China/Hong Kong Industry Focus: HK Property Sector

VICKERS SECURITIESed-JS & CK / sa- AH 14 July 2016DBS Group Research . Equity Steady for growth  Residential price correction is only halfway through  Chinese enterprises are searching for quality offices; retail market yet to hit bottom  Office landlords are attractively valued; REITs to sustain outperformance in a volatile market  Prefer Cheung Kong Property, Sun Hung Kai Properties (SHKP), Swire Properties and Fortune REIT Market view. Despite recent signs of stabilisation, the correction in home prices is just halfway through in view of deteriorating local economic fundamentals. Sustained office leasing demand from Chinese firms coupled with tight vacancy rates and supply, should enable Central to outperform other submarkets. At the same time, Chinese SOEs are on a buying spree for quality office assets. In addition to weak inbound tourism, negative wealth effect from residential market correction and volatile financial markets are weighing on discretionary spending among locals. Hence, the retail scene should remain challenging for the rest of the year. Stock recommednation. Though not as compelling as before, developers’ valuations are still inexpensive even after allowing for further correction in home prices. We like SHKP for its strong execution capability, and Cheung Kong Property for its enviable financial strength. Office landlords, Hongkong Land and Swire Properties, are attractively valued. Despite the sector’s strong rally, REITs are likely to continue to outperform in a volatile market. HSI: 20,564 ANALYST Jeff YAU CFA +852 2820 4912 jeff_yau@hk.dbsvickers.com Andrew Robert Lam andrewr_lam@hk.dbsvickers.com Recommendation and valuation CodePriceMkt12-m Recom8-J ulCap targetHK$ HK$bnHK$Property Dev elopersCheung Kong Property1113 HK49.2518956.90BuyHenderson Land 12 HK43.0515747.45BuyK Wah Int'l173 HK3.67104.17BuyKerry Properties 683 HK19.202824.55BuyLai Sun Dev488 HK0.12730.148BuyMTR Corp 66 HK39.5023239.25HoldNew World Dev17 HK7.83749.60BuySino Land 83 HK12.827914.10BuySHKP 16 HK97.70283117.60BuyTai Cheung88 HK6.3147.52BuyWheelock & Co.20 HK36.807539.20BuyWing Tai Properties369 HK4.4265.43BuyProperty Inv estorsHang Lung Properties 101 HK15.507015.40HoldHongkong Land @HKL SP6.10147.87BuyHy san Dev 14 HK34.103635.50HoldSwire Properties 1972 HK21.0012326.45BuyWharf 4 HK46.7014246.55HoldDiv ersified PropertiesF ar East Consortium35 HK2.6963.14BuyGreat Eagle 41 HK31.602130.45HoldREITsChampion REIT2778 HK4.45264.76BuyF ortune REIT778 HK9.561810.22BuyLink REIT823 HK53.7012057.00BuyProsperity REIT808 HK3.2453.39BuySunlight REIT435 HK4.5674.80Buy@ denominated in USD Source: Thomson Reuters, DBS Vickers China / Hong Kong Industry Focus HK Property Sector Refer to important disclosures at the end of this report China / Hong Kong Industry Focus HK Property Sector VICKERS SECURITIES Page 2 Table of Contents Investment summary 3 Residential 4 Office 15 Retail 21 Property developers 27 Property investors 36 REITs 41 Diversified properties 46 Appendix: Asset breakdown 47 Appendix: NAV sensitivities 49 Appendix: Share buyback 50 Stock Profiles 52 Cheung Kong Property (1113 HK) 52 Henderson Land (12 HK) 54 K Wah Int'l (173 HK) 56 Kerry Properties (683 HK) 58 Lai Sun Dev (488 HK) 60 MTR Corp (66 HK) 62 New World Dev (17 HK) 64 Sino Land (83 HK) 66 SHKP (16 HK) 68 Tai Cheung (88 HK) 70 Wheelock & Co. (20 HK) 72 Wing Tai Properties (369 HK) 74 Hang Lung Properties (101 HK) 76 Hongkong Land @ (HKL SP) 78 Hysan Dev (14 HK) 80 Swire Properties (1972 HK) 82 Wharf (4 HK) 84 Far East Consortium (35 HK) 86 Great Eagle (41 HK) 88 Champion REIT (2778 HK) 90 Fortune REIT (778 HK) 92 Link REIT (823 HK) 94 Prosperity REIT (808 HK) 96 Sunlight REIT (435 HK) 98 Note: Prices used as of 8 July 2016 Covered photo (from left): ALASSIO (Swire Properties); 700 Nathan Road (Link REIT); Dah Sing Financial Centre (China Everbright Holdings) China / Hong Kong Industry Focus HK Property Sector VICKERS SECURITIES Page 3 Investment summary Residential New project launches received mixed market responses after developers lowered prices to spur sales. Mass projects are generally selling better. Developments targeting upgraders saw relatively slower take-up rates due to the quiet secondary market and tight mortgage lending rules which have made it difficult for people to upgrade. The residential price correction has showed signs of stablising since Mar-16. But local economic growth has been losing steam which should dampen buying interest. “Brexit” may cloud global economic growth prospects and increase the volatility of world financial markets. This could in turn add uncertainty to local economic growth and dent the housing demand. On the other hand, the US Fed is likely to take a more gradual approach in raising interest rates which would in turn ease