投资金融之InvestmentProperty041206新鸿基金融集团.docx

Equity Research - Hong Kong Company NoteInvestment Property SectorStock picks amid continual market recovery6 Dec 2004Hang Lung Properties (101.HK)Hysan Development (14.HK)Great Eagle Holdings (41.HK)Swire Pacific A (19.HK)Wharf Holdings (4.HK)Michael MokBuyBuyHoldBuyHold(852) 2822 5082Investment HighlightsWith improved economic fundamentals such as GDP growth, strong business sentiment andimproved corporate earnings, demand for quality office space is on the rise.Increased office take-up in prime areas has been driven by tenant relocation as well as businessexpansion, especially for Central District. We believe Central will continue to take the lead inrental and capital value appreciation next year.Office rent in fringe areas will lag those in Central, but will benefit from the spillover as mediumterm supply remains very tight. Vacancy rates are expected to drop further across Hong Kong.We have revised our rental reversion assumptions to 20% and 10% for Central, and 15% and 10%for other areas in FY05 and FY06, respectively.Amid a resilient retail market with improving domestic consumption and continual increase intourist spending, retail rent is expected to rise by 15% and 10% in core business areas for FY05and FY06, respectively.In our model, we have also revised down the retail rental yield by 1% to narrow the gap betweenoffice and retail rental yields, based on the historical average gap of 2%.Stock price performance is more related to capital values rather than rental levels. The lowestyields that we see currently is a result of rapid surge in capital values post-SARS while rent is notcatching up. In the long term, we believe rent rise can be more sustainable than capital valueappreciation.As capital values have been rising rapidly during this year while share prices lag behind, webelieve share prices would have a 20-25% upside should they catch up with the rise.We recommend BUY on Hang Lung Properties, Hysan Development, and Swire Pacific A andHOLD for Great Eagle Holdings and Wharf Holdings.Investment Property Sector 6 Dec 20041Improving economy has led to a robust office market in 2004Hong Kongs office market began to rebound during the last quarter of 2003. Amid an uptrendin GDP growth, strong business sentiment and improved corporate earnings, overall marketrent for grade A offices has already increased by about 25% during the first nine months of thisyear. Financial and trading sectors take the lead riding on the trend of a broad property marketrecovery in Hong Kong. Transaction prices of grade A office buildings recorded a surge of over50% thus far.Grade A office rents are trending upwards140120100806040200Jan 01Jul 01Jan 02Jul 02Jan 03Jul 03Jan 04Jul 04Sheung Wan/CentralWanchai/Causeway BayTSTSource: Rating and Valuation DepartmentStrong rental demand amid solid economic fundamentalsThe pace of recovery of office rentals, however, varies from district to district. To a largedegree, increased office take-up has been mainly driven by tenant relocation upgrading to morepremier space in view of robust earnings outlook. Also driven by business expansion, demandis likely to increase over the next couple of years with the coming of CEPA II / III and therelaxation of enterprises investment policy by the mainland authorities leading to an influx ofmainland Chinese companies into Hong Kong to set up offices. For the first time in two years,vacancy of grade-A office in Central has dropped to single digit. Other areas, including IslandEast, are also seeing a decrease in office vacancy levels. As a good gauge of current markettrends, the rapid take-up of IFC Two, in which space is fully committed despite rents escalatingto the level of HK$50/psf, paint a rosy picture for grade A office market. We expect the overallvacancy rate will continue to edge down to below 10% in 2005 from the current 12%.Investment Property Sector 6 Dec 20042Grade A office vacancy rates steadily trending downwards(%)2520151050Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Q3 04 Q4 04Central/fringeWanchai/Causeway BayIsland ETSTSource: DTZ ResearchRent in fringe areas lags behind, but is increasingThe spillover from Central is already taking effect in the Wanchai-Causeway Bay area.Landlords with space in fringe areas, however, may have to wait longer to see a recovery intheir office rental income. From the graph above, office rent in Island East was essentially flateven after a recovery from SARS in 2003 while Central saw the highest rent increase of 35%.We believe a drop in vacancy rates will eventually lead to an increase in asking rent. Thereforeit will only be a matter of time for rent in Island East to start increasing along with the rest ofthe market as vacancy rate there are expected to drop further with new tenants gradually takingup the space left vacant by the upgraders. However, we believe that office landlords areunlikely to experience positive rental reversions before the second half of 2005, while thosewho own assets in prime areas will experience positive rental reversions earlier.Investment Property Sector 6 Dec 20043Grade A office rent rebounds except for Island East(HK$/sq ft)4035302520151050Q1 02Q3 02Q1 03Q3 03Q1 04Q3 04Central/fringeWanchai/Causeway BayIsland ETSTSource: DTZ ResearchSupply shortage is on the other side of the equationAn absence of meaningful new grade-A office supply should assist further recovery in thesector, especially on Hong Kong Island. We believe the office landlords have regainedbargaining power amid increasing office leasing activities. In view of the current marketconditions, we have revised our rent reversion assumptions to 20% and 10% (previous: 15%and 10%) for FY05 and FY06, respectively for Central, and 15% and 10% (previous 10% and10%) for other areas.New office supply, 2004-2007District2004AdmiraltyPokfulamMongkokKwun TongKowloon Bay2005CentralCentral2006CentralCentral2007Source: DTZ ResearchDevelopmentThree Pacific PlaceCyberport Phase 3Langham PlaceMillennium City P5Enterprise Square 3AIG TowerLiu Chong Hing Bank (redevelopment)Landmark East92-94 Queens Road CentralTotal GFA (000)63241071071055330154102101821424630Investment Property Sector 6 Dec 20044Office yields cannot be compressed furtherWhile we are positive towards the office rental market, we also note that grade A office yieldsin core business districts, currently at 2.5%-4%, are at the lowest level in more than ten years.This reflects an expectation of huge appreciation potential for prime properties. Yet we believeas rent catches up next year, the capitalization rate should return to a more sustainable level.We keep the yield at 3-3.5% (unchanged) for Central grade-A properties and 4-4.5% for otherfringe areas. However, following the sale of PCCW Tower in Quarry Bay recently, we havepromptly revised the yield for Taikoo Place downwards to 4.5% from 6% to reflect a higher persquare feet value.Retail rental market remains resilientNegative rental reversion has been less pronounced in the retail rental market than the officesector. Retail sales started to rebound after the effects of SARS had subsided in the secondquarter last year. Some property investing companies have already been experiencing positiveretail rental reversions in the second half of this year, which helped partly offset decliningoffice rentals. Last week, Hong Kong government announced a yoy change in retail sales forSeptember at 7.8%, even with the low base SARS effect fading away. Yoy change in the retailrental index, which bears a close relationship with retail sales as shown below, also increasedby 6.6% over last year.(%)Retail rents correlates strongly with retail sales3020100(10)(20)Source: Rating and Valuation Department, Census and Statistics DepartmentInvestment Property Sector 6 Dec 20045Jan 01Jan 02Jan 03Jan 04Apr 01Apr 02Apr 03Apr 04Jul 01Jul 02Jul 03Oct 01Oct 02Oct 03Jul 04Oct 04Retail consumption expected to remain strongWe believe domestic consumption remains strong and sustainable as unemployment rate isexpected to improve with potential rise in wages. As service industries, opposed tomanufacturing, become an increasingly important part of Hong Kongs economy, retailconsumption as well as a continual growth in visitor arrivals will likely support the retailproperty market because the Chinese government may allow residents from more provinces tovisit Hong Kong under the Individual Travel Scheme. Just as grade-A office properties inCentral will outperform, by the same analogy, we think that rents in prime shopping areas suchas Causeway Bay and Tsim Sha Tsui will rise more than other areas.Retail property yield to fallAs most Hong Kong-listed property companies invest in retail malls in traditional shoppinghubs, we have revised our assumed rental rate rises to 15% and 10% (previous: 10% and 10%)for FY05 and FY06, respectively. In contrast to office properties for which we have kept ourcapitalization rates unchanged (except Island East), we have adjusted our required retail rentalyield downwards by 1%, based on the average historic yield spread between retail and officesector of about 2%. Currently the retail yield is around 6% and the spread is 2.5%.(%)Grade A office yield spread over retail432101994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1H04Source: Jones Lang LaSalleInvestment Property Sector 6 Dec 20046Stock prices rise on surge in capital valuesIn order to identify the primary factor that affects stock prices of property investing companies,we have created a SHK property investor stock price index in which four companies1, all areheavily involved in prime commercial properties, are included using a market-capitalizationweighted method. This index line is then plotted against the rental and capital value indices foroffice and retail properties, respectively. From the graphs below we observe that share price ismore correlated with capital value than rent, especially after mid-2003. This phenomenoncoincides with the uptrend in share prices of such property stocks due to a rapid revaluation ofcommercial buildings after SARS. We also argue that the low rental yields that we are currentlyexperiencing is due to the fact that rental levels are not catching up with capital values. In ourview, rent increase can be more sustainable in the long term than capital value appreciation.Stock price correlates strongly with capital values605040302014012010080604020Jan 01Jul 01Jan 02Jul 02Jan 03Jul 03Jan 04Jul 04Share price index (LHS)Office price index (RHS)Retail price index (RHS)Source: Census and Statistics Department, Bloomberg and SHK EstimateStock price shows little correlation with rent6050403020100140120100806040Jan 01Jul 01Jan 02Jul 02Jan 03Jul 03Jan 04Jul 04Share price index (LHS)Office rental index (RHS)Retail rental index (RHS)Source: Rating and Valuation Department, Bloomberg and SHK EstimateNote 1.Hang Lung Properties, Great Eagle Holdings, Hysan Development and Chinese EstatesInvestment Property Sector 6 Dec 20047From the graph below showing the share price index against the office and retail price index,respectively, we observed that during the second half of 2003, share prices are running ahead ofcapital values which confirmed the expectations of an improving property market. Yet capitalvalues catches up quickly due to a rapid revaluation of assets during this year. Assuming thisratio will once again peak at the mid-60s, share prices, particularly of those with prime officebuildings, should be running ahead of capital values with an approximately 20-25% upside.(X)7060504030Share prices are still low compared to capital valuesJan 01Jul 01Jan 02Jul 02Jan 03Jul 03Jan 04Jul 04Share price index/office price indexShare price index/retail price indexSource: Rating and Valuation Department, Bloomberg and SHK EstimateInvestment Property Sector 6 Dec 20048Hang Lung Properties (101.HK, HK$12.05, BUY)More upside from its luxury residential projectYear ended JunTurnover (HK$m)Operating profit (HK$m)Net profit (HK$m)EPS (HK$)EPS Growth (%)PER (X)DPS (HK$)Dividend Yield (%)2004A4,533.42,675.32,065.00.685904.12005F7,684.54,496.73,422.61.08258.011.10.5144.32006F10,024.35,519.74,284.81.290384.5Hang Lung Properties (HLP) is an all-round performer with steady income arising from itsretail and office property portfolio, as well as positive upside from its luxury residential project,The Harbourside. Its profit margin from property sales is the highest among developers ataround 40% thanks to its strategy not acquiring land at high cost and manage property salesover a period of time to gain the best possible prices. Following the successful sale of 10luxury apartments recently, we believe an average price of HK$9,700 (previous: HK$9400) persquare foot is achievable for the coming year.The recent placement of 370m shares will not have negative impact on the Company in thelong term, in our view. It is simply building up its cash reserve at good timing when sentimentis high to seek potential opportunities to buy land. Therefore, contrary to the markets concernabout its depletion of land reserve for further development after existing projects are sold, webelieve HLP can easily replenish its land bank in the foreseeable future as government maypump up its land supply.Given the positive outlook for the Company, we continue to like the stock given the upsidepotential of 19% based on a target price of HK$14.35, using a 10% discount to its appraisedNAV of HK$15.96. Maintain BUY.Investment Property Sector 6 Dec 20049Hysan Development (14.HK, HK$16.00, BUY)A good balance between prime retail and office propertiesYear ended DecTurnover (HK$m)Operating profit (HK$m)Net profit (HK$m)EPS (HK$)EPS Growth (%)PER (X)DPS (HK$)Dividend Yield (%)2003A1,139.3835.2545.40.531.930.20.372.32004F1,190.5869.4597.20.5819.627.50.432.72005F1,312.61,032.0633.90.6155.926.00.452.8Hysan is the biggest landlord in Causeway Bay. With around 40% of its NAV derived fromretail properties, positive reversion in retail rent manage to offset partially a drop in office rent.Amid a resilient retail market, its rental income is expected to improve steadily. Following therenovation of Lee Gardens Two and the luxury residential rental project, Bamboo Grove, rentalincome has increased by over 20%. A positive for the Company is the government proposal torezone Kai Chiu Road as a 24-hour pedestrian zone thereby increasing pedestrian flow to thedistrict.We noted that Hysan had booked a HK$15m gain in 1H04 from sale of securities, believed tobe China Mobile (941.HK). There was also a one-off income of HK$41m from write-back ofSingapore investments. We remain cautious as to the amount of further extraordinary incomethat could underpin the bottom line as well as satisfying funding needs for renovating its olderbuildings. Nevertheless, we believe some of Hysans buildings may well be the next target forrevaluation. The stock is now trading at around 30% discount to its NAV of HK$22.69. From atarget discount of 20%, there is around 15% upside to our target price of HK$18.15. MaintainBUY.Investment Property Sector 6 Dec 200410Swire Properties (19.HK, HK$64.50, BUY)A major beneficiary of the PCCW Tower transactionYear ended DecTurnover (HK$m)Operating profit (HK$m)Net profit (HK$m)EPS (HK$)EPS Growth (%)PER (X)DPS (HK$)Dividend Yield (%)2003A17,568.04,615.04,922.03.20-8.320.21.332.12004F18,010.34,828.96,762.54.4037.514.71.582.42005F17,852.04,643.37,257.84.727.313.71.702.6PCCWs sale of PCCW Tower for HK$2.8bn last week was the biggest property transactionthis year. As about half of Swire Pacifics property portfolio is located in the Quarry Bay area,investors attention is focused on the Companys asset values which will be a key