Asia Pacific Equity Research 08 January 2020
Hong Kong Property Beyond the Darkness
We expect the various property sub-segments to trend down in 2020, but downside Hong Kong, Singapore in residential prices and office rents is likely more temporary than for retail. Thanks Head of HK Research, to significant corrections in developers’ and office landlords’ share prices, we are Conglomerates and Property positioning our OW on these two sectors ahead of an expected recovery in sentiment Cusson Leung, CFA AC starting from 2Q-3Q2020. However, we believe the downturn in Hong Kong retail (852) 2800-8526 is more structural and we maintain our UW on the two key shopping mall landlords. [email protected] Bloomberg JPMA LEUNG
See page 91 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Equity Ratings and Price Targets Mkt Cap Price Rating Price Target Company Ticker ($ mn) CCY Price Cur Prev Cur End Prev End Date Date CK Asset Holdings Ltd (1113) 1113 HK 25,735 HKD 54.20 OW n/c 75.50 Dec-20 68.80 Dec-19 Henderson Land Development (0012) 12 HK 23,340 HKD 37.50 OW n/c 49.40 Dec-20 46.00 Dec-19 Kerry Properties (0683) 683 HK 4,569 HKD 24.40 N n/c 27.50 Dec-20 27.30 Dec-19 New World Development (0017) 17 HK 13,804 HKD 10.50 OW n/c 12.80 Dec-20 10.50 Dec-19 Sino Land (0083) 83 HK 10,092 HKD 11.28 N UW 12.00 Dec-20 9.70 Dec-19 Sun Hung Kai Properties (0016) 16 HK 43,363 HKD 116.40 N n/c 117.90 Dec-20 103.24 Dec-19 Wheelock and Company Limited (0020) 20 HK 13,921 HKD 52.85 N n/c 57.30 Dec-20 44.70 Dec-19 The Wharf (Holdings) Limited (0004) 4 HK 8,193 HKD 20.90 OW n/c 26.00 Dec-20 21.50 Dec-19 Hang Lung Properties (0101) 101 HK 10,454 HKD 18.08 OW n/c 23.10 Dec-20 19.10 Dec-19 Hongkong Land HKL SP 13,482 USD 5.73 OW N 6.70 Dec-20 5.10 Dec-19 Hysan Development Co (0014) 14 HK 4,133 HKD 30.80 UW n/c 27.40 Dec-20 28.20 Dec-19 Swire Properties (1972) 1972 HK 18,877 HKD 25.10 OW UW 28.50 Dec-20 23.40 Dec-19 Wharf REIC (1997) 1997 HK 17,487 HKD 44.80 UW n/c 42.10 Dec-20 33.00 Dec-19 Champion REIT (2778) 2778 HK 3,828 HKD 5.07 N n/c 5.20 Dec-20 5.10 Dec-19 Fortune REIT (0778) 778 HK 2,267 HKD 9.10 OW N 10.40 Dec-20 9.70 Dec-19 Link REIT (0823) 823 HK 21,643 HKD 80.70 OW n/c 98.00 Dec-20 99.90 Dec-19 Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 08 Jan 20.
2 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Table of Contents Ascertaining the downside risks: Our 2020 assumptions and stock picks...... 4 How (not) to achieve sustainable returns? ...... 14 Deteriorating economic environment ...... 17 Residential: Moderate impact on home prices ...... 20 Office: Central office at a tipping point ...... 22 Retail: Luxury retail to brace for a structural downturn...... 30 NAV breakdown...... 36 Valuation charts...... 37 CK Asset Holdings Ltd (1113) ...... 40 Henderson Land Development (0012) ...... 44 Kerry Properties (0683)...... 47 New World Development (0017) ...... 50 Sino Land (0083)...... 53 Sun Hung Kai Properties (0016)...... 56 Wheelock and Company Limited (0020)...... 60 The Wharf (Holdings) Limited (0004) ...... 63 Hang Lung Properties (0101)...... 66 Hongkong Land ...... 69 Hysan Development Co (0014) ...... 73 Swire Properties (1972)...... 76 Wharf REIC (1997) ...... 79 Champion REIT (2778) ...... 82 Fortune REIT (0778)...... 85 Link REIT (0823)...... 88
3 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Ascertaining the downside risks: Our 2020 assumptions and stock picks
We previously factored in a ‘worst-case’ valuation scenario for all the property stocks given uncertainty at that time in our report “Navigating the Darkness, Part II” on August 30, 2019. Our previous 'worst-case’ scenario includes assumptions of a 30% drop in residential prices, a 40% fall in office rents and a 30% drop in retail rents. The rationales for the three assumptions were:
Residential prices: Assuming the current home price-to-income ratio falls back from the current 14x to its long-term average of 10x, this would imply a 30% decline in residential prices. Office rents: Hong Kong CBD office rents are at a 160% premium to Singapore CBD rents. In the event of an unforeseen confidence crisis in Hong Kong, an emigration of MNCs could contract the premium to about 60%, which is a similar level to those seen during the Asian Financial Crisis and Global Financial Crisis. This implies a 40% decline in office rents. Retail rents: If the current social unrest in Hong Kong leads to a 70% reduction in tourist spending and a 10% decline in domestic consumption, we estimate Hong Kong retail sales would see about a 30% drop and retail rents would fall by the same magnitude to keep occupancy costs in check. These assumptions were applied across the entire sector when we had little visibility of the social events and the US-China trade war. However, the following developments that took place in 4Q2019 have made us turn less pessimistic about the sector outlook:
The US and China reached a preliminary agreement on trade issues in early December 2019, which is an important parameter to gauge potential downside in the China economy; Social events appear to be of a smaller scale and the severity of violent clashes has receded since the Legislative Council elections on November 24, 2019. Although there are still sporadic events that cause disturbance to retail sales, we believe the extent of the effect is more predictable right now; No major relocation of MNCs out of Hong Kong as their regional headquarters; the lack of expansion or leasing demand is more a function of price and consideration of the current economic cycle; No major deterioration of liquidity conditions in Hong Kong. Despite all the market talk about potential capital outflow due to the current social events, the Hong Kong monetary base has been largely stable throughout 2019; Although residential prices have fallen by 6.5% from the peak in June 2019, they were still up by 2.1% for 2019. Negative sentiment has not been causing any fire- sales in the market. The recent relaxation of the LTV for residential apartments less than HK$10mn has also helped cushion any downward spiral in sentiment; The retail market is still in pretty bad shape, but anecdotal evidence suggests a bottoming of the decline in tourist arrivals in December 2019 and domestic consumption has been slowly coming back from the pre-Christmas period.
4 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
We are not saying things are turning around already. They are still trending down, but we believe visibility on the downside has improved so that we can more realistically calibrate our assumptions to reflect the downside risks:
Residential market – we expect prices to fall by about 10% in response to the temporary negative sentiment arising from the lagged impact of a potential rise in unemployment rates. However, we believe positive momentum in the residential market is likely to come back in 2H2020 on the back of abundant liquidity in the system, low interest rates and the shortage of land supply for private housing as land supply has given way to public housing.
Office market – we expect office rents in Central and non-core areas to decline by 15% and 5-10% in 2020, respectively. We haven’t seen any fleeing of MNCs from Hong Kong as feared at the start of the social events. The financial hub status of Hong Kong remains intact thanks to its open capital account. We believe the current downturn in the office market is more cyclical, due mainly to the current slowdown in China economic momentum. Once the China economy stabilizes, we expect office demand will come back in 2H2020.
Retail market – we expect a 20% decline in retail rents in 2020. We believe the retail sector is not out of the critical phase yet and the reliance on Mainland tourist spending is probably a thing of the past. It will take a long time for Mainland tourists to reestablish their confidence in Hong Kong to come back in scale. In addition, China’s overall policy of keeping domestic consumption onshore is acting as another headwind for Hong Kong prime mall landlords. We believe further tenant mix transformation from tourist-centric to focusing on domestic consumption needs to be made. Assuming 30% of retail sales were driven by tourist spending and 50% of tourists are gone, this would impact retail sales by about -15%. Further assuming domestic consumption drops by 7% in 2020, our estimate for overall retail sales contraction will be at -20% along with the retail rental level.
Cap rate – we are assuming cap rate to expand by 50bps in 2020, in order to take into account various factors. For one, anemic investment sentiment in the en-bloc commercial asset market is likely to pose downward pressure on capital values, especially when rental value is on the way down. The only offsetting factor is the benign US interest rate outlook.
However, we attribute most of the 50bp expansion in cap rates to the rise in 'Hong Kong risk premium’. Recent social events and concerns about political instability in Hong Kong may force investors to ask for a higher required return for investing in Hong Kong. There has also been increasing vandalism at shopping malls and disruption to their operations. The current property valuation methodology is predicated on solid protection of private property rights. If property rights cannot be protected appropriately, the discount rate will then have to be adjusted upward to compensate for the increasing riskiness of owning the assets.
5 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Table 1: Summary of changes in ratings and price targets Last Price Potential (LC$) Ratings Price Targets Tgt NAV upside/ Company Ticker 8-Jan-20 New Old New Old % Change Discount (downside) Developers CK Asset 1113.HK 54.20 OW OW 75.5 68.8 10% -35% 39% Henderson Land 0012.HK 37.50 OW OW 49.4 46.0 7% -43% 32% Kerry Properties 0683.HK 24.40 N N 27.5 27.3 1% -67% 13% New World Dev 0017.HK 10.50 OW OW 12.8 10.5 22% -49% 22% Sino Land 0083.HK 11.28 N UW 12.0 9.7 24% -50% 6% Sun Hung Kai 0016.HK 116.40 N N 117.9 103.2 14% -42% 1% Wheelock & Co 0020.HK 52.85 N N 57.3 44.7 28% -30% 8% Wharf 0004.HK 20.90 OW OW 26.0 21.5 21% -56% 24% Landlords Hang Lung Pty 0101.HK 18.08 OW OW 23.1 19.1 21% -26% 28% Hongkong Land HKLD.SI 5.73 OW N 6.7 5.1 31% -43% 17% Hysan 0014.HK 30.80 UW UW 27.4 28.2 -3% -58% -11% Swire Properties 1972.HK 25.10 OW UW 28.5 23.4 22% -39% 14% Wharf REIC 1997.HK 44.80 UW UW 42.1 33.0 28% -30% -6% REITs Champion REIT 2778.HK 5.07 N N 5.2 5.1 2% NA 3% Fortune REIT 778.HK 9.10 OW N 10.4 9.7 7% NA 14% Link REIT 0823.HK 80.70 OW OW 98.0 99.9 -2% NA 21% Average 15% 14% Source: Bloomberg, J.P. Morgan estimates
Table 2: Hong Kong property valuation table Last Price Market PT NAV Dis. to PER P/B Div.Yield Company Rating (LC$) Cap Dec-20 Dec-20 Dec-20 NAV FY19E FY20E FY19E FY20E FY19E FY20E 8-Jan-20 (US$mn) (HK$) (HK$) (%) (X) (X) (X) (X) (%) (%) Developers CK Asset OW 54.20 25,738 75.5 116.1 -53% 6.9 8.5 0.6 0.5 4.2% 4.1% Henderson Land OW 37.50 23,343 49.4 86.7 -57% 12.8 13.6 0.5 0.5 5.0% 5.1% Kerry Properties N 24.40 4,569 27.5 83.3 -71% 6.5 6.6 0.4 0.3 5.3% 5.9% New World Dev OW 10.50 13,806 12.8 25.1 -58% 12.2 11.8 0.5 0.5 4.9% 5.0% Sino Land N 11.28 10,093 12.0 23.9 -53% 22.4 16.8 0.5 0.5 5.1% 5.7% Sun Hung Kai N 116.40 43,368 117.9 203.3 -43% 10.4 10.1 0.6 0.6 3.8% 4.6% Wheelock & Co N 52.85 13,922 57.3 81.2 -35% 6.6 6.5 0.4 0.4 3.1% 3.3% Wharf OW 20.90 8,194 26.0 59.2 -65% 9.3 8.8 0.5 0.4 3.6% 4.3% Landlords Hang Lung Pty OW 18.08 10,455 23.1 31.2 -42% 17.7 16.3 0.6 0.6 4.2% 4.3% Hongkong Land OW 5.73 13,482 6.7 11.8 -51% 12.3 11.5 0.3 0.3 3.8% 4.2% Hysan UW 30.80 4,134 27.4 65.1 -53% 12.3 12.0 0.4 0.4 4.9% 5.2% Swire Properties OW 25.10 18,879 28.5 46.4 -46% 17.8 17.0 0.5 0.5 3.5% 3.7% Wharf REIC UW 44.80 17,489 42.1 60.2 -26% 13.4 13.5 0.6 0.6 4.9% 4.9% REITs Champion REIT N 5.07 3,828 5.2 5.2 -3% 19.9 19.5 0.4 0.4 5.3% 5.4% Fortune REIT OW 9.10 2,271 10.4 10.4 -12% 20.9 19.9 0.5 0.5 5.8% 6.1% Link REIT OW 80.70 21,645 98.0 98.0 -18% 31.5 27.5 0.9 0.9 3.3% 3.6% Developers' avg -51% 10.6 10.5 0.5 0.5 4.2% 4.6% Investors' avg 1898.75 -41% 15.1 14.5 0.5 0.5 4.2% 4.3% REITs' avg -15% 29.0 25.8 0.8 0.8 3.8% 4.1% Source: Company data, Bloomberg, J.P. Morgan estimates. *Dec-20 NPV for REITs
6 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
NAVs and earnings changes Table 3: Summary of changes in NAV estimates Last Price (LC$) NAV Disc to Company 8-Jan-20 Dec-20 Dec-19 % Chg Dec-20 NAV Key reasons for NAV changes Developers Marked-to-market value of listed subsidiaries/investments; changes in residential ASP, sales progress and booking; changes in IP cap rates and CK Asset 54.20 116.1 121.5 -4% -52% rental assumptions, adjustment for addition of HK land bank and non-ppty businesses (Greene King) Marked-to-market value of listed subsidiaries/investments; changes in Henderson Land 37.50 86.7 89.0 -3% -56% residential ASP, sales progress and booking; changes in IP cap rates and rental assumptions; addition of new projects Marked-to-market value of listed subsidiaries/investments; changes in Kerry Properties 24.40 83.3 87.2 -4% -70% residential ASP, sales progress and booking; changes in IP cap rates and rental assumptions Marked-to-market value and adjustment of listed subsidiaries/investments; New World Dev 10.50 25.1 27.9 -10% -57% changes in residential ASP, sales progress and booking; changes in IP cap rates, occupancies and rental assumptions; changes in net debt Changes in residential ASP, sales progress and booking; changes in IP cap Sino Land 11.28 23.9 24.5 -3% -52% rates and rental assumptions; changes in net cash/debt; acquisition of landbank Marked-to-market value of listed subsidiaries/investments; changes in Sun Hung Kai 116.40 203.3 233.9 -13% -42% residential ASP, sales progress and booking; changes in IP cap rates and rental assumptions; acquisition of landbank Marked-to-market value of listed subsidiaries/investments; new TP for Wharf Wheelock & Co 52.85 81.2 68.5 19% -35% REIC and Wharf Hldg; changes in residential ASP, sales progress and booking; acquisition of landbank; disposal of non-core IP Marked-to-market value and adjustment of listed subsidiaries/investments; Wharf 20.90 59.2 57.1 4% -66% changes in residential ASP, sales progress and booking; changes in IP cap rates and rental assumptions; acquisition of landbank and IP from Wheelock Landlords Changes in residential ASP, sales progress and booking; changes in IP cap Hang Lung Pty 18.08 31.2 36.7 -15% -42% rates and rental assumptions Changes in residential ASP, sales progress and booking; changes in IP cap Hongkong Land 5.73 11.8 12.9 -8% -51% rates and rental assumptions; addition of new projects Hysan 30.80 62.6 79.4 -21% -51% Changes in IP cap rates and rental assumptions; changes in residential ASP Changes in residential ASP, sales progress and booking; changes in IP cap Swire Properties 25.10 46.4 52.1 -11% -46% rates and rental assumptions; acquisition of landbank Marked-to-market value and adjustment of listed subsidiaries/investments; Wharf REIC 44.80 60.2 77.2 -22% -22% Changes in IP cap rates and rental assumptions; acquisition of IP from Wheelock Source: Bloomberg, J.P. Morgan estimates
Table 4: Summary of changes in NPV estimates Last Price (LC$) NPV Disc to Company 8-Jan-20 Dec-20 Dec-19 % Chg Dec-20 NPV Reason for NPV changes Champion REIT 5.07 5.23 5.88 -11% -3% Changes in IP rental assumptions Fortune REIT 9.10 10.40 10.11 3% -12% Changes in IP rental assumptions Changes in IP rental assumptions; adjusted for property acquisitions and Link REIT 80.70 98.03 NA NA -18% buyback; acquisition of Sydney office Source: Bloomberg, J.P. Morgan estimates
7 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Table 5: Changes in EPS estimates Company Year FY19E core EPS FY20E core EPS FY21E core EPS Key reasons for earnings changes % % % end New Old Chg New Old Chg New Old Chg Developers Changed residential ASP and IP rental assumptions, adjusted sales progress and booking of projects and CK Asset Dec 7.90 7.88 0% 6.37 6.84 -7% 6.98 7.06 -1% non-ppty businesses, adjusted for UK acquisition, buyback Changed residential ASP and IP rental assumptions, Henderson Dec 2.92 3.12 -7% 2.76 3.03 -9% 2.96 3.78 -22% adjusted sales progress and booking of some projects, adjusted for income from HKCG Changed residential ASP and IP rental assumptions, Kerry Prop Dec 3.75 3.62 4% 3.69 4.04 -9% 3.91 4.46 -13% adjusted sales progress and booking of some projects Changed residential ASP and IP rental assumptions, adjusted sales progress and booking of some projects, NWD Jun NA 0.89 0.90 -1% 0.96 1.05 -9% adjusted occupancies of Victoria Dockside, issuance of shares due to share options/scrip dividends and buyback Changed residential ASP and IP rental assumptions, Sino Land Jun NA 0.67 0.76 -12% 1.58 1.83 -14% adjusted sales progress and booking of some projects (mainly Grand Central) Changed residential ASP and IP rental assumptions, SHKP Jun NA 11.51 12.01 -4% 12.00 12.36 -3% adjusted sales progress and booking of some projects Adjusted for latest earnings estimates of Wharf/Wharf Wheelock Dec 8.01 7.78 3% 8.13 8.31 -2% 8.72 8.26 6% REIC, changed residential ASP assumptions, adjusted sales progress and booking of some projects Changed residential ASP and IP rental assumptions, Wharf Dec 2.24 2.42 -8% 2.39 2.47 -3% 2.45 2.73 -10% adjusted sales progress and booking of some projects Landlords Hang Lung Dec 1.02 0.97 6% 1.11 1.10 1% 1.16 1.17 -1% Changed residential ASP and IP rental assumptions Changed residential ASP and IP rental assumptions, HK Land Dec 0.46 0.46 1% 0.50 0.48 3% 0.51 0.52 -1% adjusted sales progress and booking of some projects Changed IP rental assumptions; changed residential Hysan Dec 2.51 2.56 -2% 2.57 2.68 -4% 2.55 3.19 -20% ASP and booking assumptions Changed IP rental assumptions, adjusted for change of Swire Prop Dec 1.30 1.45 -11% 1.32 1.56 -15% 1.32 1.61 -18% occupancies Wharf REIC Dec 3.34 3.42 -2% 3.33 3.57 -7% 3.39 3.66 -7% Changed IP rental assumptions Source: J.P. Morgan estimates
Table 6: Changes in DPU estimates Company Year FY19E DPU FY20E DPU FY21E DPU Key reasons for earnings changes % % % end New Old Chg New Old Chg New Old Chg Champion Changes in rental and occupancy assumptions; adjusted Dec 0.27 0.28 -3% 0.27 0.29 -6% 0.27 0.30 -8% REIT for financing costs in WACC and terminal growth Fortune Changes in rental and occupancy assumptions; adjusted Dec 0.53 0.53 0% 0.55 0.55 1% 0.56 0.56 1% REIT for financing costs in WACC and terminal growth Changes in rental and occupancy assumptions; adjusted Link REIT Mar NA 2.93 2.98 -2% 3.18 3.15 1% for acquisitions and buyback Source: J.P. Morgan estimates
8 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Sector and stock preferences in 2020 Similar to our preferences in 2H2019, we prefer the residential market followed by office and our least preferred sector is retail.
We believe there is about 10% potential downside on residential prices from end- 2019 in the short term driven by the current negative sentiment. However, we believe the shortage of land supply and the continuous low interest rate environment will lend support to demand in the residential market. Given developers are mostly trading at -1.5 to -2 S.D. below mean valuations, we believe stocks in the sector are poised for a rebound in 2Q2020.
Residential developers: OW CK Asset, Henderson Land and NWD Our OWs among the developers remain the same with CK Asset, Henderson Land and New World Development. The strong growth of recurrent earnings for the three names provides enticing reasons for long-term investments, in our view, while we expect the faster conversion of farmland will also help the performances of Henderson Land and NWD. We also upgrade Sino Land to N from UW as we believe the extremely negative sentiment towards the developers is dissipating. We maintain our Neutral ratings on SHKP, Kerry Properties and Wheelock. We believe negative sentiment on SHKP’s retail properties is likely to be offset by a potential turnaround in the residential market. By virtue of its market share, we believe the stock will perform in line with the market. Kerry Properties is facing increasing challenges in the high-end residential market, while its China shopping malls have been underperforming its peers. However, we believe further downside of the stock is protected by its distressed valuation and restored confidence on its dividend policy. We agree that Wheelock is a cheaper way to get exposure to Wharf REIC if investors believe there is any short-term rebound. We hold an opposite view on this, but Wheelock's negative stub value should provide a downside cushion, in our view.
Office landlords: OW Hongkong Land and Swire Properties While we believe the news flow on the office market may continue to be negative in 1H2020, given the underperformance of Hongkong Land and Swire Properties over the last two years and last six months, respectively, we are upgrading both stocks to OW as we believe any early indications of the China economy bottoming out would be a key driver of both stock prices. Swire Properties’ strong IP performance on Mainland China and the resilience of its HK East office portfolio is also under- appreciated by investors, in our view.
China shopping malls: OW Hang Lung Prop and Wharf We continue to prefer China shopping mall exposures including Hang Lung Properties and Wharf Holdings. With the new contribution from Spring 66 in Kunming and completion of Grand Gateway 66 renovations, we expect Hang Lung Prop’s earnings to grow at 11% Y/Y in 2020. On the other hand, Wharf is benefiting from both the positive trend of China domestic consumption as well as the expected easing on the China development properties. Together with the stock's distressed valuation and Wheelock’s holding on Wharf already increased to 70%, we believe this will reignite market expectations of further group restructuring.
9 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Staple retail landlords: OW Link REIT and Fortune REIT We prefer staple retail landlords who demonstrate resilience amidst strong headwinds facing the general retail sector. We are comfortable that Link will deliver about 7-8% p.a. DPU growth in the next two years, driven partly by organic and partly by new property contributions from Quayside and acquisitions in Mainland China/overseas. We also upgrade Fortune REIT to OW from N as we believe its valuation is getting very attractive together with its resilient tenant mix. Champion, on the other hand, is likely to be dragged by the performance of Langham Place mall, in our view.
Retail landlords: UW Wharf REIC and Hysan We maintain our UW ratings on both Wharf REIC and Hysan as we believe the decline in high-end retail is structural rather than short term. The narrowing price differential with China for high-end goods and increasing competition from e- commerce pose more threats to the prime mall operators, in our view.
10 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Table 7: Summary of recommendations and investment theses Ratings Company Ticker New Old Reasons/Catalysts Risks to our view Developers CK Asset 1113.HK OW OW The beauty of a diversified and strong recurrent earnings base Company disappoints on is likely to be the focus in 2020 dividend increase We expect increase in dividend and/or an uplift in payout ratio in Insufficient disclosure on 2019 as recurrent income is accounting for >70% of its earnings overseas investments Strong expected earnings growth in 2019 supported by strong such that investors cannot HK development booking and new contribution from acquisition appreciate the stable of Greene King nature of such businesses Clearer political situation in UK likely to buoy the sentiment on CKA in relation to its UK investments Potential launch of LOHAS Park Ph8 and Borrett Road residential projects Henderson Land 0012.HK OW OW Increasing asset turnover of overall business portfolio include Discontinuation of the non-core asset disposals such as commercial assets, residential 10% bonus issue sites, or farmland projects Application for PPP farmland conversion will start in 2020 Healthy growth of rental income to support its generous dividend increase along with 10% bonus issue New World Dev 0017.HK OW OW Positive feedback of Victoria Dockside and the steady pick up of Increasing new recurrent earnings contribution for the next two years with ramp- investment efforts may up of Victoria Dockside and completion of strategic commercial increase market concerns properties in Greater Bay Area such as Shenzhen Bay and Sky on its financial burden City projects Re-emergence of Potential launch of Tai Wai Station project Ph1 in 1Q2020, a connected transactions sizable project of (783 units; all 3 phases total 3,090 units); another sign of improving execution of the management Beneficiary of acceleration in farmland conversion Full year contribution of FTL Life from NWS level and expectation for other non-core asset disposals Kerry Properties 0683.HK N N Residential sales in Hong Kong are mostly concentrated on the Very strong improvement high-end segments, the sentiment of which is not expected to in its China development improve in 2020 and retail operations The performances of its China mixed-use developments have Return of Mainland been lagging those of its peers buyers for the ultra-luxury Stalled sales progress of its Beacon Hill projects may limit residential products earnings growth and DPS growth Likely to hover around bottom range of its valuation range until the market finds a new bright spot on the company Currently distressed valuation is likely to cushion downside from current levels given stable DPS outlook Sino Land 0083.HK N UW Conservative land banking approach to support the defensive Aggressive land bidding nature of the company together with its strong net cash position by the company may alter However, dividend growth is also likely to disappoint the market the defensive nature of as company is likely to stay conservative until the booking of Sino Land Grand Central Launch of the Wong Chuk Hang project likely to be in 2H2020 Sun Hung Kai Prop 0016.HK N N It is a market proxy – stock could suffer from any short-term Surprising changes in negative sentiment in the retail market and the initial downside dividend payout ratio on the Central office market beyond the guided range Likely to be offset by any improvement of sentiment in the of 40-50% residential market from 2Q2020 onwards The winning of the commercial project in West Kowloon is also considered a long-term NAV accretion, in our view Wheelock & Co 0020.HK N N 40% of the company’s valuation is expected to be weighed by Any privatization attempts the expected underperformance of Wharf REIC on Wheelock or Wharf will The fact that Wheelock is cleaning up its asset portfolio by be positive for Wheelock’s raising cash from Wharf and Wharf REIC may indicate further share prices group restructuring in the future With its negative stub-value wider than the historical average, Wheelock is still the preferred play to gain exposure to Wharf REIC if investors are aiming for a short-term rebound in retail sentiment
11 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Wharf 0004.HK OW OW Asset turnover in China development properties is likely to Unexpected deceleration increase with potential selective easing in home sales in China; Support of domestic consumption have benefited Wharf’s IFS malls in China Concerns over its corporate governance related to equity investments have been factored in; we believe its current valuation has more than reflected this Wheelock’s holding in Wharf has increased to 69%; hidden value in Modern Terminals; positive prospect for dividend increase Landlords Hang Lung Pty 0101.HK OW OW Operating performance is gathering steam in 1H2020 with Aggressive land banking opening of Spring City 66 (in Kunming) and completion of in China at high prices renovation of Grand Gateway 66 in Shanghai Maintaining flat dividend With the improvement in occupancy and tenant sales throughout despite earnings 2019, we expect moderate positive rental reversion in 2020 improvement Dividend likely to rise with improvement upon earnings announcement at 1H2020 Hongkong Land HKLD.SI OW N News flow on Central office rent is likely to be negative in Unexpected news flow of 1H2020. However, when the stock has already underperformed major corporate tenants for three years, we believe all the negative momentum in the moving out of Hong Kong leasing market has been factored in Passing rents at ~10% below market average and few expiring leases to shield its portfolio from downturn; still expect positive reversions for Central offices in 2020 Leading indicators of the China economy, e.g. PMI, and stock trading volume (with more internet companies coming to Hong Kong for secondary listing) likely to drive direction of the stock price Management becoming more forthcoming to investors’ feedback including capital management which is likely to be key catalyst for the stock Hysan 0014.HK UW UW Significant impact on retail sales from social events is likely to Retail sales and tourist be carried forward into 2020 arrivals rebound sooner The lower turnover rent ratio may cushion immediate downside and stronger than risk but pressure on negative base rent reversion and rental expected concession is still significant Sustained Rmb Continued tenant reshuffling to cater for more domestic appreciation consumption and more affordable/experience-related options likely to pose pressure on passing rent as well The only downside cushion for Hysan is its full year contribution of LG3 and some property development earnings to be recognized in 2022 Swire Properties 1972.HK OW UW HK retail is accounting for less than 20% of the company’s Hiccups in the preleasing earnings and NAV; we think the recent underperformance of the of Two Taikoo Place if stock is overdone driven by poor visibility in 2H2019 and office demand turns out previously expensive valuation worse than expected Swire’s Island East office portfolio remains very resilient despite Further slowdown in the the overall slowdown in office demand; leasing of Two Taikoo China economy Place likely to start mid-2020 and will start providing earnings uplift in 2021 Swire’s retail properties in China has been performing well along with the China domestic consumption theme; also a strong completion pipeline in Beijing and Shanghai Swire Prop is not the cheapest landlord but its management and ESG profile are among the best quality in the sector Wharf REIC 1997.HK UW UW Hong Kong retail and Harbour City’s passing rents are at the Retail sales and tourist highest level despite the sharp slowdown in retail sales arrivals rebound sooner Supportive policies for China domestic consumption likely to be and stronger than at the expense of Hong Kong retail sales expected Further tenants reshuffling will need to be done to focus more Sustained Rmb on domestic consumption, implying potentially lower or negative appreciation rental reversions Increasing dividend Short-term downside risk on earnings and dividend payout ratio from the Potential loss of market share to SHKP’s new project in West guided 65% Kowloon and NWD’s Victoria Dockside in the longer run
12 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
REITs Champion REIT 2778.HK N N Upcoming vacancy at Cheung Kong Center could put pressure Upside risks from sharp on Three Garden Road’s rental reversion as they have pick-up of China considerable space up for rental review and expiry economic growth Langham Place mall likely susceptible to rental decline on the Downside risks from back of a subdued retail market given the high proportion of sustained rental turnover rents concession of LP mall if Dimmed DPU growth but we think downside is limited at 5.5% retail sales remains weak FY20E dividend yield Fortune REIT 0778.HK OW N Expect non-discretionary retail malls to show defensiveness Downside risks from amid retail slump further slowdown in The completion of Kingswood AEI to boost DPU growth for domestic consumption 2H19 and next year with normalized base of comparison (disposal of Provident Square in 1H18) 6% yield with low single digit growth in DPU made the stock look attractive in the current environment Link REIT 0823.HK OW OW Acquisition of Sydney project moderately positive Rise in corporate gearing Despite the slowdown in retail market, Link’s defensive tenants from expansion of cap are still delivering low-single digit retail sales growth rates Commitment of share buyback will continue to support valuation DPU growth expected to be sustained at 7-8% for the next two years mainly from new property contributions Source: J.P. Morgan
13 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
How (not) to achieve sustainable returns?
Massive redistribution of wealth from hyper asset inflation When economic momentum slows down, it becomes a zero-sum game between buyers and sellers. The big question for the seller is: how to make money from your customers if they are getting poorer and poorer.
Given its distinctive open capital account and pegged exchange rate at the same time, Hong Kong SAR was one of the most affected places by global quantitative easing efforts over the last ten years. Due to the rigidity of the exchange rate, most of liquidity inflow translated into asset price inflation. Associated with any form of inflation is a significant redistribution of wealth from non-asset holders to asset holders and from creditors to debtors. This is the time, when the laissez-faire economic approach fails to balance the different stakeholders in society or the economy, when the government is most needed to take a role to redistribute wealth to different stakeholders.
Government failed to rebalance different stakeholders’ interests In the last 22 years since Hong Kong SAR was returned to China, the Hong Kong government has run a budget surplus in 17 years, and continuously for the past 15 years. Government fiscal reserves have increased by 570% to HK$1.2trn as at the end of March 2019 – with a lot of the surplus driven by the unexpected surge in land sales revenue, which still accounts for 25% of the government's revenue.
HK property market a classic example of laissez-faire Residential market outpaced economic fundamentals The Hong Kong property market, especially in the residential and retail sub- segments, is a showcase of how current returns are not sustainable in the long term.
Taking a look at the residential market, residential prices have increased by 221% since the beginning of 2009, significantly outpacing nominal GDP growth of 68%, median household income growth of 54% and CPI of 39%. The only thing which matched the growth in residential prices during the period was the growth in Hong Kong’s monetary base, which has increased by 224% for the same period.
The growth in residential prices was largely driven by liquidity. It was the first time in Hong Kong that the rally in residential market was so unaffected by economic fundamentals. Salary earners with no assets or savings in the first place would have underperformed the most. For developers which need to keep selling residential units at such a high prices, their target market will then have be condensed to existing asset holders (cash or property assets) or they would need to extend credit to salary earners to fund their down payments.
Mounting call for addressing stakeholders’ interests There is nothing wrong with the free-market economy as far as economics is concerned. However, the subsequent social issues arising from the imbalance of resource allocation could be one of the many reasons that exacerbated the recent social events in Hong Kong.
14 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Profit maximization is the unambiguous sole objective for most of the privately listed corporations and there is nothing wrong with what developers have been doing as far as economics are concerned. However, putting ESG into context, maximizing stakeholders' returns to drive sustainable growth in the long term is as important as maximization of shareholders' returns. We believe some developers are on the right track of addressing the social issues of their businesses, such as helping society by donating farmland, increasing co- operation with the government to increase the pace of farmland conversion or simply charity donations to help the underprivileged. Examples include NWD announcing plans to donate up to 3mn sf of farmland and Henderson's leasing out its brownfield sites for building 2,000 units of transitional housing. Recently, Wheelock also announced that they would lease out 500K sf of sites in Tai Po, Tung Chung and Tuen Mun for developing some 2,000 units of transitional housing. We believe this trend will continue, as developers will donate their idle farmland and brownfield sites which would be beneficial for both society and their ESG profiles. We believe this should just be the beginning of a long-term transformation. As society is increasingly turning the spotlight of social responsibility onto the private sector, more progressive and innovative ways by the listed property companies are probably required, in our view.
Figure 1: Hong Kong Residential price vs Economic indicators (Dec 2008 = 100) 350 300 250 200 150 100 50 8 7 6 5 4 3 2 1 0 9 8 1 1 1 1 1 1 1 1 1 0 0 ------c c c c c c c c c c c e e e e e e e e e e e D D D D D D D D D D D Residential price index Composite CPI (Mar 00=100) HK Median Household Income (incl bonus) index HK monetary base Nominal GDP index (12-mth rolling) Source: Centaline, CEIC, HK Government
Retail rental defied gravity of economic fundamental Other than the residential market, we believe the retail property market is another area which has completely defied the gravitational pull of the economic fundamentals. Overall Hong Kong retail rents have outpaced Hong Kong retail sales by about 56% over the last ten years. However, if we look at some of the tourist- centric shopping malls such as Harbour City in TST, its passing rent has outpaced Hong Kong retail sales by 193% during the same period. Retail rent and retail sales tend to go hand-in-hand. For the last 16 years, Mainland tourist spending has been the major propeller of Hong Kong retail sales. Despite this strong support, retail rentals in general have still massively outperformed business fundamentals. Given the challenges facing the Hong Kong retail market right now, we believe there is plenty of room for landlords to respond in the retail rental market either as a pure commercial reaction to declining retail sales or a move towards bearing more socially responsibility to help tenants strive for more sustainable growth going forward.
15 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 2: Hong Kong Retail sales vs Retail rental (Jan 2009 = 100) 350 300 250 200 150 100 50 0 0 2 5 3 7 0 8 2 1 9 5 3 7 6 4 1 9 8 9 6 4 1 9 6 4 9 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 0 1 1 1 1 1 0 1 1 1 ------l l t t r r r r y y c v c v p p g g b n b n n n n n c c u u a a p p a a e o e o e e u u e a e a a u u u J J O O A A J J J J J J F M F M S S A A D N D N M M Harbour City passing rent Hong Kong retail rent index Hong Kong retail sales index
Source: Company data, CEIC
The office rental market is probably the most ‘normal’ among the three property sub- sectors, i.e. the growth rates of office rent in most districts were most in line with overall nominal GDP growth. In fact, the overall and the Central office rents lagged nominal GDP by 26% and 28% over the last ten years, respectively. The only area which outpaced the Hong Kong economy during the same period is Island East office. Despite the fact that demand for Central office space over the last few years was mainly driven by Mainland corporates, due to the commoditized nature of office space, we believe rental growth was kept in check with the increase in supply in fringe areas.
Figure 3: Hong Kong Nominal GDP vs Office rental (Dec 2008 = 100) 180 160 140 120 100 80 60 40 8 9 8 8 7 7 6 6 6 5 4 3 5 4 3 3 2 2 1 1 1 0 9 8 0 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 1 0 ------l l t t r r r r c y v c y v c y b p n n g b p n n g c c u u a a p p e a o e a o e a e e u a u e e u a u J J A O A O J J J J F M F M D S N A D S N A D M M M Nominal GDP index Overall HK Central Wan Chai TST HKE Source: CEIC, JLL
16 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Deteriorating economic environment
Despite the continuous low interest rate environment in Hong Kong, we believe one of the major concerns is the potential sharp rise in the local unemployment rate which has been steady in the 3-3.5% range for the last ten years. This is the direct result of: Weakness in the import/export sector from the US-China trade issues; The indirect impact from the slowdown of the China economy; The slump of tourist spending and the temporary impact on retail sales from recent social events. The local unemployment rate has increased to 3.2% of late (for Sep to Nov 2019) and the downtrend in the employment picture was mainly driven by: 1) the import/export sector; 2) retail sector; 3) accommodation and food service. These three sectors alone account for 25% of total employment in Hong Kong. The collective decline in the employment of these three sectors was 88,300 over the last 12 months.
Figure 4: HK overall unemployment rate (3-mth period ending) Figure 5: Total employment of import/export sector (%) (000') 10 600 9 8 550 7 500 6 5 450 4 3 400 2 350 1 0 300 9 8 7 6 5 4 3 2 1 0 9 8 7 6 5 4 3 2 1 0 9 8 7 6 8 8 9 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 9 9 9 9 0 0 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------r r r r r r r r r r r r n n n n n n n n n n n n n n n n n n n n n n n n p p p p p p p p p p p p a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a e e e e e e e e e e e e J J J J J J J J J J J J J J J J J J J J J J J J M M M M M M M M M M M M S S S S S S S S S S S S Source: Hong Kong Census and Statistic Department Source: CEIC, J.P. Morgan
Figure 6: Total employment of retail sector Figure 7: Total employment of accommodation and food services (000') (000') 350 310 340 300 330 290 320 280 310 270 300 290 260 280 250 270 240 9 8 8 7 7 6 6 5 8 9 5 4 7 8 4 6 7 3 5 6 3 2 4 5 2 3 4 1 2 3 1 0 1 2 0 0 1 9 9 0 9 8 8 9 9 9 8 8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 1 0 0 0 0 1 1 0 0 ------r r r r r r r r r r r r r r r r r r r r r r r r p p p p p p p p p p p p p p p p p p p p p p p p a a a a a a a a a a a a a a a a a a a a a a a a e e e e e e e e e e e e e e e e e e e e e e e e M M M M M M M M M M M M M M M M M M M M M M M M S S S S S S S S S S S S S S S S S S S S S S S S Source: CEIC, J.P. Morgan Source: CEIC, J.P. Morgan
The decline in employment in the import/export sector happened well ahead of social events in Hong Kong. It was much more structural and was exacerbated by the worsening US-China trade relations. We believe structural issues facing Hong Kong as a trading hub will remain, though in the short term the employment picture may be helped by the agreement on the first phase of the trade deal.
17 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Retail is more of a structural downturn The challenges facing Hong Kong’s retail sector are not just from the social events over the last six months, which have deterred tourist arrivals/spending and domestic consumption. We believe the long-term issues facing Hong Kong retail are mainly:
Over-reliance on Mainland tourist spending over the last 13 years; Increasing penetration of e-commerce in Hong Kong; Cannibalization of disposable income from high housing costs. Having said that, the impact on unemployment in the sector is hard to tell at the moment depending on whether landlords are willing to absorb the cost of falling businesses of their tenants. Employment in the retail sector has increased from 207K in 1Q2003 to 267K in 3Q2019, while Hong Kong retail sales increased from HK$173bn to HK$485bn during the same period. Theoretically, the sales productivity of each retail employee has increased from HK$701K of sales per person in 2000 to HK$1.44mn sales per person in 2018. If the entire productivity gain was passed onto retail staff, we believe there would be still a big downside cushion on employment despite the downturn in retail sales. Unfortunately, we believe much of these productivity gains were taxed by landlords through higher rentals. In other words, landlords’ attitude on rental concessions will directly affect the level of unemployment rate in the sector.
Figure 8: Retail rental vs employee productivity (HK$/sqf) (HK$/person) 600 1,600,000 500 1,400,000 400 1,200,000 300 1,000,000 200 100 800,000 0 600,000 8 7 6 5 4 3 2 1 0 9 8 7 6 5 4 3 2 1 0 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Passing rent at Harbour City - LHS Productivity per employee - RHS
Source: Company data, CEIC, J.P. Morgan estimates
Impact on accommodation and food services industries is more temporary The accommodation and food service sectors are most impacted from the recent social events due to the drop-off in tourist arrivals and the general decline in domestic consumption activities. Average hotel occupancies for high-tariff as of Oct 2019, medium-tariff and guesthouses have come down to 65%, 72% and 55% respectively, from >90% a year ago.
18 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 9: Hong Kong Hotel Occupancy Rate 100
90 80
70 60
50 7 4 4 4 5 6 6 5 8 8 9 9 0 1 1 2 3 3 2 5 5 6 6 7 8 8 9 9 0 0 0 1 1 1 1 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 ------l l t t t r r r r r y c v y c v n g b p n n g b p n n g c u c u c a p a p a a a e o e o a u e e u a u e e u a u J J O A O A O J J J J J M F M F M A D S N A D S N A M M Hotel Room Occupancy Rate: High Tariff Hotel Room Occupancy Rate: Medium Tariff Hotel Room Occupancy Rate: Guesthouses Source: CEIC
The unemployment rate in the F&B restaurant sector has also gone up, driven by the sharp drop in restaurant receipts in 3Q2019. Further deterioration in 4Q2019 is expected. However, our Composite Tension Index has indicated that the tension level of recent social events has come down significantly since 2H Nov 2019.
Figure 10: Hong Kong restaurant receipts Y/Y 20% 15% 10% 5% 0% -5% -10% -15% 8 9 7 8 6 7 5 6 4 5 3 4 2 3 1 2 0 1 9 0 8 9 7 8 6 7 5 6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 0 0 0 0 0 0 0 0 ------c c c c c c c c c c c c c c n n n n n n n n n n n n n n e e e e e e e e e e e e e e u u u u u u u u u u u u u u J J J J J J J J J J J J J J D D D D D D D D D D D D D D Source: CEIC
As we highlighted in our note “Calm before Dawn?” given the economic and social issues in Hong Kong have not been sorted, investors should not take the current calm for granted. We believe tourists are not going to come back in scale in a consistent manner unless we see several months of calm in Hong Kong, which is likely preceded by a radical resolution to the current social unrest.
Figure 11: JPM’s Composite Tension Index 110 5.0 4.5 105 4.0 3.5 100 3.0 2.5 95 2.0 1.5 90 1.0 0.5 85 0.0 3-Jun 17-Jun 1-Jul 15-Jul 29-Jul 12-Aug 26-Aug 9-Sep 23-Sep 7-Oct 21-Oct 4-Nov 18-Nov 2-Dec 16-Dec 30-Dec
Composite tension index (RHS) Hang Seng Index (LHS) Hang Seng Properties Index (LHS) CTI 1 week MA
Source: J.P. Morgan, Stand News, HK01, HKET, HKEJ, HK Police press conferences, Bloomberg
19 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Residential: Moderate impact on home prices
The expected rise in unemployment rate is expected to have a moderately negative impact on residential prices of about -10% in 2020. When the unemployment rate increased by 150% to peak at 6.4% in 1999 and by 75% to 5.5% in 2008/09, residential prices corrected by 50% and 28%, respectively. Given the current unemployment rate of 3.2%, are we going to see this going up by 75-100%, or 2.4- 3.2pps, to 5.6%-6.4%? This is equivalent to total employment in Hong Kong contracting by another 94K to 122K over the next 12 months out of the current working population of 3.8mn. Over the last 12 months, employment has contracted by 88K in Hong Kong.
The rise in the unemployment rate would negatively impact purchasing power in the residential market on the margin but we believe the impact will be much less than in 1998 and 2008. Both crises were also characterized by a drain in regional or global liquidity crunch and therefore the sharp spike in short-term interest rates and therefore an immediate drop in asset prices.
The current slowdown in economic momentum in Hong Kong has little to do with any worsening of liquidity.
Figure 12: Hong Kong Unemployment rate vs Residential price change 60% 200%
40% 150% 20% 100% 0% 50% -20% -40% 0% -60% -50% 6 7 5 8 6 9 9 9 7 5 3 0 8 2 8 8 1 4 2 9 4 1 0 3 1 0 1 1 0 0 1 1 0 0 1 0 0 1 1 9 0 9 1 0 9 1 0 0 ------l l t t r r r r y y c v c v n b n n g b p n g p c u c u p a p a a a e o e o a e u a u e e u u e J J A A O O J J J J M F M F D N D A N S A S M M CCL Y/Y - LHS Unemployment Rate Y/Y - RHS
Source: Centaline, CEIC
In fact, how much of the rise in residential prices over the last 10 years was driven by prosperous employment and genuine growth in household income? We are comfortable to say that the correlation is almost close to zero. While property prices have increased by 200% over the last 10 years, medium household incomes in both public and private estates have increased only by 69% and 60%, respectively. Residential prices have far exceeded the purchasing power of the general public and were still well supported by the vast inflow of liquidity into the system. The rise in the unemployment rate may temporarily limit upside in market sentiment and drive a minor correction. However, we believe any major correction in the market is unlikely unless we start to see significant capital outflows from Hong Kong.
20 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 13: Hong Kong Residential price vs Median income (Mar 2009 = 100) 350 300 250 200 150 100 50 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 9 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 ------r r r r r r r r r r r p p p p p p p p p p p a a a a a a a a a a a e e e e e e e e e e e M M M M M M M M M M M S S S S S S S S S S S
CCI Median household income (Public estates) Median household income (Private estates)
Source: Centaline, CEIC
Land supply is likely to remain tight Given uncertainty about some controversial land supply policies, e.g. major land reclamation project, we believe future land supply in Hong Kong will be quite backend loaded. While the resumption of farmland conversion will not require any major change in laws, public housing relying on farmland conversion will probably become available to the market in 8-10 years at the earliest.
To supplement land resumption, the government is also going to launch the Private- Public-Participation scheme (Land Sharing Pilot Scheme) to encourage developers to engage actively in farmland conversion. This will be open for applications in early 2020 for three years and the limit will be up to 150 hectares or 16mn sf of site area. The aim is to have land ready from conversion in 4-6 years.
Under this scheme, developers will hand part of the site (70% of increased plot ratio) to the Government to build public housing. Developers will be responsible for infrastructure build-out, the expense of which could be reimbursed from the land premium paid. The government will assist in the resumption of land for infrastructure. According to HKET, some 90K units of total supply could be produced if the scheme limit is fulfilled. However, the bottom line is that land supply will only be ready for construction four years from now at the earliest.
Table 8: Proposed procedure of the Land Sharing Pilot Scheme Application Approval by steering committee 3 months Land and Development Advisory Committee to advise and then pass to Chief Executive in Council for vetting and approval 3 months 36-42 months Statutory procedures including submitting rezoning or planning applications to the Town Planning Board (TPB) 30-36 months Land premium to be finalized in 18 months Land formation 12-30 months 12-30 months Source: HKET
Residential prices to remain resilient post short-term blip With the limited land supply in the short term and the recent loosening of LTV, we believe residential prices in the mass market will remain resilient after the short-term weakening in sentiment. We are assuming a 10% decline in home prices in 2020 to account for the lagging impact of the economic downturn. Given the tight supply in the medium term and the continuous low interest rate environment, we believe residential prices in Hong Kong will remain resilient over a 3-5 year horizon.
21 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Office: Central office at a tipping point
Lingering US-China trade concerns, unsettling social and political issues and a moderation of GDP growth in China are expected to exacerbate business sentiment and office demand in Hong Kong as corporations became more cautious on any new establishment or expansion plans. Despite very light office supply in 2020, we think landlords in decentralized precincts could become more aggressive in filling up occupancy at their offices, rendering more pressure on Central landlords to reduce rents in order to retain tenants. We expect decentralizing demand will drive a narrower rental gap of non-core locations vs Central, while Central office rents are most susceptible to decline given their historical peak levels.
Table 9: 2020 office rental forecast Rental growth forecast 2020E Central -15% Wanchai/Causeway Bay -5% HK Island East -5% Tsimshatsui -5% Kowloon East and other non-core areas -10% Source: J.P. Morgan estimates
Figure 14: Overall Grade A office rent vs vacancy Figure 15: Central Grade A office rent vs vacancy 90 HK$psf 14% 140 HK$psf 18% 80 12% 120 16% 70 14% 10% 100 60 12% 50 8% 80 10% 40 6% 60 8% 30 6% 4% 40 20 4% 10 2% 20 2% - 0% - 0% 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Overall Grade A office rent Overall office vacancy (RHS) Central office rents Central office vacancy (RHS) Source: JLL Source: JLL
22 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Table 10: JLL 4Q19 Grade-A Office/Prime Retail key figures Avg From Cap rate chg in 4Q19 Q/Q % chg YTD % Chg Cap rate in 4Q Vacancy (HK$/sqft) previous Peak 4Q (bps) Overall Office Rental 72.5 -4.0% -4.8% -6.2% 2.8% 6 6.0% Capital Value 31,698 -6.0% -8.1% -8.0% Central Office Rental 121.3 -3.0% -5.3% -6.7% 2.7% 6 3.6% Capital Value 53,474 -5.2% -9.1% -9.1% Wanchai/CWB Office Rental 69.0 -3.1% -4.1% -5.0% 2.7% 5 4.1% Capital Value 30,159 -5.1% -7.7% -7.1% TST Office Rental 53.2 -1.7% 0.4% -2.3% 2.9% 7 4.2% Capital Value 22,203 -4.2% -0.9% -4.8% HK East Office Rental 54.9 -0.7% 3.1% -0.7% 3.0% 3 2.8% Capital Value 22,028 -1.6% 0.3% -1.6% Kln East Office Rental 33.4 -3.0% -2.3% -3.2% 2.5% 2 13.1% Capital Value 15,790 -3.8% -3.6% -4.0% Retail Rental 156.3 -5.4% -5.6% -8.1% 4.9% 4 2.9% Capital Value 38,664 -6.2% -6.5% -7.2% Street shops Rental 382.8 -9.7% -18.4% -53.0% 2.6% 6 n/a Capital Value 179,284 -11.9% -21.9% -56.3% Source: JLL, J.P. Morgan estimates
Central Grade-A office at a tipping point HK’s 3Q19 GDP growth has marked the first technical recession since 2009 with two consecutive quarters of contractions. The overlay of the 'Black Swan' events pertaining to the series of protests related to the Extradition Bill has exacerbated our expected impact of a slowdown of the Chinese economy last year. The series of events has taken its toll on all aspects of the HK economy including consumption and business sentiment. Also, the net employment outlook for 1Q20 is the grimmest since late 2013, according to Manpower Group. Our EM Asia, Economic and Policy Research team now expects HK’s GDP decline to be -1.5% Y/Y in 2019. On the other hand, we maintain our forecast for China’s 2019 GDP growth at 6.1% Y/Y while that could ease to 5.9% Y/Y in 2020. Against this soft economic backdrop, we believe office demand is unlikely to revive in 1H2020.
We believe Central office rents will be most susceptible to such downturn on: 1) still the widest rental gap in history and 2) plunging new lettings. Central has recorded three consecutive quarters of negative net absorption and in 9M19 new lettings were down close to 40% Y/Y. YTD, Chinese demand accounted for 11% of the take-up, down from some 30% in 2018. Soft Chinese demand is likely to extend into 2020 with no visibility of turnaround, in our view. Based on our channel checks, expansion demand has also stalled while no major lease surrenders are surfacing yet. Notably, 200K sf space at Cheung Kong Center to be returned by the Securities and Futures Commission (relocation to Quarry Bay) along would lift the vacancy by 0.8%. The challenge in backfilling the space could mount pressure for nearby office buildings.
We hence expect average Central rents to dip 15% in 2020, given sporadic leases have been transacted at significant discounts to asking prices, such as a unit of Bank of America Tower which was transacted at 46% below the asking price in Dec 2019. We believe Grade-A offices at lower passing rents and fewer expiring leases such as Hongkong Land’s portfolio will see more resilience but weaker spot and asking rents will be a common trend.
23 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 16: Office expiry profile by landlord in 2020 25% 22% 21% 22% 20% 18% 15% 15%
10%
5%
0% HK Land Swire Properties Champion: Langham Champion: Three Hysan office Garden Road Source: Company data. *Note: 14% of Three Garden Road is subject to Rent review in 2020 in addition to the 22% expiry.
According to the Manpower Employment Outlook Survey, the seasonally adjusted net employment outlook for Finance, Insurance and Real Estate (FIRE) sector plunged from +20 as of 3Q19 to +12 for 1Q20, along with that of the overall market. Against such a backdrop and also downsizing measures announced by a few international banks, we think Central could also see some space to be sublet by these MNCs, lease discontinuation or even surrender in light of shrinking operations. As we believe it would be a tough year for the office market next year, we prefer office landlords that have fewer leases coming to expiry and more decentralized exposure.
Figure 17: China GDP growth vs Central take-up Figure 18: China GDP growth vs Central rental growth (sf) 100% 25% 160,000 25% 80% 20% 120,000 20% 60% 80,000 40% 15% 15% 20% 40,000 10% 0% 10% 0 -20% 5% 5% -40,000 -40% -80,000 0% -60% 0% 3 3 4 4 5 5 6 7 6 8 7 9 8 0 9 1 2 0 3 1 4 2 5 3 6 7 4 8 5 9 6 7 8 9 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D D Central take up Y/Y - LHS China GDP growth Y/Y - RHS Central rents Y/Y - LHS China GDP growth Y/Y - RHS
Source: CEIC, JLL Source: CEIC, JLL
Figure 19: Net office take-up in Central vs FIRE net employment outlook 1,000,000 35 800,000 30 600,000 25 400,000 20 200,000 15 0 -200,000 10 -400,000 5 -600,000 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 Net take-up Central (sf) - LHS FIRE net employment outlook - RHS
Source: Manpower, JLL, J.P. Morgan.
24 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Decentralization to tighten rental gap; higher resilience for non-core areas as tenants seek cost-efficient options The rental gap between Central and non-core areas has contracted by 3% to 7% after consecutive widening for the past five years. We believe that is driven by Central office losing its support from Chinese corporates, while new builds and infrastructure are boosting the attractiveness of non-core areas. Vacancies are largely healthy with new builds mostly filled up and ongoing decentralizing demand to backfill the empty office space, while there will be no completions in any of the major precincts in 2020.
HK East > CWB/WC=TST > Kowloon East > Central The most significant catch-up of rental level was seen at HK East in 2019, as the Central-Wanchai Bypass has shortened the traveling time between Central-Quarry Bay and that Swire’s rental reversions at One Island East and One Taikoo Place have lifted average rents in the area. The cluster is also made up of more diverse tenant backgrounds such as Facebook, international law firms, asset managers, banks, fashion and luxury goods and other professional service companies. Currently, the gap between Central and Causeway Bay/Wanchai, HK East, Tsim Sha Tsui and Kowloon East is HK$52, HK$66, HK$68 and HK$88 psf respectively. The HK East cluster with improved tenant facilities including catering, entertainment, cultural space, wellness events, flexible conference/meeting space provide additional incentives for traditional Central tenants to relocate to the hub. We expect HK East to continue its outperformance against other precincts with more limited downside on rental. We do not expect any turnaround on Kowloon East yet as the vacancy level is persistently high at 13%.
Figure 20: Travel time before Central Wan Chai bypass Figure 21: Travel time after Central Wan Chai bypass From/To Central CWB KLN East TST HK East From/To Central CWB KLN East TST HK East Central 13 31 20 19 Central 11 31 20 17 CWB 14 27 21 15 CWB 14 27 21 15 KLN East 38 26 25 41 KLN East 39 26 25 41 TST 27 19 24 32 TST 21 19 18 32 HK East 18 14 35 32 HK East 15 14 35 30 Source: J.P. Morgan Source: J.P. Morgan
Figure 22: Office rental gap between Central and other districts 120 100
80 60 40
20 - 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 CWB/WC TST HK East KLn East
Source: JLL
25 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
CWB/WC: Pressure from co-working operators looms as the tide turns Over the last three-year rental cycle, co-working space providers have accounted for 26% of the leasing transactions in Causeway Bay/Wanchai (CWB/WC) for Grade-A space on our estimates. The two dominant players are Kr Space, a Chinese operator, and WeWork, an American operator. Co-working space leasing activities have been concentrated in the CWB/WC, amounting to ~3% of the Grade-A office space as compared to 1% of HK overall, as we believe this is the precinct with the strongest potential of rental arbitrage given: 1) the fringe-CBD location where the commute to Central is within 15 min by MTR, bus or taxi and 2) 40% of rental gap vs Central.
Following the halted IPO plan and capital injection by Softbank, WeWork was reported to substantially restructure its workforce, according to Bloomberg. In Nov 2019, HKEJ also reported that WeWork had mulled surrendering six operating locations in Hong Kong. Based on our channel checks, co-working space peers after the past three years of expansion have been experiencing some 20% of vacancy, which is in line with the 22.1% vacancy of WeWork as of Sep 2019, according to the Financial Times. We see risks of such co-working space operators from: 1) sustained high level of vacancy and slim margins pressuring their profitability and 2) macro uncertainties clouding global liquidity and sentiment for start-up investments. If more operators have to surrender or sublet their office space, we believe CWB/WC rents could be under pressure due to the high concentration. The only balancing force is its still wide rental gap vs Central but this area is less of a beneficiary from decentralization compared to HK East, in our view.
Table 11: Selected leasing transactions by co-working space operators Property name Precinct Year Area leased (sf) Co-working space operator Mapletree Bay Point Kwun Tong 2017 72,866 Wework Cityplaza 3 Quarry Bay 2018 53,977 WeWork Two Harbour Square Kwun Tong 2018 55,867 naked Hub The Gateway Prudential Twr & Sun Life Twr TST 2018 47,211 Atlas Lee Garden Three Causeway Bay 2018 35,688 Spaces Champion Tower Central 2018 34,297 The Executive Centre One Hennessy Wanchai 2018 83,099 KR Space One Taikoo Place Quarry Bay 2018 20,773 The Great Room One Pacific Centre Kwun Tong 2018 25,980 A New Set Up East Exchange Tower Causeway Bay 2018 17,049 The Desk Times Square, Tower One Causeway Bay 2018 34,321 KR Space International Commerce Centre Kowloon Station 2018 33,803 WeWork Times Square, Tower Two Causeway Bay 2018 19,559 KR Space Hysan Place Causeway Bay 2018 32,866 WeWork Lee Garden One Causeway Bay 2018 32,770 WeWork United Centre Admiralty 2018 31,410 theDesk Champion Tower, Three Garden Road Central 2018 16,169 Eaton House K11 Atelier TST 2019 25,258 CEO Suite The Center Sheung Wan 2019 23,628 Victory Workspace Hopewell Centre Wanchai 2019 62,002 WeWork Source: JLL
26 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
No notable new supply in 2020 Amid the murky demand outlook, the only countering factor is that there will be no new supply in the major Grade-A precincts after some 2.8mn sf came to the market in 2019. Based on JLL forecasts, only 300K sf of office will be available to the market and all are located in Tsuen Wan and West Kowloon, areas that are outside the major developers’ strongholds. That will likely limit the overall office vacancy at 4-5% for most of the precincts other than Kowloon East, as per our estimates.
We also expect supply in 2021 to be moderate at 1.3mn sf driven by completions in areas such as Cheung Sha Wan, Kowloon Bay and Chek Lap Kok hence pre-leasing in 2021 is unlikely to be overwhelming, in our view. The next round of heightened completions will be in 2022 with Henderson's Murray Road site (Central), Swire's Two Taikoo Place (HK East), SHKP’s How Ming Street project (Kowloon East) and two Kai Tak projects coming to completion. If the macro outlook and local economy remain cloudy in 1H2020, mounting pressure from the accumulated pre-leasing supply could pose downside risk to our rental assumptions.
Figure 23: Average new office supply to be minimal in 2020 and 2021 7 Million sf 18.0 91-00 avg supply: 3.1m sf 01-10 average supply: 1.8m sf 6 average take-up: 1.6m sf 19-23E average 16.0 5 average take-up: 2.7m sf supply: 2.7m sf 14.0 4 12.0 10.0 3 8.0 2 6.0 1 4.0 0 2.0 -1 0.0 E E E E E 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 3 2 1 0 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 2 2 2 2 1 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Supply (LHS) Take-up (LHS) vacancy rate (RHS)
Source: HK R&VD, JLL, J.P. Morgan estimates
Table 12: Net supply breakdown by district in 2020-23 2020-23 net supply NFA (sf) % of total Other areas 5,015,695 50% Kowloon East 2,989,697 30% Central 943,799 9% HK East 764,999 8% CWB/WC 314,200 3% TST 0 0% Total 10,028,390 100% Note: Other areas include Yau Ma Tei, Aberdeen and Wong Chuk Hang and Tsuen Wan. Source: JLL, J.P. Morgan estimates
27 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Not a tail risk anymore? Moving to Shanghai or Singapore? Hong Kong CBD office rents are currently at about 150% and 170% premiums to Singapore CBD and Shanghai CBD office rents, respectively. Hong Kong has been the regional headquarters for many MNCs on the back of the strong demand from China corporates, an intact legal system and stable political environment. As the political landscape and likely certain operations in Hong Kong have been shaken by the recent protests, according to CNBC some interviewed corporations have been rethinking their decision to base their regional offices in Hong Kong. That said, based on our channel checks with leasing agents, as much as the idea of relocation has been tossed around, there is no notable MNC relocation detected for now as Hong Kong is still perceived as an imperative strategic location for access to the China market and its open financial market. Instead, some have halted their expansion plans or are seeking more cost-effective options in areas other than Central given the immense savings of 40-50%.
While there are no quantifiable measures on such, we think any relocation overseas or to cities in Mainland China would involve large-scale rearrangement of talent, consideration of tax and legal systems and long-term investment plans. While most of the MNCs do have footprints in all these major Asian cities, rearranging headquarters would still be a rather long-term decision. That said, if local political instability persists, it would likely restrain corporations’ appetite to invest or expand in Hong Kong, which would in turn limit the rental growth of offices.
In our report “Navigating the Darkness, Part II”, we estimated that if Hong Kong’s office premium were to contract to 60%, which was the level during financial crises, Central rents would have to correct by 40%. The 20-year average premiums over Singapore and Shanghai office rents were 115% and 107%, respectively. This implies about an 18% to 33% drop in office rents from current levels if Central rents were to fall back to the historical average premium. In a more extreme case where Central rents move to be level with Shanghai and Singapore CBDs, the implied fall would be ~60%.
Cap rate to expand on higher risk premium (+50bps) Market yields in the commercial property market have expanded across the board in 2H19, more obviously so in the Grade-A office segment. We believe the expansion is on the back of diminishing investment appetite and increasing uncertainty on the political landscape of Hong Kong. According to JLL, the volume of office sales priced over US$5 mn has dropped 87% Q/Q in 3Q19 and marked the lowest volume since 3Q13. The number of transactions and total consideration for retail properties in July-August also slid by 42% Y/Y and 35% Y/Y, respectively.
28 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 24: Cap rate expansion to accelerate into 2020 4.2% 4.0% 3.8% 3.6% 3.4% 3.2% 3.0% 2.8% 2.6% 2.4% 15 2Q 3Q 4Q 16 2Q 3Q 4Q 17 2Q 3Q 4Q 18 2Q 3Q 4Q 19 2Q 3Q 4Q
Overall office Central CWB/WC TST Hong Kong East KLn East
Source: JLL
We believe the cap rate expansion will accelerate in 2020 as investors will likely demand higher yields on the back of looming rental declines, uplift of vacancy and macro uncertainties. We are penciling in a magnitude of 50bps for the commercial properties sector. Notwithstanding a benign interest rate outlook along with the Fed guiding for a flat rate in 2020 and Hong Kong having cut back its Prime rate to 5% (lifted to 5.125% in Sep 2018), we think the ebbing capital flow into the commercial property market alone would drive up overall cap rates. Also, we believe investors will demand a higher 'Hong Kong risk premium’ as recent social events and concerns about political instability in Hong Kong may force investors to ask for a higher required return for investing in Hong Kong. This has been evident in the latest tender of the High Speed Rail commercial site that was won by SHKP at 4.6% yield.
29 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Retail: Luxury retail to brace for a structural downturn
We prefer non-discretionary retail to luxury retail given the temporary disruption from local social unrest and longer-term structural issues for the prime mall landlords. We expect further restructuring of tenant mixes and measures to cope with the challenges from online retailers will limit the room for positive reversions at high-end shopping malls even if the social unrest is resolved. On the flipside, non- discretionary retail trades that are geared towards the daily necessities of local consumers have demonstrated very strong resilience throughout times of turmoil. Also, we believe the sustained repatriation of luxury spending to Mainland China will benefit landlords such as Hang Lung and Wharf Holdings.
Table 13: 2020 retail rental forecast Rental growth forecast 2020E Prime shopping malls -20% Source: J.P. Morgan estimates
Price gap and e-commerce penetration to eat into sales of luxury goods Retail sales dropped by 10.3% Y/Y in 11M2019 or 20.2% Y/Y from Jul-Nov 2019 on the back of the ongoing social unrest and macro uncertainties pertaining to the US-China trade negotiations. Tourist arrivals were also down by 10% Y/Y in 11M2019 with Jul-Nov 2019 down by 36.2% Y/Y. We expect tourist arrivals, along with retail sales, to pick up again in 2H20 off a low base. However, we believe HK retail sales could land at a new lower normal where tourist-related and luxury consumption that account for some 25-30% of retail sales will level off. Price gap narrowed to 0 to 7%. As we mentioned in our report “China Retail landlords – In the midst of structural positive changes”, the price gap of selected luxury goods for Mainland Chinese (i.e. no tax refund) has narrowed to 0 to 7%, taking into account Rmb appreciation since Aug 2019. Taste shifts away from shopping. According to a survey conducted by the World Tourism Cities Federation in 2018, 44% of Chinese outbound tourist respondents claimed that their major traveling purpose was shopping. However, the ratio declined to 31% in 2017/18. Moreover, in terms of destination, we expect inbound travel to grow much faster than outbound travel on the back of more proactive promotions, supportive domestic duty-free policies, less favorable tax policies for overseas shopping, and Rmb depreciation to induce more travel at home.
30 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 25: Mainland tourists' spending by purpose; % shopping on a structural downtrend HK$mn 300,000 85% 250,000 80% 200,000 150,000 75% 100,000 70% 50,000 0 65% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Shopping Hotel Meals Entertainment Others % of shopping (RHS)
Note: Annual data available only. Source: CEIC, J.P. Morgan estimates
Figure 26: Mainland tourists' per capita spending by purpose (2007=100) 300
250 200 150
100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Shopping Hotel Meals Entertainment Tours
Source: CEIC, J.P. Morgan estimates
Online distribution channel could cannibalize physical channels. Based on Bain & Co's estimates, the online luxury goods market has grown by a CAGR of 24% from 2013-17, outpacing any other channels including off-price stores, department stores and monobrand/specialty stores, and is expected to reach 10% of the total luxury market globally. Asia is also the region that is growing fastest. For Hong Kong specifically, online shopping platforms such as Mr. Porter, Net-a-Porter, Selfridges, ASOS, Harrods.com and Farfetch are all gaining popularity given the price differential vs physical store and easy delivery facilitated by logistics companies such as Shun Fung. We believe with the new round of challenges, the evolvement of retail landlords would entail the following trends: More focus on attracting millennial consumers: They are the major growth driver of luxury spending. That could mean shopping malls operators could reserve more space for events, pop-up stores, specialized and exclusive collaborated product offerings instead of solely luxury goods with hefty price tags, ‘instagrammable’ spots and specialized F&B to appeal to millennial shoppers; on the flip side, it may lower productivity of the shopping mall and lower rental revenue.
31 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Non-price competition: ‘Luxury’ could come in forms other than goods. With the luxury market growing as fast, if not faster, on hospitality, fine dining and art, we believe the those operators that are successful in incorporating an all-around luxury experience would outperform and incentivize consumers with more reasons to visit their properties other than merely shopping. Focus of tenant mix could be skewed back to domestic consumption: That could imply a structural but gradual swing of concentration to affordable luxury and more authentic boutiques instead of medicines, cosmetics and high-end fashion, jewelry and watches. Collaborate with big data/online platforms to connect customers: We believe traditional landlords have been more reluctant to collaborate with online retailers. However, this may change under the current climate and we expect landlords to either reinvent their own loyalty programs or systems internally or collaborate with online giants to capture both online and office retail sales. We expect the need for landlords to adjust their tenant mixes in response to such structural trend will compel declines in rent levels or at the least leveling off in rental reversion for the traditional premium prime malls. Newly opened high-end malls such as K11 MUSEA that are more acclimated to the recent trends are expected to be more resilient.
Non-discretionary sales not affected much On the flipside, we think domestic consumption will remain supported by inflation and a potential shift in spending patterns skewed towards affordable options. Non- discretionary such as F&B and supermarket sales have been outperforming other categories even in the midst of the protests in 2H2019. We believe with inflation hovering at close to 3%, unless the spike in unemployment is uncontrollable, non- discretionary retail trade is likely to be held up at a stable level. Indeed, we expect estates near major estates run by Link REIT and Fortune REIT to perform well with more consumption at local restaurants, wet markets and supermarkets. Link REIT noted that their F&B and supermarkets trade has grown by 2.1% and 4.5% Y/Y in Apr-Sep 2019, respectively.
We expect HK to see a pick-up of unemployment rates as the impact from social unrests and trade disputes gradually feeds through. The latest reading of unemployment rate was at 3.2% for the three months ending November 2019, the highest since July 2017. While this could limit spending in non-discretionary trade as well, we believe the impact would be much more contained and hence we expect to see only a slowdown rental reversions instead of a drastic rental reduction. We continue to like Link REIT and Fortune REIT for their defensive nature, as their trades are likely sheltered from macro and local uncertainties.
32 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 27: Domestic consumption highly correlates with inflation Figure 28: Hong Kong Wage growth vs unemployment rate 15% 25% 6% 7% 20% 10% 4% 6% 15% 2% 5% 5% 10% 0% 4% 5% -2% 0% 3% 0% -4% -5% 2% -5% -6% 1% -10% -10% -8% 8 6 4 2 0 8 6 4 2 0 8 6 4 2 0 -10% 0% 1 1 1 1 1 0 0 0 0 0 9 9 9 9 9 ------5 6 7 7 8 9 0 1 4 5 2 3 6 7 8 8 r r r r r r r r r r r r r r r 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 a a a a a a a a a a a a a a a ------l t r r r c v y c b n p g n b n M M M M M M M M M M M M M M M c u a a p e o a e e a e u u e a J O A J J J M F M F D N S A D Composite CPI Y/Y% - LHS M Private consumption expenditure Y/Y% - RHS Real wage Y/Y - LHS Unemployment rate - RHS Source: CEIC Source: CEIC, J.P. Morgan
How much downside for high-end retail rental? Table 14: Hong Kong retail property performance of major landlords in 1H19 Landlords Period Retail sales % of turnover rent Occupancy cost Reversion Y/Y rental Remarks change HK Land 1H19 -8% 5% n/a +ve 3.5% Avg passing rents Hysan 1H19 4% 4.8% 18% +ve mid-single digit 4.0% Including LG3 Wharf REIC 1H19 Harbour City: -0.6%; 14% Harbour City: 19.6% Harbour City: +ve mid-high 4.5% HK only Times Square: -3.6% Times Square: single digit 21.3% Times Square: +ve Champion 1H19 -0.6% 20% 19% +ve 2.7% Langham Place Mall; REIT rental income increase due to higher base rents Swire 1H19 PP: -4.2%; n/a n/a n/a 3.0% HK only Properties Cityplaza: +0.1%; Citygate: +0.1% MTRC 1H19 Overall: +ve; n/a Mid to high-teens Malls: 3% n/a Ex Elements: mild -ve Kiosks: >3% Link REIT 1H20 1.4% 1% 14.4% 18.1% 5.9% Including shops, markets, welfare; excluding carpark Fortune +0.7% ex-Provident REIT 1H19 n/a n/a n/a 7.8% -0.8% Square Note: Wharf REIC -35% and -30% Y/Y for HC and TS respectively in 3Q19; Swire Prop -12%, -1%, -3% for PP, Cityplaza, Citygate respectively in 9M19. Source: Company data, J.P. Morgan estimates
Occupancy costs are currently at around high-teens to low-20s. Given the slump of retail sales in 3Q19 that is down some 30% Y/Y for high-end malls, our assumption of a 20% decline in spot retail rents is based on a temporary stretch of occupancy costs by approximately 3pps – historical highs for malls such as Harbour City and Times Square. In corollary, we estimate that if they are to maintain the same level of occupancy costs, it would mean the extent of retail sales drop would be ~20% for 2020 overall: 50% reduction of tourists-related retail sales (30% of total) while domestic consumption (70% of total) drops by 7% in 2020. Indeed, since Swire Prop’s announcement of rental concession to selective retail tenants at Pacific Place, the vast majority of retail landlords have followed suit with Harbour City offering up to 15% of concession (assuming turnover rents vanished that could amount to a 30% rental decline) and up to 40% for six months at Cityplaza for selected tenants, according to Apple Daily. Note that these concessions are for selective tenants and the one-off concessions are to be amortized across the remaining lease term, hence the resultant impact on earnings would be much more moderate.
33 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
In addition, turnover rents could come down substantially should retail sales remain subdued. Based on the comparison above, the most susceptible landlords would be Wharf REIC and Champion REIT. Turnover rents for other retail landlords such as Hysan has always been at 3-5% of rental income and hence the earnings impact would be much mellower.
Given the share prices of the retail landlords have corrected by 23-31% as of end-2019 from their peaks in April/May 2019 (vs HSI 6%), we believe upside risks on share prices would be a continued recovery of the Rmb on the back of a moderation of the US-China trade war. That said, we believe the downtrend of Hong Kong retail sales is structural and the current retail rental level presents considerable room for downward revision to a new normal. For instance, passing rents of K11 MUSEA are only about a quarter of those at Harbour City. While it is true that the rebound of the Rmb may trigger a short-term rebound in the share prices of the retail landlords as a leading indicator, we are rather cautious on the retail outlook in the medium term given the structural changes facing the sector.
Figure 29: Retail sales growth decoupling with Rmb trend Figure 30: Plunge in tourist arrivals could hurt high-end malls most 12% 40% 50% 40% 10% 8% 30% 30% 30% 6% 20% 20% 4% 10% 10% 10% 2% -10% 0% 0% 0% -2% -30% -4% -10% -10% -6% -20% -50% -20% -8% -10% -30% -70% -30% 9 0 1 2 3 4 5 6 7 8 9 9 8 7 6 5 4 3 2 1 0 9 9 8 7 6 5 4 3 2 1 0 9 9 0 1 2 3 4 5 6 7 8 9 1 1 1 1 1 1 1 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------l l l l l l l l l l l l l l l l l l l l l l n n n n n n n n n n n n n n n n n n n n n n u u u u u u u u u u u u u u u u u u u u u u a a a a a a a a a a a a a a a a a a a a a a J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J CNYUSD Y/Y % HK retail sales Y/Y - RHS Total visitor arrivals Y/Y HK retail sales Y/Y - RHS
Source: Bloomberg, CEIC Source: Bloomberg, CEIC
34 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
China retail exposure stand to benefit China’s overall policy of keeping domestic consumption onshore is acting as another headwind to Hong Kong retail landlords. We believe more tenant mix transformation from tourist-centric to focusing on domestic consumption needs to be made. On the other hand, landlords with substantial China retail exposure including Hang Lung, Wharf Holdings and Swire Prop stand to benefit from the continued repatriation of luxury spending to Mainland China on the back of the narrower price gap and broadly weaker Rmb.
Moreover, we expect domestic travel spending and domestic tourist growth in Mainland China to pick up despite the constant growth in the past years. We believe efforts to boost domestic travel are in line with the overall policy direction of boosting domestic consumption. Given luxury goods offerings are concentrated in tier-1 and top tier-2 cities, we think the aforementioned landlords would be beneficiaries of growing onshore luxury spending with domestic travel gaining popularity.
Figure 31: China domestic tourists vs outbound tourists Y/Y growth Figure 32: China domestic tourism revenue growth 30% (RMBtn) 6.0 60% 25% 53% 5.0 50% 20% 4.0 40% 15% 3.0 24% 30% 10% 18% 2.0 16% 16% 15% 13% 15% 16% 12% 20% 5% 1.0 10% 0% 9 0 1 2 3 4 5 6 7 8 0.0 0% 0 1 1 1 1 1 1 1 1 1 9 0 1 2 3 4 5 6 7 8 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2
0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2
China domestic tourist yoy growth China outbound tourist yoy growth China domestic tourism revenue yoy growth (RHS) Source: CEIC Source: CEIC, J.P. Morgan estimates
Table 15: Projected pipeline of new supply of prime retail space Property Location Year of completion GFA (sf) Developer The LOHAS Tseung Kwan O 2020 478,994 MTRC TWTL 393, Yeung Uk Road Tsuen Wan 2020 333,403 Billion Development Hopewell Centre 2 Wanchai 2021 266,945 Hopewell Kwun Tong Town Centre Development Kwun Tong 2021 207,711 URA, Sino & Chinese Estates Skycity Ph1A Tung Chung 2021 39,364 NWD, Airport Authority HK 98 How Ming Street, KTIL 240 Kwun Tong 2022 500,000 SHKP, Transport Int'l NKIL 6556, Site1F2, Kai Tak Kai Tak 2022 699,998 Nan Fung NKIL 6557, Site1E2, Kai Tak Kai Tak 2022 530,725 SOGO Yuen Long Station Development, YLTL 510 Yuen Long 2022 107,000 SHKP, MTRC Tai Wai Station Shopping Centre Shatin 2023 652,508 MTRC NKIL 6568, Site1F1, Kai Tak Kai Tak 2023 262,000 SHKP Wong Chuk Hang Shopping Centre Wong Chuk Hang 2023 505,903 MTRC KIL 11262, XRL Station West Kowloon 2023 316,459 SHKP Source: JLL
35 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
NAV breakdown
Table18: Asset exposure by companies % of GAV Hong Kong - Developers Hong Kong - Investors / REITs Hong Kong Henderson New World Hang Lung Land Fortune Champion CK Asset Land Sino Land SHKP Dev Kerry Props Wharf Wheelock Props (US$) Hysan Swire Prop Wharf REIC Link REIT REIT REIT 1113.HK 0012.HK 0083.HK 0016.HK 0017.HK 0683.HK 0004.HK 0020.HK 0101.HK HKLD.SI 0014.HK 1972.HK 1997.HK 0823.HK 0778.HK 2778.HK Under Dev Resid 12% 39% 34% 26% 24% 20% 19% 23% 2% 1% 3% 1% 0% 0% 0% 0% - HK Office 0% 4% 1% 5% 2% 0% 0% 0% 0% 0% 0% 10% 0% 0% 0% 0% Retail 0% 0% 2% 1% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Others 0% 0% 0% 1% 9% 0% 0% 0% 1% 0% 0% 2% 0% 0% 0% 0% Inv Prop – Resid 0% 2% 2% 3% 4% 13% 1% 0% 9% 0% 16% 4% 2% 0% 0% 0% HK Office 15% 6% 16% 13% 8% 3% 0% 0% 15% 46% 39% 39% 36% 4% 0% 70% Retail 11% 7% 25% 19% 13% 4% 0% 0% 19% 12% 30% 13% 54% 66% 100% 28% Others 15% 1% 6% 5% 3% 1% 2% 0% 2% 0% 1% 0% 2% 17% 0% 2% Under Dev Resid 15% 2% 3% 5% 9% 5% 21% 0% 2% 16% 0% 0% 0% 0% 0% 0% - China Office 0% 4% 0% 4% 0% 6% 0% 0% 7% 0% 0% 3% 0% 0% 0% 0% Retail 0% 2% 1% 5% 4% 2% 0% 0% 8% 0% 0% 4% 0% 0% 0% 0% Others 0% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Inv Prop - Resid 0% 0% 0% 0% 1% 6% 1% 0% 0% 1% 2% 0% 0% 0% 0% 0% China Office 1% 8% 1% 3% 1% 15% 22% 0% 9% 2% 2% 2% 0% 3% 0% 0% Retail 1% 2% 2% 4% 5% 11% 15% 0% 28% 5% 6% 12% 0% 9% 0% 0% Others 0% 0% 0% 0% 0% 6% 1% 0% 1% 0% 0% 0% 0% 0% 0% 0% Others Overseas props 2% 0% 4% 1% 0% 1% 0% 0% 0% 16% 0% 9% 3% 2% 0% 0% Listed assets 3% 23% 1% 3% 8% 6% 16% 77% 0% 1% 2% 0% 4% 0% 0% 0% Unlisted 24% 0% 1% 2% 6% 0% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0% GAV 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Source: Company data, J.P. Morgan estimates.
36 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Valuation charts
Figure45: CK Asset - Current NAV discount Figure 46: Henderson Land - Current NAV discount 20.0% 40.0%
10.0% +2 s.d. +2 s.d. 20.0% 0.0% +1 s.d. +1 s.d. -10.0% 0.0% Average = -22.3% -20.0% Average = -23.0% -20.0% -30.0% -1 s.d. -40.0% -1 s.d. -40.0% -2 s.d. -50.0% -2 s.d. -60.0% -60.0%
-70.0% -80.0% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 NAV (Discount/Premium) Mean NAV (Discount/Premium) Mean
Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates.
Figure 47: Kerry - Current NAV discount Figure 48: NWD - Current NAV discount 20% 60.0%
0% +2 s.d. 40.0%
20.0% -20% +1 s.d. +2 s.d. 0.0% -40% +1 s.d. Average = -47.7% -20.0% Average = -39.5% -60% -40.0% -1 s.d. -1 s.d. -80% -60.0% -2 s.d. -2 s.d. -80.0% -100% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 -100.0% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 NAV (Discount/Premium) Mean Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates.
Figure 49: Sino Land - Current NAV discount Figure 50: SHKP - Current NAV discount 40.0% 60.0%
20.0% 40.0% +2 s.d. +2 s.d. 20.0% 0.0% +1 s.d. +1 s.d. Average = -32.9% 0.0% Average = -21.5% -20.0% -20.0% -1 s.d. -40.0% -40.0% -2 s.d. -1 s.d. -60.0% -60.0% -80.0% -2 s.d. 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 -80.0% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 NAV (Discount/Premium) Mean NAV (Discount/Premium) Mean
Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates.
37 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 51: HLP - Current NAV discount Figure 52: HK Land - Current NAV discount 40% 30.0% 20.0% 20% 10.0% +2 s.d. +2 s.d. 0.0% 0% +1 s.d. +1 s.d. -10.0% -20.0% -20% -30.0% Average = -30.7% -40.0% -40% -1 s.d. -1 s.d. -50.0% Average = -26.4% -2 s.d. -60% -2 s.d. -60.0% -70.0% -80% 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 NAV (Discount/Premium) Mean NAV (Discount/Premium) Mean Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates.
Figure 53: Hysan - Current NAV discount Figure 54: Swire Properties - Current NAV discount 10.0% 0% 0.0% +2 s.d. -10% -10.0% +2 s.d. -20.0% +1 s.d. -20% +1 s.d. -30.0% Average = -39.5% -30% Average = -35.5% -40.0%
-50.0% -40% -1 s.d. -1 s.d. -60.0% -50% -2 s.d. -70.0% -2 s.d. -60% -80.0% Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
NAV (Discount/Premium) Mean Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates.
Figure 55: Wharf - Current NAV discount Figure 33: Wharf REIC - Current NAV discount
30.0% -10.0% 20.0% +2 s.d. -15.0% 10.0% +2 s.d. 0.0% -20.0% +1 s.d. -10.0% +1 s.d. -25.0% -20.0% -30.0% -30.0% Average = -32.7% Average = -32.7% -40.0% -35.0% -50.0% -1 s.d. -40.0% -1 s.d. -60.0% -2 s.d. -70.0% -45.0% -2 s.d. -80.0% -50.0% 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19
NAV (Discount/Premium) Mean NAV (Discount/Premium) Mean
Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates
38 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Figure 56: Champion REIT – Yield spread Figure 57: Champion REIT – Dividend yield
20 25 18 16 20 14 12 15 10 8 10 Long-term yield =6.36% 6 Long-term yield spread =452 bps 4 5 Avg yield before financial crisis: 7.92% 2 293 bps 0 0 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-19
Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates.
Figure 58: Fortune REIT – Yield spread Figure 59: Fortune REIT – Dividend yield
18.0 20 16.0 18 14.0 16 12.0 14 Avg yield before financial 10.0 12 crisis: 6.10% 8.0 10 Avg yield spread before 419bps 6.0 financial crisis: 217 bps 8 4.0 6
2.0 Long-term yield spread =379 bps 4 0.0 2 Long-term yield =6.3% -2.0 0 Jan-04 Jul-05 Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16 Jul-17 Jan-19 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates.
Figure 60: Link REIT – Yield spread Figure 61: Link REIT – Dividend yield
7.0 9 6.0 8 5.0 7 4.0
3.0 6 Long-term yield =4.64% 2.0 Long-term yield spread =239 bps 5 1.0 4 0.0
-1.0 3 Avg yield before financial -2.0 crisis: 4.45% Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 2 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Nov-19
Source: Bloomberg, Company data, J.P. Morgan estimates. Source: Bloomberg, Company data, J.P. Morgan estimates.
39 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
CK Asset Holdings Ltd (1113) Overweight Investment Thesis, Valuation and Risks 1113.HK,1113 HK Price (08 Jan 20): HK$54.20 CK Asset Holdings Ltd (Overweight; Price Target: HK$75.50) ▲ Price Target (Dec-20): HK$75.50 Investment Thesis Prior (Dec-19): HK$68.80 CK Asset’s diversified recurrent earnings base is likely to be the focus in 2020. We Hong Kong expect CKA to increase dividends in 2019 as recurrent income is accounting for Head of HK Research, Conglomerates >70% of its earnings. Other catalysts include: 1) Strong expected earnings growth in and Property 2019 supported by strong HK development booking and new contribution from Cusson Leung, CFA AC acquisition of Greene King; and 2) Potential launch of LOHAS Park Ph8 and Borrett (852) 2800-8526 Road projects. [email protected] Bloomberg JPMA LEUNG
Style Exposure Dec-20 HK$MM HK$/sh % of GAV Quant Current Hist %Rank (1=Top) Property Development Factors %Rank 6M 1Y 3Y 5Y Hong Kong Luxury residential 47,090 12.7 9.9% Value 15 10 14 19 38 Mass residential 16,464 4.5 3.5% Growth 83 95 21 51 83 Agricultural Landbank/Others 996 0.3 0.2% Hong Kong Dev 64,550 17.5 13.6% Momentum 39 29 57 59 China Quality 33 54 86 58 31 Res/Com 45,619 12.4 9.6% China Dev 45,619 12.4 9.6% Low Vol 42 29 26 63 Other Overseas Dev SG/UK/Others 16,544 4.5 3.5% ESGQ 14 6 96 - - Total Property Development 126,712 34.3 26.7% Investment Property Sources for: Style Exposure – J.P. Morgan Quantitative and Hong Kong Derivatives Strategy; all other tables are company data and Residential 1,203 0.3 0.3% J.P. Morgan estimates. Office 57,214 15.5 12.1% Retail 39,850 10.8 8.4% IndustrialOthers 16,053 4.3 3.4% Hong Kong Inv Pty 114,320 31.0 24.1% China Office 2,538 0.7 0.5% Retail 5,249 1.4 1.1% China Inv Pty 7,787 2.1 1.6% Overseas UK 11,331 3.1 2.4% Total Investment Property 133,438 36.1 28.1% Hotel Hong Kong HK 49,946 13.5 10.5% China 1,163 0.3 0.2% Overseas 0 0.0 0.0% Total Hotel 51,109 13.8 10.8% Investments Fortune REIT (778 HK) 4,773 1.3 1.0% Prosperity REIT (808 HK) 845 0.2 0.2% Hui Xian REIT (87001 HK) 7,171 1.9 1.5% ARA Asset Management (ARA SP) - priv atized 823 0.2 0.2% Aircraft leasing business 25,248 6.8 5.3% DUET - at Book 17,300 4.7 3.6% Reliance Home - at Book 12,700 3.4 2.7% Ista - at Book 26,100 7.1 5.5% 6 infrastructure projects - at Book 9,600 2.6 2.0% Greene King (10x EV/EBITDA) 47,790 12.9 10.1% LT Loan Receiv ables 11,072 3.0 2.3% Total Investments 163,421 44.2 34.4% Gross Asset Value 474,680 128.5 100.0% Gross debt (105,163) (28.5) Less Cash & Short Term Deposits 59,402 16.1 Est Net Interest Bearing Debt (45,761) (12.4) NAV 428,919 116.1 125 Source: Bloomberg, J.P. Morgan estimates.
40 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Risks to Rating and Price Target Downside risks to our rating and price target include CKA disappointing on dividend increase again and insufficient disclosures on overseas investments such that investors cannot appreciate the stable nature of such businesses. Upside risks include better-than-expected sales of HK development projects and highly accretive acquisitions.
41 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis CK Asset’s diversified recurrent earnings base is likely to be the focus in 2020. We expect CKA to increase dividends in 2019 as recurrent income accounts for >70% of its earnings. Other catalysts include: 1) Strong expected earnings growth in 2019 supported by strong HK development booking and new contribution from acquisition of Greene King; and 2) Potential launch of LOHAS Park Ph8 and Borrett Road projects. YTD 1m 3m 12m Abs -3.6% 4.7% 3.7% -13.3% Valuation Rel -4.1% -2.2% -6.0% -13.6% Our Dec-20 PT of HK$75.5 is based on a 35% discount to Company Data Dec-20E NAV which is ~ 1 S.D. below the historical average. Shares O/S (mn) 3,693 52-week range (HK$) 72.50-49.00 Market cap ($ mn) 25,735 Exchange rate 7.78 Free float(%) 66.0% Performance Drivers 3M - Avg daily vol (mn) 5.69 3M - Avg daily val ($ mn) 39.1 Volatility (90 Day) 26 Index HSI BBG BUY|HOLD|SELL 12|3|0 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 64,481 117,068 101,696 122,812 Adj. EBITDA 36,347 44,187 37,881 45,030 Adj. EBIT 34,576 42,226 34,838 41,215 Adj. net income 23,459 29,192 23,561 25,805 Adj. EPS 6.35 7.90 6.37 6.98 BBG EPS 6.38 7.99 6.68 6.80 Cashflow from operations 16,145 39,290 34,529 36,539 FCFF 13,565 37,359 32,598 34,608 Margins and Growth Revenue growth 1.1% 81.6% (13.1%) 20.8% EBITDA margin 56.4% 37.7% 37.2% 36.7% EBITDA growth 16.7% 21.6% (14.3%) 18.9% EBIT margin 53.6% 36.1% 34.3% 33.6% Net margin 36.4% 24.9% 23.2% 21.0% Adj. EPS growth 18.7% 24.4% (19.3%) 9.5% Ratios Adj. tax rate 17.7% 26.9% 28.0% 34.8% Interest cover NM NM NM NM Net debt/Equity 0.0 NM NM 0.3 Net debt/EBITDA 0.4 NM NM 1.5 ROCE 7.3% 7.5% 5.8% 7.0% ROE 7.3% 8.5% 6.6% 8.2% Valuation FCFF yield 6.8% 18.6% 16.3% 17.3% Dividend yield 3.5% 3.9% 4.2% 4.4% EV/EBITDA 6.0 4.3 4.4 6.0 Adj. P/E 8.5 6.9 8.5 7.8
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
42 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
CK Asset Holdings Ltd (1113): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 63,780 64,481 117,068 101,696 122,812 Cash flow from operating activities 51,291 16,145 39,290 34,529 36,539 COGS - - - - - o/w Depreciation & amortization 1,573 1,771 1,961 3,043 3,815 Gross profit - - - - - o/w Changes in working capital 25,990 (14,242) 7,000 7,000 7,000 SG&A - - - - - Adj. EBITDA 31,144 36,347 44,187 37,881 45,030 Cash flow from investing activities (44,376) (2,580) (1,931) (1,931) (1,931) D&A (1,573) (1,771) (1,961) (3,043) (3,815) o/w Capital expenditure (1,370) 0 0 0 Adj. EBIT 29,571 34,576 42,226 34,838 41,215 as % of sales - 2.1% 0.0% 0.0% 0.0% Net Interest (400) 1,403 2,500 2,555 2,634 Adj. PBT 28,841 45,533 41,630 34,142 40,435 Cash flow from financing activities (14,599) (11,757) (11,383) (9,588) (13,657) Tax (7,758) (8,054) (11,195) (9,554) (14,056) o/w Dividends paid (6,507) (6,825) (9,005) (9,342) (9,445) Minority Interest (763) (1,517) (1,243) (1,026) (574) o/w Shares issued/(repurchased) (7,002) (232) 0 0 0 Adj. Net Income 19,957 23,459 29,192 23,561 25,805 o/w Net debt issued/(repaid) 975 (1,765) (474) 1,853 (1,940) Reported EPS 5.44 9.73 7.90 6.37 6.98 Net change in cash (7,684) 1,808 25,976 23,010 20,951 Adj. EPS 5.35 6.35 7.90 6.37 6.98 Adj. Free cash flow to firm 6,915 13,565 37,359 32,598 34,608 DPS 1.70 1.90 2.10 2.25 2.40 y/y Growth (71.5%) 96.2% 175.4% (12.7%) 6.2% Payout ratio 31.8% 29.9% 26.6% 35.3% 34.4% Shares outstanding 3,732 3,696 3,696 3,696 3,696 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 54,917 56,725 82,701 105,711 0 Gross margin - - - - - Accounts receivable 6,472 20,827 20,827 20,827 20,827 EBITDA margin 48.8% 56.4% 37.7% 37.2% 36.7% Inventories 135,589 143,373 138,373 133,373 133,373 EBIT margin 46.4% 53.6% 36.1% 34.3% 33.6% Other current assets 0 0 0 0 0 Net profit margin 31.3% 36.4% 24.9% 23.2% 21.0% Current assets 196,978 220,925 241,901 259,911 154,200 PP&E 171,335 161,138 159,177 156,134 156,134 ROE 7.0% 7.3% 8.5% 6.6% 8.2% LT investments 9,611 23,650 23,650 23,650 23,650 ROA 4.7% 5.1% 6.0% 4.7% 5.6% Other non current assets 75,415 69,511 70,933 72,342 72,342 ROCE 6.0% 7.3% 7.5% 5.8% 7.0% Total assets 453,339 475,224 495,661 512,037 406,326 SG&A/Sales - - - - - Net debt/Equity 0.1 0.0 NM NM 0.3 Short term borrowings 14,342 1,829 6,829 11,829 16,829 Net debt/EBITDA 0.5 0.4 NM NM 1.5 Payables 55,638 49,538 51,538 53,538 53,538 Other short term liabilities 3,426 3,080 3,080 3,080 3,080 Sales/Assets (x) 0.2 0.1 0.2 0.2 0.3 Current liabilities 73,406 54,447 61,447 68,447 73,447 Assets/Equity (x) 1.5 1.5 1.4 1.4 1.5 Long-term debt 57,650 67,663 62,189 59,042 52,102 Interest cover (x) 77.9 NM NM NM NM Other long term liabilities 13,103 12,807 12,807 12,807 12,807 Operating leverage (124.6%) 1539.9% 27.1% 133.3% 88.2% Total liabilities 144,159 134,917 136,443 140,296 138,356 Tax rate 26.9% 17.7% 26.9% 28.0% 34.8% Shareholders' equity 303,222 335,190 353,380 365,903 261,558 Revenue y/y Growth (8.8%) 1.1% 81.6% (13.1%) 20.8% Minority interests 5,958 5,838 5,838 5,838 6,412 EBITDA y/y Growth 13.5% 16.7% 21.6% (14.3%) 18.9% Total liabilities & equity 453,339 475,945 495,661 512,037 406,326 EPS y/y Growth 14.1% 18.7% 24.4% (19.3%) 9.5% BVPS 82.01 90.75 95.68 99.07 70.82 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 12.2% 10.7% 5.4% 3.5% (28.5%) P/E (x) 10.1 8.5 6.9 8.5 7.8 P/BV (x) 0.7 0.6 0.6 0.5 0.8 RNAV/Share 116.13 - EV/EBITDA (x) 7.1 6.0 4.3 4.4 6.0 Net debt/(cash) 17,075 12,767 (13,683) (34,840) 68,931 Dividend Yield 3.1% 3.5% 3.9% 4.2% 4.4% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
43 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Henderson Land Development (0012) Overweight Investment Thesis, Valuation and Risks 0012.HK,12 HK Price (08 Jan 20): HK$37.50 Henderson Land Development (Overweight; Price Target: HK$49.40) ▲ Price Target (Dec-20): HK$49.40 Prior (Dec-19): HK$46.00 Investment Thesis Hong Kong Henderson Land is increasing asset turnover of its overall business portfolio, Head of HK Research, Conglomerates including non-core asset disposals such as commercial assets, residential sites, or and Property farmland projects. We also expect the application of PPP farmland conversion to Cusson Leung, CFA AC start in 2020. We think healthy growth of rental income will continue to support its (852) 2800-8526 generous dividend increase, along with 10% bonus shares. [email protected] Bloomberg JPMA LEUNG
Risks to Rating and Price Target Upside risks to our rating and price target include faster-than-expected monetization of farmland through land resumption by the government and higher-than-expected margins for urban development projects in Hong Kong. Downside risks would be ceasing of the 10% bonus share issue and slower-than-expected conversion progress and faster-than-expected interest rate hikes.
44 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis Henderson Land is increasing asset turnover of its overall business portfolio, including non-core asset disposals such as commercial assets, residential sites, or farmland projects. We also expect the application of PPP farmland conversion to start in 2020. We think healthy growth of rental income will continue to support its generous dividend increase, along with 10% bonus shares.
YTD 1m 3m 12m Valuation Abs -2.0% -1.2% 3.2% -9.9% Rel -2.5% -8.1% -6.5% -10.2% Our Dec-20 PT of HK$49.4 is based on a 43% discount to Dec-20E NAV, which is ~1 S.D below its historical average. Company Data Shares O/S (mn) 4,841 52-week range (HK$) 46.41-35.30 Performance Drivers Market cap ($ mn) 23,340 Exchange rate 7.78 Free float(%) 27.1% 3M - Avg daily vol (mn) 4.35 3M - Avg daily val ($ mn) 21.3 Volatility (90 Day) 25 Index HSI BBG BUY|HOLD|SELL 13|3|1 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 21,982 30,161 27,704 32,563 Adj. EBITDA 9,115 11,631 10,143 11,826 Adj. EBIT 9,047 11,556 10,060 11,735 Adj. net income 12,541 14,134 13,364 14,335 Adj. EPS 2.85 2.92 2.76 2.96 BBG EPS 3.64 3.36 3.53 3.48 Cashflow from operations 6,290 9,130 30,228 25,348 FCFF 6,451 8,530 29,429 24,580 Margins and Growth Revenue growth (10.1%) 37.2% (8.1%) 17.5% EBITDA margin 41.5% 38.6% 36.6% 36.3% EBITDA growth 1.9% 27.6% (12.8%) 16.6% EBIT margin 41.2% 38.3% 36.3% 36.0% Net margin 57.1% 46.9% 48.2% 44.0% Adj. EPS growth (4.1%) 2.5% (5.4%) 7.3% Ratios Adj. tax rate 13.2% 13.3% 12.6% 16.7% Interest cover 60.8 25.2 44.0 42.4 Net debt/Equity 0.2 0.1 0.0 NM Net debt/EBITDA 7.5 2.8 1.1 NM ROCE 2.0% 2.5% 2.1% 2.2% ROE 4.1% 4.2% 3.6% 3.7% Valuation FCFF yield 3.9% 4.7% 16.2% 13.5% Dividend yield 4.8% 4.8% 5.0% 5.0% EV/EBITDA 15.7 8.5 7.0 3.9 Adj. P/E 13.2 12.8 13.6 12.7
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
45 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Henderson Land Development (0012): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 24,453 21,982 30,161 27,704 32,563 Cash flow from operating activities 1,046 6,290 9,130 30,228 25,348 COGS - - - - - o/w Depreciation & amortization 94 68 75 82 91 Gross profit - - - - - o/w Changes in working capital (8,873) (4,116) (3,462) 15,942 13,932 SG&A - - - - - Adj. EBITDA 8,941 9,115 11,631 10,143 11,826 Cash flow from investing activities (10,710) (11,919) (1,824) (1,906) (1,997) D&A (94) (68) (75) (82) (91) o/w Capital expenditure (28,000) (2,134) (1,000) (1,000) (1,000) Adj. EBIT 8,847 9,047 11,556 10,060 11,735 as % of sales 114.5% 9.7% 3.3% 3.6% 3.1% Net Interest (204) (150) (461) (231) (279) Adj. PBT 14,108 14,546 16,725 15,555 17,404 Cash flow from financing activities 16,642 (1,654) (6,423) (6,713) (6,810) Tax (1,877) (1,923) (2,219) (1,966) (2,914) o/w Dividends paid (6,598) (7,831) (9,423) (9,713) (9,810) Minority Interest (337) (82) (372) (225) (155) o/w Shares issued/(repurchased) 0 0 0 0 0 Adj. Net Income 11,894 12,541 14,134 13,364 14,335 o/w Net debt issued/(repaid) 21,817 6,867 3,000 3,000 3,000 Reported EPS 4.23 4.49 3.19 3.52 2.96 Net change in cash 6,978 (7,283) 883 21,608 16,541 Adj. EPS 2.97 2.85 2.92 2.76 2.96 Adj. Free cash flow to firm (23,350) 6,451 8,530 29,429 24,580 DPS 1.71 1.80 1.80 1.86 1.88 y/y Growth (458.8%) (127.6%) 32.2% 245.0% (16.5%) Payout ratio 57.5% 63.2% 61.7% 67.4% 63.5% Shares outstanding 4,001 4,401 4,841 4,841 4,841 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 27,006 18,665 19,548 41,157 57,698 Gross margin - - - - - Accounts receivable 19,452 15,239 15,030 14,855 14,639 EBITDA margin 36.6% 41.5% 38.6% 36.6% 36.3% Inventories 75,268 100,275 112,198 125,573 139,089 EBIT margin 36.2% 41.2% 38.3% 36.3% 36.0% Other current assets 0 0 0 0 0 Net profit margin 48.6% 57.1% 46.9% 48.2% 44.0% Current assets 121,726 134,179 146,777 181,584 211,425 PP&E 173,023 177,087 179,587 182,087 184,587 ROE 4.3% 4.1% 4.2% 3.6% 3.7% LT investments - - - - - ROA 3.1% 2.9% 3.1% 2.8% 2.7% Other non current assets 116,843 129,840 137,738 143,155 150,506 ROCE 2.2% 2.0% 2.5% 2.1% 2.2% Total assets 411,592 441,106 464,102 506,827 546,518 SG&A/Sales - - - - - Net debt/Equity 0.2 0.2 0.1 0.0 NM Short term borrowings 24,675 33,021 33,021 33,021 33,021 Net debt/EBITDA 6.0 7.5 2.8 1.1 NM Payables 11,366 8,701 9,158 9,639 10,145 Other short term liabilities 11,989 18,412 26,625 55,636 82,795 Sales/Assets (x) 0.1 0.1 0.1 0.1 0.1 Current liabilities 48,030 60,134 68,804 98,296 125,960 Assets/Equity (x) 1.4 1.4 1.3 1.3 1.4 Long-term debt 55,629 53,609 19,075 19,075 19,075 Interest cover (x) 43.8 60.8 25.2 44.0 42.4 Other long term liabilities 9,321 9,741 9,741 9,741 9,741 Operating leverage (268.4%) (22.4%) 74.5% 158.9% 94.9% Total liabilities 112,980 123,484 97,620 127,112 154,776 Tax rate 13.3% 13.2% 13.3% 12.6% 16.7% Shareholders' equity 293,125 312,783 362,352 376,294 389,030 Revenue y/y Growth (4.4%) (10.1%) 37.2% (8.1%) 17.5% Minority interests 5,487 4,839 4,130 3,421 2,712 EBITDA y/y Growth 11.4% 1.9% 27.6% (12.8%) 16.6% Total liabilities & equity 411,592 441,106 464,102 506,827 546,518 EPS y/y Growth 10.7% (4.1%) 2.5% (5.4%) 7.3% BVPS 73.26 71.07 74.85 77.73 80.36 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 2.4% (3.0%) 5.3% 3.8% 3.4% P/E (x) 12.6 13.2 12.8 13.6 12.7 P/BV (x) 0.5 0.5 0.5 0.5 0.5 RNAV/Share 86.68 - EV/EBITDA (x) 15.6 15.7 8.5 7.0 3.9 Net debt/(cash) 53,298 67,965 32,548 10,939 (5,602) Dividend Yield 4.6% 4.8% 4.8% 5.0% 5.0% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
46 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Kerry Properties (0683) Neutral Investment Thesis, Valuation and Risks 0683.HK,683 HK Price (08 Jan 20): HK$24.40 Kerry Properties Limited (Neutral; Price Target: HK$27.50) ▲ Price Target (Dec-20): HK$27.50 Investment Thesis Prior (Dec-19): HK$27.30 We are Neutral on Kerry as the company's residential sales in Hong Kong are mostly Hong Kong concentrated in the high-end segments, where sentiment is not expected to improve HK Research, Conglomerates and in 2020. Furthermore, Kerry’s China shopping mall performances have been lagging Property its peers. We think the stock is likely to hover around the bottom end of its valuation Jevon Jim AC range until the market finds a new bright spot on the company. We also believe the (852) 2800-8538 current distressed valuation is likely to cushion downside from current levels. [email protected] Bloomberg JPMA JJIM
Source: Bloomberg, J.P. Morgan estimates. Risks to Rating and Price Target Downside risks include worse-than-expected HK and China residential sales/project delivery, lower-than-expected yield from new investment properties in China and interest rate hikes. Upside risks include very strong improvement in its China development and retail operations driven by policy support.
47 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis We are Neutral on Kerry as the company's residential sales in Hong Kong are mostly concentrated in the high-end segments, where sentiment is not expected to improve in 2020. Furthermore, Kerry’s China shopping mall performances have been lagging its peers. We think the stock is likely to hover around the bottom end of its valuation range until the market finds a new bright spot on the company. We also believe the current distressed valuation is likely to YTD 1m 3m 12m cushion downside from current levels. Abs -1.4% -4.7% 2.7% -13.3% Rel -1.9% -11.6% -7.0% -13.6% Valuation Company Data Our Dec-20 price target of HK$27.5 is based on a 67% Shares O/S (mn) 1,457 discount to NAV, which is ~1 S.D. below its historical 52-week range (HK$) 36.90-23.10 Market cap ($ mn) 4,569 average. Exchange rate 7.78 Free float(%) 40.3% 3M - Avg daily vol (mn) 1.79 Performance Drivers 3M - Avg daily val ($ mn) 5.8 Volatility (90 Day) 26 Index HSI BBG BUY|HOLD|SELL 3|10|1 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 21,432 19,721 20,386 18,707 Adj. EBITDA 8,331 6,717 8,138 8,331 Adj. EBIT 7,822 6,157 7,522 7,654 Adj. net income 5,965 5,451 5,368 5,688 Adj. EPS 4.11 3.75 3.69 3.91 BBG EPS 3.38 3.71 3.72 3.90 Cashflow from operations 17,529 3,297 6,230 7,932 FCFF 6,453 665 3,857 5,747 Margins and Growth Revenue growth (39.7%) (8.0%) 3.4% (8.2%) EBITDA margin 38.9% 34.1% 39.9% 44.5% EBITDA growth (12.7%) (19.4%) 21.2% 2.4% EBIT margin 36.5% 31.2% 36.9% 40.9% Net margin 27.8% 27.6% 26.3% 30.4% Adj. EPS growth (7.4%) (8.8%) (1.6%) 6.0% Ratios Adj. tax rate 28.5% 20.2% 21.4% 21.1% Interest cover NM 14.6 10.2 8.1 Net debt/Equity 0.2 0.2 0.2 0.2 Net debt/EBITDA 2.2 3.2 2.7 2.7 ROCE 4.2% 3.7% 4.3% 4.2% ROE 6.2% 5.5% 5.3% 5.4% Valuation FCFF yield 18.2% 1.9% 10.9% 16.2% Dividend yield 5.5% 5.5% 5.7% 5.9% EV/EBITDA 9.4 11.6 9.6 9.4 Adj. P/E 5.9 6.5 6.6 6.2
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
48 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Kerry Properties (0683): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 35,548 21,432 19,721 20,386 18,707 Cash flow from operating activities 12,979 17,529 3,297 6,230 7,932 COGS - - - - - o/w Depreciation & amortization 468 509 560 616 678 Gross profit - - - - - o/w Changes in working capital 9,594 12,942 (2,487) (436) 1,120 SG&A - - - - - Adj. EBITDA 9,541 8,331 6,717 8,138 8,331 Cash flow from investing activities (6,355) (9,378) (3,000) (3,000) (3,000) D&A (468) (509) (560) (616) (678) o/w Capital expenditure (771) (11,087) (3,000) (3,000) (3,000) Adj. EBIT 9,073 7,822 6,157 7,522 7,654 as % of sales 2.2% 51.7% 15.2% 14.7% 16.0% Net Interest (313) 114 (461) (798) (1,033) Adj. PBT 10,820 10,077 7,324 8,166 8,154 Cash flow from financing activities (11,048) (6,828) (965) (1,039) 1,000 Tax (3,444) (2,875) (1,481) (1,748) (1,721) o/w Dividends paid (2,511) (2,535) (1,965) (2,039) 0 Minority Interest (969) (1,237) (392) (1,049) (745) o/w Shares issued/(repurchased) 90 272 0 0 0 Adj. Net Income 6,407 5,965 5,451 5,368 5,688 o/w Net debt issued/(repaid) 0 0 0 0 0 Reported EPS 4.61 2.30 3.75 3.69 3.91 Net change in cash (4,423) 1,323 (668) 2,190 5,932 Adj. EPS 4.44 4.11 3.75 3.69 3.91 Adj. Free cash flow to firm 12,918 6,453 665 3,857 5,747 DPS 1.50 1.35 1.35 1.40 1.45 y/y Growth (2153.4%) (50.0%) (89.7%) 479.8% 49.0% Payout ratio 32.5% 58.5% 36.0% 38.0% 37.1% Shares outstanding 1,444 1,452 1,456 1,457 1,457 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 13,748 14,384 12,733 14,923 20,855 Gross margin - - - - - Accounts receivable 7,596 1,314 3,801 4,237 3,117 EBITDA margin 26.8% 38.9% 34.1% 39.9% 44.5% Inventories 16,872 10,152 10,152 10,152 10,152 EBIT margin 25.5% 36.5% 31.2% 36.9% 40.9% Other current assets 7,196 8,823 8,823 8,823 8,823 Net profit margin 18.0% 27.8% 27.6% 26.3% 30.4% Current assets 45,412 34,672 35,508 38,135 42,947 PP&E 98,677 108,681 111,908 115,201 118,564 ROE 7.2% 6.2% 5.5% 5.3% 5.4% LT investments 29,215 26,832 26,832 26,832 26,832 ROA 3.7% 3.5% 3.2% 3.0% 3.1% Other non current assets 0 0 0 (0) 0 ROCE 4.7% 4.2% 3.7% 4.3% 4.2% Total assets 173,304 170,185 174,248 180,168 188,343 SG&A/Sales - - - - - Net debt/Equity 0.2 0.2 0.2 0.2 0.2 Short term borrowings 8,903 8,142 8,142 8,142 8,142 Net debt/EBITDA 2.5 2.2 3.2 2.7 2.7 Payables 15,764 13,407 13,407 13,407 13,407 Other short term liabilities 2,093 2,255 2,255 2,255 2,255 Sales/Assets (x) 0.2 0.1 0.1 0.1 0.1 Current liabilities 26,760 23,804 23,804 23,804 23,804 Assets/Equity (x) 2.0 1.8 1.7 1.7 1.8 Long-term debt 29,119 24,970 26,006 28,964 35,437 Interest cover (x) 30.5 NM 14.6 10.2 8.1 Other long term liabilities 7,607 8,276 8,276 8,276 8,276 Operating leverage 41.1% 34.7% 266.4% 656.8% (21.2%) Total liabilities 63,486 57,049 58,086 61,044 67,517 Tax rate 31.8% 28.5% 20.2% 21.4% 21.1% Shareholders' equity 94,349 97,604 100,630 103,592 105,294 Revenue y/y Growth 173.6% (39.7%) (8.0%) 3.4% (8.2%) Minority interests 15,469 15,532 15,532 15,532 15,532 EBITDA y/y Growth 63.2% (12.7%) (19.4%) 21.2% 2.4% Total liabilities & equity 173,304 170,185 174,248 180,168 188,343 EPS y/y Growth 72.5% (7.4%) (8.8%) (1.6%) 6.0% BVPS 65.22 67.10 69.09 71.12 72.29 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 13.8% 2.9% 3.0% 2.9% 1.6% P/E (x) 5.5 5.9 6.5 6.6 6.2 P/BV (x) 0.4 0.4 0.4 0.3 0.3 RNAV/Share 83.33 - EV/EBITDA (x) 8.2 9.4 11.6 9.6 9.4 Net debt/(cash) 24,274 18,728 21,415 22,182 22,723 Dividend Yield 6.1% 5.5% 5.5% 5.7% 5.9% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
49 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
New World Development (0017) Overweight Investment Thesis, Valuation and Risks 0017.HK,17 HK Price (08 Jan 20): HK$10.50 New World Development (Overweight; Price Target: HK$12.80) ▲ Price Target (Dec-20): HK$12.80 Investment Thesis Prior (Dec-19): HK$10.50 We believe the positive feedback of Victoria Dockside will translate into a pick-up Hong Kong of earnings contribution from 1H21. The potential launch of Tai Wai Station project HK Research, Conglomerates and Ph1 in 1Q20 is another sign of improving execution of management. NWD is also a Property beneficiary of an acceleration in farmland conversion. Other catalysts include full Jevon Jim AC year contribution of FTL Life from NWS level and expectations for other non-core (852) 2800-8538 asset disposals. [email protected] Bloomberg JPMA JJIM
Source: Bloomberg, J.P. Morgan estimates.
Risks to Rating and Price Target Downside risks to our rating and price target include increasing new investment efforts which may increase market concerns on its financial burden, return of unexpected connected party transactions or equity raising, which the market has dismissed, in our view. Upside risks include an unexpectedly strong rebound of the physical residential market, a greater-than-expected DPS increase and share buybacks.
50 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis We believe the positive feedback of Victoria Dockside will translate into a pick-up of earnings contribution from 1H21. The potential launch of Tai Wai Station project Ph1 in 1Q20 is another sign of improving execution of management. NWD is also a beneficiary of an acceleration in farmland conversion. Other catalysts include full year contribution of FTL Life from NWS level and expectations for other non- core asset disposals. YTD 1m 3m 12m Abs -1.7% 2.9% 3.6% -6.1% Rel -2.2% -4.0% -6.1% -6.4% Valuation Company Data Our Dec-20 price target of HK$12.8 is based on a 49% discount to Dec-20E NAV, ~0.5 S.D. below its historical Shares O/S (mn) 10,226 52-week range (HK$) 13.88-8.90 average. Market cap ($ mn) 13,804 Exchange rate 7.78 Performance Drivers Free float(%) 55.3% 3M - Avg daily vol (mn) 18.23 3M - Avg daily val ($ mn) 25.1 Volatility (90 Day) 30 Index HSI BBG BUY|HOLD|SELL 13|2|1 Key Metrics (FYE Jun) HK$ in millions FY19A FY20E FY21E FY22E Financial Estimates Revenue 76,764 63,280 74,381 72,614 Adj. EBITDA 17,012 16,320 18,971 19,324 Adj. EBIT 14,558 13,620 16,002 16,057 Adj. net income 8,814 9,104 9,819 10,655 Adj. EPS 0.86 0.89 0.96 1.04 BBG EPS 0.88 0.86 0.93 1.05 Cashflow from operations 3,911 7,992 9,260 9,251 FCFF (18,804) 9,814 11,045 11,024 Margins and Growth Revenue growth 26.5% (17.6%) 17.5% (2.4%) EBITDA margin 22.2% 25.8% 25.5% 26.6% EBITDA growth 21.9% (4.1%) 16.2% 1.9% EBIT margin 19.0% 21.5% 21.5% 22.1% Net margin 11.5% 14.4% 13.2% 14.7% Adj. EPS growth 8.1% 3.3% 7.9% 8.5% Ratios Adj. tax rate 39.6% 32.7% 34.5% 34.2% Interest cover 22.5 14.4 17.1 17.9 Net debt/Equity 0.4 0.3 0.3 0.3 Net debt/EBITDA 5.4 4.6 3.6 3.6 ROCE 2.4% 2.5% 2.9% 2.9% ROE 4.0% 4.0% 4.3% 4.6% Valuation FCFF yield (17.5%) 9.1% 10.3% 10.3% Dividend yield 4.9% 5.0% 5.1% 5.4% EV/EBITDA 13.6 13.3 11.3 11.1 Adj. P/E 12.2 11.8 10.9 10.1
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
51 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
New World Development (0017): Summary of Financials Income Statement FY18A FY19A FY20E FY21E FY22E Cash Flow Statement FY18A FY19A FY20E FY21E FY22E Revenue 60,689 76,764 63,280 74,381 72,614 Cash flow from operating activities 7,707 3,911 7,992 9,260 9,251 COGS - - - - - o/w Depreciation & amortization 2,484 2,454 2,700 2,969 3,266 Gross profit - - - - - o/w Changes in working capital (900) (4,765) (1,966) (2,315) (2,690) SG&A - - - - - Adj. EBITDA 13,958 17,012 16,320 18,971 19,324 Cash flow from investing activities 2,391 (22,626) 1,061 1,061 1,061 D&A (2,484) (2,454) (2,700) (2,969) (3,266) o/w Capital expenditure (17,781) (27,813) (5,000) (5,000) (5,000) Adj. EBIT 11,475 14,558 13,620 16,002 16,057 as % of sales 29.3% 36.2% 7.9% 6.7% 6.9% Net Interest (704) (756) (1,131) (1,107) (1,082) Adj. PBT 13,853 18,484 17,192 19,424 19,728 Cash flow from financing activities (9,779) 6,270 (4,104) (4,104) (4,104) Tax (6,066) (7,315) (5,620) (6,702) (6,739) o/w Dividends paid (2,993) (6,207) (6,207) (6,207) (6,207) Minority Interest 190 (2,356) (2,468) (2,903) (2,334) o/w Shares issued/(repurchased) 359 (78) 0 0 0 Adj. Net Income 7,978 8,814 9,104 9,819 10,655 o/w Net debt issued/(repaid) (6,498) 13,112 2,000 2,000 2,000 Reported EPS 0.80 0.86 0.89 0.96 1.04 Net change in cash 319 (12,445) 4,949 6,217 6,208 Adj. EPS 0.80 0.86 0.89 0.96 1.04 Adj. Free cash flow to firm 6,119 (18,804) 9,814 11,045 11,024 DPS 0.48 0.51 0.52 0.54 0.57 y/y Growth (165.7%) (407.3%) (152.2%) 12.6% (0.2%) Payout ratio 60.2% 59.1% 58.4% 56.2% 54.7% Shares outstanding 9,999 10,221 10,223 10,223 10,223 Balance Sheet FY18A FY19A FY20E FY21E FY22E Ratio Analysis FY18A FY19A FY20E FY21E FY22E Cash and cash equivalents 63,456 63,732 54,345 60,562 66,770 Gross margin - - - - - Accounts receivable 25,520 25,722 25,722 25,722 25,722 EBITDA margin 23.0% 22.2% 25.8% 25.5% 26.6% Inventories 80,304 58,081 56,965 55,909 54,909 EBIT margin 18.9% 19.0% 21.5% 21.5% 22.1% Other current assets 20 825 0 0 0 Net profit margin 13.1% 11.5% 14.4% 13.2% 14.7% Current assets 169,299 148,360 137,032 142,192 147,401 PP&E 180,732 205,565 205,565 205,565 205,565 ROE 4.0% 4.0% 4.0% 4.3% 4.6% LT investments - - - - - ROA 1.7% 1.8% 1.8% 2.0% 2.1% Other non current assets 131,424 149,360 142,517 147,105 151,422 ROCE 1.9% 2.4% 2.5% 2.9% 2.9% Total assets 481,455 503,285 485,114 494,862 504,388 SG&A/Sales - - - - - Net debt/Equity 0.3 0.4 0.3 0.3 0.3 Short term borrowings 20,629 41,776 29,329 26,996 24,897 Net debt/EBITDA 5.5 5.4 4.6 3.6 3.6 Payables - - - - - Other short term liabilities 74,051 59,472 61,832 64,391 67,079 Sales/Assets (x) 0.1 0.2 0.1 0.2 0.1 Current liabilities 94,681 101,248 91,161 91,387 91,975 Assets/Equity (x) 2.3 2.2 2.2 2.1 2.2 Long-term debt 120,124 114,559 100,218 102,539 111,477 Interest cover (x) 19.8 22.5 14.4 17.1 17.9 Other long term liabilities 20,921 33,619 33,619 33,619 33,619 Operating leverage 212.3% 101.4% 36.7% 99.7% (14.7%) Total liabilities 235,725 249,426 224,998 227,545 237,071 Tax rate 43.8% 39.6% 32.7% 34.5% 34.2% Shareholders' equity 216,250 223,865 227,653 231,951 231,951 Revenue y/y Growth 7.2% 26.5% (17.6%) 17.5% (2.4%) Minority interests 29,480 29,995 32,463 35,366 35,366 EBITDA y/y Growth 17.2% 21.9% (4.1%) 16.2% 1.9% Total liabilities & equity 481,455 503,285 485,114 494,862 504,388 EPS y/y Growth 7.0% 8.1% 3.3% 7.9% 8.5% BVPS 21.17 21.90 22.27 22.69 22.69 Valuation FY18A FY19A FY20E FY21E FY22E y/y Growth 11.7% 3.4% 1.7% 1.9% 0.0% P/E (x) 13.2 12.2 11.8 10.9 10.1 P/BV (x) 0.5 0.5 0.5 0.5 0.5 RNAV/Share 25.10 - - EV/EBITDA (x) 15.5 13.6 13.3 11.3 11.1 Net debt/(cash) 77,297 92,603 75,203 68,973 69,604 Dividend Yield 4.6% 4.9% 5.0% 5.1% 5.4% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Jun. o/w - out of which
52 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Sino Land (0083) ▲ Neutral Previous: Underweight Investment Thesis, Valuation and Risks 0083.HK,83 HK Price (08 Jan 20): HK$11.28 Sino Land (Neutral; Price Target: HK$12.00) ▲ Price Target (Dec-20): HK$12.00 Investment Thesis Prior (Dec-19): HK$9.70 We are upgrading Sino Land from UW to N on the back of company’s conservative Hong Kong land banking approach to support the defensive nature of the company together with Head of HK Research, Conglomerates its strong net cash position. However, dividend growth is also likely to be on the low and Property side versus market expectations. The potential launch of the Wong Chuk Hang Cusson Leung, CFA AC project in 2H20 will also likely to support its share price, in our view. (852) 2800-8526 [email protected] Valuation Bloomberg JPMA LEUNG
Source: Bloomberg, J.P. Morgan estimates.
Risks to Rating and Price Target Key upside risks to our rating and price target include: 1) a strong sales response to upcoming launches and aggressive landbanking. 2) a visible solution to current social unrest. Key downside risks include aggressive land bidding by the company may alter the defensive nature of Sino Land.
53 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis We are upgrading Sino Land from UW to N on the back of company’s conservative land banking approach to support the defensive nature of the company together with its strong net cash position. However, dividend growth is also likely to be on the low side versus market expectations. The potential launch of the Wong Chuk Hang project in 2H20 will also likely to support its share price, in our view.
YTD 1m 3m 12m Valuation Abs -0.4% -1.1% -2.8% -21.6% Rel -0.9% -8.0% -12.5% -21.9% Our Dec-20 PT of HK$12.0 is based on a 50% discount (~1 S.D below historical average) to our Dec-20 NAV estimate. Company Data Shares O/S (mn) 6,959 52-week range (HK$) 15.48-10.60 Performance Drivers Market cap ($ mn) 10,092 Exchange rate 7.78 Free float(%) 43.2% 3M - Avg daily vol (mn) 5.34 3M - Avg daily val ($ mn) 8.0 Volatility (90 Day) 25 Index HSI BBG BUY|HOLD|SELL 8|6|1 Key Metrics (FYE Jun) HK$ in millions FY19A FY20E FY21E FY22E Financial Estimates Revenue 8,010 7,812 27,850 28,599 Adj. EBITDA 2,904 3,112 12,920 10,630 Adj. EBIT 2,761 2,956 12,748 10,440 Adj. net income 3,379 4,565 10,770 9,353 Adj. EPS 0.50 0.67 1.58 1.37 BBG EPS 0.72 0.73 1.48 1.32 Cashflow from operations 15,629 (1,068) 17,512 21,076 FCFF 6,794 (1,869) 16,715 20,263 Margins and Growth Revenue growth (25.4%) (2.5%) 256.5% 2.7% EBITDA margin 36.3% 39.8% 46.4% 37.2% EBITDA growth (45.8%) 7.2% 315.1% (17.7%) EBIT margin 34.5% 37.8% 45.8% 36.5% Net margin 42.2% 58.4% 38.7% 32.7% Adj. EPS growth (38.8%) 32.8% 135.9% (13.2%) Ratios Adj. tax rate 18.4% 13.0% 16.2% 15.8% Interest cover NM NM NM NM Net debt/Equity NM NM NM NM Net debt/EBITDA NM NM NM NM ROCE 1.5% 1.7% 6.9% 5.6% ROE 2.4% 3.1% 7.2% 6.1% Valuation FCFF yield 9.0% (2.4%) 21.7% 26.4% Dividend yield 4.9% 5.1% 5.5% 5.7% EV/EBITDA 3.9 11.3 2.3 1.8 Adj. P/E 22.4 16.8 7.1 8.2
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
54 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Sino Land (0083): Summary of Financials Income Statement FY18A FY19A FY20E FY21E FY22E Cash Flow Statement FY18A FY19A FY20E FY21E FY22E Revenue 10,730 8,010 7,812 27,850 28,599 Cash flow from operating activities (6,679) 15,629 (1,068) 17,512 21,076 COGS - - - - - o/w Depreciation & amortization 130 143 157 172 190 Gross profit - - - - - o/w Changes in working capital (10,437) 12,906 (5,786) 5,410 11,017 SG&A - - - - - Adj. EBITDA 5,357 2,904 3,112 12,920 10,630 Cash flow from investing activities 10,048 (15,384) (800) (800) (800) D&A (130) (143) (157) (172) (190) o/w Capital expenditure (264) (8,488) (300) (300) (300) Adj. EBIT 5,227 2,761 2,956 12,748 10,440 as % of sales 2.5% 106.0% 3.8% 1.1% 1.0% Net Interest 513 560 576 592 609 Adj. PBT 7,014 4,324 5,379 14,029 11,644 Cash flow from financing activities (5,505) 1,418 (1,269) (1,345) (1,376) Tax (1,669) (796) (698) (2,271) (1,835) o/w Dividends paid (2,468) (905) (869) (945) (976) Minority Interest (56) (149) (115) (988) (456) o/w Shares issued/(repurchased) 0 0 0 0 0 Adj. Net Income 5,289 3,379 4,565 10,770 9,353 o/w Net debt issued/(repaid) (3,565) 2,647 (400) (400) (400) Reported EPS 0.87 0.70 0.67 1.58 1.37 Net change in cash (2,136) 1,663 (3,137) 15,366 18,900 Adj. EPS 0.82 0.50 0.67 1.58 1.37 Adj. Free cash flow to firm (6,284) 6,794 (1,869) 16,715 20,263 DPS 0.98 0.55 0.57 0.62 0.64 y/y Growth (175.9%) (208.1%) (127.5%) (994.2%) 21.2% Payout ratio 119.0% 109.1% 85.1% 39.2% 46.6% Shares outstanding 6,422 6,704 6,817 6,817 6,817 Balance Sheet FY18A FY19A FY20E FY21E FY22E Ratio Analysis FY18A FY19A FY20E FY21E FY22E Cash and cash equivalents 22,393 39,074 6,280 21,646 40,546 Gross margin - - - - - Accounts receivable 1,098 1,492 1,492 1,492 1,492 EBITDA margin 49.9% 36.3% 39.8% 46.4% 37.2% Inventories 27,053 27,620 33,406 27,996 16,979 EBIT margin 48.7% 34.5% 37.8% 45.8% 36.5% Other current assets 2,701 6,358 6,358 6,358 6,358 Net profit margin 49.3% 42.2% 58.4% 38.7% 32.7% Current assets 53,244 74,544 47,536 57,492 65,376 PP&E 65,984 68,251 71,735 75,395 79,240 ROE 3.9% 2.4% 3.1% 7.2% 6.1% LT investments - - - - - ROA 3.4% 2.0% 2.6% 6.4% 5.5% Other non current assets 39,879 37,954 46,819 36,781 28,587 ROCE 2.9% 1.5% 1.7% 6.9% 5.6% Total assets 159,107 180,748 166,090 169,667 173,203 SG&A/Sales - - - - - Net debt/Equity NM NM NM NM NM Short term borrowings 0 0 0 0 0 Net debt/EBITDA NM NM NM NM NM Payables 5,944 4,967 4,967 4,967 4,967 Other short term liabilities 6,187 20,418 4,216 4,216 4,216 Sales/Assets (x) 0.1 0.0 0.0 0.2 0.2 Current liabilities 12,131 25,386 9,184 9,184 9,184 Assets/Equity (x) 1.2 1.2 1.2 1.1 1.1 Long-term debt 1,656 5,027 5,017 5,017 5,017 Interest cover (x) NM NM NM NM NM Other long term liabilities 4,878 4,174 2,871 3,317 3,786 Operating leverage 72.3% 186.1% (285.8%) 129.2% (673.5%) Total liabilities 18,665 34,586 17,071 17,518 17,987 Tax rate 23.8% 18.4% 13.0% 16.2% 15.8% Shareholders' equity 139,582 145,294 148,150 151,282 154,348 Revenue y/y Growth (41.5%) (25.4%) (2.5%) 256.5% 2.7% Minority interests 860 868 868 868 868 EBITDA y/y Growth (29.4%) (45.8%) 7.2% 315.1% (17.7%) Total liabilities & equity 159,107 180,748 166,090 169,667 173,203 EPS y/y Growth (5.6%) (38.8%) 32.8% 135.9% (13.2%) BVPS 21.50 21.67 22.15 22.68 23.20 Valuation FY18A FY19A FY20E FY21E FY22E y/y Growth 4.0% 0.8% 2.2% 2.4% 2.3% P/E (x) 13.7 22.4 16.8 7.1 8.2 P/BV (x) 0.5 0.5 0.5 0.5 0.5 RNAV/Share 23.92 - - EV/EBITDA (x) 4.2 3.9 11.3 2.3 1.8 Net debt/(cash) (20,737) (34,047) (1,263) (16,629) (35,529) Dividend Yield 8.7% 4.9% 5.1% 5.5% 5.7% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Jun. o/w - out of which
55 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Sun Hung Kai Properties (0016) Neutral Investment Thesis, Valuation and Risks 0016.HK,16 HK Price (08 Jan 20): HK$116.40 Sun Hung Kai Properties (Neutral; Price Target: HK$117.90) ▲ Price Target (Dec-20): HK$117.90 Investment Thesis Prior (Dec-19): HK$103.24 We maintain our Neutral rating on SHKP as it is a market proxy stock which suffers Hong Kong from any short term negative sentiment in the retail market and the initial downside Head of HK Research, Conglomerates on the Central office market. We also think retail and office’s downward trend is and Property likely to be offset by the improvement in sentiment in the residential market. The Cusson Leung, CFA AC winning of the commercial project in West Kowloon is considered as a long-term (852) 2800-8526 accretion rather than short-term catalyst, in our view. [email protected] Bloomberg JPMA LEUNG
Quant Current Hist %Rank (1=Top) Factors %Rank 6M 1Y 3Y 5Y Value 14 15 13 15 25 Growth 55 21 53 62 38 Momentum 45 21 35 49 18 Quality 25 31 50 62 62 Low Vol 39 22 15 33 13 ESGQ 90 - - - -
Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
56 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Dec-20 % of HK$MM HK$/sh GAV Hong Kong properties Agricultural Land 6,500 2.2 0.9% Property under development Lux Residential 68,482 23.6 9.5% Mass Residential 114,051 39.4 15.8% Office 743 0.3 0.1% Ind/others 2,016 0.7 0.3% 185,293 63.9 25.7% Property investment Lux Residential 23,268 8.0 3.2% Office 92,401 31.9 12.8% Retail 137,362 47.4 19.0% Industrial 5,386 1.9 0.7% Office under development 37,118 12.8 5.1% Retail under development 4,896 1.7 0.7% Ind/others under development 2,803 1.0 0.4% Car Park 7,440 2.6 1.0% 310,675 107.2 43.0%
Hotel 25,688 8.9 3.6% HK Properties total 528,156 182.3 73% China properties Development property 32,888 11.3 4.6% Property investment Lux Residential 4,021 1.4 0.6% Office 49,954 17.2 6.9% Retail 62,359 21.5 8.6% 116,334 40.1 16.1%
Hotel 3,789 1.3 0.5% China properties total 153,011 52.8 21%
Singapore properties ION Orchard (Retail) 6,444 2.2 0.9% Singapore properties total 6,444 2.2 0.9% Listed investments Listed investment total 23,118 8.0 3.2%
Other business (6x P/E blended) 11,118 3.8 1.5%
Gross Asset Value 721,846 249.1 100% Net Debt (115,198) (39.8) Associated debt (17,400) (6.0) NAV 589,248 203 Number of shares (MM) 2,898 NAV per share 203
Source: Bloomberg, J.P. Morgan estimates.
Risks to Rating and Price Target Upside risks to our rating and price target include a very strong residential market throughout the entire 2020 or a surprising increase in the company’s payout ratio beyond the normal guidance range of 40-50%.
Downside risks include a further loss of confidence in Hong Kong’s legal system and business environment, leading to capital outflow.
57 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis We maintain our Neutral rating on SHKP as it is a market proxy stock which suffers from any short term negative sentiment in the retail market and the initial downside on the Central office market. We also think retail and office’s downward trend is likely to be offset by the improvement in sentiment in the residential market. The winning of the commercial project in West Kowloon is considered as a long- term accretion rather than short-term catalyst, in our view. YTD 1m 3m 12m Abs -2.4% 2.4% 6.1% -2.6% Valuation Rel -2.9% -4.5% -3.6% -2.9% Our Dec-20 PT of HK$117.9 is based on a 42% discount (~1 Company Data S.D. below historical average) to our Dec-10E NAV Shares O/S (mn) 2,898 52-week range (HK$) 142.00-106.00 Performance Drivers Market cap ($ mn) 43,363 Exchange rate 7.78 Free float(%) 49.9% 3M - Avg daily vol (mn) 4.72 3M - Avg daily val ($ mn) 69.4 Volatility (90 Day) 29 Index HSI BBG BUY|HOLD|SELL 15|1|1 Key Metrics (FYE Jun) HK$ in millions FY19A FY20E FY21E FY22E Financial Estimates Revenue 85,302 102,527 103,912 100,457 Adj. EBITDA 41,117 42,685 44,965 45,310 Adj. EBIT 38,205 39,773 42,053 42,398 Adj. net income 32,336 33,341 34,774 35,362 Adj. EPS 11.16 11.51 12.00 12.20 BBG EPS 11.49 11.93 12.60 12.68 Cashflow from operations 39,003 36,809 38,677 38,932 FCFF 9,656 28,937 30,738 30,928 Margins and Growth Revenue growth (0.4%) 20.2% 1.4% (3.3%) EBITDA margin 48.2% 41.6% 43.3% 45.1% EBITDA growth 8.5% 3.8% 5.3% 0.8% EBIT margin 44.8% 38.8% 40.5% 42.2% Net margin 37.9% 32.5% 33.5% 35.2% Adj. EPS growth 6.9% 3.1% 4.3% 1.7% Ratios Adj. tax rate 16.5% 17.3% 17.6% 17.9% Interest cover 19.7 16.6 18.0 18.6 Net debt/Equity 0.1 0.1 0.1 0.0 Net debt/EBITDA 1.8 1.3 1.0 0.7 ROCE 4.9% 4.9% 4.9% 4.8% ROE 5.8% 5.7% 5.8% 5.6% Valuation FCFF yield 2.9% 8.6% 9.1% 9.2% Dividend yield 4.3% 4.6% 4.8% 4.8% EV/EBITDA 8.5 7.6 6.9 6.5 Adj. P/E 10.4 10.1 9.7 9.5
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
58 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Sun Hung Kai Properties (0016): Summary of Financials Income Statement FY18A FY19A FY20E FY21E FY22E Cash Flow Statement FY18A FY19A FY20E FY21E FY22E Revenue 85,644 85,302 102,527 103,912 100,457 Cash flow from operating activities 43,323 39,003 36,809 38,677 38,932 COGS - - - - - o/w Depreciation & amortization 2,007 2,912 2,912 2,912 2,912 Gross profit - - - - - o/w Changes in working capital 9,555 2,228 1,200 1,200 1,200 SG&A - - - - - Adj. EBITDA 37,895 41,117 42,685 44,965 45,310 Cash flow from investing activities (59,710) (32,084) (11,000) (11,000) (11,000) D&A (2,007) (2,912) (2,912) (2,912) (2,912) o/w Capital expenditure (59,144) (31,808) (10,000) (10,000) (10,000) Adj. EBIT 35,888 38,205 39,773 42,053 42,398 as % of sales 69.1% 37.3% 9.8% 9.6% 10.0% Net Interest (1,617) (2,083) (2,574) (2,503) (2,431) Adj. PBT 37,781 40,003 41,094 43,287 43,679 Cash flow from financing activities 14,071 (8,064) (17,647) (18,227) (18,227) Tax (6,619) (6,618) (7,124) (7,635) (7,823) o/w Dividends paid (12,932) (14,453) (15,647) (16,227) (16,227) Minority Interest (921) (1,049) (629) (879) (494) o/w Shares issued/(repurchased) 65 6 0 0 0 Adj. Net Income 30,241 32,336 33,341 34,774 35,362 o/w Net debt issued/(repaid) 23,817 4,055 (2,000) (2,000) (2,000) Reported EPS 10.44 11.16 11.51 12.00 12.20 Net change in cash (2,316) (1,145) 8,162 9,450 9,705 Adj. EPS 10.44 11.16 11.51 12.00 12.20 Adj. Free cash flow to firm (13,424) 9,656 28,937 30,738 30,928 DPS 4.65 4.95 5.40 5.60 5.60 y/y Growth (145.4%) (171.9%) 199.7% 6.2% 0.6% Payout ratio 44.5% 44.4% 46.9% 46.7% 45.9% Shares outstanding 2,897 2,897 2,898 2,898 2,898 Balance Sheet FY18A FY19A FY20E FY21E FY22E Ratio Analysis FY18A FY19A FY20E FY21E FY22E Cash and cash equivalents 26,095 22,038 44,119 53,569 63,274 Gross margin - - - - - Accounts receivable 20,961 23,167 23,167 23,167 23,167 EBITDA margin 44.2% 48.2% 41.6% 43.3% 45.1% Inventories 177,367 196,107 196,107 196,107 196,107 EBIT margin 41.9% 44.8% 38.8% 40.5% 42.2% Other current assets 859 1,103 747 747 747 Net profit margin 35.3% 37.9% 32.5% 33.5% 35.2% Current assets 225,282 242,415 264,140 273,590 283,295 PP&E 409,040 426,919 436,919 446,919 456,919 ROE 5.8% 5.8% 5.7% 5.8% 5.6% LT investments - - - - - ROA 4.5% 4.4% 4.3% 4.3% 4.3% Other non current assets 81,164 81,828 86,616 91,612 96,829 ROCE 4.9% 4.9% 4.9% 4.9% 4.8% Total assets 715,486 751,162 787,674 812,121 837,043 SG&A/Sales - - - - - Net debt/Equity 0.1 0.1 0.1 0.1 0.0 Short term borrowings 12,646 9,168 9,241 9,241 9,241 Net debt/EBITDA 1.7 1.8 1.3 1.0 0.7 Payables 43,238 45,682 46,882 48,082 49,282 Other short term liabilities 10,551 11,052 22,063 22,353 22,642 Sales/Assets (x) 0.1 0.1 0.1 0.1 0.1 Current liabilities 66,435 65,902 78,186 79,676 81,165 Assets/Equity (x) 1.3 1.3 1.3 1.3 1.3 Long-term debt 78,788 85,838 89,573 87,573 85,573 Interest cover (x) 23.4 19.7 16.6 18.0 18.6 Other long term liabilities 21,831 23,603 23,603 23,603 23,603 Operating leverage 183.3% (1616.8%) 20.3% 424.5% (24.7%) Total liabilities 167,054 175,343 191,362 190,852 190,341 Tax rate 17.5% 16.5% 17.3% 17.6% 17.9% Shareholders' equity 542,985 570,218 590,711 615,669 641,101 Revenue y/y Growth 9.5% (0.4%) 20.2% 1.4% (3.3%) Minority interests 5,447 5,601 5,601 5,601 5,601 EBITDA y/y Growth 16.6% 8.5% 3.8% 5.3% 0.8% Total liabilities & equity 715,486 751,162 787,674 812,121 837,043 EPS y/y Growth 16.4% 6.9% 3.1% 4.3% 1.7% BVPS 187.43 196.79 203.86 212.47 221.25 Valuation FY18A FY19A FY20E FY21E FY22E y/y Growth 8.1% 5.0% 3.6% 4.2% 4.1% P/E (x) 11.1 10.4 10.1 9.7 9.5 P/BV (x) 0.6 0.6 0.6 0.5 0.5 RNAV/Share 203.34 - - EV/EBITDA (x) 9.0 8.5 7.6 6.9 6.5 Net debt/(cash) 65,339 72,968 54,695 43,245 31,540 Dividend Yield 4.0% 4.3% 4.6% 4.8% 4.8% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Jun. o/w - out of which
59 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Wheelock and Company Limited (0020) Neutral Investment Thesis, Valuation and Risks 0020.HK,20 HK Price (08 Jan 20): HK$52.85 Wheelock and Company Limited (Neutral; Price Target: HK$57.30) ▲ Price Target (Dec-20): HK$57.30 Investment Thesis Prior (Dec-19): HK$44.70 Although Wheelock also has more resilient mass residential exposure, 40% of the Hong Kong company is expected to be weighted by the expected underperformance of Wharf HK Research, Conglomerates and REIC. The fact that Wheelock is cleaning up its asset portfolio by raising cash from Property Wharf and Wharf REIC may indicate further group restructuring in the future, in our Jevon Jim AC view. With its negative stub-value, Wheelock is still the preferred play to gain (852) 2800-8538 exposure to Wharf REIC if investors are aiming for a short-term rebound in retail [email protected] sentiment. We maintain Neutral on the name. Bloomberg JPMA JJIM
Risks to Rating and Price Target The key downside risks for Wheelock are aggressive bidding for land in Hong Kong and a rights issue from Wharf REIC or Wharf. Upside catalysts to our rating and price target include any privatization attempts on Wheelock or Wharf , better-than- expected ASP and sell-through achieved and an increase in dividend payout.
60 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis Although Wheelock also has more resilient mass residential exposure, 40% of the company is expected to be weighted by the expected underperformance of Wharf REIC. The fact that Wheelock is cleaning up its asset portfolio by raising cash from Wharf and Wharf REIC may indicate further group restructuring in the future, in our view. With its negative stub- value, Wheelock is still the preferred play to gain exposure to Wharf REIC if investors are aiming for a short-term rebound in YTD 1m 3m 12m retail sentiment. We maintain Neutral on the name. Abs 1.7% 8.3% 18.9% 13.7% Rel 1.2% 1.4% 9.2% 13.4% Valuation Company Data Our Dec-20 PT of HK$57.3 is based on a 30% blended Shares O/S (mn) 2,049 discount (20% discount on the holding of Wharf/Wharf REIC 52-week range (HK$) 59.50-43.40 and 40% on the rest of the property assets) to the Dec-20E Market cap ($ mn) 13,921 Exchange rate 7.78 NAV. Free float(%) 34.1% 3M - Avg daily vol (mn) 1.08 3M - Avg daily val ($ mn) 6.7 Volatility (90 Day) 21 Index HSI Performance Drivers BBG BUY|HOLD|SELL 7|1|0 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 48,364 50,330 53,003 53,062 Adj. EBITDA 25,866 27,073 28,812 26,686 Adj. EBIT 24,925 26,187 27,926 25,800 Adj. net income 13,208 16,380 16,627 17,843 Adj. EPS 6.46 8.01 8.13 8.72 BBG EPS 6.34 7.64 7.68 8.33 Cashflow from operations 3,477 12,494 21,374 33,399 FCFF 1,444 9,722 18,590 30,571 Margins and Growth Revenue growth (31.5%) 4.1% 5.3% 0.1% EBITDA margin 53.5% 53.8% 54.4% 50.3% EBITDA growth 4.1% 4.7% 6.4% (7.4%) EBIT margin 51.5% 52.0% 52.7% 48.6% Net margin 27.3% 32.5% 31.4% 33.6% Adj. EPS growth 8.6% 24.0% 1.5% 7.3% Ratios Adj. tax rate 29.4% 19.6% 19.9% 15.5% Interest cover 16.2 12.6 13.5 13.5 Net debt/Equity 0.2 0.2 0.2 0.1 Net debt/EBITDA 3.6 3.5 2.9 2.2 ROCE 4.8% 5.5% 5.7% 5.5% ROE 5.4% 6.4% 6.1% 6.3% Valuation FCFF yield 1.3% 9.0% 17.2% 28.3% Dividend yield 2.9% 3.1% 3.3% 3.5% EV/EBITDA 11.1 10.8 9.9 10.0 Adj. P/E 8.2 6.6 6.5 6.1
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
61 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Wheelock and Company Limited (0020): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 70,566 48,364 50,330 53,003 53,062 Cash flow from operating activities 17,233 3,477 12,494 21,374 33,399 COGS - - - - - o/w Depreciation & amortization 984 941 886 886 886 Gross profit - - - - - o/w Changes in working capital (2,446) (15,239) (7,627) (992) 11,116 SG&A - - - - - Adj. EBITDA 24,841 25,866 27,073 28,812 26,686 Cash flow from investing activities (15,652) (30,776) (5,416) (5,444) (5,472) D&A (984) (941) (886) (886) (886) o/w Capital expenditure (7,969) (3,161) (4,500) (4,500) (4,500) Adj. EBIT 23,857 24,925 26,187 27,926 25,800 as % of sales 11.3% 6.5% 8.9% 8.5% 8.5% Net Interest (1,154) (1,599) (2,147) (2,141) (1,978) Adj. PBT 31,606 24,296 27,849 28,124 28,229 Cash flow from financing activities 13,826 1,921 (2,680) (15,452) (13,899) Tax (9,007) (7,152) (5,447) (5,586) (4,367) o/w Dividends paid (5,979) (6,973) (6,709) (6,786) (4,297) Minority Interest (7,760) (5,348) (6,022) (5,910) (6,019) o/w Shares issued/(repurchased) 158 485 0 0 0 Adj. Net Income 12,117 13,208 16,380 16,627 17,843 o/w Net debt issued/(repaid) 19,647 8,409 3,183 (9,570) (10,570) Reported EPS 10.09 8.43 8.01 8.13 8.72 Net change in cash 15,407 (25,378) 4,398 478 14,027 Adj. EPS 5.94 6.46 8.01 8.13 8.72 Adj. Free cash flow to firm 15,616 1,444 9,722 18,590 30,571 DPS 1.43 1.55 1.65 1.75 1.86 y/y Growth (32.9%) (90.8%) 573.1% 91.2% 64.5% Payout ratio 14.1% 18.4% 20.6% 21.5% 21.3% Shares outstanding 2,039 2,046 2,046 2,046 2,046 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 56,474 28,824 30,422 30,900 44,927 Gross margin - - - - - Accounts receivable 12,359 10,002 11,535 11,612 11,527 EBITDA margin 35.2% 53.5% 53.8% 54.4% 50.3% Inventories 58,518 91,433 90,755 88,239 83,780 EBIT margin 33.8% 51.5% 52.0% 52.7% 48.6% Other current assets 187 184 228 229 227 Net profit margin 17.2% 27.3% 32.5% 31.4% 33.6% Current assets 127,538 130,443 132,939 130,980 140,461 PP&E 21,772 21,970 21,970 21,970 21,970 ROE 5.3% 5.4% 6.4% 6.1% 6.3% LT investments 29,001 42,645 43,561 44,505 45,477 ROA 2.2% 2.3% 2.7% 2.8% 2.9% Other non current assets 391,361 397,566 401,180 404,794 408,408 ROCE 5.1% 4.8% 5.5% 5.7% 5.5% Total assets 569,672 592,624 599,651 602,249 616,317 SG&A/Sales - - - - - Net debt/Equity 0.1 0.2 0.2 0.2 0.1 Short term borrowings 35,170 14,968 14,968 14,968 14,968 Net debt/EBITDA 2.3 3.6 3.5 2.9 2.2 Payables 47,175 59,707 48,550 43,496 48,565 Other short term liabilities 5,820 6,611 5,073 5,640 4,675 Sales/Assets (x) 0.1 0.1 0.1 0.1 0.1 Current liabilities 88,165 81,286 68,591 64,104 68,209 Assets/Equity (x) 2.4 2.4 2.3 2.2 2.1 Long-term debt 79,021 106,863 110,046 100,476 89,906 Interest cover (x) 21.5 16.2 12.6 13.5 13.5 Other long term liabilities 14,663 14,997 15,842 16,747 17,715 Operating leverage 78.1% (14.2%) 124.6% 125.0% (6904.8%) Total liabilities 181,849 203,146 194,480 181,327 175,830 Tax rate 28.5% 29.4% 19.6% 19.9% 15.5% Shareholders' equity 241,684 251,077 264,081 277,127 291,164 Revenue y/y Growth 16.5% (31.5%) 4.1% 5.3% 0.1% Minority interests 146,139 138,401 141,091 143,795 149,322 EBITDA y/y Growth 10.2% 4.1% 4.7% 6.4% (7.4%) Total liabilities & equity 569,672 592,624 599,651 602,249 616,317 EPS y/y Growth 2.3% 8.6% 24.0% 1.5% 7.3% BVPS 118.53 122.71 129.06 135.44 142.30 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 11.9% 3.5% 5.2% 4.9% 5.1% P/E (x) 8.9 8.2 6.6 6.5 6.1 P/BV (x) 0.4 0.4 0.4 0.4 0.4 RNAV/Share 81.25 - EV/EBITDA (x) 10.8 11.1 10.8 9.9 10.0 Net debt/(cash) 57,717 93,007 94,592 84,544 59,947 Dividend Yield 2.7% 2.9% 3.1% 3.3% 3.5% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
62 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
The Wharf (Holdings) Limited (0004) Overweight Investment Thesis, Valuation and Risks 0004.HK,4 HK Price (08 Jan 20): HK$20.90 The Wharf (Holdings) Limited (Overweight; Price Target: HK$26.00) ▲ Price Target (Dec-20): HK$26.00 Investment Thesis Prior (Dec-19): HK$21.50 We expect asset turnover for Wharf in China development properties is likely to Hong Kong increase with potential selective easing. The support of domestic consumption has Head of HK Research, Conglomerates benefited Wharf’s IFS malls in China. We believe its current valuation has more than and Property reflected the concerns over its corporate governance related to equity investments. Cusson Leung, CFA AC Wheelock’s holding in Wharf has increased to 69% and we see hidden value in (852) 2800-8526 Modern Terminals/positive prospect for a potential dividend increase. [email protected] Bloomberg JPMA LEUNG
Source: Bloomberg, J.P. Morgan estimates.
Risks to Rating and Price Target Downside risks include unexpected deceleration in home sales in China and an unexpected increase in the CME2 portfolio.
Upside catalysts include a higher-than-expected dividend payout, stronger-than- expected retail sales growth in China and better-than-expected residential sales in HK and China.
63 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis We expect asset turnover for Wharf in China development properties is likely to increase with potential selective easing. The support of domestic consumption has benefited Wharf’s IFS malls in China. We believe its current valuation has more than reflected the concerns over its corporate governance related to equity investments. Wheelock’s holding in Wharf has increased to 69% and we see hidden value in Modern Terminals/positive prospect for a potential dividend increase. YTD 1m 3m 12m Abs 5.4% 16.0% 22.8% -3.5% Valuation Rel 4.9% 9.1% 13.1% -3.8% Our Dec-20 price target of HK$26.0 is based on a target Company Data discount of 56% on our Dec-20E NAV Shares O/S (mn) 3,049 52-week range (HK$) 25.65-16.30 Performance Drivers Market cap ($ mn) 8,193 Exchange rate 7.78 Free float(%) 33.9% 3M - Avg daily vol (mn) 5.84 3M - Avg daily val ($ mn) 13.8 Volatility (90 Day) 26 Index HSI BBG BUY|HOLD|SELL 9|5|0 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 21,055 21,669 22,273 21,439 Adj. EBITDA 8,625 8,248 9,537 5,872 Adj. EBIT 7,982 7,548 8,837 5,172 Adj. net income 6,158 6,809 7,253 7,429 Adj. EPS 2.02 2.24 2.39 2.45 BBG EPS 2.23 2.18 2.29 2.62 Cashflow from operations (8,091) (5,644) 5,808 9,277 FCFF (10,191) (7,943) 3,502 6,922 Margins and Growth Revenue growth (51.3%) 2.9% 2.8% (3.7%) EBITDA margin 41.0% 38.1% 42.8% 27.4% EBITDA growth (66.7%) (4.4%) 15.6% (38.4%) EBIT margin 37.9% 34.8% 39.7% 24.1% Net margin 29.2% 31.4% 32.6% 34.6% Adj. EPS growth (61.0%) 10.9% 6.5% 2.4% Ratios Adj. tax rate 21.0% 13.4% 16.5% 11.7% Interest cover 16.8 10.2 11.5 8.0 Net debt/Equity 0.2 0.3 0.3 0.2 Net debt/EBITDA 3.0 4.6 3.9 5.9 ROCE 3.5% 3.6% 3.9% 2.5% ROE 4.4% 4.9% 5.1% 5.0% Valuation FCFF yield (16.0%) (12.5%) 5.5% 10.9% Dividend yield 3.1% 3.3% 3.4% 3.8% EV/EBITDA 10.4 12.4 10.6 16.9 Adj. P/E 10.3 9.3 8.8 8.5
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
64 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
The Wharf (Holdings) Limited (0004): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 43,273 21,055 21,669 22,273 21,439 Cash flow from operating activities 5,208 (8,091) (5,644) 5,808 9,277 COGS - - - - - o/w Depreciation & amortization 938 643 700 700 700 Gross profit - - - - - o/w Changes in working capital (9,285) 5,064 (14,840) 366 (505) SG&A - - - - - Adj. EBITDA 25,920 8,625 8,248 9,537 5,872 Cash flow from investing activities 36,670 (22,564) (4,311) (2,448) (4,045) D&A (938) (643) (700) (700) (700) o/w Capital expenditure (5,366) (2,504) (3,000) (3,000) (3,000) Adj. EBIT 24,982 7,982 7,548 8,837 5,172 as % of sales 12.4% 11.9% 13.8% 13.5% 14.0% Net Interest (1,013) (512) (810) (831) (731) Adj. PBT 28,260 9,852 9,909 10,169 9,001 Cash flow from financing activities (30,815) 3,737 3,191 (9,401) (9,681) Tax (4,959) (2,069) (1,325) (1,675) (1,051) o/w Dividends paid (6,995) (3,768) (2,562) (2,401) (2,681) Minority Interest (727) (88) (484) (272) (280) o/w Shares issued/(repurchased) (119) 239 0 0 0 Adj. Net Income 15,718 6,158 6,809 7,253 7,429 o/w Net debt issued/(repaid) (23,701) 7,266 5,753 (7,000) (7,000) Reported EPS 7.21 2.18 2.24 2.39 2.45 Net change in cash 11,063 (26,918) (6,764) (6,041) (4,449) Adj. EPS 5.18 2.02 2.24 2.39 2.45 Adj. Free cash flow to firm 677 (10,191) (7,943) 3,502 6,922 DPS 1.59 0.65 0.70 0.71 0.80 y/y Growth (95.8%) (1604.7%) (22.1%) (144.1%) 97.7% Payout ratio 30.7% 32.1% 31.2% 29.7% 32.7% Shares outstanding 3,034 3,045 3,037 3,037 3,037 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 45,697 17,448 10,684 4,643 193 Gross margin - - - - - Accounts receivable 5,192 1,722 3,259 3,350 3,225 EBITDA margin 59.9% 41.0% 38.1% 42.8% 27.4% Inventories 25,200 45,954 44,752 47,536 46,162 EBIT margin 57.7% 37.9% 34.8% 39.7% 24.1% Other current assets 109 159 205 206 204 Net profit margin 36.3% 29.2% 31.4% 32.6% 34.6% Current assets 76,198 65,283 58,900 55,735 49,785 PP&E 95,329 88,408 90,702 92,996 95,291 ROE 6.9% 4.4% 4.9% 5.1% 5.0% LT investments 19,109 30,544 31,460 32,404 33,376 ROA 4.7% 2.7% 3.0% 3.2% 3.3% Other non current assets 32,011 43,114 43,114 43,114 43,114 ROCE 7.4% 3.5% 3.6% 3.9% 2.5% Total assets 222,647 227,349 224,176 224,249 221,566 SG&A/Sales - - - - - Net debt/Equity NM 0.2 0.3 0.3 0.2 Short term borrowings 10,142 11,239 15,000 15,000 15,000 Net debt/EBITDA NM 3.0 4.6 3.9 5.9 Payables 26,065 29,690 16,433 16,892 16,259 Other short term liabilities 2,872 3,736 2,490 3,075 2,029 Sales/Assets (x) 0.1 0.1 0.1 0.1 0.1 Current liabilities 39,079 44,665 33,923 34,967 33,288 Assets/Equity (x) 1.5 1.6 1.6 1.6 1.5 Long-term debt 26,267 31,847 33,839 26,839 19,839 Interest cover (x) 25.6 16.8 10.2 11.5 8.0 Other long term liabilities 11,830 12,077 12,922 13,827 14,795 Operating leverage (99.3%) 132.5% (186.5%) 611.9% 1107.6% Total liabilities 77,176 88,589 80,684 75,633 67,922 Tax rate 17.5% 21.0% 13.4% 16.5% 11.7% Shareholders' equity 141,974 135,424 140,108 145,205 150,204 Revenue y/y Growth (7.2%) (51.3%) 2.9% 2.8% (3.7%) Minority interests 3,497 3,336 3,384 3,412 3,440 EBITDA y/y Growth 4.8% (66.7%) (4.4%) 15.6% (38.4%) Total liabilities & equity 222,647 227,349 224,176 224,249 221,566 EPS y/y Growth 14.2% (61.0%) 10.9% 6.5% 2.4% BVPS 46.76 44.60 46.14 47.82 49.46 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth (55.3%) (4.6%) 3.5% 3.6% 3.4% P/E (x) 4.0 10.3 9.3 8.8 8.5 P/BV (x) 0.4 0.5 0.5 0.4 0.4 RNAV/Share 59.17 - EV/EBITDA (x) 2.1 10.4 12.4 10.6 16.9 Net debt/(cash) (9,288) 25,638 38,155 37,196 34,646 Dividend Yield 7.6% 3.1% 3.3% 3.4% 3.8% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
65 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Hang Lung Properties (0101) Overweight Investment Thesis, Valuation and Risks 0101.HK,101 HK Price (08 Jan 20): HK$18.08 Hang Lung Properties (Overweight; Price Target: HK$23.10) ▲ Price Target (Dec-20): HK$23.10 Investment Thesis Prior (Dec-19): HK$19.10 Operating performance for HLP is gathering steam in 1H2020 with the opening of Hong Kong Spring City 66 (in Kunming) and completion of renovation of Grand Gateway 66 in Head of HK Research, Conglomerates Shanghai. With the improvement in occupancy and tenant sales throughout 2019, we and Property expect moderate positive rental reversion in 2020. We believe dividend is likely to Cusson Leung, CFA AC rise with improvement upon earnings announcement at 1H2020. (852) 2800-8526 [email protected] Valuation Bloomberg JPMA LEUNG
Source: Bloomberg, J.P. Morgan estimates. Risks to Rating and Price Target Downside risks include aggressive land banking in China at high prices and maintaining flat dividend despite earnings improvement. Upside catalysts include better-than-expected office and retail outlook in HK and China.
66 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis Operating performance for HLP is gathering steam in 1H2020 with the opening of Spring City 66 (in Kunming) and completion of renovation of Grand Gateway 66 in Shanghai. With the improvement in occupancy and tenant sales throughout 2019, we expect moderate positive rental reversion in 2020. We believe dividend is likely to rise with improvement upon earnings announcement at 1H2020.
YTD 1m 3m 12m Valuation Abs 5.7% 9.8% 1.0% 17.4% Rel 5.2% 2.9% -8.7% 17.1% Our Dec-20 PT of HK$23.1 is based on a 26% discount to our Dec-20E NAV, which is the historical average Company Data Shares O/S (mn) 4,498 52-week range (HK$) 20.50-15.20 Performance Drivers Market cap ($ mn) 10,454 Exchange rate 7.78 Free float(%) 41.2% 3M - Avg daily vol (mn) 4.92 3M - Avg daily val ($ mn) 10.7 Volatility (90 Day) 24 Index HSI BBG BUY|HOLD|SELL 13|0|3 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 9,408 9,349 10,076 10,574 Adj. EBITDA 6,280 6,517 7,284 7,816 Adj. EBIT 6,280 6,517 7,284 7,816 Adj. net income 4,093 4,601 4,976 5,230 Adj. EPS 0.91 1.02 1.11 1.16 BBG EPS 1.14 0.99 1.07 1.12 Cashflow from operations 2,906 4,647 4,967 5,129 FCFF (2,600) (967) (452) (132) Margins and Growth Revenue growth (16.0%) (0.6%) 7.8% 4.9% EBITDA margin 66.8% 69.7% 72.3% 73.9% EBITDA growth (19.9%) 3.8% 11.8% 7.3% EBIT margin 66.8% 69.7% 72.3% 73.9% Net margin 43.5% 49.2% 49.4% 49.5% Adj. EPS growth (26.0%) 12.4% 8.2% 5.1% Ratios Adj. tax rate 21.1% 19.8% 19.8% 19.8% Interest cover 10.0 13.6 10.0 8.5 Net debt/Equity 0.1 0.2 0.2 0.2 Net debt/EBITDA 2.7 3.9 4.1 4.4 ROCE 3.0% 3.1% 3.4% 3.6% ROE 3.0% 3.3% 3.6% 3.7% Valuation FCFF yield (3.2%) (1.2%) (0.6%) (0.2%) Dividend yield 4.1% 4.2% 4.3% 4.4% EV/EBITDA 16.0 16.1 15.0 14.8 Adj. P/E 19.9 17.7 16.4 15.6
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
67 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Hang Lung Properties (0101): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 11,199 9,408 9,349 10,076 10,574 Cash flow from operating activities 8,422 2,906 4,647 4,967 5,129 COGS - - - - - o/w Depreciation & amortization 43 0 0 0 0 Gross profit - - - - - o/w Changes in working capital 2,796 (1,422) 418 433 448 SG&A - - - - - Adj. EBITDA 7,838 6,280 6,517 7,284 7,816 Cash flow from investing activities (14,893) (6,000) (6,000) (6,000) (6,000) D&A (43) 0 0 0 0 o/w Capital expenditure (4,776) (6,000) (6,000) (6,000) (6,000) Adj. EBIT 7,795 6,280 6,517 7,284 7,816 as % of sales 42.6% 63.8% 64.2% 59.5% 56.7% Net Interest (570) (626) (481) (726) (922) Adj. PBT 7,278 5,703 6,097 6,618 6,954 Cash flow from financing activities (6,930) (140) (1,033) (1,237) (1,140) Tax (1,353) (1,203) (1,207) (1,312) (1,379) o/w Dividends paid (3,685) (3,374) (3,418) (3,508) (3,598) Minority Interest (395) (407) (289) (330) (345) o/w Shares issued/(repurchased) 0 0 0 0 0 Adj. Net Income 5,530 4,093 4,601 4,976 5,230 o/w Net debt issued/(repaid) (3,245) 3,234 2,386 2,271 2,458 Reported EPS 1.23 0.91 1.02 1.11 1.16 Net change in cash (13,401) (3,234) (2,386) (2,271) (2,011) Adj. EPS 1.23 0.91 1.02 1.11 1.16 Adj. Free cash flow to firm 4,670 (2,600) (967) (452) (132) DPS 0.75 0.75 0.76 0.78 0.80 y/y Growth 119.2% (155.7%) (62.8%) (53.3%) (70.8%) Payout ratio 61.0% 82.5% 74.3% 70.5% 68.8% Shares outstanding 4,501 4,501 4,501 4,501 4,501 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 18,401 10,510 4,359 2,088 77 Gross margin - - - - - Accounts receivable 2,036 2,046 2,046 2,046 2,046 EBITDA margin 70.0% 66.8% 69.7% 72.3% 73.9% Inventories 1,826 2,543 2,425 2,308 2,190 EBIT margin 69.6% 66.8% 69.7% 72.3% 73.9% Other current assets 0 0 0 0 0 Net profit margin 49.4% 43.5% 49.2% 49.4% 49.5% Current assets 22,263 15,099 8,830 6,442 4,313 PP&E 156,256 168,078 172,555 180,524 188,553 ROE 4.2% 3.0% 3.3% 3.6% 3.7% LT investments 5,067 3,276 3,303 3,330 3,357 ROA 3.1% 2.2% 2.5% 2.7% 2.7% Other non current assets 0 0 0 0 (0) ROCE 4.0% 3.0% 3.1% 3.4% 3.6% Total assets 183,586 186,453 184,687 190,295 196,223 SG&A/Sales - - - - - Net debt/Equity 0.0 0.1 0.2 0.2 0.2 Short term borrowings 2,112 2,414 2,414 2,414 2,414 Net debt/EBITDA 0.8 2.7 3.9 4.1 4.4 Payables 6,694 5,999 6,299 6,614 6,945 Other short term liabilities 483 533 533 533 533 Sales/Assets (x) 0.1 0.1 0.1 0.1 0.1 Current liabilities 9,289 8,946 9,246 9,561 9,892 Assets/Equity (x) 1.4 1.4 1.3 1.3 1.4 Long-term debt 22,708 24,839 27,225 29,495 31,953 Interest cover (x) 13.8 10.0 13.6 10.0 8.5 Other long term liabilities 9,344 9,074 8,840 9,184 9,539 Operating leverage 60.0% 121.5% (596.0%) 151.2% 148.0% Total liabilities 41,341 42,859 45,310 48,241 51,384 Tax rate 18.6% 21.1% 19.8% 19.8% 19.8% Shareholders' equity 136,158 137,561 137,661 140,423 141,295 Revenue y/y Growth (14.2%) (16.0%) (0.6%) 7.8% 4.9% Minority interests 6,087 6,033 1,716 1,631 3,544 EBITDA y/y Growth (8.6%) (19.9%) 3.8% 11.8% 7.3% Total liabilities & equity 183,586 186,453 184,687 190,295 196,223 EPS y/y Growth (12.8%) (26.0%) 12.4% 8.2% 5.1% BVPS 30.27 30.58 30.61 31.22 31.41 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 7.6% 1.0% 0.1% 2.0% 0.6% P/E (x) 14.7 19.9 17.7 16.4 15.6 P/BV (x) 0.6 0.6 0.6 0.6 0.6 RNAV/Share 31.22 - EV/EBITDA (x) 11.5 16.0 16.1 15.0 14.8 Net debt/(cash) 6,419 16,743 25,280 29,822 34,291 Dividend Yield 4.1% 4.1% 4.2% 4.3% 4.4% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
68 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Hongkong Land ▲ Overweight Previous: Neutral Investment Thesis, Valuation and Risks HKLD.SI,HKL SP Price (08 Jan 20): $5.73 Hongkong Land Holdings Ltd (Overweight; Price Target: $6.70) ▲ Price Target (Dec-20): $6.70 Investment Thesis Prior (Dec-19): $5.10 News flow on Central office rents is likely to be negative in 1H2020. However, when Singapore the stock has already underperformed for three years, we believe all the negative HK Research, Conglomerates and momentum in the leasing market has been factored in. We think HK Land’s passing Property rents at ~10% below market average and few expiring leases will be able to shield its Jevon Jim AC portfolio from the downturn and we still expecting positive reversions for Central (852) 2800-8538 offices in 2020. In addition, leading indicators of the China economy, e.g. PMI, and [email protected] stock trading volume (with more internet companies coming to Hong Kong for Bloomberg JPMA JJIM
Quant Current Hist %Rank (1=Top) Factors %Rank 6M 1Y 3Y 5Y Valuation Value 12 19 33 31 38 Our Dec-20 PT of US$6.7 is based on a 43% discount on our Dec-20E NAV, which Growth 73 75 22 35 89 is ~0.75 S.D below its historical average. Momentum 73 63 49 49 42 Dec-20 Quality 29 29 8 38 66 Project Type HK$MM US$M M % of GAV US$/sh Hong Kong property development Low Vol 66 31 22 68 82 Others Lux Res 1,527 196 0.6% 0.08 ESGQ 30 86 95 - - 1,527 196 0.6% 0.08 Hong Kong property investment Sources for: Style Exposure – J.P. Morgan Quantitative and Central office Of fice 113,384 14,571 46.5% 6.19 Derivatives Strategy; all other tables are company data and Central retail Retail 28,373 3,646 11.6% 1.55 J.P. Morgan estimates. Mandarin Landmark Hotel 1,201 154 0.5% 0.07 HK investment properties total 142,958 18,371 58.6% 7.81 HK properties total 144,485 18,568 59.2% 7.89 China property development Chongqing Lux Res 17,671 2,271 7.2% 0.97 Shenyang Lux Res 598 77 0.2% 0.03 Chengdu Lux Res 1,041 134 0.4% 0.06 Others Lux Res 19,891 2,556 8.2% 1.09 China pty dev total 39,202 5,038 16.1% 2.14 China Investment properties 18,719 2,405 7.7% 1.02 China properties total 57,920 7,443 23.7% 3.16 Macau property One Central Retail 1,756 226 0.7% 0.10 One Central Hotel 488 63 0.2% 0.03 Macau property total 2,244 288 0.9% 0.12 Overseas property Vietnam & Cambodia 1,113 143 0.5% 0.06 Indonesia 3,259 419 1.3% 0.18 Singapore properties Residential property 8,921 1,146 3.7% 0.49 Commercial property 24,416 3,138 10.0% 1.33 33,338 4,284 13.7% 1.82 Overseas property total 37,710 4,846 15.5% 2.06 Other Investments Longfor 1,521 195 0.6% 0.08 1,521 195 0.6% 0.08 Gross asset value 243,881 31,341 100.0% 13.32 Net Debt (27,734) (3,564) (1.51) Net Asset Value 216,148 27,777 11.81
Source: Bloomberg, J.P. Morgan estimates.
69 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Risks to Rating and Price Target Upside risks to our rating and price target include unexpected increases in dividend payout ratio or consistent share buyback.
Key downside risk includes unexpected news flow of major corporate tenants moving out of Hong Kong, further loss of confidence in Hong Kong’s legal system and business environment, leading to capital outflow; and lower office demand in Central.
70 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis News flow on Central office rents is likely to be negative in 1H2020. However, when the stock has already underperformed for three years, we believe all the negative momentum in the leasing market has been factored in. We think HK Land’s passing rents at ~10% below market average and few expiring leases will be able to shield its portfolio from the downturn and we still expecting positive reversions for Central offices in 2020. In addition, leading YTD 1m 3m 12m indicators of the China economy, e.g. PMI, and stock trading Abs -0.3% 4.9% 5.1% -14.5% volume (with more internet companies coming to Hong Kong Rel -1.1% 3.2% 0.3% -15.4% for secondary listings) are likely to drive the direction of the Company Data stock price. Management is also becoming more forthcoming Shares O/S (mn) 2,353 to investors’ feedback including capital management which is 52-week range ($) 7.53-5.16 likely to be key catalyst for the stock, in our view. We Market cap ($ mn) 13,482 Exchange rate 1.00 upgrade our rating from N to OW. Free float(%) 50.0% 3M - Avg daily vol (mn) 2.45 Valuation 3M - Avg daily val ($ mn) 13.5 Volatility (90 Day) 25 Our Dec-20 PT of US$6.7 is based on a 43% discount on our Index FTSTI Dec-20E NAV, which is ~0.75 S.D below its historical BBG BUY|HOLD|SELL 7|4|3 average. Key Metrics (FYE Dec) Performance Drivers $ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 2,665 2,177 1,968 2,651 Adj. EBITDA 1,094 1,160 1,106 1,211 Adj. EBIT 1,089 1,156 1,102 1,207 Adj. net income 1,036 1,087 1,169 1,203 Adj. EPS 0.44 0.46 0.50 0.51 BBG EPS 0.43 0.45 0.47 0.49 Cashflow from operations 625 1,742 1,079 1,173 FCFF 569 1,010 471 854 Margins and Growth Revenue growth 64.9% (18.3%) (9.6%) 34.7% EBITDA margin 41.0% 53.3% 56.2% 45.7% EBITDA growth 24.4% 6.1% (4.7%) 9.5% EBIT margin 40.9% 53.1% 56.0% 45.5% Net margin 38.9% 49.9% 59.4% 45.4% Adj. EPS growth 9.9% 4.9% 7.5% 2.9% Ratios Adj. tax rate 16.6% 14.9% 14.4% 14.0% Interest cover 9.6 8.4 7.0 6.7 Net debt/Equity 0.1 0.1 0.1 0.1 Net debt/EBITDA 3.3 2.8 3.1 2.7 ROCE 2.2% 2.3% 2.2% 2.4% ROE 2.8% 2.8% 3.0% 3.1% Valuation FCFF yield 4.2% 7.5% 3.5% 6.4% Dividend yield 3.8% 4.0% 4.2% 4.4% EV/EBITDA 15.7 14.5 15.4 14.0 Adj. P/E 13.0 12.3 11.5 11.2
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
71 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Hongkong Land: Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 1,616 2,665 2,177 1,968 2,651 Cash flow from operating activities 800 625 1,742 1,079 1,173 COGS - - - - - o/w Depreciation & amortization 3 4 4 4 4 Gross profit - - - - - o/w Changes in working capital 8 (329) 899 316 325 SG&A - - - - - Adj. EBITDA 879 1,094 1,160 1,106 1,211 Cash flow from investing activities (947) (1,056) (850) (743) (474) D&A (3) (4) (4) (4) (4) o/w Capital expenditure (214) (150) (850) (743) (474) Adj. EBIT 876 1,089 1,156 1,102 1,207 as % of sales 13.2% 5.6% 39.0% 37.8% 17.9% Net Interest (78) (114) (139) (158) (180) Adj. PBT 1,100 1,240 1,294 1,381 1,414 Cash flow from financing activities (193) 237 (457) (430) (453) Tax (151) (206) (193) (199) (197) o/w Dividends paid (432) (601) (537) (560) (583) Minority Interest (1) 2 (14) (14) (14) o/w Shares issued/(repurchased) 0 0 0 0 0 Adj. Net Income 947 1,036 1,087 1,169 1,203 o/w Net debt issued/(repaid) - - - - - Reported EPS 0.40 0.44 0.46 0.50 0.51 Net change in cash (340) (194) 435 (94) 245 Adj. EPS 0.40 0.44 0.46 0.50 0.51 Adj. Free cash flow to firm 654 569 1,010 471 854 DPS 0.20 0.22 0.23 0.24 0.25 y/y Growth (28.5%) (12.9%) 77.4% (53.4%) 81.2% Payout ratio 49.7% 49.7% 49.6% 48.1% 48.7% Shares outstanding 2,353 2,342 2,342 2,342 2,342 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 1,622 1,375 1,811 1,716 1,962 Gross margin - - - - - Accounts receivable 498 892 300 300 300 EBITDA margin 54.4% 41.0% 53.3% 56.2% 45.7% Inventories 2,535 1,983 1,783 1,583 1,383 EBIT margin 54.2% 40.9% 53.1% 56.0% 45.5% Other current assets 11 11 11 11 11 Net profit margin 58.6% 38.9% 49.9% 59.4% 45.4% Current assets 4,666 4,262 3,905 3,611 3,656 PP&E 32,481 33,712 34,562 35,306 35,780 ROE 2.8% 2.8% 2.8% 3.0% 3.1% LT investments - - - - - ROA 2.4% 2.4% 2.4% 2.6% 2.6% Other non current assets 5,805 6,989 6,788 6,788 6,788 ROCE 2.0% 2.2% 2.3% 2.2% 2.4% Total assets 42,952 44,963 45,255 45,704 46,224 SG&A/Sales - - - - - Net debt/Equity 0.1 0.1 0.1 0.1 0.1 Short term borrowings 191 794 635 508 406 Net debt/EBITDA 2.9 3.3 2.8 3.1 2.7 Payables 1,695 1,337 1,444 1,560 1,685 Other short term liabilities 150 150 151 153 155 Sales/Assets (x) 0.0 0.1 0.0 0.0 0.1 Current liabilities 2,036 2,281 2,231 2,221 2,246 Assets/Equity (x) 1.2 1.2 1.2 1.2 1.2 Long-term debt 3,980 4,145 4,384 4,641 4,873 Interest cover (x) 11.2 9.6 8.4 7.0 6.7 Other long term liabilities 127 167 167 167 167 Operating leverage 51.5% 37.5% (33.3%) 48.9% 27.4% Total liabilities 6,143 6,594 6,782 7,029 7,286 Tax rate 13.8% 16.6% 14.9% 14.4% 14.0% Shareholders' equity 36,774 38,342 38,445 38,647 38,910 Revenue y/y Growth (18.9%) 64.9% (18.3%) (9.6%) 34.7% Minority interests 35 28 28 28 28 EBITDA y/y Growth (9.7%) 24.4% 6.1% (4.7%) 9.5% Total liabilities & equity 42,952 44,963 45,255 45,704 46,224 EPS y/y Growth 11.7% 9.9% 4.9% 7.5% 2.9% BVPS 15.63 16.43 16.47 16.56 16.67 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 17.5% 5.1% 0.3% 0.5% 0.7% P/E (x) 14.2 13.0 12.3 11.5 11.2 P/BV (x) 0.4 0.3 0.3 0.3 0.3 RNAV/Share 11.81 - EV/EBITDA (x) 18.4 15.7 14.5 15.4 14.0 Net debt/(cash) 2,549 3,564 3,208 3,433 3,317 Dividend Yield 3.5% 3.8% 4.0% 4.2% 4.4% Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
72 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Hysan Development Co (0014) Underweight Investment Thesis, Valuation and Risks 0014.HK,14 HK Price (08 Jan 20): HK$30.80 Hysan Development Co (Underweight; Price Target: HK$27.40) ▼ Price Target (Dec-20): HK$27.40 Investment Thesis Prior (Dec-19): HK$28.20 We maintain our UW rating on Hysan as the significant impact on retail sales from Hong Kong social events is likely to be carried forward into 2020. Although the lower turnover HK Research, Conglomerates and rent ratio may cushion immediate downside risk, pressure on negative base rent Property reversion and rental concession is still significant. We think continued tenant Jevon Jim AC reshuffling to cater for more domestic consumption and more affordable/experience- (852) 2800-8538 related options is likely to put pressure on passing rents as well. The only downside [email protected] cushion for Hysan is its full-year contribution of LG3 and some property Bloomberg JPMA JJIM
Source: Bloomberg, J.P. Morgan estimates. Risks to Rating and Price Target Upside risks to our rating and PT include retail sales and tourist arrivals rebound sooner and stronger-than-expected as well as sustained Rmb appreciation Downside risks include slower-than-expected rental growth, slower-than-expected retail sales growth and a sharp increase in cap rates.
73 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis We maintain our UW rating on Hysan as the significant impact on retail sales from social events is likely to be carried forward into 2020. Although the lower turnover rent ratio may cushion immediate downside risk, pressure on negative base rent reversion and rental concession is still significant. We think continued tenant reshuffling to cater for more domestic consumption and more affordable/experience- related options is likely to put pressure on passing rents as YTD 1m 3m 12m well. The only downside cushion for Hysan is its full-year Abs 0.8% 2.7% 2.0% -18.7% contribution of LG3 and some property development earnings Rel 0.3% -4.2% -7.7% -19.0% to be recognized in 2022, in our view. Company Data Shares O/S (mn) 1,044 Valuation 52-week range (HK$) 44.95-28.35 Our Dec-20 PT of HK$27.4 is based on a 58% target discount Market cap ($ mn) 4,133 Exchange rate 7.78 to our Dec-20E NAV, which is ~1.5 S.D below its historical Free float(%) 58.4% average. 3M - Avg daily vol (mn) 3.24 3M - Avg daily val ($ mn) 12.4 Performance Drivers Volatility (90 Day) 29 Index HSI BBG BUY|HOLD|SELL 3|8|2 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 3,890 4,024 4,074 4,044 Adj. EBITDA 3,235 3,354 3,399 3,363 Adj. EBIT 3,218 3,337 3,382 3,346 Adj. net income 2,536 2,631 2,689 2,665 Adj. EPS 2.42 2.51 2.57 2.55 BBG EPS 2.42 2.53 2.59 2.73 Cashflow from operations 2,620 2,662 2,688 2,651 FCFF 2,008 2,074 2,118 2,093 Margins and Growth Revenue growth 9.6% 3.4% 1.3% (0.8%) EBITDA margin 83.2% 83.3% 83.4% 83.2% EBITDA growth 5.6% 3.7% 1.4% (1.1%) EBIT margin 82.7% 82.9% 83.0% 82.8% Net margin 65.2% 65.4% 66.0% 65.9% Adj. EPS growth 7.9% 3.7% 2.2% (0.9%) Ratios Adj. tax rate 15.2% 15.1% 15.0% 14.9% Interest cover 14.6 13.4 12.5 11.8 Net debt/Equity 0.0 0.0 0.0 0.0 Net debt/EBITDA 1.1 1.0 0.9 0.9 ROCE 3.5% 3.5% 3.5% 3.4% ROE 3.5% 3.6% 3.6% 3.5% Valuation FCFF yield 6.2% 6.4% 6.6% 6.5% Dividend yield 4.7% 4.9% 5.1% 5.1% EV/EBITDA 12.0 11.6 11.4 11.5 Adj. P/E 12.7 12.3 12.0 12.1
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
74 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Hysan Development Co (0014): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 3,548 3,890 4,024 4,074 4,044 Cash flow from operating activities 2,491 2,620 2,662 2,688 2,651 COGS - - - - - o/w Depreciation & amortization 22 17 17 17 17 Gross profit - - - - - o/w Changes in working capital 15 101 (7) (6) (6) SG&A - - - - - Adj. EBITDA 3,062 3,235 3,354 3,399 3,363 Cash flow from investing activities (170) (803) (803) (803) (803) D&A (22) (17) (17) (17) (17) o/w Capital expenditure (1,472) (800) (800) (800) (800) Adj. EBIT 3,040 3,218 3,337 3,382 3,346 as % of sales 41.5% 20.6% 19.9% 19.6% 19.8% Net Interest (158) (222) (250) (271) (285) Adj. PBT 3,205 3,159 3,278 3,338 3,301 Cash flow from financing activities (1,654) (943) (1,007) (1,080) (1,133) Tax (484) (481) (496) (500) (491) o/w Dividends paid (1,539) (1,443) (1,507) (1,580) (1,633) Minority Interest (230) (142) (151) (150) (145) o/w Shares issued/(repurchased) 15 0 0 0 0 Adj. Net Income 2,349 2,536 2,631 2,689 2,665 o/w Net debt issued/(repaid) (130) 500 500 500 500 Reported EPS 2.38 2.42 2.51 2.57 2.55 Net change in cash 667 874 852 805 715 Adj. EPS 2.25 2.42 2.51 2.57 2.55 Adj. Free cash flow to firm 1,153 2,008 2,074 2,118 2,093 DPS 1.37 1.44 1.50 1.56 1.58 y/y Growth (50.0%) 74.1% 3.3% 2.1% (1.2%) Payout ratio 57.5% 59.4% 59.7% 60.7% 62.1% Shares outstanding 1,045 1,046 1,046 1,046 1,046 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 2,662 2,817 3,669 4,474 5,189 Gross margin - - - - - Accounts receivable 226 203 203 203 203 EBITDA margin 86.3% 83.2% 83.3% 83.4% 83.2% Inventories 0 0 0 0 0 EBIT margin 85.7% 82.7% 82.9% 83.0% 82.8% Other current assets 510 227 232 236 241 Net profit margin 66.2% 65.2% 65.4% 66.0% 65.9% Current assets 3,398 3,247 4,103 4,913 5,633 PP&E 73,221 78,189 78,992 79,795 80,598 ROE 3.4% 3.5% 3.6% 3.6% 3.5% LT investments - - - - - ROA 2.9% 3.0% 3.0% 3.0% 3.0% Other non current assets 5,501 5,607 4,400 4,400 4,400 ROCE 3.4% 3.5% 3.5% 3.5% 3.4% Total assets 82,120 87,043 87,495 89,108 90,631 SG&A/Sales - - - - - Net debt/Equity 0.0 0.0 0.0 0.0 0.0 Short term borrowings 150 300 225 263 244 Net debt/EBITDA 1.2 1.1 1.0 0.9 0.9 Payables 1,284 1,312 1,316 1,322 1,328 Other short term liabilities 327 223 327 327 327 Sales/Assets (x) 0.0 0.0 0.0 0.0 0.0 Current liabilities 1,761 1,835 1,868 1,911 1,899 Assets/Equity (x) 1.2 1.2 1.2 1.2 1.2 Long-term debt 6,035 6,022 6,934 7,397 7,915 Interest cover (x) 19.4 14.6 13.4 12.5 11.8 Other long term liabilities 1,323 1,549 1,681 1,813 1,945 Operating leverage 944.0% 60.7% 107.2% 108.9% 140.2% Total liabilities 9,119 9,406 10,483 11,121 11,759 Tax rate 15.1% 15.2% 15.1% 15.0% 14.9% Shareholders' equity 69,953 74,431 73,742 74,652 75,469 Revenue y/y Growth 0.4% 9.6% 3.4% 1.3% (0.8%) Minority interests 3,048 3,206 3,270 3,336 3,402 EBITDA y/y Growth 3.4% 5.6% 3.7% 1.4% (1.1%) Total liabilities & equity 82,120 87,043 87,495 89,108 90,631 EPS y/y Growth (0.7%) 7.9% 3.7% 2.2% (0.9%) BVPS 66.90 71.12 70.47 71.33 72.12 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 3.6% 6.3% (0.9%) 1.2% 1.1% P/E (x) 13.7 12.7 12.3 12.0 12.1 P/BV (x) 0.5 0.4 0.4 0.4 0.4 RNAV/Share 62.59 - EV/EBITDA (x) 12.7 12.0 11.6 11.4 11.5 Net debt/(cash) 3,523 3,505 3,490 3,185 2,970 Dividend Yield 4.4% 4.7% 4.9% 5.1% 5.1% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
75 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Swire Properties (1972) ▲ Overweight Previous: Underweight Investment Thesis, Valuation and Risks 1972.HK,1972 HK Price (08 Jan 20): HK$25.10 Swire Properties (Overweight; Price Target: HK$28.50) ▲ Price Target (Dec-20): HK$28.50 Investment Thesis Prior (Dec-19): HK$23.40 HK retail accounts for less than 20% of the company’s earnings and NAV; we think Hong Kong the recent underperformance of the stock is overdone driven by poor visibility in Head of HK Research, Conglomerates 2H2019 and previously expensive valuation. Swire’s Island East office portfolio and Property remains very resilient despite the overall slowdown in office demand; leasing of Two Cusson Leung, CFA AC Taikoo Place is likely to start mid-2020 and will start providing an earnings uplift in (852) 2800-8526 2021, in our view. Swire’s retail properties in China have been performing well [email protected] along with the China domestic consumption theme. There is also a strong completion Bloomberg JPMA LEUNG
Source: Bloomberg, J.P. Morgan estimates. Risks to Rating and Price Target Downside risks include hiccups in the preleasing of Two Taikoo Place if office demand turns out worse than expected and further slowdown in the China economy. Major upside risks include stronger-than-expected rental growth in Island East.
76 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis HK retail accounts for less than 20% of the company’s earnings and NAV; we think the recent underperformance of the stock is overdone driven by poor visibility in 2H2019 and previously expensive valuation. Swire’s Island East office portfolio remains very resilient despite the overall slowdown in office demand; leasing of Two Taikoo Place is likely to start mid-2020 and will start providing an earnings uplift in 2021, in our view. Swire’s retail properties in China have YTD 1m 3m 12m been performing well along with the China domestic Abs -2.9% 1.8% 4.4% -8.6% consumption theme. There is also a strong completion Rel -3.4% -5.1% -5.3% -8.9% pipeline in Beijing and Shanghai. Swire Prop is not the Company Data cheapest landlord but its management and ESG profile are Shares O/S (mn) 5,850 among the best quality in the sector, in our view. Upgrading 52-week range (HK$) 34.65-22.50 from UW to OW. Market cap ($ mn) 18,877 Exchange rate 7.78 Free float(%) 18.0% 3M - Avg daily vol (mn) 3.35 Valuation 3M - Avg daily val ($ mn) 10.5 Our Dec-20 PT of HK$28.5 is based on a 39% discount to Volatility (90 Day) 29 Index HSI our Dec-20E NAV, which is ~0.5 S.D. below its long-term BBG BUY|HOLD|SELL 8|3|3 historical average. Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Performance Drivers Financial Estimates Revenue 14,719 13,604 13,596 14,573 Adj. EBITDA 9,031 9,385 9,299 9,237 Adj. EBIT 8,637 8,892 8,800 8,731 Adj. net income 7,514 7,578 7,746 7,725 Adj. EPS 1.28 1.30 1.32 1.32 BBG EPS 1.49 1.38 1.43 1.50 Cashflow from operations 9,391 5,515 5,937 5,726 FCFF 10,993 18,640 3,093 2,915 Margins and Growth Revenue growth (20.7%) (7.6%) (0.1%) 7.2% EBITDA margin 61.4% 69.0% 68.4% 63.4% EBITDA growth (8.7%) 3.9% (0.9%) (0.7%) EBIT margin 58.7% 65.4% 64.7% 59.9% Net margin 51.0% 55.7% 57.0% 53.0% Adj. EPS growth (2.9%) 0.8% 2.2% (0.3%) Ratios Adj. tax rate 12.5% 13.8% 13.7% 13.6% Interest cover 10.2 10.6 13.8 13.0 Net debt/Equity 0.1 0.1 0.1 0.1 Net debt/EBITDA 3.3 1.8 2.1 2.5 ROCE 2.5% 2.4% 2.2% 2.2% ROE 2.8% 2.6% 2.6% 2.6% Valuation FCFF yield 7.5% 12.7% 2.1% 2.0% Dividend yield 3.3% 3.5% 3.7% 3.7% EV/EBITDA 17.4 16.8 16.9 17.0 Adj. P/E 19.5 19.4 19.0 19.0
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
77 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Swire Properties (1972): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 18,558 14,719 13,604 13,596 14,573 Cash flow from operating activities 11,756 9,391 5,515 5,937 5,726 COGS - - - - - o/w Depreciation & amortization 426 394 492 499 506 Gross profit - - - - - o/w Changes in working capital (2,048) (5,295) (1,756) (1,443) (1,571) SG&A - - - - - Adj. EBITDA 9,893 9,031 9,385 9,299 9,237 Cash flow from investing activities (6,887) 754 12,359 (3,427) (3,427) D&A (426) (394) (492) (499) (506) o/w Capital expenditure (6,019) (4,490) (3,427) (3,427) (3,427) Adj. EBIT 9,467 8,637 8,892 8,800 8,731 as % of sales 32.4% 30.5% 25.2% 25.2% 23.5% Net Interest (900) (882) (888) (675) (712) Adj. PBT 9,158 8,670 8,904 9,081 9,045 Cash flow from financing activities (4,904) (9,712) 2,647 (6,854) (6,971) Tax (1,415) (1,086) (1,226) (1,244) (1,228) o/w Dividends paid (4,464) (4,646) (5,031) (5,265) (5,382) Minority Interest (4) (70) (100) (90) (92) o/w Shares issued/(repurchased) 0 0 0 0 0 Adj. Net Income 7,739 7,514 7,578 7,746 7,725 o/w Net debt issued/(repaid) 1,889 111 (8,343) (1,589) (1,589) Reported EPS 5.82 4.90 3.99 1.32 1.32 Net change in cash (35) 433 20,521 (4,344) (4,671) Adj. EPS 1.32 1.28 1.30 1.32 1.32 Adj. Free cash flow to firm 6,498 10,993 18,640 3,093 2,915 DPS 0.77 0.84 0.89 0.92 0.94 y/y Growth 109.6% 69.2% 69.6% (83.4%) (5.8%) Payout ratio 58.2% 65.4% 68.7% 69.5% 71.2% Shares outstanding 5,850 5,850 5,850 5,850 5,850 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 1,708 2,094 22,615 18,272 13,600 Gross margin - - - - - Accounts receivable 9,258 2,401 2,401 2,401 2,401 EBITDA margin 53.3% 61.4% 69.0% 68.4% 63.4% Inventories 3,722 18,434 20,190 21,633 23,203 EBIT margin 51.0% 58.7% 65.4% 64.7% 59.9% Other current assets 5 15 15 15 15 Net profit margin 41.7% 51.0% 55.7% 57.0% 53.0% Current assets 14,693 22,944 45,221 42,320 39,220 PP&E 275,902 281,063 283,998 286,925 289,846 ROE 3.2% 2.8% 2.6% 2.6% 2.6% LT investments - - - - - ROA 2.6% 2.3% 2.2% 2.2% 2.1% Other non current assets 23,714 29,640 30,539 31,495 32,521 ROCE 2.9% 2.5% 2.4% 2.2% 2.2% Total assets 314,309 333,647 359,758 360,741 361,587 SG&A/Sales - - - - - Net debt/Equity 0.1 0.1 0.1 0.1 0.1 Short term borrowings 3,161 1,230 7,589 7,589 7,589 Net debt/EBITDA 3.0 3.3 1.8 2.1 2.5 Payables 8,458 10,760 10,760 10,760 10,760 Other short term liabilities 5,176 0 0 0 0 Sales/Assets (x) 0.1 0.0 0.0 0.0 0.0 Current liabilities 16,795 11,990 18,349 18,349 18,349 Assets/Equity (x) 1.2 1.2 1.2 1.2 1.2 Long-term debt 28,718 30,769 32,088 30,499 28,910 Interest cover (x) 11.0 10.2 10.6 13.8 13.0 Other long term liabilities 9,418 9,597 9,597 9,597 9,597 Operating leverage 60.3% 42.4% (39.0%) 1802.9% (11.0%) Total liabilities 54,931 52,356 60,034 58,445 56,856 Tax rate 15.5% 12.5% 13.8% 13.7% 13.6% Shareholders' equity 257,381 279,275 297,608 300,089 302,432 Revenue y/y Growth 10.5% (20.7%) (7.6%) (0.1%) 7.2% Minority interests 1,997 2,016 2,116 2,207 2,299 EBITDA y/y Growth 6.7% (8.7%) 3.9% (0.9%) (0.7%) Total liabilities & equity 314,309 333,647 359,758 360,741 361,587 EPS y/y Growth 10.2% (2.9%) 0.8% 2.2% (0.3%) BVPS 44.00 47.74 50.87 51.30 51.70 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 14.2% 8.5% 6.6% 0.8% 0.8% P/E (x) 19.0 19.5 19.4 19.0 19.0 P/BV (x) 0.6 0.5 0.5 0.5 0.5 RNAV/Share 46.35 - EV/EBITDA (x) 15.9 17.4 16.8 16.9 17.0 Net debt/(cash) 30,171 29,905 17,062 19,816 22,899 Dividend Yield 3.1% 3.3% 3.5% 3.7% 3.7% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
78 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Wharf REIC (1997) Underweight Investment Thesis, Valuation and Risks 1997.HK,1997 HK Price (08 Jan 20): HK$44.80 Wharf Real Estate Investment Company Ltd (Underweight; Price Target: HK$42.10) ▲ Price Target (Dec-20): HK$42.10 Prior (Dec-19): HK$33.00 Investment Thesis Hong Kong Hong Kong retail and Harbour City’s passing rents are at the highest level despite the Head of HK Research, Conglomerates sharp slowdown in retail sales. We believe supportive policies for China domestic and Property consumption are likely to be at the expense of Hong Kong retail sales. Further tenant Cusson Leung, CFA AC reshuffling will need to be done to focus more on domestic consumption, implying (852) 2800-8526 potentially lower or negative rental reversions. We see short-term downside risk on [email protected] earnings and dividends. There is also a potential loss of market share to SHKP’s new Bloomberg JPMA LEUNG
Style Exposure Valuation
Quant Current Hist %Rank (1=Top) Our Dec-20 price target of HK$42.1 is based on a target discount to NAV of 30% on Factors %Rank 6M 1Y 3Y 5Y Wharf REIC’s assets, which is ~1 S.D below its historical average. Value 47 45 49 3 Growth 25 18 67 99 Dec-20 % of Momentum 58 26 51 NAV valuation Methodology HK$MM HK$/sh GAV Quality 18 13 51 73 Hong Kong Investment Properties Low Vol 55 53 61 Luxury Residential Cap rate 3,998 1.3 2% ESGQ 85 97 - - - Office Cap rate 80,163 26.4 36% Retail Cap rate 122,421 40.3 54% Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and Hotel - HK$MM/room 3,656 1.2 2% J.P. Morgan estimates. 210,237 69.2 93% Singapore Investment Properties Office Cap rate 5,252 1.7 2% Retail Cap rate 1,284 0.4 1% 6,536 2.2 3% Non-property assets Harbour Centre (0051 HK) Market Capitalisation 6,236 2.1 3% Investment securities Market Value 2,548 0.8 1% 8,784 2.9 4% Gross Asset Value (GAV) 225,558 74 100% Less: Net debt Book Value (42,817) (14.1) Total Net Asset Value (NAV) 182,741 60.19
Source: Bloomberg, J.P. Morgan estimates.
Risks to Rating and Price Target Upside risks include 1) retail sales and tourist arrivals rebound sooner and stronger than expected; 2) sustained Rmb appreciation and 3) increasing dividend payout ratio from the guided 65%. A downside risk is any unexpected investments made by REIC that might alter its risk profile.
79 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis Hong Kong retail and Harbour City’s passing rents are at the highest level despite the sharp slowdown in retail sales. We believe supportive policies for China domestic consumption are likely to be at the expense of Hong Kong retail sales. Further tenant reshuffling will need to be done to focus more on domestic consumption, implying potentially lower or negative rental reversions. We see short-term downside risk on earnings and dividends. There is also a potential loss of YTD 1m 3m 12m market share to SHKP’s new project in West Kowloon and Abs -5.8% 3.5% 7.2% -5.0% NWD’s Victoria Dockside in the longer run. We maintain our Rel -6.3% -3.4% -2.5% -5.3% UW rating on Wharf REIC. Company Data Shares O/S (mn) 3,036 Valuation 52-week range (HK$) 61.30-40.55 Our Dec-20 price target of HK$42.1 is based on a target Market cap ($ mn) 17,487 Exchange rate 7.78 discount to NAV of 30% on Wharf REIC’s assets, which is Free float(%) 33.9% ~1 S.D below its historical average. 3M - Avg daily vol (mn) 3.81 3M - Avg daily val ($ mn) 21.6 Performance Drivers Volatility (90 Day) 35 Index HSI BBG BUY|HOLD|SELL 5|6|4 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates Revenue 16,481 16,309 16,051 16,562 Adj. EBITDA 13,062 13,290 13,241 13,659 Adj. EBIT 12,770 13,110 13,061 13,479 Adj. net income 10,007 10,141 10,104 10,303 Adj. EPS 3.30 3.34 3.33 3.39 BBG EPS 3.21 3.31 3.36 3.44 Cashflow from operations 9,498 9,119 10,420 10,911 FCFF 9,598 8,861 10,114 10,557 Margins and Growth Revenue growth (21.2%) (1.0%) (1.6%) 3.2% EBITDA margin 79.3% 81.5% 82.5% 82.5% EBITDA growth (14.5%) 1.7% (0.4%) 3.2% EBIT margin 77.5% 80.4% 81.4% 81.4% Net margin 60.7% 62.2% 62.9% 62.2% Adj. EPS growth 4.8% 1.3% (0.4%) 2.0% Ratios Adj. tax rate 15.6% 16.6% 16.7% 17.0% Interest cover 16.0 14.9 15.9 17.6 Net debt/Equity 0.2 0.2 0.2 0.1 Net debt/EBITDA 3.0 2.9 2.8 2.5 ROCE 4.2% 4.2% 4.1% 4.2% ROE 4.7% 4.6% 4.5% 4.5% Valuation FCFF yield 7.1% 6.5% 7.4% 7.8% Dividend yield 4.7% 4.9% 4.9% 4.9% EV/EBITDA 14.3 14.0 13.9 13.3 Adj. P/E 13.6 13.4 13.5 13.2
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
80 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Wharf REIC (1997): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 20,904 16,481 16,309 16,051 16,562 Cash flow from operating activities 9,648 9,498 9,119 10,420 10,911 COGS - - - - - o/w Depreciation & amortization 144 292 180 180 180 Gross profit - - - - - o/w Changes in working capital (5,049) 422 (1,442) (95) 189 SG&A - - - - - Adj. EBITDA 15,275 13,062 13,290 13,241 13,659 Cash flow from investing activities (12,613) (213) (1,500) (1,500) (1,500) D&A (144) (292) (180) (180) (180) o/w Capital expenditure (2,507) (588) (1,000) (1,000) (1,000) Adj. EBIT 15,131 12,770 13,110 13,061 13,479 as % of sales 12.0% 3.6% 6.1% 6.2% 6.0% Net Interest (1,029) (815) (889) (833) (777) Adj. PBT 14,169 12,188 12,474 12,422 12,702 Cash flow from financing activities 477 (9,568) (9,429) (9,420) (9,519) Tax (2,690) (1,901) (2,074) (2,077) (2,159) o/w Dividends paid (10,374) (6,199) (6,859) (6,850) (6,949) Minority Interest (675) (232) (240) (231) (239) o/w Shares issued/(repurchased) 661 0 0 0 0 Adj. Net Income 9,547 10,007 10,141 10,104 10,303 o/w Net debt issued/(repaid) 10,190 (3,369) (2,570) (2,570) (2,570) Reported EPS 5.67 5.94 3.34 3.33 3.39 Net change in cash (2,488) (283) (1,810) (500) (108) Adj. EPS 3.14 3.30 3.34 3.33 3.39 Adj. Free cash flow to firm 7,975 9,598 8,861 10,114 10,557 DPS 0.95 2.10 2.18 2.18 2.21 y/y Growth 111.7% 20.4% (7.7%) 14.1% 4.4% Payout ratio 30.2% 63.7% 65.3% 65.5% 65.1% Shares outstanding 3,036 3,036 3,036 3,036 3,036 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 3,076 2,675 865 365 257 Gross margin - - - - - Accounts receivable 635 873 1,014 998 1,030 EBITDA margin 73.1% 79.3% 81.5% 82.5% 82.5% Inventories 144 3,726 3,726 3,726 3,726 EBIT margin 72.4% 77.5% 80.4% 81.4% 81.4% Other current assets 389 419 419 419 419 Net profit margin 45.7% 60.7% 62.2% 62.9% 62.2% Current assets 4,244 7,693 6,025 5,508 5,432 PP&E - - - - - ROE 4.7% 4.7% 4.6% 4.5% 4.5% LT investments 2,708 2,396 2,396 2,396 2,396 ROA 3.5% 3.6% 3.6% 3.6% 3.7% Other non current assets 265,723 270,267 271,087 271,907 272,727 ROCE 5.0% 4.2% 4.2% 4.1% 4.2% Total assets 272,675 280,356 279,508 279,811 280,555 SG&A/Sales - - - - - Net debt/Equity 0.2 0.2 0.2 0.2 0.1 Short term borrowings 20,800 3,070 3,070 3,070 3,070 Net debt/EBITDA 2.8 3.0 2.9 2.8 2.5 Payables 8,805 8,351 7,051 6,939 7,160 Other short term liabilities 2,829 2,926 2,426 1,926 1,426 Sales/Assets (x) 0.1 0.1 0.1 0.1 0.1 Current liabilities 32,434 14,347 12,547 11,935 11,656 Assets/Equity (x) 1.3 1.3 1.3 1.2 1.2 Long-term debt 24,752 39,027 36,457 33,887 31,317 Interest cover (x) 14.8 16.0 14.9 15.9 17.6 Other long term liabilities 2,521 2,650 2,650 2,650 2,650 Operating leverage 106.7% 73.7% (254.3%) 23.3% 100.4% Total liabilities 59,707 56,024 51,654 48,472 45,623 Tax rate 19.0% 15.6% 16.6% 16.7% 17.0% Shareholders' equity 207,318 218,797 222,319 225,804 229,397 Revenue y/y Growth 24.1% (21.2%) (1.0%) (1.6%) 3.2% Minority interests 5,650 5,535 5,535 5,535 5,535 EBITDA y/y Growth 25.0% (14.5%) 1.7% (0.4%) 3.2% Total liabilities & equity 272,675 280,356 279,508 279,811 280,555 EPS y/y Growth 12.0% 4.8% 1.3% (0.4%) 2.0% BVPS 68.28 72.06 73.22 74.37 75.55 Valuation FY17A FY18A FY19E FY20E FY21E y/y Growth 4.1% 5.5% 1.6% 1.6% 1.6% P/E (x) 14.2 13.6 13.4 13.5 13.2 P/BV (x) 0.7 0.6 0.6 0.6 0.6 RNAV/Share - 60.19 - EV/EBITDA (x) 12.5 14.3 14.0 13.9 13.3 Net debt/(cash) 42,476 39,422 38,662 36,592 34,130 Dividend Yield 2.1% 4.7% 4.9% 4.9% 4.9% Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
81 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Champion REIT (2778) Neutral Investment Thesis, Valuation and Risks 2778.HK,2778 HK Price (08 Jan 20): HK$5.07 Champion REIT (Neutral; Price Target: HK$5.20) ▲ Price Target (Dec-20): HK$5.20 Investment Thesis Prior (Dec-19): HK$5.10 We believe upcoming vacancy at Cheung Kong Center could put pressure on Three Hong Kong Garden Road’s rental reversion as they have considerable space up for rental review HK Research, Conglomerates and and expiry. Langham Place mall is likely susceptible to rental decline on the back of Property a subdued retail market given the high proportion of turnover rents. Although we see Jevon Jim AC dimmed DPU growth, we think downside is likely limited due to the 5.5% FY20E (852) 2800-8538 dividend yield. [email protected] Bloomberg JPMA JJIM
82 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation We believe upcoming vacancy at Cheung Kong Center could put pressure on Three Garden Road’s rental reversion as they have considerable space up for rental review and expiry. Langham Place mall is likely susceptible to rental decline on the back of a subdued retail market given the high proportion of turnover rents. Although we see dimmed DPU growth, we think downside is likely limited due to the 5.5% FY20E dividend yield.
YTD 1m 3m 12m Valuation Abs -1.6% 1.6% 1.4% -7.3% Our Dec-20 price target of HK$5.2 is based on our NPV Rel -2.1% -5.3% -8.3% -7.6% estimate with the 1% terminal growth rate assumption. Company Data Shares O/S (mn) 5,873 Performance Drivers 52-week range (HK$) 6.89-4.77 Market cap ($ mn) 3,828 Exchange rate 7.78 Free float(%) 33.5% 3M - Avg daily vol (mn) 4.97 3M - Avg daily val ($ mn) 3.2 Volatility (90 Day) 18 Index HSI BBG BUY|HOLD|SELL 4|7|4 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates NOI 2,405 2,520 2,578 2,598 Adj. EBITDA 2,089 2,197 2,247 2,265 FFO per share - - - - BBG FFOPS 0.24 0.24 0.24 0.23 AFFO per share 0.35 0.36 0.37 0.37 DPS 0.26 0.27 0.27 0.27 Margins and Growth NOI margin 81.1% 81.0% 80.7% 80.7% NOI growth 11.0% 4.8% 2.3% 0.8% EBITDA margin 70.5% 70.6% 70.4% 70.3% EBITDA growth 10.8% 5.1% 2.3% 0.8% Ratios Adj. tax rate 14.7% 13.3% 13.3% 13.3% FFO payout - - - - AFFO payout 0.7 0.8 0.7 0.7 Net debt/EBITDA 6.5 5.7 4.8 4.3 ROA 1.8% 1.7% 1.7% 1.7% ROE 2.3% 2.2% 2.2% 2.1% Valuation Net debt/EV 0.3 0.3 0.3 0.2 Dividend yield 5.2% 5.3% 5.4% 5.4% EV/EBITDA 20.9 19.4 18.2 17.5 Adj. P/E 20.5 19.9 19.5 19.5 P/FFO - - - - P/AFFO 14.4 14.2 13.8 13.6 P/ BV 0.4 0.4 0.4 0.4
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
83 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Champion REIT (2778): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 2,700 2,965 3,110 3,194 3,220 Cash flow from operating activities 1,918 2,070 2,094 2,162 2,200 COGS - - - - - o/w Depreciation & amortization 0 0 0 0 0 Net property income 2,166 2,405 2,520 2,578 2,598 o/w Changes in working capital 65 (21) (21) (21) (21) Adj. EBITDA 1,886 2,089 2,197 2,247 2,265 D&A - - - - - Cash flow from investing activities (304) (386) (477) (486) (495) Adj. EBIT 1,886 2,089 2,197 2,247 2,265 o/w Capital expenditure - - - - - Revaluation gains/(losses) - - - - - as % of sales - - - - - Net Interest (331) (400) (477) (486) (495) Adj. PBT 1,555 1,689 1,720 1,761 1,770 Cash flow from financing activities (1,378) (1,262) (718) (423) (621) Tax (225) (248) (228) (234) (235) o/w Dividends paid (1,378) (1,462) (726) 0 (621) Minority Interest 0 0 0 0 0 o/w Shares issued/(repurchased) 0 0 0 0 0 Adj. Net Income 1,330 1,442 1,492 1,527 1,535 o/w Net debt issued/(repaid) 0 200 9 (423) 0 Distributable profit 1,487 1,611 1,667 1,707 1,716 Net change in cash 236 422 899 1,253 1,084 Funds from operations (FFO) 1,487 1,611 1,667 1,707 1,716 Adjusted funds from operations (AFFO) - - - - - Adj. Free cash flow to firm 2,201 2,411 2,507 2,583 2,630 y/y Growth 13.8% 9.5% 4.0% 3.0% 1.8% Reported EPS 0.23 0.25 0.25 0.26 0.26 Adj. EPS 0.23 0.25 0.25 0.26 0.26 Valuation FY17A FY18A FY19E FY20E FY21E P/FFO (x) - - - - - FFO per share - - - - - P/AFFO (x) 15.5 14.4 14.2 13.8 13.6 Payout ratio (x) - - - - - P/E (x) 22.2 20.5 19.9 19.5 19.5 AFFO per share 0.33 0.35 0.36 0.37 0.37 P/BV (x) 0.5 0.4 0.4 0.4 0.4 Payout ratio (x) 0.7 0.7 0.8 0.7 0.7 EV/EBITDA (x) 23.1 20.9 19.4 18.2 17.5 Dividend Yield 4.8% 5.2% 5.3% 5.4% 5.4% DPS 0.24 0.26 0.27 0.27 0.27 Shares outstanding 5,816 5,841 5,861 5,889 5,918 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 1,190 1,400 2,515 3,769 4,852 NOI margin 80.2% 81.1% 81.0% 80.7% 80.7% Accounts receivable 295 297 299 302 304 EBITDA margin 69.8% 70.5% 70.6% 70.4% 70.3% Other current assets 6 201 4 4 4 EBIT margin 69.8% 70.5% 70.6% 70.4% 70.3% Current assets 1,492 1,897 2,819 4,074 5,160 Net profit margin 49.3% 48.6% 48.0% 47.8% 47.7% PP&E 76,704 83,135 84,133 85,151 86,189 FFO margin 55.1% 54.3% 53.6% 53.4% 53.3% Investment properties - - - - - LT investments - - - - - ROE 2.4% 2.3% 2.2% 2.2% 2.1% Other non current assets 221 219 0 0 0 ROA 1.8% 1.8% 1.7% 1.7% 1.7% Total assets 78,416 85,251 86,951 89,225 91,349 ROCE 2.3% 2.3% 2.3% 2.3% 2.3% Net debt/Equity 0.2 0.2 0.2 0.2 0.1 Short term borrowings 0 3,697 5,200 5,200 5,200 Net debt/EBITDA 7.2 6.5 5.7 4.8 4.3 Payables 1,338 1,337 1,361 1,384 1,408 Other short term liabilities 1,423 1,591 792 792 792 Sales/Assets (x) 0.0 0.0 0.0 0.0 0.0 Current liabilities 2,761 6,624 7,352 7,376 7,399 Assets/Equity (x) 1.3 1.3 1.3 1.3 1.2 Long-term debt 14,785 11,307 9,813 9,390 9,390 Interest cover (x) 5.7 5.2 4.6 4.6 4.6 Other long term liabilities 556 598 698 799 903 Operating leverage 127.0% 110.0% 105.3% 85.1% 97.3% Total liabilities 18,102 18,530 17,862 17,565 17,693 Debt/Investment properties 18.9% 17.6% 17.3% 16.4% 16.0% Tax rate 14.4% 14.7% 13.3% 13.3% 13.3% Shareholders' equity 60,315 66,722 69,089 71,660 73,657 Minority interests 0 0 0 0 0 Revenue y/y Growth 5.6% 9.8% 4.9% 2.7% 0.8% Total liabilities & equity 78,416 85,251 86,951 89,225 91,349 EBITDA y/y Growth 7.1% 10.8% 5.1% 2.3% 0.8% EPS y/y Growth 8.7% 7.9% 3.1% 1.9% 0.0% BVPS 10.36 11.41 11.76 12.14 12.42 y/y Growth 18.9% 10.2% 3.1% 3.2% 2.3% Net debt/(cash) 13,594 13,605 12,497 10,821 9,738 Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
84 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Fortune REIT (0778) ▲ Overweight Previous: Neutral Investment Thesis, Valuation and Risks 0778.HK,778 HK Price (08 Jan 20): HK$9.10 Fortune REIT (Overweight; Price Target: HK$10.40) ▲ Price Target (Dec-20): HK$10.40 Investment Thesis Prior (Dec-19): HK$9.70 We expect non-discretionary retail malls to show defensiveness amid the retail Hong Kong slump. The completion of Kingswood AEI is expected to boost DPU growth for Head of HK Research, Conglomerates 2H19 and next year, and the normalized base of comparison (disposal of Provident and Property Square in 1H18) is also a catalyst. We think that an estimated 6% yield with low Cusson Leung, CFA AC single digit growth in DPU make the stock look attractive in the current environment. (852) 2800-8526 Upgrade from N to OW. [email protected] Bloomberg JPMA LEUNG
Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and Risks to Rating and Price Target J.P. Morgan estimates. Downside risks to our rating and price target include further slowdown in domestic consumption, lower-than-expected upside of Fortune Kingswood after AEI, lower- than-expected rental reversions.
Upside risks include better-than-expected rental reversion, unit buyback and any yield-accretive acquisitions by the REIT.
85 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis We expect non-discretionary retail malls to show defensiveness amid the retail slump. The completion of Kingswood AEI is expected to boost DPU growth for 2H19 and next year, and the normalized base of comparison (disposal of Provident Square in 1H18) is also a catalyst. We think that an estimated 6% yield with low single digit growth in DPU make the stock look attractive in the current environment. Upgrade from N to OW. YTD 1m 3m 12m Abs 0.1% 0.7% 3.1% -2.4% Valuation Rel -0.4% -6.2% -6.6% -2.7% Our Dec-20 price target of HK$10.4 is based on our NPV Company Data estimate with the terminal growth rate assumption of 1%. Shares O/S (mn) 1,938 52-week range (HK$) 11.32-8.68 Market cap ($ mn) 2,267 Exchange rate 7.78 Performance Drivers Free float(%) 72.6% 3M - Avg daily vol (mn) 2.47 3M - Avg daily val ($ mn) 2.9 Volatility (90 Day) 21 Index HSI BBG BUY|HOLD|SELL 8|3|0 Key Metrics (FYE Dec) HK$ in millions FY18A FY19E FY20E FY21E Financial Estimates NOI 1,472 1,512 1,574 1,608 Adj. EBITDA 1,333 1,338 1,398 1,429 FFO per share - - - - BBG FFOPS 0.91 0.45 0.45 0.46 AFFO per share 1.67 0.67 0.70 0.70 DPS 0.51 0.53 0.55 0.56 Margins and Growth NOI margin 75.9% 75.9% 75.9% 75.9% NOI growth 1.0% 2.7% 4.1% 2.2% EBITDA margin 68.7% 67.2% 67.4% 67.4% EBITDA growth 0.4% 0.4% 4.4% 2.2% Ratios Adj. tax rate 20.8% 21.3% 21.2% 21.2% FFO payout - - - - AFFO payout 0.3 0.8 0.8 0.8 Net debt/EBITDA 6.2 6.2 5.9 5.8 ROA 2.1% 2.0% 2.0% 2.1% ROE 2.9% 2.6% 2.7% 2.7% Valuation Net debt/EV 0.3 0.3 0.3 0.3 Dividend yield 5.6% 5.8% 6.1% 6.2% EV/EBITDA 20.9 20.8 20.0 19.5 Adj. P/E 20.7 20.9 19.9 19.4 P/FFO - - - - P/AFFO 5.5 13.6 13.0 13.1 P/ BV 0.5 0.5 0.5 0.5
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
86 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Fortune REIT (0778): Summary of Financials Income Statement FY17A FY18A FY19E FY20E FY21E Cash Flow Statement FY17A FY18A FY19E FY20E FY21E Revenue 2,030 1,940 1,993 2,075 2,120 Cash flow from operating activities 1,282 3,262 1,309 1,382 1,384 COGS - - - - - o/w Depreciation & amortization 0 0 0 0 0 Net property income 1,457 1,472 1,512 1,574 1,608 o/w Changes in working capital 35 11 36 57 31 Adj. EBITDA 1,327 1,333 1,338 1,398 1,429 D&A - - - - - Cash flow from investing activities (52) (55) (14) (14) (14) Adj. EBIT 1,327 1,333 1,338 1,398 1,429 o/w Capital expenditure (52) (61) (20) (20) (20) Revaluation gains/(losses) - - - - - as % of sales 2.6% 3.2% 1.0% 1.0% 0.9% Net Interest (263) (267) (269) (266) (263) Adj. PBT 1,064 1,066 1,070 1,132 1,166 Cash flow from financing activities (1,297) (3,182) (1,381) (1,427) (1,460) Tax (219) (221) (228) (240) (247) o/w Dividends paid (953) (988) (1,012) (1,061) (1,097) Minority Interest 0 0 0 0 0 o/w Shares issued/(repurchased) 0 0 0 0 0 Adj. Net Income 844 845 841 892 919 o/w Net debt issued/(repaid) (96) (1,950) (100) (100) (100) Distributable profit 971 986 1,021 1,074 1,105 Net change in cash (67) 25 (86) (59) (90) Funds from operations (FFO) 971 986 1,021 1,074 1,105 Adjusted funds from operations (AFFO) - - - - - Adj. Free cash flow to firm 1,438 3,412 1,501 1,571 1,571 y/y Growth 0.9% 137.2% (56.0%) 4.7% 0.0% Reported EPS 0.44 0.44 0.44 0.46 0.47 Adj. EPS 0.44 0.44 0.44 0.46 0.47 Valuation FY17A FY18A FY19E FY20E FY21E P/FFO (x) - - - - - FFO per share - - - - - P/AFFO (x) 14.1 5.5 13.6 13.0 13.1 Payout ratio (x) - - - - - P/E (x) 20.6 20.7 20.9 19.9 19.4 AFFO per share 0.64 1.67 0.67 0.70 0.70 P/BV (x) 0.7 0.5 0.5 0.5 0.5 Payout ratio (x) 0.8 0.3 0.8 0.8 0.8 EV/EBITDA (x) 21.0 20.9 20.8 20.0 19.5 Dividend Yield 5.6% 5.6% 5.8% 6.1% 6.2% DPS 0.51 0.51 0.53 0.55 0.56 Shares outstanding 1,909 1,921 1,932 1,946 1,961 Balance Sheet FY17A FY18A FY19E FY20E FY21E Ratio Analysis FY17A FY18A FY19E FY20E FY21E Cash and cash equivalents 516 543 457 398 308 NOI margin 71.8% 75.9% 75.9% 75.9% 75.9% Accounts receivable 268 71 73 76 77 EBITDA margin 65.4% 68.7% 67.2% 67.4% 67.4% Other current assets 19 19 19 19 19 EBIT margin 65.4% 68.7% 67.2% 67.4% 67.4% Current assets 803 632 549 492 404 Net profit margin 41.6% 43.5% 42.2% 43.0% 43.4% PP&E 37,751 42,000 42,860 43,737 44,632 FFO margin 47.8% 50.8% 51.2% 51.8% 52.1% Investment properties - - - - - LT investments - - - - - ROE 3.4% 2.9% 2.6% 2.7% 2.7% Other non current assets 0 0 (0) 0 0 ROA 2.2% 2.1% 2.0% 2.0% 2.1% Total assets 38,554 42,632 43,409 44,230 45,036 ROCE 2.9% 2.7% 2.6% 2.6% 2.6% Net debt/Equity 0.4 0.3 0.3 0.2 0.2 Short term borrowings 1,497 400 948 674 811 Net debt/EBITDA 7.7 6.2 6.2 5.9 5.8 Payables 1,451 1,271 1,306 1,360 1,389 Other short term liabilities 11 17 17 17 17 Sales/Assets (x) 0.1 0.0 0.0 0.0 0.0 Current liabilities 2,959 1,688 2,271 2,051 2,217 Assets/Equity (x) 1.5 1.4 1.3 1.3 1.3 Long-term debt 9,286 8,459 7,811 7,985 7,748 Interest cover (x) 5.0 5.0 5.0 5.3 5.4 Other long term liabilities 450 471 506 542 579 Operating leverage 125.6% (9.5%) 16.3% 107.6% 102.8% Total liabilities 12,696 10,619 10,588 10,577 10,544 Debt/Investment properties - - - - - Tax rate 20.6% 20.8% 21.3% 21.2% 21.2% Shareholders' equity 25,858 32,013 32,821 33,652 34,492 Minority interests 0 0 0 0 0 Revenue y/y Growth 2.8% (4.4%) 2.7% 4.1% 2.2% Total liabilities & equity 38,554 42,632 43,409 44,230 45,036 EBITDA y/y Growth 3.5% 0.4% 0.4% 4.4% 2.2% EPS y/y Growth 3.5% (0.6%) (0.9%) 5.2% 2.3% BVPS 13.51 16.64 16.93 17.23 17.53 y/y Growth 4.7% 23.2% 1.8% 1.8% 1.7% Net debt/(cash) 10,267 8,317 8,302 8,262 8,251 Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which
87 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Link REIT (0823) Overweight Investment Thesis, Valuation and Risks 0823.HK,823 HK Price (08 Jan 20): HK$80.70 Link REIT (Overweight; Price Target: HK$98.00) ▼ Price Target (Dec-20): HK$98.00 Investment Thesis Prior (Dec-19): HK$99.90 We view Link’s acquisition of a Sydney project as moderately positive to the stock Hong Kong price. Despite the slowdown in the retail market, Link’s defensive tenants are still Head of HK Research, Conglomerates delivering low-single-digit retail sales growth. Link’s commitment of share buybacks and Property will likely continue to support valuation. We expect DPU growth to be sustained at Cusson Leung, CFA AC 7-8% for the next two years mainly from new property contributions. (852) 2800-8526 [email protected] Valuation Bloomberg JPMA LEUNG
Style Exposure Bond Rate 2.70% Beta 0.57 Quant Current Hist %Rank (1=Top) Risk premium 3.80% Factors %Rank 6M 1Y 3Y 5Y Discount Rate 4.88% Value 63 69 71 74 91 LT Grow th 1.50% Growth 6 11 9 35 25 Terminal Cap Rate 3.38% Momentum 51 11 11 38 14 Source: J.P. Morgan estimates. Quality 10 10 3 19 19 Low Vol 18 21 18 14 21 Risks to Rating and Price Target ESGQ 25 15 16 5 92 Downside risks to our price target and rating include a rise in corporate gearing from Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and expansion of cap rates. A sharp rise in cap rate, would also make the value-accretive J.P. Morgan estimates. capital recycling difficult to be achieved. Upside catalysts include better-than-expected retail sales, higher-than-expected rental income growth and DPU-accretive acquisitions announced.
88 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Price Performance Summary Investment Thesis and Valuation Investment Thesis We view Link’s acquisition of a Sydney project as moderately positive to the stock price. Despite the slowdown in the retail market, Link’s defensive tenants are still delivering low-single-digit retail sales growth. Link’s commitment of share buybacks will likely continue to support valuation. We expect DPU growth to be sustained at 7-8% for the next two years mainly from new property contributions.
YTD 1m 3m 12m Valuation Abs -2.2% 0.2% -5.4% 0.4% Rel -2.7% -6.7% -15.1% 0.1% Our Dec-20 PT of HK$98 is based on our NPV estimate, derived using a terminal growth assumption of 1.5%. Company Data Shares O/S (mn) 2,086 Performance Drivers 52-week range (HK$) 99.80-78.25 Market cap ($ mn) 21,643 Exchange rate 7.78 Free float(%) 99.9% 3M - Avg daily vol (mn) 6.40 3M - Avg daily val ($ mn) 67.5 Volatility (90 Day) 22 Index HSI BBG BUY|HOLD|SELL 11|5|3 Key Metrics (FYE Mar) HK$ in millions FY19A FY20E FY21E FY22E Financial Estimates NOI 7,689 8,173 8,813 9,433 Adj. EBITDA 7,306 7,778 8,407 9,015 FFO per share - - - - BBG FFOPS 5.42 3.05 3.29 3.53 AFFO per share (1.81) 1.97 2.74 2.97 DPS 2.71 2.93 3.18 3.41 Margins and Growth NOI margin 76.6% 75.8% 76.2% 76.6% NOI growth 0.3% 6.3% 7.8% 7.0% EBITDA margin 72.8% 72.2% 72.7% 73.2% EBITDA growth 0.5% 6.5% 8.1% 7.2% Ratios Adj. tax rate 14.3% 17.9% 18.0% 18.0% FFO payout - - - - AFFO payout NM 1.5 1.2 1.1 Net debt/EBITDA 2.4 3.0 2.9 2.7 ROA 3.7% 2.7% 2.9% 3.1% ROE 4.4% 3.2% 3.5% 3.7% Valuation Net debt/EV 0.1 0.1 0.1 0.1 Dividend yield 3.4% 3.6% 3.9% 4.2% EV/EBITDA 25.9 25.1 23.3 21.8 Adj. P/E 20.9 27.5 25.4 23.7 P/FFO - - - - P/AFFO NM 41.0 29.5 27.1 P/ BV 0.9 0.9 0.9 0.9
Sources for: Performance Drivers – Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.
89 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Link REIT (0823): Summary of Financials Income Statement FY18A FY19A FY20E FY21E FY22E Cash Flow Statement FY18A FY19A FY20E FY21E FY22E Revenue 10,023 10,037 10,775 11,568 12,308 Cash flow from operating activities 6,485 5,941 5,727 7,314 7,801 COGS - - - - - o/w Depreciation & amortization 22 22 22 22 22 Net property income 7,663 7,689 8,173 8,813 9,433 o/w Changes in working capital 777 13 (856) 210 196 Adj. EBITDA 7,268 7,306 7,778 8,407 9,015 D&A (22) (22) (22) (22) (22) Cash flow from investing activities 8,087 6,775 (1,600) (1,600) (1,600) Adj. EBIT 7,246 7,284 7,756 8,385 8,993 o/w Capital expenditure (6,533) (9,757) (1,600) (1,600) (1,600) Revaluation gains/(losses) - - - - - as % of sales 65.2% 97.2% 14.8% 13.8% 13.0% Net Interest (646) (513) (270) (298) (334) Adj. PBT 13,906 9,532 7,487 8,086 8,659 Cash flow from financing activities (11,962) (13,142) (4,614) (5,069) (5,548) Tax (1,420) (1,359) (1,341) (1,454) (1,555) o/w Dividends paid (5,254) (5,517) (5,934) (6,389) (6,868) Minority Interest - - - - - o/w Shares issued/(repurchased) (4,349) (3,216) 0 0 0 Adj. Net Income 12,486 8,173 6,146 6,633 7,104 o/w Net debt issued/(repaid) (2,359) (4,409) 1,320 1,320 1,320 Distributable profit 5,431 5,723 6,146 6,633 7,104 Net change in cash 2,610 (426) (488) 645 653 Funds from operations (FFO) 5,431 5,723 6,146 6,633 7,104 Adjusted funds from operations (AFFO) - - - - - Adj. Free cash flow to firm 532 (3,376) 4,348 5,959 6,475 y/y Growth (291.7%) (734.6%) (228.8%) 37.0% 8.7% Reported EPS 5.68 3.87 2.93 3.18 3.41 Adj. EPS 5.68 3.87 2.93 3.18 3.41 Valuation FY18A FY19A FY20E FY21E FY22E P/FFO (x) - - - - - FFO per share - - - - - P/AFFO (x) NM NM 41.0 29.5 27.1 Payout ratio (x) - - - - - P/E (x) 14.2 20.9 27.5 25.4 23.7 AFFO per share (0.02) (1.81) 1.97 2.74 2.97 P/BV (x) 1.0 0.9 0.9 0.9 0.9 Payout ratio (x) NM NM 1.5 1.2 1.1 EV/EBITDA (x) 25.6 25.9 25.1 23.3 21.8 Dividend Yield 3.1% 3.4% 3.6% 3.9% 4.2% DPS 2.50 2.71 2.93 3.18 3.41 Shares outstanding 2,200 2,112 2,098 2,086 2,086 Balance Sheet FY18A FY19A FY20E FY21E FY22E Ratio Analysis FY18A FY19A FY20E FY21E FY22E Cash and cash equivalents 11,689 6,789 2,206 2,851 3,504 NOI margin 76.5% 76.6% 75.8% 76.2% 76.6% Accounts receivable 716 939 187 200 213 EBITDA margin 72.5% 72.8% 72.2% 72.7% 73.2% Other current assets 97 106 50 53 57 EBIT margin 72.3% 72.6% 72.0% 72.5% 73.1% Current assets 12,502 7,834 2,442 3,104 3,773 Net profit margin 124.6% 81.4% 57.0% 57.3% 57.7% PP&E 203,486 218,670 221,659 224,663 227,681 FFO margin 54.2% 57.0% 57.0% 57.3% 57.7% Investment properties - - - - - LT investments - - - - - ROE 7.9% 4.4% 3.2% 3.5% 3.7% Other non current assets 416 433 433 433 433 ROA 6.4% 3.7% 2.7% 2.9% 3.1% Total assets 216,404 226,937 224,535 228,200 231,888 ROCE 3.5% 3.0% 3.0% 3.2% 3.4% Net debt/Equity 0.1 0.1 0.1 0.1 0.1 Short term borrowings 2,589 3,367 3,367 3,367 3,367 Net debt/EBITDA 1.9 2.4 3.0 2.9 2.7 Payables 2,971 3,008 2,155 2,314 2,462 Other short term liabilities 1,665 1,751 939 1,008 1,072 Sales/Assets (x) 0.1 0.0 0.0 0.1 0.1 Current liabilities 7,225 8,126 6,461 6,688 6,901 Assets/Equity (x) 1.2 1.2 1.2 1.2 1.2 Long-term debt 23,196 20,850 22,170 23,490 24,810 Interest cover (x) 11.3 14.2 28.8 28.2 27.0 Other long term liabilities 6,915 8,635 5,154 5,833 6,535 Operating leverage 107.6% 375.5% 88.2% 110.1% 113.4% Total liabilities 37,336 37,611 33,784 36,011 38,246 Debt/Investment properties 11.9% 10.7% 11.4% 11.8% 12.2% Tax rate 10.2% 14.3% 17.9% 18.0% 18.0% Shareholders' equity 178,594 188,739 190,163 191,602 193,055 Minority interests 0 0 0 0 0 Revenue y/y Growth 8.3% 0.1% 7.4% 7.4% 6.4% Total liabilities & equity 215,930 226,350 223,948 227,613 231,301 EBITDA y/y Growth 8.9% 0.5% 6.5% 8.1% 7.2% EPS y/y Growth 97.4% (31.8%) (24.3%) 8.5% 7.1% BVPS 83.06 89.48 91.16 91.85 92.54 y/y Growth 33.0% 7.7% 1.9% 0.8% 0.8% Net debt/(cash) 14,096 17,428 23,331 24,006 24,673 Source: Company reports and J.P. Morgan estimates. Note: HK$ in millions (except per-share data).Fiscal year ends Mar. o/w - out of which
90 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect the research analyst’s personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, if applicable, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. All authors named within this report are research analysts unless otherwise specified. In Europe, Sector Specialists may be shown on this report as contacts but are not authors of the report or part of the Research Department. Important Disclosures
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://www.jpmm.com/research/disclosures, calling 1-800-477- 0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477- 0406 or e-mail [email protected]. Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com. Coverage Universe: Leung, Cusson: CK Asset Holdings Ltd (1113) (1113.HK), CK Hutchison Holdings (0001) (0001.HK), Fortune REIT (0778) (0778.HK), Hang Lung Properties (0101) (0101.HK), Henderson Land Development (0012) (0012.HK), Jardine Cycle & Carriage Ltd (JCYC.SI), Jardine Matheson Holdings Ltd (JARD.SI), Jardine Strategic Holdings Ltd (JSH.SI), Link REIT (0823) (0823.HK), Sino Land (0083) (0083.HK), Sun Hung Kai Properties (0016) (0016.HK), Swire Properties (1972) (1972.HK), The Wharf (Holdings) Limited (0004) (0004.HK), Wharf REIC (1997) (1997.HK) Jim, Jevon: Champion REIT (2778) (2778.HK), Hongkong Land (HKLD.SI), Hysan Development Co (0014) (0014.HK), Kerry Properties (0683) (0683.HK), New World Development (0017) (0017.HK), Wheelock and Company Limited (0020) (0020.HK)
J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2020 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 45% 41% 15% IB clients* 51% 47% 39% JPMS Equity Research Coverage 43% 42% 14% IB clients* 75% 64% 56% *Percentage of subject companies within each of the "buy," "hold" and "sell" categories for which J.P. Morgan has provided investment banking services within the previous 12 months. Please note that the percentages might not add to 100% because of rounding. For purposes only of FINRA ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. This information is current as of the end of the most recent calendar quarter.
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91 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
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92 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
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93 Cusson Leung, CFA Asia Pacific Equity Research (852) 2800-8526 08 January 2020 [email protected]
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