Wharf Holdings (4.HK) Attractive price for premier assets, and a solid re-rating in the making

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT. Global Equity Research Company Report 5 February 2010 (No. of pages: 32)Wharf Holdings (4 HK) Construction & real estate: Hong Kong 6-mth rating: 2 → 1Target price: HK$46.80 → HK$50.30(+7.5%)Share price: HK$37.00 (5 Feb)Jonas Kan, CFA(852) 2848 4439jonas.kan@hk.daiwacm.comAttractive price for premier assets, and a solid re-rating in the making Recent correction provides a good buying opportunity ƒ Wharf Holdings’s (Wharf) share price stood at HK$46.80 on 6 January and has fallen sharply in recent weeks. We think this has taken its valuation back to attractive territory, with a 46%discount to our estimate of its FY10 year-end NAV ofHK$68.90 (it has traded at an average NAV discount of 32% since 1991). We estimate that just Harbour City and Times Square are worth HK$41.30/share, which exceeds the current share price. Outstanding property assets, but discounted valuation ƒ Given the quality and outstanding performance of Harbour Cityand Times Square in recent years, we think Wharf’s NAVdiscount since 4Q97 has been quite high. While there were reasons for this, we think they have been removed, and believe a re-rating of the stock, driven by the increasing recognition of the outstanding quality of the Hong Kong assets and the company’simproving credentials in China property, is under way. Target price raised to HK$50.30 from HK$46.80 ƒ We expect Wharf’s valuation to catch up with those of the other leading property investors and to return to its levels prior to 1997. We have raised our six-month target price to HK$50.30, from HK$46.80, after revising down our target NAV discount to 27% (at the high end of its NAV discount range from 1991-3Q97) from 32% (its historical average since 1991). We also have upgraded our rating to 1 (Buy) from 2 (Outperform). Reuters code 0004.HK Market data HSI 19,665.08 Market cap (US$bn) 13.11 EV (US$bn; 09E) 15.07 3-mth avg daily T/O (US$m) 30.03 Shares outstanding (m) 2,754 Free float (%) 50.0 Major shareholder Wheelock and Company (50.0%) Exchange rate HK$/US$ 7.771 Performance (%)* 1M 3M 6M Absolute (20.2) (11.1) 0.4 Relative (9.6) (2.9) 4.6 Source: Daiwa Note: *Relative to HSI Investment indicators 2009E 2010E 2011E PER (x) 17.0 15.1 13.6 PCFR (x) 11.7 10.0 9.3 EV/EBITDA (x) 11.5 9.8 8.5 PBR (x) 1.0 0.9 0.9 Dividend yield (%) 2.2 2.3 2.3 ROE (%) 5.9 6.3 6.7 ROA (%) 3.6 4.0 4.4 Net debt equity (%) 20.2 16.9 12.4 Source: Daiwa forecasts Price and relative performance 10.0020.0030.0040.0050.0007/207/808/208/809/209/810/2(HK$)5081113144175Rel to HSISource: Bloomberg, Daiwa Income summary Revenue EBITDA Net profit EPS CFPS DPS Year to 31 Dec (HK$m) (%) (HK$m) (%) (HK$m) (%) (HK$) (%) (HK$) (HK$) 2007 16,208 21.3 10,638 37.5 5,892 37.5 2.317 32.3 3.862 0.800 2008 15,940 (1.7) 9,031 (15.1) 4,194 (28.8) 1.528 (34.1) 2.095 0.800 2009E 16,964 6.4 10,220 13.2 6,010 43.3 2.182 42.8 3.172 0.800 2010E 18,985 11.9 11,677 14.3 6,750 12.3 2.451 12.3 3.693 0.850 2011E 20,653 8.8 12,771 9.4 7,520 11.4 2.731 11.4 3.971 0.850 Source: Company, Daiwa forecasts Jonas Kan, CFA (852) 2848 4439 Wharf Holdings 2 Contents Premier Hong Kong commercial property assets provide a solid value anchor.............12 Offering solid and improving credentials and potential in the China property ..............23 Jonas Kan, CFA (852) 2848 4439 Wharf Holdings 3 The three most important charts in this report ... Wharf: historical price to current NAV (15.2)(21.3)(26.8)(37.4)(31.7)(41.4)(43.3)(50)(40)(30)(20)(10)0Upcycle1Q92-1Q94Downcycle2Q94-4Q95Upcycle1Q96-3Q97Downcycle4Q97-4Q03Upcycle1Q04-3Q08Downcycle4Q08-4Q09NowTrading at a lower NAV disc.Avg. 21.1% Higher NAV discount due to i-Cable start-up losses; rise in debt Higher NAV discount due to concerns over China landbanking and correction in rentsAvg. 34.6% Avg. 40.8% P/NAV(%) Source: Thomson Financial, Daiwa Price to NAV of Wharf and Hang Lung Properties (80%)(60%)(40%)(20%)0%20%Jan-91Jan-92Jan-93Jan-94Jan-95Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Wharf's P/NAVHang Lung's P/NAVWharf trades at a lower NAV disc. vs. HLPWharf trades at a notably higher NAV disc. vs. HLPP/NAV(%) Source: Thomson Financial, Daiwa Wharf: breakdown