Company Profile

Sun Hung Kai Properties is one of the major property developersin HK. Its core business is development of properties for sale andinvestment. As of Jun 13, the Group’s land bank reached 46.6 mnsq ft in HK, which included 28.6 mn sq ft of completed investmentproperties. In addition, the Group also operates in hotels, propertymanagement, construction businesses, etc. The Group holdsequity interests in the listed companies such as SmarTone(315.HK), Transport Intl (62.HK), Sunevision (8008.HK), Wing TaiProperties (369.HK).

Investment rationales

Primary residential market picked up, but investor sentimentstill negative: Primary residential market picked up, thetransaction value in December last year recorded HK$19.75 bn, up19.9% MoM, and 156.9% more than 12-month average, but itdidn’t stimulate property developer’s share prices up obviously. Webelieve this is because HK property developers have launcheddiscounts and stamp duty rebates to attract buyers, whichreflecting the declining bargaining power of property developers.Investors think the price-cut strategy brought a greater downsiderisk for HK flat prices. SHK’s current price represents NAVdiscount of more than 40%, which we think enough to reflect therelated risks. But in view of weak investor sentiment and lack ofcatalysts for industry in near-term, we don’t expect a significantNAV discount narrowing for SHK.

Century Gateway Phase 2 well received by user demand: Arecent major sale of SHK is Century Gateway Phase 2 located inTuen Mun. After taking discounts into account, the ASP was belowHK$10,000 psf. The project, launched in Dec 13, received warmresponse and sold about 880 units, representing 96% of salableunits. It reflected that buyers still welcome the mass-end projects.We think domestic user demand is still strong, but many potentialbuyers are staying on the sidelines as HK flat prices have recordeda considerable increase. Some potential buyers turned soft ondeveloper’s price-cut strategy. Although HK flat prices surged onlow interest rate environment and limited supply, affordability ratiois over 50% now. But we estimate that the flat prices correctionrange will be about 20-25% only based on flat owners’ strongholding power (>60% owners have paid off the mortgage loans),developers’ low gearing ratio and the supply is hard to increasesignificantly in short-term. We remain optimistic on projectstargeting end-users, but a bit bearish on luxury projects.

Market demand of luxury projects remains to be seen:Following Century Gateway Phase 2, SHK is expected to relaunchRiva, located in Yuen Long. The mid-end project has 780units, including 732 apartment units and 48 garden houses. TheGroup sold 2 garden houses on Feb 13, we expect it to attract upgradersfrom the same district. But the entry price for the gardenhouses is high, we expect it takes longer time to be absorbed bythe market as HK government introduced BSD to dampen themainland buyers demand.

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