Fundamentals continue to deteriorate; valuations far from trough; Sell

Deutsche Bank Markets Research Rating Sell Asia Hong Kong Property Company Great Eagle Hldgs Date 4 February 2016 Forecast Change Fundamentals continue to deteriorate; valuations far from trough; Sell Reuters Bloomberg Exchange Ticker 0041.HK 41 HK HKG 0041 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (HKDm) 7,301.0 8,127.4 7,353.3 6,946.9 6,662.3 EBITDA (HKDm) 3,250.5 3,488.4 3,294.4 3,076.1 2,938.3 Reported NPAT (HKDm) 2,399.5 2,115.1 1,441.2 1,210.2 1,023.9 DB EPS FD (HKD) 2.64 3.00 2.25 1.89 1.60 PER (x) 11.1 9.1 9.5 11.3 13.3 Yield (net) (%) 7.4 2.7 2.7 2.2 1.9 Source: Deutsche Bank estimates, company data Reiterate Sell on soft fundamentals; valuations still far from historical trough ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 3 Feb 2016 (HKD) 21.35 Price target - 12mth (HKD) 16.90 52-week range (HKD) 31.00 - 21.35 HANG SENG INDEX 18,992 Jason Ching, CFA Research Analyst (+852) 2203 6205 jason.ching@db.com Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Key changes Price target 19.10 to 16.90 ↓ -11.5% Sales (FYE) 7,573 to 7,353 ↓ -2.9% Op prof margin (FYE) 41.6 to 38.7 ↓ -7.2% Net profit (FYE) 1,551.9 to 1,441.2 ↓ -7.1% Source: Deutsche Bank Price/price relative 20242832362/148/142/158/15Great Eagle HldgsHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -15.6 -16.3 -18.7 HANG SENG INDEX -13.3 -15.8 -22.7 Source: Deutsche Bank We reaffirm Sell on Great Eagle (GE) with a target price of HK$16.9. A further economic slowdown has caused continued deterioration in GE’s fundamentals. In particular, marked declines in retail sales and visitor arrivals since early-2015 have adversely impacted its retail and hotel portfolios via contributions from Champion REIT and Langham Hospitality Investments. While performance in the Hong Kong office market is resilient so far, we expect more challenges to emerge, which would translate into lower contributions from Champion REIT. Current valuation is high with the discount to NAV still at +1SD while P/E and dividend yield are merely close to the historical average. Current valuation high; still trading far from historical trough levels GE has historically traded at an average discount of 45% to NAV (between the peak discount of 15% in 2006 to the trough discount of 85% in 2008), P/E of 12x (peaked at 31x in 2005 and troughed at 3x in 2011) and P/B of 0.4x (peaked at 1x in 2007 and troughed at 0.2x in 2008). Despite falling 15% in the past month (vs. -11% HSI Index), it still trades at a mere 30% discount to NAV, 9.5x P/E and 0.2x P/B with a 2.7% potential dividend yield. Specifically, with the exception of P/B, all other valuation metrics remain far from historical trough levels. Deterioration in the Hong Kong economy accelerated; more downside ahead The pace of deterioration in the Hong Kong economy has quickened since August 2015, with declines in retail sales and visitor arrivals accelerating. We believe we are just at the beginning of a multi-year structural de-rating, where falling tourist arrivals, stretched financial position of local households and potential negative wealth impact associated with the recent stock market volatility would put further downward pressure on retail sales/tourism and ultimately drag down retail rents and hotel occupancy. On the other hand, MNC downsizing, a potential wave of small companies shutting down and a reverse in the current limited supply/low vacancy situation upon the upcoming supply peak are likely triggers for a sooner-than-expected turning point in the Hong Kong office market, in our view. Target price based on a 45% discount to our NAV estimate of HK$30.7/share Our target price is based on a 45% discount to our revised NAV estimate of HK$30.7/share, implying a 2015E PER of 8x. We adopt NAV as our primary valuation metric, in line with peers under our coverage. Our target discount is in line with the long-term historical average, which we believe is appropriate. Risks: Asset disposal at low cap rates and stronger-than-expected leasing performances. 4 February 2016 Property Great Eagle Hldgs Page 2 Deutsche Bank AG/Hong Kong Model updated:03 February 2016 Running the numbers Asia Hong Kong Property Grea