Financials / Hong Kong 22 March 2013 Is Hong Kong Inc. ready to make Hong Kong Strategy the jump? • Integration with China promises to transform Hong Kong’s finance, property and rail sectors • Some Hong Kong companies are already reaping the rewards • We highlight 30 companies that offer exposure to six integration- related investment themes for 2013 and beyond See important disclosures, including any required research certifications, beginning on page 125 See important disclosures, including any required research certifications, beginning on page 125 Financials / Hong Kong 22 March 2013 Is Hong Kong Inc. ready to make Hong Kong Strategy the jump? • Integration with China promises to transform Hong Kong’s finance, property and rail sectors • Some Hong Kong companies are already reaping the rewards • We highlight 30 companies that offer exposure to six integration- related investment themes for 2013 and beyond We think the sheer scale of China’s trap” or do they provide an unusual economy compared with that of “value opportunity”? The larger NAV Hong Kong means the integration of discounts of the Hong Kong property the latter with the former is adding stocks relative to their counterparts an entirely new dimension to Hong globally exist for a reason. Still, we Jonas Kan, CFA Kong’s corporate sector. Such a believe that significant value can be (852) 2848 4439 transformation should have unlocked from these stocks and that [email protected] significant implications for investor the process has started for some of perceptions of Hong Kong these companies. While unlocking Grace Wu companies, in our view. such value won’t be straightforward, (852) 2532 4383 [email protected] we do not see this as an unsolvable The liquidity and consumption power issue. Indeed, some companies have Kelvin Lau of China are powerful forces that are made notable progress on this front. (852) 2848 4467 already influencing the city’s [email protected] corporate sector. Equally important ■ What we recommend is the scale of the Mainland market, We do not expect the near-term which gives some Hong Kong uncertainties globally to derail the ■ What's new companies the opportunity to apply positive structural forces now at The recent correction in share prices their expertise on a much larger work in Hong Kong. in Hong Kong has created what we scale, in areas such as retail-property see as buying opportunities for Hong management and rail management We have identified six major Kong companies that are facing (in the case of MTR Corp [MTRC]). themes, and look at 30 favourable structural factors companies in this context. underpinned by integration with Hong Kong stocks constitute a Our six investment themes are: Mainland China. We believe this special theme for investors. We 1) Growing recognition by investors transformation will play out as an see Hong Kong companies as of Hong Kong companies’ China investment theme for the city in providing a channel through which investments. 2013 and beyond. investors can gain exposure to the 2) Hong Kong enhancing its position economic potential of China, while as an all-round international ■ What's the impact at the same time offering the quality financial centre for China. Considerable opportunities and protection provided by Hong ahead for Hong Kong’s Kong assets and governance. We 3) Transformation of several districts corporate sector. One recurring regard this as a credible investment in Hong Kong. question in our research on Hong proposition. In our view, one way for 4) Growing importance of suburban Kong companies is whether or not investors to benefit from the rise of malls. Hong Kong is poised to make the China’s economy is through prime 5) Increased recognition by investors jump from being a medium-sized real-estate assets in Hong Kong. that Hong Kong family-owned city in Asia with a population of companies feature quality asset 6-7m into being a metropolis akin to Do Hong Kong property managers and savvy private – New York or London, backed by the companies present a good value equity investors. mega-sized economy of Mainland opportunity? One important China. question for the Hong Kong market 6) Restructuring, recovery, and in 2013 and beyond is: do property transformation of some companies there represent a “value companies. See important disclosures, including any required research certifications, beginning on page 125 Hong Kong Strategy 22 March 2013 Sector stocks: key indicators EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg BOC Hong Kong 2388 HK 26.30 Buy Buy 30.00 30.00 0.0% 2.107 2.107 0.0% 2.181 2.181 0.0% Cheung Kong 1 HK 111.70 Buy Buy 143.70 143.70 0.0% 11.601 11.601 0.0% 13.505 13.505 0.0% Fortune REIT 778 HK 6.87 Buy Buy 8.20 8.20 0.0% 0.316 0.316 0.0% 0.359 0.359 0.0% Hang Lung Properties 101 HK 29.20 Buy Buy 34.40 34.40 0.0% 1.597 1.597 0.0% 1.845 1.845 0.0% Henderson Land 12 HK 48.70 Buy Buy 67.30 67.30 0.0% 2.753 2.753 0.0% 3.361 3.361 0.0% Hong Kong Exchanges & Clearing 388 HK 132.70 Outperform Outperform 159.60 159.60 0.0% 4.518 4.518 0.0% 4.803 4.803 0.0% Hysan Development 14 HK 37.30 Buy Buy 48.16 48.16 0.0% 1.809 1.809 0.0% 2.045 2.045 0.0% Midland 1200 HK 3.36 Buy Buy 4.10 4.10 0.0% 0.335 0.335 0.0% 0.413 0.413 0.0% MTR Corporation 66 HK 30.90 Outperform Outperform 33.40 33.40 0.0% 1.582 1.582 0.0% 2.277 2.277 0.0% Orient Overseas International 316 HK 51.70 Buy Buy 73.00 73.00 0.0% 0.687 0.686 0.1% 1.008 0.999 1.0% Regal REIT 1881 HK 2.24 Outperform Outperform 2.60 2.60 0.0% 0.127 0.127 0.0% 0.145 0.145 0.0% SHK Properties 16 HK 106.30 Buy Buy 136.50 136.50 0.0% 9.315 9.315 0.0% 9.988 9.988 0.0% Sino Land 83 HK 12.66 Buy Buy 16.73 16.73 0.0% 1.012 1.012 0.0% 1.130 1.130 0.0% Soundwill 878 HK 19.88 Buy Buy 28.40 28.40 0.0% 2.145 4.394 (51.2%) 4.948 4.766 3.8% Sunlight REIT 435 HK 3.40 Buy Buy 4.00 4.00 0.0% 0.155 0.172 (9.6%) 0.183 0.183 0.0% The Link REIT 823 HK 42.50 Outperform Outperform 48.00 48.00 0.0% 1.466 1.466 0.0% 1.653 1.653 0.0% Wharf Holdings 4 HK 61.50 Buy Buy 72.40 72.40 0.0% 3.321 3.321 0.0% 3.737 3.737 0.0% Source: Daiwa forecasts; note: prices as of close on 19 March 2013 Other contributors: Maurine Wan (852) 2848 4451 [email protected] Karen Chan (852) 2848 4464 [email protected] Leon Qi (852) 2532 4381 [email protected] Daiwa Hong Kong Research Team - 2 - Hong Kong Strategy 22 March 2013 Contents Is Hong Kong Inc. ready to make the jump? ........................................................................... 4 1. Transport ............................................................................................................................. 10 2. Exchange and securities ...................................................................................................... 13 3. Retail property .................................................................................................................... 16 4. Office properties ................................................................................................................. 20 5. Residential properties ........................................................................................................ 26 6. Banks ................................................................................................................................... 31 7. Hotels ................................................................................................................................. 33 8. Shipping and ports .............................................................................................................. 35 Appendix I: The six investment themes ................................................................................ 36 Appendix II: Investment perspective on Hong Kong’s family-run property companies ...... 41 Company Section BOC Hong Kong ..................................................................................................................... 44 Cheung Kong ........................................................................................................................... 47 Fortune REIT ......................................................................................................................... 50 Hang Lung Properties ............................................................................................................. 53 Henderson Land .....................................................................................................................56 Hong Kong Exchanges & Clearing ..........................................................................................59 Hysan Development ............................................................................................................... 62 Midland ...................................................................................................................................65 MTR Corporation ................................................................................................................... 68 Orient Overseas International ................................................................................................ 71 Regal REIT .............................................................................................................................. 74 SHK Properties ......................................................................................................................