Equity Valuation—Hopewell Holdings 54 HK: End of the Tunnel
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City University of Hong Kong EF4300 Project Semester A 09/10 AND CityU entry for HKSFA University Investment Research Challenge 09-10 (2nd Runner-up, HK Region) Equity Valuation – Hopewell Holdings 54 HK End of the Tunnel Group Members Ai, Tom Zhongcheng (艾仲承) Chan, Thomas Kwun Wa (陳冠華) Lam, Daniel Yik Chun (林益進) Qin, Monica Xue Lu (秦雪璐) November 2009 54 HK Hopewell Holdings Initiating CCCOOONNNGGGLLLOOOMMMEEERRRAAATTTEEESSS || | HHHooonnnggg K KKooonnnggg Tom AI Monica QIN CITYU ASIA-PACIFIC Thomas CHAN Daniel LAM EQUITY RESEARCH STRONG Fundamentals are good; the sale decision of 12 Broadwood remains desirable: Recent BUY policy change in HK luxury home market causes numerous fears. However, we believe that the market fundamentals are still good, with low supply-demand ratio, high liquidity, strong external demand, and early economy recovery signs. Moreover, this policy tweak’s impact is Stock Data also mitigated by the facts that luxury home buyers are usually cash rich, and that luxury and Price HK$ 24.3 mass markets are relatively separated, implying that the government has no REAL intention Price Objective HK$ 31.03 to further intervene in the overall home market. Therefore, in our view, the sale decision of 12 Broadwood remains desirable for HH, which is principally a landlord rather than a Data Established 3 Nov 2009 developer in HK, under the current market condition. 52-week Range HK$19.34 - HK$26.90 Market Value (mn) 21,360 Strong 4Q09 hiring expectations; positive for Hopewell Center: The latest Hudson survey shows continuing improvement in net hiring from +10% in 3Q09 to +32% in 4Q09. Shares Outstanding (mn) 879 We believe Hopewell Centre will benefit from the overall HK office market rebound as history Average Daily Volume 1,706,800 records tell us that big hiring plans usually lead to a lower unemployment rate, which in turn pushes down office vacancy rate and give rise to rental increase. Bloomberg/ Reuters 54 HK/ 0054. HK Mini empire in Wan Chai is in the making: We believed 1) the completion of Lee Tung st Key Financial & Valuations Street project and Hopewell Center II (to be the 1 conference hotel in HK) will bring numerous externalities, e.g. a superior transportation network as well as a larger pedestrian 30 Jun (HK$mn) FY09 FY10F FY11F FY12F flow, to HH’s existing property portfolio in Wan Chai, evidenced by previous successful vitalization projects of URA, and 2) Queen’s Road East will be made a new commercial area Revenue 968 2224 2264 1150 in five years time and Hopewell is the best play on this, given its exposure. Net profit 1,681 1,641 1,698 1,214 EPS 1.90 1.86 1.92 1.37 GS -- end of the tunnel: As the leading expressway operator in mainland China, GS is expected to see a substantial growth in toll revenue in FY10, as suggested by updated Norm. P/E 26.63 13.2 12.75 17.83 desirable China’s economic indicators and IMF optimistic estimates. Noticeably, in Sep EV/EBITDA 19.55 18.85 18.47 42.20 2009, the average daily toll revenue of GS almost reached before-tsunami peak level again. As for potential traffic diversions from Coastal Expressway and new Express Rail Link, we Price/Book 0.91 0.86 0.82 0.79 believe that the impact will be limited and GS will actually benefit from the further integration Dividend yield% 23.07 3.03 3.14 2.24 and development of PRD region. ROE% 7.07 6.55 6.44 4.44 West Delta Route -- another cash cow is growing up: In spite of a worldwide economic downturn, the average daily toll revenue per kilometer of WDR Phase I actually maintained a slightly positive growth in the past two years. We believe that this kind of strong growth will persist and become even stronger for Phase I, and for upcoming Phase II & III, especially after the completion of Hong Kong – Zhuhai – Macau Bridge (2015), which should translate into a larger volume of traffic for HHI’s linkage expressways and help the traffic volume of WDR eventually catch up with that of GS. Mapping the future; driving down the discount: We believe that, on one side, Lee Tung Street project (NPV: HK$536mn or 1.6% of total NAV) and Hopewell Center II (NPV: HK$5,502mn or 16% of total NAV) should not only exert a direct positive impact on HH’s NAV, but also create synergy with its existing portfolio in Wan Chai; on the other side, WDR should gradually become another profit accelerator as the completion of Phase II & III West 1 M 3 M 6 M and Hong Kong – Macao Bridge. In addition, wind power, whose technology is currently 54 HK 0.62% -5.45% 19.41% under Hopewell’s in-house development, stands a good chance to bring an even brighter future for HH, given that HH has always been a pioneer in innovation. Rel to HSI -5.49% -9.41% -12.57% Based on our estimate, HH is arguably trading 8% wider than its long term discount to NAV. In our view, 6-month underperformance to HSI by 12.57%, a strong balance sheet, relatively predictable cash flows, HHI’s target 100% dividend payout ratio, together with the above-mentioned exciting projects, should drive down the discount and make Hopewell finally achieve our TP of HK$31.03 /share. CITYU ASIA-PACIFIC EQUITY RESEARCH 1 3 Nov 2009 Hopewell Holdings 54 HK Fundamentals are good; the sale decision of 12 Broadwood remains desirable On 15 October, HH announced that in light of the current property market condition, in particular, the recent surge in demand for luxury residential properties, its directors were exploring the possibility of selling its developing property situated at 12 Broadwood, instead of holding it for rental. Market interpreted this positively and HH went up by 9.5% from 15 Oct until 23 Oct, on which date HKMA raised the down payment from originally 30% to 40%, for luxury homes costing over HK$20mn. Worries about government’s policy change and further intervention led HH to drop by more than 5% in the following 3 trading days. However, in our opinion, 1) it is too soon to conclude that the rise in HK luxury residential market has ended, and 2) the market overreacted to the news and for HH in particularly: firstly, the market fundamentals are still good, with low supply-demand ratio (Exhibit 1 & 2), high liquidity (in Oct 2009, HKMA injected into the market a total of HK$87.2bn, a historical high since 1993), strong external demand (cash-rich Chinese are pricing local buyers out of the market and account for as much as 40% of new home sales), and early economy recovery signs (Exhibit 3). Exhibit 1. Monthly residential units sold Source: Transport & Housing Bureau Exhibit 2. Average monthly completion of private residential units Source: Land Registry CITYU ASIA-PACIFIC EQUITY RESEARCH 2 3 Nov 2009 Hopewell Holdings 54 HK Exhibit 3. HK key economic indicators comparison Private Consumption Unemployment rate GDP CPI Expenditure (Seasonally Adjusted) 1st Qtr 2009 -7.8% -6.0% -1.6% 5.4% (Jun - Aug) 2nd Qtr 2009 -3.8% -1.0% +0.5% 5.3% (Jul – Sep) Source: Census and Statistics Department Exhibit 4. Private transaction by dollar sum Source: Centaline Secondly, the down payment policy tweak may not have much direct impact as luxury buyers are generally cash rich and they typically borrow 50-60% LTV, further supported by the fact that the recent world-record transaction is paid all by cash. Thirdly, it is worth noting that homes costing over HK$20mn only constitute 2% of total transactions (Exhibit 4) and “there are no real problems in the overall property market”, as said by HKMA deputy chief executive Y.K. Choi recently, implying that government has no REAL intention to intervene into the mass market and the fear over policy risk is over-magnified. Last but not least, HH is rather a landlord than a property developer as 12 Broadwood is the only luxury residential project intended for sale on its hand. Therefore, we conclude that the sale decision of 12 Broadwood remains desirable under current market condition -- it would provide a total profit of HK$1.85bn, or roughly 9% of HH current market cap, even just assuming an ASP of HK$18,000/sq ft -- and the worst case is that HH sticks back to its original plan, i.e. rent out those units to generate long-term cash flows, should any unexpected changes occur. Strong 4Q09 hiring expectations; positive for Hopewell Center The latest Hudson survey shows continuing improvement in net hiring from +10% in 3Q09 to +32% in 4Q09. Hudson reports that 35% of the respondents have hiring plans in 4Q09 (vs 22% in 3Q09), whereas only 3% plan to cut headcounts (vs 12% in 3Q09). Across industries, media/advertising sector reveals the highest q-q increase of 47%, followed by finance (+29%), IT (+19%) and consumer (+17%). Empirical evidence tells that big hiring plans usually lead to a lower unemployment rate, which in turn pushes down office vacancy rate and give rise to rental increase. As the single biggest profit generator among HH rental properties (62% in terms of EBIT in FY09), Hopewell Centre is believed to benefit from the overall HK office market rebound and continue to provide HH with high-quality earnings from its stable client base. CITYU ASIA-PACIFIC EQUITY RESEARCH 3 3 Nov 2009 Hopewell Holdings 54 HK Mini empire in Wan Chai is in the making HH currently has 4 existing properties, including Hopewell Center, QRE Plaza, GARDENEast and Wu Chung House, in Queen’s Road East.