Hong Kong Property：A race to capture the remaining demand

Deutsche Bank Markets Research Asia Hong Kong Property Property Industry Hong Kong Property Date 20 January 2017 Industry Update A race to capture the remaining demand Developers are desperate to launch projects in a more challenging market ________________________________________________________________________________________________________________ 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. Jason Ching, CFA Research Analyst (+852 ) 2203 6205 jason.ching@db.com Iris Poon Research Associate (+852) 2203 6182 iris.poon@db.com Foo Leung Research Associate (+852 ) 2203 6239 foo.leung@db.com Companies Featured SHK Properties Ltd (0016.HK),HKD105.00 Hold CK Property (1113.HK),HKD50.95 Buy Henderson Land Dev. Co. (0012.HK),HKD42.45 Buy New World Dev (0017.HK),HKD8.90 Buy Sino Land Co (0083.HK),HKD12.54 Hold Kerry Prop (0683.HK),HKD21.60 Buy Source: Deutsche Bank The second short-lived rebound in the current cyclical downturn has officially kick-started after three developers launched new projects in the first two weeks of the New Year. We see the rather aggressive launches as a sign developers are desperate to capture any pent-up demand in the market in a challenging operating environment with ample new supply in a rate hike cycle. In our view, the magnitude of this rebound may not be as strong, given it's only three months since the last rebound (rebounds are usually at least six months apart in previous cycles). Nevertheless, we expect the primary market dominance to continue on favorable payment terms and rebates offered. Up to 33,123 units available for sale in 2017 vs. actual sales of 16,562 in 2016 We estimate that there are a total of 129 new projects involving 24,490 units available for sale in 2017. Including leftover inventories (launched but unsold units) of 8,633 units, there are potentially 33,123 units available for sale in 2017, markedly higher than the actual primary volume of 16,562 achieved in 2016. In particular, SHKP has the highest number of units available for sale at 4,282 units or 17% of the total new supply in 2017, followed by Henderson Land with 3,550 units (14%) and CKP at 1,995 units (8%). By geography, Tsuen Wan and Kowloon City have the highest number of units for sale at 3,899 and 3,598 units (collectively 31% of total), respectively. Another 2,431 units pending launch; more projects pending presale consent On top of the three projects already launched, namely SHKP’s Grand Yoho II, COLI’s One Kai Tak II and NWD’s The Pavilia Hill, we expect an additional nine projects with 2,431 units (presale consent already obtained) pending immediate launch. On the other hand, there are a total of 31 projects involving some 12,948 units pending presale consent, markedly higher than the historical average of 9,702 units, according to the Lands Department. Meanwhile, after a more meaningful influx of Mainland developers since 2015, we expect the first batch of project launches to become more notable in 2H17. Short-lived rebounds typically last for 1-3 months and at least six months apart Referencing past cyclical downturns, it is not uncommon to see short-lived rebounds supported by the release of pent-up demand. In the cyclical downturn during 1998-2003, there were seven short-lived rebounds (typically lasting for 1-3 months) in primary sales volume where QoQ growth was above 30%. Correspondingly, CCL index was up by 2-12% over these short-lived rebounds. Typically, short-lived rebounds are at least six months apart, so as to accumulate enough pent-up demand for the next short-lived rebound. Look for better entry point in the sector as it approaches closer to “-1SD” In the cyclical downturn in 1998-2003, share price rallies typically lasted 6-8 months, with cumulative share price performance ranging from +48% to +68% over the period. Following the end of an eight-month sector rally during Mar-Oct-16 and sell-down after the government introduced a new administrative tightening measure in Nov-16, the sector is now trading just below the average discount to NAV. In our view, a better entry point to the sector is when discounts to NAV approach “-1SD”. We maintain our preference for developers over landlords, with CK Property our top pick. For our sector view, please refer to our FITT report “The game has changed”. D