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 <GO> Moderate correction in residential prices of 10%. Hong Kong SAR home Jevon Jim AC prices are likely to be affected by negative sentiment from a potential rise in the (852) 2800-8538 unemployment rate; however, income growth and employment have not been [email protected] key drivers for residential prices over the past ten years. The key driver was Bloomberg JPMA JJIM <GO> liquidity, which has seen about a HK$40bn net increase in the last 12 months. Ryan Li, CFA We believe a short-term correction of 10% is likely given concerns on the local (852) 2800-8529 economy, yet we expect sentiment to improve after 1Q2020 with more [email protected] substantial primary launches in the market. Developers are trading at -1.5 to -2 Karl Chan S.D. below mean and the moderate downside in prices is more than priced in. (852) 2800-8513 We are OW CK Asset, Henderson Land and NWD, while the rest of the [email protected] developers are rated Neutral. Avery Chan (852) 2800-8659 China PMI more important than falling office rents. While we are forecasting [email protected] Central and non-core office rents to fall by 15% and 5-10% in 2020, respectively, J.P. Morgan Securities (Asia Pacific) Limited these are all lagging indicators. Office landlords’ share prices trade on leasing activities; the leading indicator of change in the intensity of the leasing activities 2019 share price performance is China PMI, which has started its rebound. We upgrade both Hongkong Land and Swire Prop to OW, from N and UW, respectively, given their previous Wheelock underperformance and sensitivity to a potential leasing recovery in 2H2020. SHKP NWD Prefer China to HK retail landlords. Given policy support for China’s CK Asset domestic consumption, we believe growth in the China consumption sector will Henderson Developers be carried into 2020. China shopping mall landlords have been doing well on Wharf their tenant sales and we expect positive rental reversion in 2020. Both Hang Kerry Lung Properties and Wharf Holdings are rated OW. However, we believe Sino this will be at the expense of Hong Kong retail, which has been relying heavily HLP on Mainland tourist spending. Even without any disruption from social events, Wharf REIC downward pressure on rental reversion remains, in our view. Maintain UW on Swire Prop Landlords Wharf REIC and Hysan. Staple retail landlords are a fringe segment that we HK Land like. We rate Link REIT and Fortune REIT (previously N) as OW. Hysan Link Which companies are doing more for Hong Kong? This is going to be Fortune REITs increasingly the key question to ask. The massive asset inflation over the last ten Champion years has caused property companies’ pool of target customers to shrink due to HSI affordability issues. The question is how to make money when your customers are -20% -10% 0% 10% 20% getting poorer, and property companies’ efforts to rebalance the different Note: Adjusted for dividends and bonus shares stakeholders’ interests will likely be increasingly appreciated to drive sustainable Source: Bloomberg returns in the long term. So far, we have seen Henderson Land, NWD and Wheelock take initial steps in this direction, with more expected to come. 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.