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Hong Kong Property Market Summary (February 8, 2018)

Core Content

This report provides an analysis of the Hong Kong property market, focusing on the upcoming results season, expected earnings growth, rental reversion trends, and dividend policy outlook for key property companies. It also includes valuation methods and risk factors affecting the sector.

Main Points

Results Season Outlook

• Hang Lung Properties kick-started the results season on Jan 30, 2018.
• Four companies (Sino-land, New World, SHKP, and Hysan) are expected to report results in February, while nine companies will report in March.
• Limited excitement is anticipated in the upcoming results season due to slowing recurring income growth and dividend hikes outpacing income growth in recent years.

Earnings Growth Forecast

• Core earnings growth is expected to be 7.6% YoY in FY17 among the companies set to report.
• Kerry Properties is expected to report the strongest results with 55% YoY growth, driven by development sales.
• Hysan Dev and Wharf REIC are expected to report the weakest results, with 0.9% and -1.6% YoY growth, respectively.
• Earnings estimates are revised upward by 7% for FY18 due to stronger-than-expected ASP in development sales.

Rental Reversion Trends

• Office market is expected to see positive rental reversion as Grade-A office rents rose 2.6% YoY to 20% above expiring rent.
• Retail market is expected to see neutral to marginal negative reversion as prime retail rents softened by -0.5% YoY.
• High street retail rents declined by 10% in 2017, continuing a 18% decline in 2016, with rents now 43% below three years ago.
• Vacancy rate increased slightly to 5.1% in FY17, due to new supply outstripping demand.

Dividend Policy Outlook

• Dividend hikes are expected to be limited due to recurring income growth slowing.
• CK Asset, Henderson Land, Wharf, and MTRC have a higher chance of dividend hikes in FY17.
• Hysan, Kerry, SHKP, and NWD have a 50% chance of raising dividends.
• Hongkong Land and Sino-Land are expected to keep dividends flat.
• The sector payout ratio reached 49% in FY16, with recurring profit as a percentage to dividend at 108%.

Valuation and Risks

• NAV is calculated using sum-of-the-parts valuation.
• Development properties are valued using DCF.
• Investment properties are valued using income capitalization.
• Non-property businesses are valued using income multiples.
• Key downside risks include:
  • Stricter government tightening measures
  • Unexpected economic fluctuations in China
  • Weaker volume recovery
  • Weaker domestic consumption growth
• Key upside risks include:
  • Policy loosening leading to market recovery
  • Improvement in credit environment

Key Information

Dividend Hike Likelihood

• CK Asset: Yes
• Henderson Land: Yes
• Wharf: Yes
• MTRC: Yes
• Hysan: 50% chance
• Kerry: 50% chance
• SHKP: 50% chance
• NWD: 50% chance
• Hongkong Land: No
• Sino-Land: No

Recurring Income and Dividend Coverage

• Core net profit payout ratio varies among companies, with CK Asset at 32%, Hang Lung at 61%, and Kerry at 33%.
• Recurring IP profit as % of dividend is 83% for CK Asset, 118% for Hang Lung, and 104% for Kerry.
• Dividend is fully covered by recurring profit for Hongkong Land, Hysan Dev, Kerry, SHKP, and Wharf REIC.

Key Companies and Their Forecasts

Market Dynamics

• Office sector cap rates compressed to 2.74% in 4Q17, but may reverse in 2018 due to rising US 10-year Treasury Yields.
• Retail sector cap rates remain mixed, with mall rents holding up despite high street rent declines.
• Retail sales growth reversed in 2017 to 2.2% YoY, but visitors' per capita spending continued to soften.

Conclusion

The Hong Kong property market is expected to show moderate earnings growth in FY17, driven by development sales, but limited dividend hikes due to slowing recurring income growth. The office market is expected to have positive rental reversion, while the retail market faces mixed performance. Valuation is based on sum-of-the-parts and DCF for development properties, and income capitalization for investment properties. Key risks include government policy changes and economic fluctuations, while potential opportunities arise from policy loosening and credit improvements.