Sun Hung Kai Properties：Issue bonus warrants to raise HK$22bn for land banking

>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch 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. Refer to important disclosures on page 22 to 25. Analyst Certification on Page 20. Price Objective Basis/Risk on page 20. Link to Definitions on page 20.11364789 Sun Hung Kai Properties Price Objective Change BUY Issue bonus warrants to raise HK$22bn for land banking Equity | Hong Kong | Real Estate/Property 01 March 2014 Raymond Ngai, CFA >> +852 2536 3987 Research Analyst Merrill Lynch (Hong Kong) raymond.ngai@baml.com Ronald Leung, CFA >> +852 2536 3728 Research Analyst Merrill Lynch (Hong Kong) ronald.leung@baml.com  Stock Data Price (Common / ADR) HK$99.30 / US$12.78 Price Objective HK$106.00 / US$13.60 Date Established 1-Mar-2014 / 1-Mar-2014 Investment Opinion B-1-7 / B-1-7 Volatility Risk MEDIUM / MEDIUM 52-Week Range HK$92.10-HK$120.90 Market Value (mn) US$34,608 Market Value (mn) HK$268,561 Shares Outstanding (mn) 2,704.5 / 2,704.5 Average Daily Volume 3,951,156 BofAML Ticker / Exchange SUHJF / HKG BofAML Ticker / Exchange SUHJY / OTU Bloomberg / Reuters 16 HK / 0016.HK ROE (2014E) 5.4% Net Dbt to Eqty (Jun-2013A) 12.3% Est. 5-Yr EPS / DPS Growth 1.4% / 0% Free Float 57.4%  Key Changes (HK$) Previous Current Price Obj. 108.00 106.00 2014E EPS 7.57 7.99 2015E EPS 6.82 7.15 2016E EPS 6.96 7.35 2014E EBITDA (m) 25,643.7 27,432.4 2015E EBITDA (m) 23,418.0 24,376.4 2016E EBITDA (m) 23,505.3 24,752.6  Genuine need to raise capital to buy land SHKP proposed to issue 1 warrant for every 12 shares at a subscription price of HK$98.6 to raise HK$22bn if all warrants are exercised by April 2016. This represents 8% of existing share capital. The warrants are in the money and are worth HK$8.8/warrant share, we estimate. Last day of dealing on a cum-entitlement basis is 7 April 2014. SHKP’s net gearing is close to its tolerance level of 20% as of Jan 2014 after paying the land premium for the Xujiahui site in Shanghai (HK$27.6bn). Based on the HK SAR Government’s latest land sale schedule, there will have five big sites worth around HK$5-10bn each for public sale. SHKP may be interested in the sites in Kwun Tong and Tai Wai where the group has vested interests. Why bonus warrants? There is no immediate dilution and rights issue normally needs a big discount to share price, in our view.. It gives flexibility for Kwok family on the timing to inject capital if and when SHKP wins any of these big sites. According to the offering, Kwok family can choose to early exercise their share to inject HK$9.5bn to maintain the group’s net gearing at below 20%. The full conversion can reduce SHKP’s net gearing to 12% and dilution is mild at 2.6% for BV and 3.5% for NAV. To build a strong investment property portfolio SHKP has executed well on its investment property portfolio with 16% YoY rise in gross rental income to HK$9.1bn in 1H FY14. It achieved CAGR of 11% in rental income in the past 10 years and has a strong pipeline of new additions from HK and China. The Xujiahui project and two shopping mall projects in Guangzhou coupled with three shopping centers under construction in HK will further strengthen the group’s recurrent rental income. We maintain Buy but reduce PO slightly by 2% to HK$106 to reflect the fully-diluted NAV.  Estimates (Jun) (HK$) 2012A 2013A 2014E 2015E 2016E Net Income (Adjusted - mn) 21,678 18,619 21,606 19,336 19,870 EPS 8.37 7.05 7.99 7.15 7.35 EPS Change (YoY) -4.8% -15.7% 13.3% -10.5% 2.8% Dividend / Share 3.35 3.35 3.35 3.35 3.35 Book value / Share 129.75 144.49 151.09 161.52 176.61 NAV / Share NA NA 176.68 NA NA Valuation (Jun) 2012A 2013A 2014E 2015E 2016E P/E 11.9x 14.1x 12.4x 13.9x 13.5x Dividend Yield 3.4% 3.4% 3.4% 3.4% 3.4% Price/Book value 0.8x 0.7x 0.7x 0.6x 0.6x Discount to NAV NA NA -43.8% NA NA * For full definitions of iQmethod SM measures, see page 21. ky.seong@samsung.com FIRST LAST 03/02/14 03:19:13 PM Samsung Information Systems of Sun Hung Kai Properties 01 March 2014 2 iQprofile SM Sun Hung Kai Properties Key Income Statement Data (Jun) 2012A 2013A 2014E 2015E 2016E (HK$ Millions) Development Sales 35,922 16,427 30,368 26,897 39,424 Rental Income 11,421 12,750 14,957 15,659 16,287 Total Revenue 68,278 53,659 69,997 67,907 81,548 Operating Profit 25,662 20,871 25,704 22,648 23,025 Associates & JCE NA NA NA NA NA Net Income Reported 21,678 18,619 21,606 19,336