher CAPL SP Target price: company at SGD13.11 per share and total liabilities including minorities interest rates, or adverse policy action, which could lead to lower
SGD4.15 at SGD8.20 per share. Our target discount remains unchanged at 15% asset values and a reduced valuation for CapitaLand. RMB (10% for transparency and agency issues and another 5% for our depreciation versus SGD is also a risk to RNAV given the Buy Up/downside: outlook for the physical property market) – thus, our target price sensitivity of developments in China to RNAV. +17% (rounded) is set at SGD4.15. At the current price, the stock is trading at a 28% discount to RNAV. Our target price implies 17% upside. We
maintain our Buy rating on the stock given potential uplift from CapitaLand’s recent acquisition of Ascendas-Singbridge and divestment of non-core assets at better than expected prices. Pratik Burman Ray* | [email protected] | +65 6658 0611
Frasers Current price: Our gross valuation (per share) for FPL, based on a sum-of-the- Downside risks: The primary downside risk is from a hard Property SGD1.83 parts valuation, is SGD10.01. Adjusting for net liabilities of landing in the key markets where FPL operates, either as a FPL SP Target price: SGD6.99, our RNAV is SGD3.02. Our TP is set at SGD2.25 – result of recession, sharply higher interest rates or policy pegged at a target discount of 25% (10% for investability, another missteps. Also, given the low free float of c12%, there is a SGD2.25 10% for transparency and agency issues and 5% for our outlook on risk associated with liquidity events whereby the controlling
Buy Up/downside: the physical property market) and rounded down. shareholders – TCC Group and/or ThaiBev – could look to +23% Our TP implies an upside of 23.0% and we maintain our Buy rating pare down exposure to FPL while still maintaining majority
on the stock. Potential catalysts include a turnaround in sentiment in control. While such a placement could boost trading liquidity, key markets where FPL operates (Singapore and Australia), the risk associated with such a liquidity event could also act divestment of mature assets and an improved free float. as an overhang on FPL’s share price. Lastly, the company’s capital allocation philosophy is likely to remain a key area of investor focus – this can impact the extent of the RNAV discount the stock trades at if investors perceive capital allocation decisions to be sub-optimal. Pratik Burman Ray* | [email protected] | +65 6658 0611
Frasers Current price: Our RNAV for FCT is SGD2.18 and our DDM valuation (using a Downside risks are: 1) potential adverse impact on CCP from Centrepoint SGD2.59 cost of equity assumption of 6.80% and a terminal stage growth the recent opening of Jewel at Changi Airport; 2) increase in Trust Target price: rate assumption of 2.50%) is SGD3.05. The average of our DDM gearing, which could result in an overhang on the shares if valuation and RNAV is SGD2.62. Our premium/discount framework expectations of an equity raising take hold; 3) worse-than- FCT SP SGD2.50 ascribes a 5% discount to this average valuation (due to its expected outlook for Singapore’s retail sector, given the threat of Up/downside: relatively lower trading liquidity), thus, we peg FCT’s target price e-commerce as well as supply of retail malls (both private as -4%
Hold (rounded up) at SGD2.50. Our target price implies an downside of well as public sector), translating into lower rentals for FCT’s 4% and we rate the stock a Hold. properties; 4) overpaying for acquisitions in Singapore or overseas; and 5) an increase in long-term interest rates, which is a generic risk of the sector.
Upside risks are: 1) potential upside from FCT’s acquisition of the stake in the PGIM-linked fund; and 2) upside from accretive acquisitions. Pratik Burman Ray* | [email protected] | +65 6658 0611
Priced at 24 June 2019. *Employed by a non-US affiliate of HSBC Securities (USA) Inc. and not registered/qualified pursuant to FINRA regulations Source: HSBC estimates
42 Equities ● REMD June 2019
Financials & valuation: China Overseas Land & Investment Buy
Financial statements COLI: NAV breakdown Year to 12/2018a 12/2019e 12/2020e 12/2021e (RMBm) (HKD/sh) % of GAV Profit & loss summary (HKDm) Development properties Property sales 165,298 203,644 251,598 318,548 Residential 516,908 54.5 79.6% Property investment & others 4,361 5,145 6,159 6,722 Others 51,559 5.4 7.9% Total revenue 169,659 208,789 257,757 325,270 Investment properties Cost of sales (104,855) (138,012) (173,286) (221,708) Office/retail 80,448 8.5 12.4% Gross profit 64,803 70,777 84,471 103,562 Industrial 215 0.0 0.0% Selling & Admin expenses (5,588) (6,780) (7,449) (8,540) Car park space 30 0.0 0.0% Other gains/expenses (721) 0 0 0 Net debt (98,600) (10.4) Operating profit 58,494 63,997 77,022 95,022 Outstanding LAT (119,913) (12.6) Net interest 217 498 806 940 Outstanding Land premium (10,000) (1.1) Share of profit from asso. 3,422 2,996 3,251 4,591 Fair value NAV 420,646 44.4 100.0% Revaluation on IP and others 10,436 0 0 0 Source: HSBC estimates PBT 72,568 67,492 81,078 100,553
Taxation (25,866) (21,091) (25,745) (35,760) Minority interests (1,802) (1,576) (1,606) (1,794) ESG metrics Net profit 44,900 44,825 53,727 63,000 Core Profit 37,090 44,825 53,727 63,000 Environmental indicators 12/2018a Governance indicators 12/2018a Cash flow summary (HKDm) GHG emission intensity* 11.7 No. of board members 7 Cash flow from operations 5,671 4,903 8,300 5,338 Energy intensity* 18.7 Average board tenure (years) 6.8
Capex (3,917) (8,298) (8,984) (10,471) CO2 reduction policy Yes Female board members (%) 14.3 Changes in investments (13,647) (5,289) (4,024) (2,096) Social indicators 12/2018a Board members independence (%) 42.9 Net cash from financing activities 8,398 22,063 7,100 14,460 Employee costs as % of revenue 1.7 Net change in cash (3,495) 13,379 2,393 7,232 Employee turnover (%) 8.0 Cash at the beginning 104,051 100,555 113,935 116,327 Cash at the end 100,555 113,935 116,327 123,559 Diversity policy Yes Balance sheet summary (HKDm) *GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD’000 Shareholders' funds 283,481 315,449 353,785 397,372 Source: Company data, HSBC Long-term liabilities 165,045 167,873 151,114 122,795 Minority interests 10,125 11,701 13,307 15,100 Deferred items 17,554 17,554 17,554 17,554 NAV discount Total capital employed 476,204 512,576 535,759 552,822 30% Fixed assets 115,241 123,171 131,783 141,879 20% Other non-current assets 43,068 49,535 54,972 58,763 Current assets 567,032 698,479 844,943 1,047,026 10% Total assets 725,341 871,184 1,031,698 1,247,668 0% -10% Ratio, growth and per share analysis -20% -30% Year to 12/2018a 12/2019e 12/2020e 12/2021e -40% y-o-y % change -50% Revenue 3% 23% 23% 26% -60% PBT 14% -7% 20% 24% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Reported EPS 10% 0% 20% 17% HSBC EPS 8% 21% 20% 17% % to NAV +1 SD Mean -1 SD
Ratios (%) Source: Company data, Refinitiv Datastream, HSBC estimates ROIC ex-exceptional 10% 10% 11% 11% ROAE ex-exceptional 13% 15% 16% 17% ROAA ex-exceptional 5% 6% 6% 6% Price relative Gross profit margin 38% 34% 33% 32% Core profit margin 22% 21% 21% 19% 33.00 33.00 Interest cover ex-exceptional (x) 8.1 7.2 8.0 8.4 31.00 31.00 Net debt/equity (incl.restricted cash) 34% 36% 37% 38% Per share data (HKD) 29.00 29.00 Reported EPS (fully diluted) 4.10 4.09 4.90 5.75 27.00 27.00 HSBC EPS (fully diluted) 3.39 4.09 4.90 5.75 25.00 25.00 DPS 0.90 1.11 1.35 1.61 23.00 23.00 BV 25.87 28.79 32.29 36.27 21.00 21.00 Source: Company data, HSBC estimates 19.00 19.00 17.00 17.00 2017 2018 2019 China Overseas Land & Inv Rel to HSCEI
Note: Priced at close of 24 June 2019 Source: HSBC
43 Equities ● REMD June 2019
Financials & valuation: Shimao Property Hold
Financial statements Shimao: NAV breakdown Year to 12/2018a 12/2019e 12/2020e 12/2021e (RMBm) (HKD/sh) % of GAV Profit & loss summary (RMBm) Development properties Property sales revenue 80,907 105,848 127,385 151,574 Residential 169,807 58.8 66.2% Property investment & other revenue 4,606 5,560 6,899 9,912 Office/retail 10,588 3.7 4.1% Total revenue 85,513 111,408 134,284 161,487 Investment properties Cost of sales (58,564) (77,081) (94,099) (113,180) Office/retail 63,166 21.9 24.6% Gross profit 26,949 34,327 40,184 48,307 Hotel properties 12,928 4.5 5.0% Selling & Admin expenses (5,973) (7,455) (8,992) (10,719) Net debt (excluding restricted cash) (78,409) (27.1) Other gains & misc 2,233 306 315 325 Outstanding land premium (8,400) (2.9) Operating profit/EBIT 23,209 27,178 31,508 37,912 Outstanding LAT (54,737) (19.0) Net interest (337) (516) (698) (653) Fair value NAV 114,944 39.8 100.0% Share of profit from asso. (233) (163) (114) (118) PBT 22,638 26,499 30,696 37,141 Source: HSBC estimates
Taxation (10,327) (11,831) (13,468) (16,671) Minority interests (3,476) (3,927) (4,310) (4,741) Net profit 8,835 10,742 12,918 15,729 ESG metrics Core Profit 8,548 10,742 12,918 15,729 Environmental indicators 12/2018a Governance indicators 12/2018a Cash flow summary (RMBm) GHG emission intensity* N/A No. of board members 7 Cash flow from operations (8,811) (8,436) (9,911) (8,507) Energy intensity* N/A Average board tenure (years) 11.1 Capex (12,412) (12,272) (12,611) (12,893) CO2 reduction policy Yes Female board members (%) 28.6 Changes in investments and minorities 2,304 1,565 1,544 1,802 Social indicators 12/2018a Board members independence (%) 42.9 Dividends paid (3,693) (3,823) (4,344) (5,224) Other financing activities 37,763 19,397 23,699 27,047 Employee costs as % of revenue 2.4 Net change in cash 15,151 (3,569) (1,624) 2,224 Employee turnover (%) N/A Cash at the beginning 28,537 43,688 40,120 38,496 Diversity policy Yes Cash at the end 43,688 40,120 38,496 40,720 *GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD’000 Balance sheet summary (RMBm) Source: Company data, HSBC Shareholders' funds 64,334 73,267 83,606 95,879 Long-term liabilities 77,825 78,328 84,874 93,579 Minority interests 40,946 44,873 49,183 53,924 NAV discount Deferred items 6,596 6,596 6,596 6,596 20% Total capital employed 189,702 203,064 224,259 249,978 Fixed assets 61,010 64,223 65,236 90,941 0% Other assets 27,738 31,072 35,249 39,040 Current assets 288,849 342,591 378,783 423,031 -20% Total assets 377,597 437,886 479,268 553,012 -40%
-60% Ratio, growth and per share analysis Year to 12/2018a 12/2019e 12/2020e 12/2021e -80% y-o-y % change -100% Revenue 21% 30% 21% 20% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Gross profit 26% 27% 17% 20% PBT 21% 17% 16% 21% % to NAV +1 SD Mean -1 SD
Reported EPS 14% 23% 20% 22% Source: Company data, Refinitiv Datastream, HSBC estimates HSBC EPS 25% 27% 20% 22%
Ratios (%) ROIC ex-exceptional 7% 7% 8% 9% Price relative ROAE ex-exceptional 15% 17% 18% 19% ROAA ex-exceptional 2% 3% 3% 3% 27.80 27.80 Gross margin 32% 31% 30% 30% Core profit margin 10% 10% 10% 10% 22.80 22.80 Interest cover ex-exceptional (x) 3.4 3.1 3.2 4.1 Net debt/equity(excl. restricted cash 119% 123% 123% 101% 17.80 17.80 & MI, perp as debt) 5.30 5.30 Net debt/equity(incl. restricted cash 59% 66% 68% 58% and MI) 4.8012.80 12.804.80 Per share data (RMB) 4.30 4.30 Reported EPS (fully diluted) 2.65 3.25 3.91 4.76 3.807.80 7.803.80 HSBC EPS (fully diluted) 2.56 3.25 3.91 4.76 3.30 2017 2018 2019 3.30 DPS (HKD) 1.20 1.32 1.58 1.93 Shimao Property Rel to HSCEI BV (HKD) 20.7 23.9 27.5 31.8 2.80 2.80 Source: riced at close of 24 June 2019 Source: Company data, HSBC estimates 2.30 2.30
1.80 1.80 2017 2018 2019 SOHO China Limited Rel to HSCEI
44 Equities ● REMD June 2019
Financials & valuation: SOHO China Buy
Financial statements SOHO China: NAV breakdown Year to 12/2018a 12/2019e 12/2020e 12/2021e (RMBm) (HKD/sh) % of GAV Profit & loss summary (RMBm) Office/Retail 63,861 14.2 100% Property sales revenue 68 193 257 161 GAV 63,861 14.2 100.0% Property investment revenue 1,652 1,971 2,381 3,041 Net debt (excluding restricted cash) (15,034) (3.3) Total revenue 1,721 2,164 2,639 3,202 Fair Value NAV 48,827 10.9 Cost of sales (435) (595) (732) (831) Source: HSBC estimates
Gross profit 1,285 1,568 1,906 2,371 SG&A (278) (422) (475) (576) Other income and gains 1,327 148 104 45 ESG metrics Operating profit 2,335 1,294 1,535 1,840 Environmental Indicators 12/2018a Governance Indicators 12/2017a Net interest expense (471) (568) (604) (664) GHG emission intensity* 202.5 No. of board members 5 Revaluation gains 1,093 0 0 0 Energy intensity* 248.2 Average board tenure (years) N/A
PBT 2,957 727 931 1,176 CO2 reduction policy Yes Female board members (%) 20.0 Taxation (1,009) (182) (233) (294) Social Indicators 12/2018a Board members independence (%) 60.0 Minority interests (24) (76) (91) (122) Employee costs as % of revenues 12.8 Net profit 1,925 469 607 760 HSBC core profit 1,105 469 607 760 Employee turnover (%) N/A Cash flow summary (RMBm) Diversity policy Yes Cash flow from operations 1,096 850 653 746 Source: Company data, HSBC Capex (954) (617) (382) (357) * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Other investing activities 1,222 (33) (41) (51) Net cash from financing activities 500 (71) (46) (148) NAV discount Net change in cash 1,864 130 185 190 Cash at the beginning 3,702 5,566 5,696 5,881 -20% Cash at the end 5,566 5,696 5,881 6,070 Balance sheet summary (RMBm) -30% Shareholders’ funds 34,747 35,028 35,332 35,712 -40% Long-term liabilities 16,730 16,406 17,055 16,923 -50% Minority interests 1,047 1,123 1,213 1,336 -60% Deferred items and others 8,581 8,662 8,743 8,825 Total capital employed 61,105 61,218 62,343 62,795 -70% Fixed assets 59,742 60,631 61,301 61,993 -80% Other non-current assets 1,285 942 988 1,045 -90% Current assets 9,072 9,126 9,201 9,332 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total assets 70,099 70,698 71,490 72,371 % to NAV +1 SD Mean -1 SD
Ratio, growth and per share analysis Source: Company data, Refinitiv Datastream, HSBC estimates Year to 12/2018a 12/2019e 12/2020e 12/2021e y-o-y % change Revenue -12% 26% 22% 21% Price relative Operating profit 38% -45% 19% 20% PBT -64% -75% 28% 26% 5.30 5.30 Reported EPS -59% -76% 30% 25% HSBC EPS 141% -58% 30% 25% 4.80 4.80 Ratios (%) 4.30 4.30 ROIC excl. exceptional 1% 1% 1% 1% 3.80 3.80 ROAE excl. exceptional 1% 1% 2% 2% ROAA excl. exceptional 1% 1% 1% 1% 3.30 3.30 Gross profit margin 75% 72% 72% 74% 2.80 2.80 Core profit margin (excl. IP revaluation) 64% 22% 23% 24% 2.30 2.30 Interest cover excl. exceptional (x) 3.8 1.3 1.5 1.6 Net debt/equity (excl. restricted cash) 44% 43% 43% 42% 1.80 1.80 Net debt/equity (incl. restricted cash) 43% 42% 42% 41% 2017 2018 2019 Per share data (RMB) SOHO China Limited Rel to HSCEI Reported EPS (diluted) 0.37 0.09 0.12 0.15 Note: Priced at close of 24 June 2019 HSBC EPS (diluted) 0.21 0.09 0.12 0.15 Source: HSBC DPS (RMB) 0.03 0.04 0.06 0.07 BV 6.68 6.74 6.80 6.87 Source: Company data, HSBC estimates
45 Equities ● REMD June 2019
Financials & valuation: Champion REIT Hold
Financial statements Champion: NAV breakdown (based on DDM)
Year to 12/2018a 12/2019e 12/2020e 12/2021e Year DPU (HKD/unit) Profit & loss summary (HKDm) FY19e 0.295 Rental Income 2,594 2,892 3,151 3,202 FY20e 0.310 Other Income 371 348 355 361 FY21e 0.303 Operating Expenses (560) (583) (609) (619) Perpetual value 4.457 Net Property Income 2,405 2,656 2,898 2,945 Est. NAV 6.9 Non-property Expenses (316) (344) (373) (378) Operating Profit/EBIT 2,089 2,312 2,525 2,567 Source: HSBC estimates Net Interest Expense (400) (346) (317) (272) PBT 1,689 1,966 2,208 2,295 ESG metrics HSBC PBT 1,689 1,966 2,208 2,295 Taxation (289) (324) (364) (379) Environmental Indicators 12/2018a Governance Indicators 12/2018a Core Net Profit 1,400 1,642 1,844 1,916 GHG emission intensity* 74.0 No. of board members 7 Net impact of property rev reserve 6,412 0 0 0 Energy intensity* 115.5 Average board tenure (years) 10.6 Reported Profit 7,812 1,642 1,844 1,916 HSBC Net Profit 1,400 1,642 1,844 1,916 CO2 reduction policy Yes Female board members (%) 14.3 Distribution Income 1,530 1,734 1,940 2,012 Social Indicators 12/2018a Board members independence (%) 57.1 Employee costs as % of revenues NA Cash flow summary (HKDm) Net cash from operating activities 1,704 2,041 2,205 2,234 Employee turnover (%) 0 Cash flow from investing activities (219) 144 140 71 Diversity policy Yes Bank financing 200 300 0 0 Source: Company data, HSBC Distribution paid (1,462) (1,583) (1,745) (1,877) * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Net cash used in financing activities (1,275) (1,307) (1,770) (1,902) Net change in cash 209 878 574 403 Price relative Net cash at end 1,400 2,277 2,852 3,255
Balance sheet summary (HKDm) Shareholders’ funds 66,761 66,582 66,854 67,070 6.70 6.70 Long-term liabilities 11,307 11,582 15,282 15,282 Total capital employed 78,666 78,792 82,796 83,045 Fixed assets 83,135 83,135 83,135 83,135 5.70 5.70 Current assets 1,897 2,644 3,249 3,649 Total assets 85,291 85,818 86,423 86,823 4.70 4.70 Ratio, growth and per share analysis 3.70 3.70 Year to 12/2018a 12/2019e 12/2020e 12/2021e y-o-y % change 2.70 2.70 01/15 07/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18 Revenue 10% 9% 8% 2% Champion REIT Rel to HANG SENG INDEX Operating profit 11% 11% 9% 2% PBT -29% -76% 12% 4% Source: HSBC Reported EPS -30% -79% 12% 3% HSBC EPS 8% 13% 12% 3% Note: Priced at close of 24 Jun 2019
Ratios (%) ROIC ex-exceptional 2% 2% 2% 2% ROAE ex-exceptional 2% 2% 3% 3% ROAA ex-exceptionals 2% 2% 2% 2% EBITDA margin 70% 71% 72% 72% Core profit margin 47% 51% 53% 54% Interest cover ex-exceptional (x) 5.2 6.7 8.0 9.4 Debt/gross assets 18% 18% 18% 18% Net debt/EBITDA (x) 6.5 5.7 5.0 4.8
Per share data (HKD) EPS reported (fully diluted) 1.34 0.28 0.31 0.32 HSBC EPS (fully diluted) 0.25 0.28 0.31 0.32 DPS 0.262 0.295 0.328 0.339
46 Equities ● REMD June 2019
Financials & valuation: Hongkong Land Buy
Financial statements NAV estimates
Year to 12/2018a 12/2019e 12/2020e 12/2021e (USDm) (USD/sh) % of gross asset Profit & loss summary (USDm) Revenue - Rental Income 983 1,020 1,039 1,058 Hong Kong investment properties Revenue - Property Trading 1,533 1,022 434 981 Office 15,929 6.8 48% Revenue Others (service & mgmt. charges) 150 221 230 230 Retail 5,107 2.2 15% Total cost of sales (1,429) (1,043) (556) (1,015) Overseas properties Gross profit 1,236 1,219 1,147 1,255 Singapore Investment properties 2,123 0.9 6% Other Income 28 29 30 32 Investment properties in other regions 3,888 1.7 12% Admin & Other Expense (174) (192) (201) (211) Development properties China 3,103 1.3 9% Operating Profit/EBIT 1,089 1,056 977 1,076 Singapore 1,125 0.5 3% Net Interest (114) (154) (134) (125) Other regions 1,948 0.8 6% Non-operating profit/loss 265 382 466 549 Estimated net debt (3,916) (1.7) PBT 1,240 1,284 1,309 1,501 Taxation (206) (180) (169) (190) Est. NAV 29,307 12.50 100% Minority Interests 2 (7) (7) (18) Source: HSBC estimates
Core Net Profit 1,036 1,097 1,133 1,292 Cash flow summary (USDm) ESG metrics Cash flow from operations 604 1,062 2,010 1,437 Environmental Indicators 12/2018a Governance Indicators 12/2018a Capex (150) (1,282) (863) (449) Cash flow from investing activities (1,056) (1,282) (863) (449) GHG emission intensity* 57.3 No. of board members 15 Dividends paid (469) (515) (539) (562) Energy intensity* 92.7 Average board tenure (years) 12.0 Net cash used in financing activities 237 171 (430) (573) CO2 reduction policy Yes Female board members (%) 6.7 Net change in cash (215) (49) 716 415 Social Indicators 12/2018a Cash at the beginning 1,617 1,369 1,326 2,043 Board members independence (%) 0 Cash at the end 1,369 1,326 2,043 2,458 Employee costs as % of revenues 5.9 Employee turnover (%) NA Balance sheet summary (USDm) Shareholders’ funds 38,342 39,208 40,071 41,060 Diversity policy Yes Long-term liabilities 4,145 3,994 3,711 3,387 Source: Company data, HSBC Minority interests 28 35 42 60 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Total capital employed 42,713 43,436 44,022 44,705 Fixed assets 33,846 35,124 35,982 36,427 HKL (discount)/premium to NAV Other assets 6,855 7,237 7,703 8,252 15% Current assets 4,262 5,030 6,831 8,136 Total assets 44,963 47,391 50,517 52,815 0%
-15% Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e -30% y-o-y % change Revenue 65% -15% -25% 33% -45% Operating profit 24% -3% -8% 10% PBT 13% 4% 2% 15% -60% Reported EPS 10% 6% 3% 14% 07 08 09 10 11 12 13 14 15 16 17 18 19 HSBC EPS 10% 6% 3% 14% % to NAV -1 S.D Ratios (%) ROIC ex-exceptional 3% 3% 3% 3% Source: HSBC estimates ROAE ex-exceptional 3% 3% 3% 3% Price relative ROAA ex-exceptional 2% 3% 3% 3% Operating margin 41% 47% 58% 48% Core profit margin 39% 48% 66% 57% Interest cover ex-exceptional (x) 9.1 7.1 8.5 10.4 8.60 8.60 Net debt/equity 9% 8% 6% 4% PB (x) 0.4 0.4 0.4 0.4 PE (x) 15.1 14.3 13.8 12.1 7.60 7.60 Dividend yield 3.3% 3.4% 3.6% 3.7% Per share data (USD) 6.60 6.60 Reported EPS (diluted) 0.44 0.47 0.48 0.55 HSBC EPS (diluted) 0.44 0.47 0.48 0.55 5.60 5.60 DPS 0.22 0.23 0.24 0.25 4.60 4.60 01/15 07/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18 Hongkong Land Rel to HANG SENG INDEX
Source: HSBC Note: Priced at close of 24 Jun 2019
47 Equities ● REMD June 2019
Financials & valuation: Swire Properties Buy
Financial statements Swire Properties: NAV breakdown
Year to 12/2018a 12/2019e 12/2020e 12/2021e Particulars (HKDm) HKD/share % of GAV Profit & loss summary (HKDm) Investment properties-HK 253,909 43.4 73% Property Investment 12,117 13,762 14,819 15,234 Office 186,707 31.9 54% Property Development 1,061 976 605 2,808 Retail 47,968 8.2 14% Hotels & Other Business 1,541 1,612 1,681 1,709 Residential 11,365 1.9 3% Operating Costs (ex. Dep. & Amor.) (5,881) (6,022) (6,315) (8,680) Hotel 7,869 1.3 2% EBITDA 8,838 10,328 10,790 11,071 Development properties 4,667 0.8 1% Depreciation and Amortisation (394) (401) (408) (416) China-Investment properties 73,541 12.6 21% Other Gains 1,469 2,547 0 0 Office (completed) 45,203 7.7 13% Non-operating Profit/Loss 20,515 0 0 0 Retail (completed) 13,904 2.4 4% Net Interest Expense (882) (810) (765) (747) Under developments 7,814 1.3 2% Share of Profit from Asso. 915 1,062 1,140 1,098 China residential and hotels 6,620 1.1 2% PBT 30,461 12,725 10,756 11,005 Others (US props and HK other props) 16,645 2.8 5% Taxation (1,740) (1,900) (1,551) (1,595) GAV 348,762 59.6 100% Minority Interests (55) (40) (41) (42) Net debt -14,827 -2.5 Net Profit 28,666 10,784 9,165 9,369 Net asset value 333,935 57.1 Net Impact of Ppty. Rev. Reserve/gains (18,518) 2,127 0 0 Source: HSBC estimates Core Profit 10,148 12,911 9,165 9,369 ESG metrics
Cash flow summary (HKDm) Environmental Indicators 12/2018a Governance Indicators 12/2018a Cash flow from operations 10,397 11,156 10,006 11,651 Capex (4,038) (3,561) (4,469) (3,163) GHG emission intensity* 114.7 No. of board members 13 Other investments activities 4,901 13,647 (39) (27) Energy intensity* 177.6 Average board tenure (years) 5.5 Dividends paid (4,622) (5,031) (5,207) (5,207) CO2 reduction policy Yes Female board members (%) 30.8 Others fin. activities (6,206) (3,123) (2,238) (1,113) Social Indicators 12/2018a Board members independence (%) 38.5 Net change in cash 432 13,089 (1,947) 2,141 Cash at beginning 1,708 2,093 15,182 13,235 Employee costs as % of revenues 12.6 Cash at end 2,093 15,182 13,235 15,376 Employee turnover (%) 24.0 Diversity policy Yes Balance sheet summary (HKDm) Shareholders’ funds 279,275 286,980 290,938 295,042 Source: Company data, HSBC Long-term liabilities 30,769 28,855 27,738 27,680 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s
Minority interests 2,016 2,056 2,097 2,139 Deferred tax & others 9,597 9,597 9,597 9,597 Swire Properties (disc)/prem to NAV Total capital employed 321,657 327,489 330,370 334,458 Fixed assets 281,063 290,130 315,152 340,528 0% Other assets 31,000 31,371 31,761 32,070 -10% Current assets 21,584 20,028 18,639 22,266 Total assets 333,647 341,530 365,553 394,864 -20% Ratio, growth and per share analysis -30%
Year to 12/2018a 12/2019e 12/2020e 12/2021e -40% Y-o-y % change -50% Revenue -21% 11% 5% 15% Operating profit -10% 18% 5% 3% -60% PBT -15% -58% -15% 2% Jan-12 Apr-13 Jun-14 Aug-15 Oct-16 Dec-17 Mar-19 Reported EPS -16% -62% -15% 2% HSBC EPS 30% 27% -29% 2% % to NAV Target NAV (%)
Ratios (%) Source: HSBC estimates ROIC ex exceptionals 4% 5% 3% 3% ROAE ex exceptionals 4% 5% 3% 3% Price relative ROAA ex exceptionals 3% 4% 3% 2% Operating margin 57% 61% 61% 54% 37.00 37.00 Core profit margin 69% 79% 54% 47% Interest cover ex exceptionals (x) 8.9 11.6 12.7 13.3 Net debt/equity 11% 5% 5% 5% 32.00 32.00 PB(x) 0.7 0.7 0.7 0.6 PE(x) 18.8 14.8 20.8 20.4 27.00 27.00 Dividend yield 2.6% 2.7% 2.7% 2.8% Per share data (HKD) 22.00 22.00 Reported EPS (diluted) 4.90 1.84 1.57 1.60 HSBC EPS (diluted) 1.73 2.21 1.57 1.60 DPS 0.84 0.89 0.89 0.90 17.00 17.00 01/15 07/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18 Source: Company data, HSBC estimates Swire Properties Rel to HANG SENG INDEX
Source: HSBC Note: Priced at close of 24 Jun 2019
48 Equities ● REMD June 2019
Financials & valuation: Wharf REIC Buy
Financial statements Wharf REIC : Est. NAV breakdown
Year to 12/2018a 12/2019e 12/2020e 12/2021e Particulars (HKDm) HKD/ % of total Profit & loss summary (HKDm) Share asset Property Development 89 413 0 0 HK investment prop 307,581 101.3 96% Property Investment 14,304 15,258 16,554 17,478 Office 90,938 30.0 28% Hotels 1,821 2,223 2,231 2,239 Retail 212,983 70.1 67% Others 267 274 282 289 Residential and others 3,659 1.2 1% Total revenue 16,481 18,169 19,066 20,006 China investment Prop 1,281 0.4 0% Cost of Sales (3,757) (4,027) (3,947) (4,074) Office 861 0.3 0% Gross Profit 12,724 14,141 15,119 15,932 Retail 26 0.0 0% Net Interest Expense (815) (784) (736) (701) Residential and others 394 0.1 0% Share of Profit from Asso. 233 2 80 0 Development properties 1,062 0.3 0% Property revaluation 8,065 0 0 0 Hotels 10,131 3.3 3% Other exceptionals 46 26 35 49 GAV 320,054 105.4 100% PBT 20,253 13,386 14,497 15,280 Net debt (36,491) (12.0) Taxation (1,994) (2,373) (2,515) (2,653) Est. NAV 283,563 93.4 Minority Interests (232) (132) (170) (185) Source: HSBC estimates Net Profit 18,027 10,881 11,812 12,442 Net impact of revaluation 7,974 0 0 0 ESG metrics Core Profit 10,053 10,881 11,812 12,442 Environmental Indicators 12/2018a Governance Indicators 12/2018a Cash flow summary (HKDm) GHG emission intensity* 58.1 No. of board members 10 Cash flow from operations 9,498 11,486 12,708 13,513 Energy intensity* 108.1 Average board tenure (years) 1.2 Capex (588) (2,894) (1,998) (1,650) Changes in investments 375 (26) (104) (24) CO2 reduction policy Yes Female board members (%) 20 New shares issued 0 0 0 0 Social Indicators 12/2018a Board members independence (%) 50 Dividends paid (6,199) (6,724) (7,375) (7,883) Employee costs as % of revenues 6.1 Others (3,369) (980) (2,005) (1,626) Employee turnover (%) 34.6 Net change in cash (283) 861 1,225 2,330 Cash at beginning 3,076 2,675 3,536 4,761 Diversity policy Yes Cash at end 2,675 3,536 4,761 7,091 Source: Company data, HSBC Balance sheet summary (HKDm) * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Shareholders’ funds 218,797 223,255 227,916 232,779 Long-term liabilities 39,068 37,876 35,397 33,171 Wharf REIC (discount)/premium to NAV Minority interests 5,535 5,667 5,837 6,022 Deferred tax and others 2,609 2,739 2,876 3,020 -20% Total capital employed 266,009 269,538 272,026 274,992 Fixed assets 267,261 269,093 270,437 271,779 -25% Other assets 5,738 5,769 5,878 5,907 Current assets 7,357 8,489 9,999 12,396 -30% Total assets 280,356 283,351 286,314 290,082 -35%
Ratio, growth and per share analysis -40% -45% Year to 12/2018a 12/2019e 12/2020e 12/2021e y-o-y % change -50% Revenue -21% 10% 5% 5% Operating profit -18% 11% 7% 5% PBT -9% -34% 8% 5% Core profit 5% -40% 9% 5% NAV disc (%) Mean Reported EPS 9% 8% 9% 5% HSBC EPS -21% 10% 5% 5% Source: Bloomberg, HSBC estimates Ratios (%) Price relative ROIC ex exceptionals 4% 4% 5% 5% ROAE ex exceptionals 5% 5% 5% 5% ROAA ex exceptionals 4% 4% 4% 4% 66.00 66.00 Operating margin 77% 78% 79% 80% Core profit margin 61% 60% 62% 62% 61.00 61.00 Interest cover ex exceptionals (x) 15.3 17.7 20.1 22.3 Net debt/equity 18% 16% 14% 12% 56.00 56.00 PB(x) 0.8 0.8 0.7 0.7 51.00 51.00 PE(x) 16.8 15.5 14.3 13.6 Dividend yield 3.8% 4.2% 4.5% 4.8% 46.00 46.00 Per share data (HKD) Reported EPS (fully diluted) 5.94 3.58 3.89 4.10 41.00 41.00 HSBC EPS (fully diluted) 3.31 3.58 3.89 4.10 11/17 05/18 10/18 05/19 DPS 2.10 2.33 2.53 2.66 Wharf REIC Rel to HANG SENG INDEX
Source: HSBC Note: Priced at close of 24 Jun 2019
49 Equities ● REMD June 2019
Financials & valuation: Hysan Development Hold
Financial statements Hysan: NAV breakdown
Year to 12/2018a 12/2019e 12/2020e 12/2021e Particulars (HKDm) (HKD/sh) % of GAV Profit & loss summary (HKDm) HK investment portfolio Turnover 3,890 4,147 4,232 4,346 Office 39,660 37.9 43% Operating Expenses (523) (540) (541) (555) Retail 37,000 35.4 41% Net Property Income 3,367 3,607 3,691 3,791 Lux. Res. 6,548 6.3 7% Net Interest (222) (211) (238) (198) PRC investment portfolio Other Expenses (227) (272) (274) (277) Office 1,122 1.1 1% Operating Profit 2,980 3,213 3,265 3,404 Retail 2,793 2.7 3% Share of Profit from JCEs 179 219 246 250 Lux. Res. 777 0.7 1% PBT 3,159 3,431 3,512 3,654 Taxation (481) (516) (524) (547) HK development property 3,418 3.3 4% Minority Interests (142) (163) (167) (172) Gross Asset Value 91,317 87.3 100% Core Net Profit 2,536 2,753 2,820 2,934 Estimated net debt (4,167) (4.0) Net impact of revaluation 3,497 0 0 0 Hysan NAV 87,150 83.3 Reported Profit 6,033 2,753 2,820 2,934 Source: HSBC estimates HSBC net profit 2,536 2,753 2,820 2,934 Cash flow summary (HKDm) Net cash from operating activities 2,751 3,029 3,101 6,370 ESG metrics Capex (1,265) (1,716) (1,718) (1,716) Other investing activities (990) (1,682) (1,690) (1,678) Environmental Indicators 12/2018a Governance Indicators 12/2018a Dividends paid (1,572) (1,663) (1,747) (1,799) GHG emission intensity* 82.4 No. of board members 10 Other financing activities (1,726) (1,455) (1,871) (3,076) Energy intensity* 104.2 Average board tenure (years) 12.3 Net change in cash 35 (108) (460) 1,616 Cash at begin inc. time deposits 2,782 2,817 2,709 2,249 CO2 reduction policy Yes Female board members (%) 20.0 Net cash at end inc. time deposits 2,817 2,709 2,249 3,865 Social Indicators 12/2018a Board members independence (%) 50.0 Balance sheet summary (HKDm) Employee costs as % of revenues 6.3 Shareholders’ funds 74,431 75,646 76,845 78,105 Employee turnover (%) 28.9 Long-term liabilities 7,571 8,018 8,242 7,317 Diversity policy Yes Minority interests 3,206 3,244 3,286 3,333 Total capital employed 85,208 86,907 88,372 88,755 Source: Company data, HSBC Fixed assets 78,189 79,888 81,588 83,287 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s
Other assets 5,607 5,879 6,183 6,496 Current assets 3,247 3,170 2,745 4,398 Total assets 87,043 88,937 90,516 94,181 Hysan (discount)/premium to NAV 0% Ratio, growth and per share analysis -10%
Year to 12/2018a 12/2019e 12/2020e 12/2021e -20% + y-o-y % change -30% Revenue 10% 7% 2% 3% Operating profit -1% 8% 2% 4% -40% PBT -1% 9% 2% 4% -50% Reported EPS 66% -54% 2% 4% HSBC EPS 2% 9% 2% 4% -60% Ratios (%) -70% ROIC ex-exceptional 4% 4% 4% 4% 07 08 09 10 11 12 13 14 15 16 17 18 19 ROAE ex-exceptional (ex-revaluation res) 4% 4% 4% 4% ROAA ex-exceptionals 3% 3% 3% 3% % to NAV +1 S.D EBITDA margin 77% 78% 78% 79% -1 S.D Mean Core profit margin 65% 66% 67% 68% Source: HSBC estimates Interest cover ex-excep (x) 14.4 16.2 14.7 18.2 Net debt/equity 5% 6% 6% 3% Price relative PB (x) 0.6 0.6 0.6 0.5 PE (x) 16.7 15.4 15.0 14.4 Dividend yield 3.6% 3.8% 3.9% 4.0% Per share data (HKD) 46.00 46.00 EPS reported 5.77 2.63 2.70 2.80 SBC EPS 2.42 2.63 2.70 2.80 41.00 41.00 DPS 1.44 1.54 1.59 1.64 36.00 36.00
31.00 31.00
26.00 26.00 01/15 07/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18 Hysan Development Rel to HANG SENG INDEX
Source: HSBC Note: Priced at close of 24 Jun 2019
50 Equities ● REMD June 2019
Financials & valuation: CapitaLand Buy
Financial statements RNAV Computation (SGDm) Per Share % of Year to 12/2017 12/2018 12/2019e 12/2020e (SGD) GAV Profit & loss summary (SGDm) CapitaLand Singapore 11,880 2.80 21% Revenue 4,618 5,602 5,472 6,057 CapitaLand China 9,291 2.19 17% EBIT 3,302 4,145 2,542 2,922 CapitaMalls Asia 23,286 5.48 42% Net interest (487) (636) (649) (713) Serviced Residences (Ascott) 7,838 1.85 14% PBT 2,816 3,509 1,893 2,209 Others 3,370 0.79 6% Taxation (469) (659) (398) (464) Total attributable GAV* 55,665 13.11 100% PAT 2,347 2,850 1,495 1,745 Less: Attributable net liabilities* (34,835) (8.20) Minority interest (777) (1,087) (496) (559) RNAV 20,830 4.90 PATMI 1,570 1,762 1,000 1,187 No. of shares (m) 4,247 Operating PATMI 927 872 1,000 1,187 RNAV per share (SGD) 4.90 PATMI (ex-revaluations) – core 766 872 1,000 1,187 Target premium / (discount) to RNAV 15% Cash flow summary (SGDm) Target price (SGD) 4.15 Cash flow from operations 2,166 553 1,916 1,771 *Note: For the purposes or computing our RNAV, our attributable GAV and attributable net Cash flow from investing activities (1,770) (1,356) (3,240) (2,657) liabilities are computed on the basis of equity accounting for all REITs and assets in which CAPL Cash flow from financing 979 (217) 673 608 has a stake of 50% or lower. Other adjustments (48) (0) - - ESG metrics Change in cash 1,328 (1,020) (651) (277) Environmental Indicators 12/2018a Governance Indicators 12/2018a Opening cash balance 4,778 6,080 5,005 4,354 Closing cash balance 6,105 5,060 4,354 4,077 GHG emission intensity* 152.9 No. of board members 12 Balance sheet summary (SGDm) Energy intensity* 308.8 Average board tenure (years) 4.2 Cash and cash equivalents 6,105 5,060 4,354 4,077 CO2 reduction policy Yes Female board members (%) 16.7 Total current assets 12,312 12,446 11,576 12,037 Social Indicators 12/2018a Board members independence (%) 83.3 Non-current assets 49,227 52,201 55,755 58,755 Employee costs as % of revenues n/a Total assets 61,539 64,648 67,331 70,792 Employee turnover (%) 17.0 Total debt 21,695 23,634 25,634 27,634 Diversity policy Yes Total liabilities 29,421 31,341 33,507 36,261 Source: Company data, HSBC Total equity 32,118 33,307 33,807 34,494 Shareholder’s funds 18,413 18,953 19,453 20,140 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s CapitaLand Limited: PBV chart Ratio, growth and per share analysis 2.5 Year to 12/2017 12/2018 12/2019e 12/2020e 2.0 Y-o-y % change +1SD: 1.42 Revenue -12% 21% -2% 11% 1.5 EBIT 40% 26% -39% 15% PBT 48% 25% -46% 17% Avg: 1.02 1.0 PATMI 32% 12% -43% 19% EPS (basic) 32% 14% -43% 19% 0.5 Ratios (%) -1SD: 0.63 ROE 9% 9% 5% 6% 0.0 ROE (ex-revaluations) – core 4% 5% 5% 6% ROA (ex-revaluations) – core 6% 4% 4% 4% Jan-05 Aug-08 Mar-12 Nov-15 Jun-19 EBITDA margin 72% 74% 46% 48% CAPL PBV Avg Trendline EBITDA/net interest expense 6.8 6.5 3.5 3.8 +1 std dev -1 std dev Net debt/equity 49% 56% 63% 68% Source: Bloomberg, HSBC Net debt/EBITDA (x) 3.9 4.1 7.8 7.7 Per share data (SGD) Performance relative to FSSTI EPS* (basic) 0.37 0.42 0.24 0.29 500 EPS* (diluted) 0.34 0.39 0.21 0.25 DPS 0.12 0.12 0.12 0.12 400 NTA per share 4.20 4.40 4.52 4.69 BV per share 4.34 4.55 4.67 4.84 300 *estimates reflect only core numbers 200
100
0 Jan-05 Aug-08 Mar-12 Oct-15 Jun-19 CAPL FSSTI
Source: Bloomberg, HSBC
51 Equities ● REMD June 2019
Financials & valuation: Frasers Property Limited Buy
Financial statements RNAV Computation (SGDm) Per share % of Year to 09/2018 09/2019e 09/2020e 09/2021e (SGD) GAV Profit & loss summary (SGDm) Business Segments Revenue 4,312 3,799 3,820 3,917 Residential 3,473 1.18 12% EBIT 1,279 1,352 1,246 1,193 Former Australand portfolio 2,140 0.73 7% Net interest (280) (325) (334) (339) Investment properties – Retail 2,420 0.82 8% Other charges (Fair value change on 478 0 0 0 Investment properties – Office/Business parks 2,358 0.80 8% properties, exceptional items etc.) Listed REITs (FCT, FCOT, FHT, FLT) 10,859 3.70 37% PBT (core) 999 1,027 912 853 Global hospitality 2,659 0.91 9% Taxation (282) (152) (127) (110) Stakes in listed Thai companies 1,910 0.65 6% PAT (core) 944 875 785 744 Continental Europe, UK 2,665 0.91 9% Minority Interest (436) (263) (235) (223) Funds management business 417 0.14 1% PATMI (core) 507 613 549 521 Other assets (ex-SG, ex-CH, ex-AUS) 501 0.17 2% Preferred equity interests (83) (91) (91) (91) Total GAV 29,402 10.01 100% PATMI (core) – Common equity holders 425 521 458 429 Less: Net debt (12,790) (4.35) Cash flow summary (SGDm) Other liabilities (net) and minority interests (5,800) (1.97) Perpetual securities (1,950) (0.66) Cash flow from operations 493 1,376 1,596 1,758 RNAV 8,862 3.02 Cash flow from investing activities (2,010) (1,311) (1,319) (1,324) No. of shares (m) 2,938 Cash flow from financing 1,560 (690) (690) (690) RNAV per share (SGD) 3.02 Change in cash 42 (625) (413) (255) Premium / discount to RNAV -25% Cash at beginning 2,136 2,136 1,511 1,098 Target price (SGD) 2.25 Effect of exchange rate on opening cash (45) 0 0 0 Bank overdraft 3 0 0 0 Cash at end (excluding bank overdrafts) 2,136 1,511 1,098 843 ESG metrics Total cash (including cash held by REITs) 2,136 1,511 1,098 843 Environmental Indicators Governance Indicators Balance sheet summary (SGDm) GHG Intensity (kg/USD) 54.2 No. of board members 11 Cash & cash equivalents 2,136 1,511 1,098 843 Energy Intensity (kWh/USD) 91.9 Average board experience (years) 4.7 Current assets excluding cash 5,140 5,085 5,087 5,098 CO2 reduction policy Y Female board members (%) 9 Non-current assets 25,144 25,944 26,744 27,544 Board members Independence (%) 55 Total assets 32,421 32,541 32,930 33,485 Social Indicators Total debt 14,926 14,926 14,926 14,926 Employee costs as % of sales n/a Total liabilities 17,793 17,642 17,824 18,200 Employee turnover (%) n/a Total equity 14,628 14,899 15,106 15,285 Diversity policy Y Preferred equity and minorities 7,266 7,266 7,266 7,266 Source: Company data, HSBC Common equity holders’ funds 7,362 7,633 7,840 8,019 FPL: Historical PBV chart
Ratio, growth and per share analysis 0.9 Year to 09/2018 09/2019e 09/2020e 09/2021e Y-o-y % change 0.8 +1SD: 0.78 Revenue 7% -12% 1% 3% Avg: 0.70 EBIT 17% 6% -8% -4% 0.7 PBT core 3% 3% -11% -6% PATMI core – Common equity holders 1% 23% -12% -6% 0.6 -1SD: 0.63 EPS core – Common equity holders 1% 23% -12% -6% Ratios (%) 0.5 ROE (core – Common equity) 6% 7% 6% 5% Jan-14 Aug-14 Mar-15 Oct-15 Jun-16 Jan-17 Aug-17 Mar-18 Oct-18 Jun-19 ROA (core) 4% 4% 4% 4% FPL PBV Avg Trendline +1 std dev -1 std dev EBIT Margins 24% 32% 30% 28% Net debt/total equity 87% 90% 92% 92% Source: Bloomberg, HSBC Net debt and prefs/ total common equity 118% 120% 121% 122% Net debt/EBIT (x) 10.0 9.9 11.1 11.8 Per share data (SGD) FPL: Performance relative to FSSTI EPS core (basic) – Common equity holders 14.6 17.9 15.7 14.7 160.0 EPS core (fully diluted) – Common equity 14.5 17.7 15.6 14.6 holders DPS (basic) 8.6 8.6 8.6 8.6 130.0 DPS (fully diluted) 8.6 8.5 8.5 8.5
100.0
70.0 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Oct-18 Jun-19
FPL FSSTI Source: Bloomberg, HSBC
52 Equities ● REMD June 2019
Financials & valuation: Frasers Centrepoint Trust Hold
Financial statements RNAV computation (SGDm) Year to 09/2018 09/2019e 09/2020e 09/2021e Gross asset valuation Profit & loss summary (SGDm) Causeway Point 1,200 Gross revenue 193 206 211 216 Northpoint 803 Property expenses (56) (57) (58) (60) Changi City Point 398 Net property income 137 149 153 156 YewTee Point 201 Asset management and trust expenses (17) (23) (19) (19) Anchorpoint 125 EBIT 120 126 134 137 Bedok Point 92 Net interest expense (20) (25) (29) (29) Waterway Point 244 Share of results of associate 5 16 36 37 Other assets 457 Fair value gains 62 0 0 0 Total GAV 3,520 Income before taxes 167 117 141 145 Debt (994) Income tax expense 0 0 0 0 Other liabilities (94) Income after tax 167 117 141 145 Total liabilities (1,088) Net investment income (for distribution) 111 127 147 151 RNAV 2,433 Cash flow summary (SGDm) No. of units (m) 1,114 RNAV / unit (SGD) 2.18 Cash generated from operations 137 143 139 142 Cash flows from investing activities (12) (603) 36 37 Cash flows from financing activities (117) 466 (176) (180) ESG metrics Net change in cash and cash equivalents 8 7 (1) (1) Environmental Indicators 09/2018a Governance Indicators 09/2018a Beginning cash and cash equivalents 14 22 29 28 GHG emission intensity* 86.9 No. of board members 6 Cash and cash equivalents at end 22 29 28 27 Balance sheet summary (SGDm) Energy intensity* 207.1 Average board tenure (years) 6.4 CO2 reduction policy Yes Female board members (%) 0 Non-current assets Social Indicators 09/2018a Investment properties 2,749 2,749 2,749 2,749 Board members independence (%) 50 Other non-current assets 66 686 688 689 Employee costs as % of revenues n/a Total non-current assets 2,815 3,435 3,437 3,438 Employee turnover (%) 13.3 Current assets Diversity policy Yes Trade and other receivables 3 8 8 8 Source: Company data, HSBC Cash and cash equivalents 22 29 28 27 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Total current assets 25 36 36 35 Total Assets 2,840 3,471 3,472 3,474 Current liabilities FCT: Historical PBV chart Trade and other payables 46 60 61 63 1.5 Short term borrowings 217 203 248 248 Other current liabilities 16 16 16 16 Total current liabilities 280 279 326 327 Non-current liabilities 1.3 Interest bearing loans & borrowings 596 791 745 745 +1 sd: 1.18 Other non-current liabilities 32 32 32 32 Avg: 1.10 Total non-current liabilities 627 822 777 777 1.1 Total Liabilities 907 1,102 1,103 1,104 -1 sd: 1.01 Net Assets 1,934 2,370 2,369 2,369
0.9 Ratio growth and per unit analysis Jan-10 Jul-11 Feb-13 Sep-14 Apr-16 Nov-17 Jun-19 Year to 09/2018 09/2019e 09/2020e 09/2021e FCT PBV Average +1 stdev -1 stdev
Y-o-y % change Source: Bloomberg, HSBC Revenue 6% 7% 2% 2% Net property income 6% 9% 2% 2% FCT: Performance relative to FSSTI & FSTREI Income after tax -14% -30% 20% 3% Net investment income (for distribution) 1% 14% 15% 3% 180 Fully diluted EPU -14% -36% 10% 3% Fully diluted DPU 1% 3% 6% 3% 160 Ratios EBIT margin 62% 61% 63% 63% 140 Net Debt/Assets 28% 28% 28% 28% EBIT/Net interest expense 6.0 5.1 4.7 4.8 120 Net debt/EBIT 6.6 7.7 7.2 7.1 Per unit data (cents) 100 EPU 18.0 11.5 12.7 13.0 Diluted EPU 18.0 11.5 12.7 13.0 80 DPU 12.0 12.4 13.2 13.5 Jan-10 Jul-11 Feb-13 Sep-14 Apr-16 Nov-17 Jun-19 Diluted DPU 12.0 12.4 13.2 13.5 FCT FSSTI FSTREI Dividend yield (%) 4.6% 4.8% 5.0% 5.2% Source: Bloomberg, HSBC
53 Equities ● REMD June 2019
Notes
54 Equities ● REMD June 2019
Notes
55 Equities ● REMD June 2019
Notes
56 Equities ● REMD June 2019
Disclosure appendix
Analyst Certification The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Michelle Kwok, Pratik Ray, CFA, Raymond Liu, CFA, Albert Tam, Simon Sin, Derek Chang and Max Liang
Important disclosures Equities: Stock ratings and basis for financial analysis HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).
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*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
57 Equities ● REMD June 2019
Rating distribution for long-term investment opportunities As of 26 June 2019, the distribution of all independent ratings published by HSBC is as follows: Buy 52% ( 29% of these provided with Investment Banking Services ) Hold 38% ( 27% of these provided with Investment Banking Services ) Sell 10% ( 21% of these provided with Investment Banking Services )
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
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HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price date Disclosure CAPITALAND CATL.SI 3.54 25 Jun 2019 4, 5, 6, 7, 12 CHAMPION REIT 2778.HK 6.69 25 Jun 2019 4, 6, 7 CHINA OVERSEAS LAND & INV 0688.HK 27.60 25 Jun 2019 4, 6, 11 FRASERS CENTREPOINT TRUST FCRT.SI 2.61 25 Jun 2019 4 FRASERS PROPERTY LIMITED FRPL.SI 1.84 25 Jun 2019 4, 6 HONGKONG LAND HKLD.SI 6.81 25 Jun 2019 5, 6, 7 HYSAN DEVELOPMENT 0014.HK 40.50 25 Jun 2019 4, 5, 6, 7 SHIMAO PROPERTY 0813.HK 23.90 25 Jun 2019 1, 5, 6, 7 SOHO CHINA LIMITED 0410.HK 2.61 25 Jun 2019 5, 6, 7 SWIRE PROPERTIES 1972.HK 32.65 25 Jun 2019 4, 5, 6, 7 Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 May 2019, HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company
58 Equities ● REMD June 2019
12 As of 20 Jun 2019, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. 13 As of 20 Jun 2019, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.
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Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities. This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.
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Additional disclosures 1 This report is dated as at 27 June 2019. 2 All market data included in this report are dated as at close 24 June 2019, unless a different date and/or a specific time of day is indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument. 5 As of 14 Jun 2019 HSBC owned a significant interest in the debt securities of the following company(ies): HYSAN DEVELOPMENT, SWIRE PROPERTIES Production & distribution disclosures 1. This report was produced and signed off by the author on 26 Jun 2019 08:24 GMT.
2. In order to see when this report was first disseminated please see the disclosure page available at https://www.research.hsbc.com/R/34/LMdS9v9
59 Equities ● REMD June 2019
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Global Financial Institution Group Research Team
Banks Insurance Latin America Europe Europe Jonathan Brandt, CFA +1 212 525 4499 Co-Head of European Insurance [email protected] Robin Down +44 20 7991 6926 Dhruv Gahlaut, CFA +44 20 7991 6728 [email protected] [email protected] Mariano Szachtman 54 11 4121 7629 [email protected] Domenico Santoro +44 20 7991 0378 Co-Head of European Insurance [email protected] Thomas Fossard +33 1 56 52 43 40 Ethan Kirwin +1 212 525 3035 [email protected] [email protected] Kiri Vijayarajah +44 20 7005 8621 [email protected] Steven Haywood +44 20 7991 3184 Eduardo Altamirano +1 212 525 8333 [email protected] [email protected] Iason Kepaptsoglou +44 20 7991 6722 [email protected] LatAm Cement and Constructions, Real Estate Asia Coleman Clyde +1 212 525 2441 Nigel Fletcher +44 20 7992 0985 Head of Financials Equity Research, Asia- [email protected] [email protected] Pacific Kailesh Mistry, CFA +852 2822 4321 Credit Research Global Head of Exchanges [email protected] Johannes Thormann +49 211 910 3017 Ivan Zubo +44 20 7991 5975 [email protected] Vinod Rajamani +91 22 2268 1232 [email protected] [email protected] Salman A Khan +44 20 3268 3158 Banks and Insurance [email protected] Edwin Liu +852 2822 2895 [email protected] Asia CEEMEA Head of Global Research, Asia-Pacific Andrzej Nowaczek +44 20 7991 6709 Real Estate /Conglomerates Dilip Shahani +852 2822 4520 [email protected] [email protected] Europe Aybek Islamov +971 44 236 921 Head of Real Estate, Europe Sovereigns and Financial Institutions [email protected] Stephen Bramley-Jackson +971 4 423 6903 Devendran Mahendran +852 2822 4521 [email protected] [email protected] Henry Hall +27 11 880 1855 [email protected] Stéphanie Dossmann +33 1 56 52 43 01 Specialist Sales [email protected] Dr. Cihan Saraoglu +90 212 376 46 20 Carlo Digrandi +44 20 7991 6843 [email protected] Thomas Martin +49 211 910 3276 [email protected] [email protected] Latin America Financials Matthew Robertson +44 20 7991 5077 [email protected] Global Sector Head, EM Banks Asia Carlos Gomez-Lopez, CFA +1 212 525 5253 Head of Real Estate Research, Asia-Pacific [email protected] Michelle Kwok +852 2996 6918 [email protected] Neha Agarwala, CFA +1 212 525 5418 [email protected] Puneet Gulati +91 22 2268 1235 Natalie Theodozio +1 212 525 0912 [email protected] [email protected] Saurabh Jain +91 22 6164 0691 [email protected] Asia Head of Financials Equity Research, Asia- Pratik Burman Ray +65 6658 0611 Pacific [email protected] Kailesh Mistry, CFA +852 2822 4321 [email protected] Raymond Liu +852 2996 6743 [email protected] Head of Greater China Banks Research Gary Lam, CFA +852 2996 6926 Albert Tam +852 2822 4395 [email protected] [email protected]
York Pun +852 2822 4396 Simon Sin +852 2996 6514 [email protected] [email protected]
Livy Lyu +852 2822 2981 Max Liang +852 2996 6629 [email protected] [email protected]
Aseem Pant +91 22 3396 0688 Regional Head of Utilities and Alternative Energy [email protected] and HK/China Conglomerates Research Evan Li +852 2996 6619 Umang Shah +91 22 2268 1243 [email protected] [email protected] Wilson Ling +852 2914 9795 Ravi Singh +91 22 2268 1238 [email protected] [email protected]
Kushan Parikh +91 22 2268 1239 [email protected]
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Level 19, 1 Queen’s Road Central Hong Kong SAR Telephone: +852 2843 9111 Fax: +852 2596 0200
Main contributors
Michelle Kwok* Derek Chang* Head of Real Estate Research, Asia Pacific Property Analyst The Hongkong and Shanghai Banking The Hongkong and Shanghai Banking Corporation Limited Corporation Limited, Singapore Branch [email protected] [email protected] +852 2996 6918 +65 6658 0624
Pratik Ray*, CFA Simon Sin* Senior Property Analyst, ASEAN Associate The Hongkong and Shanghai Banking The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch Corporation Limited [email protected] [email protected] +65 6658 0611 +852 2996 6514
Raymond Liu*, CFA Max Liang* Analyst Associate The Hongkong and Shanghai Banking The Hongkong and Shanghai Banking Corporation Limited Corporation Limited [email protected] [email protected] +852 2996 6743 +852 2996 6629
Albert Tam* Utkarsh Rastogi* Analyst Associate, Bangalore The Hongkong and Shanghai Banking Corporation Limited [email protected] +852 2822 4395
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered / qualified pursuant to FINRA regulations
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