Losing its shine–downgrading to Hold

Deutsche Bank Markets Research Rating Hold Asia Hong Kong Property Company SHK Properties Ltd Date 14 September 2016 Recommendation Change Losing its shine – downgrading to Hold Reuters Bloomberg Exchange Ticker 0016.HK 16 HK HSI 0016 ADR Ticker ISIN SUHJY US86676H3021 Forecasts And Ratios Year End Jun 30 2015A 2016A 2017E 2018E 2019E Sales (HKDm) 66,783.0 91,184.0 89,282.5 104,427.5 103,905.6 EBITDA (HKDm) 24,750.0 30,806.0 25,183.0 24,294.7 22,978.0 Reported NPAT (HKDm) 31,082.0 32,666.0 24,168.6 22,785.2 21,396.4 DB EPS FD (HKD) 7.07 8.37 8.34 7.86 14.77 PER (x) 16.9 11.7 14.0 14.8 7.9 Yield (net) (%) 2.8 3.9 3.3 3.3 6.6 Source: Deutsche Bank estimates, company data D/g to Hold as valuation is at historical average NAV discount in downturns ________________________________________________________________________________________________________________ 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) 057/04/2016. Price at 13 Sep 2016 (HKD) 116.40 Price target - 12mth (HKD) 113.40 52-week range (HKD) 120.90 - 80.35 HANG SENG INDEX 23,291 Jason Ching, CFA Research Analyst (+852 ) 2203 6205 jason.ching@db.com Foo Leung Research Associate (+852 ) 2203 6239 foo.leung@db.com Iris Poon Research Associate (+852) 2203 6182 iris.poon@db.com Key changes Rating Buy to Hold ↓ Price target 99.20 to 113.40 ↑ 14.3% Sales (FYE) 88,553 to 89,283 ↑ 0.8% Op prof margin (FYE) 18.2 to 28.2 ↑ 55.2% Net profit (FYE) 14,207.5 to 24,168.6 ↑ 70.1% Source: Deutsche Bank Price/price relative 75901051201351509/143/159/153/16SHK Properties LtdHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 4.6 28.8 12.9 HANG SENG INDEX 2.3 13.5 8.3 Source: Deutsche Bank We downgrade SHKP to Hold (from Buy) following a 44% share price rally in the past 2.5 months. At current levels, SHKP is trading mostly at the historical average NAV discount seen in previous downturns and close to the valuation peak seen in short-lived rebounds during downturns, thus we believe further upside is limited. On the other hand, while we appreciate SHKP’s strong sales performance YTD, we see there is less need for a sizeable landbank as the HK residential market enters an inventory accumulation cycle. Moreover, we remain cautious on its relatively high exposure to the China retail sector where growth is slowing on a softening economy/increasing threat from e-commerce. Hong Kong residential market enters an inventory accumulation cycle Residential prices in HK have been well supported by supply shortage in the past 10 years where completions (averaging 11,124/year) were markedly below the respective demand, but we believe this favorable market condition is changing with completions expected to reach a 10-year high in 2016 at 17,321 units (+54% YoY). In our view, with the government having accelerated the land development program since 2013; we should see better equilibrium in the supply/demand dynamics ahead. In such an environment, there is less need to build up large landbank as price appreciation is likely to be capped by the ample supply ahead. Exposure to China retail grew to 11% of GAV; up from 6% five years ago On the back of aggressive expansion in China over the past five years, SHKP’s China portfolio now accounts for 22% of its gross assets, of which half is retail (up from 6% five years ago). While we do not have much doubt about SHKP’s execution capability, given its strong track record as one of the best retail mall operators, we remain cautious on the macro environment where retail sales growth in China is slowing down on the back of a softening economy and also given the increasing threat from e-commerce. Target price based on 35% discount to our revised NAV of HK$174.4/share We base our HK$113.4 target price on a 35% discount (formerly 25%) to our NAV estimate of HK$174.4/share, which implies a 2016E PE of 14x. Our revised target discount is larger than the peer average (at 30%) on its relatively high exposure to the China retail sector where growth is slowing down on a softening economy and increasing threat from e-commerce. Key risks: external economic shocks, liquidity outflow, rate hikes and government measures. Distributed on: 13/09/2016 21:30:00 GMT 14 September 2016 Property SHK Properties Ltd Page 2 Deutsche Bank AG/Hong Kong Model updated:12 September 2016 Running the numbers Asia Hong Kong Property SHK Properties Ltd Reuters: 0016.HK Bloomberg: 16 HK Hold Price