Company Reports

Sun Hung Kai Properties', or SHKP's, fiscal 2024 (ending June) performances were below our expectations as net profit fell 9% year on year to HKD 19.0 billion. This was driven by a 30.5% year-on-year decline in earnings from its property sales in Hong Kong and mainland China, and fair value losses on its investment properties under development and held by its joint ventures and associates. These were slightly offset by better performances in its property rental segment, hotel operations, and other businesses. The group declared a final dividend of HKD 2.80 per share, leading to a full-year dividend of HKD 3.75, 24.2% lower than last fiscal year.

Sun Hung Kai Properties is the leading property developer in Hong Kong. While others may specialize in certain sectors—for example, CK Asset in mass residential and Swire Properties in office—SHKP is a significant player in all sectors of the city’s property market. Its sheer scale and dominance translate into a formidable competitive advantage in a highly consolidated Hong Kong property market.

We still see value in Hong Kong developers despite the recent slowdown in home sale transactions. Our preferred pick in the sector is Henderson Land, which trades at a 37% discount to our fair value estimate and offers an attractive 2024 dividend yield of 8.4% at the current price. We also like its diversified recurring income stream generated by its investment properties portfolio and stable contribution from its utility associate.

Sun Hung Kai Properties’, or SHKP’s, first-half fiscal 2024 (ending June) results aligned with our expectations. While management expects the uncertain economic environment and high borrowing costs in Hong Kong to weigh on home-buying sentiment in the near term, they believe the recent relaxation of property cooling measures, rising home rents, and US interest rate cuts will benefit the residential market. SHKP’s move to cut the interim dividend by 24% to HKD 0.95 per share before the announcement of the Hong Kong government's budget appears conservative. For the final dividend, management guided a payout ratio of 50%, which we estimate to be 12% lower than fiscal 2023. This still implies a decent fiscal 2024 dividend yield of 5.4% based on its last closing price of HKD 78. Although we like the company’s portfolio of high-quality investment properties in Hong Kong, we prefer Henderson Land, trading at a more attractive 7.8% dividend yield.

Sun Hung Kai Properties is the leading property developer in Hong Kong. While others may specialize in certain sectors—for example, CK Asset in mass residential and Swire Properties in office—SHKP is a significant player in all sectors of the city’s property market. Its sheer scale and dominance translate into a formidable competitive advantage in a highly consolidated Hong Kong property market.

Sun Hung Kai Properties is the leading property developer in Hong Kong. While others may specialize in certain sectors—for example, CK Asset in mass residential and Swire Properties in office—SHKP is a significant player in all sectors of the city’s property market. Its sheer scale and dominance translate into a formidable competitive advantage in a highly consolidated Hong Kong property market.

The lowering of the stamp duty in Hong Kong has had a limited impact in reviving the residential market as housing prices continue to decline in the face of high interest rates and a weak economic outlook. According to the Rating and Valuation Department, the private residential price index fell to a seven-year low in November 2023, and we expect price weakness to persist through the first half of 2024. While interest rates have likely peaked, we think that housing prices will only find support in the second half of 2024. Our U.S. economist said he expects the Federal Reserve to start cutting rates in March 2024. We cut our fair value estimates for Henderson Land and Sun Hung Kai Properties to HKD 34 and HKD 115 from HKD 36 and HKD 128, respectively, after lowering our near-term assumptions on their Hong Kong development margins and sales.

We transfer and resume coverage of Sun Hung Kai Properties, or SHKP, with a no-moat rating and fair value estimate of HKD 128 per share. This implies a price/book ratio of 0.6 times, in line with its average 10-year trading range. Although we expect the Hong Kong residential market to remain soft in the near term given the high interest-rate environment, we think the negatives have been priced in, with a 19% year-to-date decline in the company’s share price. We expect SHKP’s property leasing business, hotel operations, and data center operations to drive the bulk of its earnings growth for fiscal 2024 (ending June) and fiscal 2025. We also anticipate residential property demand in Hong Kong to rebound from the second half of 2024 following a pivot in the interest rate. This would positively drive SHKP’s fiscal 2026 earnings when the presold properties are completed and we expect three-year net profit CAGR of 18.3%.

Sun Hung Kai Properties is the leading property developer in Hong Kong. While others may specialize in certain sectors—for example, CK Asset in mass residential and Swire Properties in office—SHKP is a significant player in all sectors of the city’s property market. Its sheer scale and dominance translate into a formidable competitive advantage in a highly consolidated Hong Kong property market.

We are placing Sun Hung Kai Properties under review pending a change in analyst. We will provide further updates on coverage resumption in January 2023.

Sun Hung Kai Properties', or SHKP's, fiscal 2022 result was below our and consensus expectations. The booking of development properties in Hong Kong and China was below our forecasts and revenue from investment properties in China was weaker than our expectation. Underlying profit, excluding revaluation of investment properties, was 3.8% lower against fiscal 2021 at HKD 28.7 billion. The final dividend was unchanged against the same period last year at HKD 3.70 per share with the full-year dividend also steady at HKD 4.95 per share. In line with peers, investment properties in both Hong Kong and China were affected by lockdowns. Rents remained pressured, but occupancy level improved by 1% against the first half to 92% for the Hong Kong portfolio, reflecting the high quality of the portfolio. In our view, rents in Hong Kong are starting to stabilize though a recovery is dependent on the relaxation of restrictive border measures. This also remains a key positive catalyst for the stock and the wider real estate sector.

Sun Hung Kai Properties is the leading property developer in Hong Kong. While others may specialize in certain sectors—for example, CK Asset in mass residential and Swire Properties in office—SHKP is a significant player in all sectors of the city’s property market. Its sheer scale and dominance translate into a formidable competitive advantage in a highly consolidated Hong Kong property market.

Sun Hung Kai Properties remains our preferred Hong Kong developer, and valuation is undemanding at a price/fair value ratio of 0.64. Our fair value estimate of HKD 145 per share is unchanged. While near-term positive catalysts are lacking, the developer is trading on a forecast dividend yield of 5.5%, at a share price of HKD 93 per share. The dividend is supported by recurring income from its high-quality investment property portfolio and a strong balance sheet with net gearing at 17.5%. We expect the reopened domestic economy in Hong Kong to ease a decline in rent for its investment property portfolio, and we continue to expect the high occupancy level for its office and retail portfolio to be maintained. We believe a reopening of borders with mainland China and internationally to be a key catalyst for the real estate sector, which should benefit the share prices of the retail-concentrated landlords, relative to landlords with a larger share of income derived from office properties.

Sun Hung Kai Properties is the leading property developer in Hong Kong. While others may specialize in certain sectors—for example, CK Asset in mass residential and Swire in office—SHKP is a significant player in all sectors of the city’s property market. Its sheer scale and dominance translate into a formidable competitive advantage in a highly consolidated Hong Kong property market.

Sun Hung Kai Properties’ first-half fiscal 2022 result was within expectation and management remained upbeat on the outlook for the real estate sector in Hong Kong. First-half dividend of HKD 1.25 per share is steady against the same period last year. We expect full=year dividend to remain unchanged at HKD 4.95 per share, representing an attractive dividend yield of 5.3% at the current share price. This is supported by a strong balance sheet with net gearing at 17.5%. Our fair value estimate of HKD 145 per share is unchanged, and the developer is undervalued.

The valuation for Hong Kong real estate stocks remains attractive, in our view. With economic recovery expected in 2022, the near-term positive catalyst for the sector is the reopening of borders with mainland China, then internationally. We expect the share prices of landlords with larger retail exposure to rally ahead of any news of border reopenings. At a 15% discount to our fair value, Wharf REIC is our preferred pick and we expect the landlord to benefit the most as close to 90% of operating income is derived in Hong Kong, mainly from its two flagship properties in Harbour City and Times Square. Link REIT, Swire Properties and Hongkong Land would also benefit though the latter two have a smaller proportion of retail contribution. A recovery in office rents is likely to be the driver for Hongkong Land and Swire Properties, though a recovery in office should lag retail as corporates need to confirm their business plans after the reopening of borders, in our view. Swire Properties and Hongkong Land are trading at close to a 24% discount to their respective fair values while Link REIT’s more defensive portfolio sees the trust trading at a narrower discount to its fair value.

We align Sun Hung Kai Properties, or SHKP’s, moat rating with its peers as we do not see competitive advantages in residential property development. While we have lowered our economic moat rating for Sun Hung Kai Properties to no-moat from narrow moat, we do not expect changes to the firm’s overall business model and we expect its dominant competitive position in the Hong Kong real estate market to be sustained. We make no changes to our fair value estimate of HKD 145 and we continue to see value in the real estate developer.

Sun Hung Kai Properties, or SHKP, is the leading property developer in Hong Kong. While others may specialise in certain sectors--for example, CK Asset in mass residential and Swire in office--SHKP is a significant player in all sectors of the city’s property market. SHKP's sheer scale and dominance translate into a formidable competitive advantage in a highly consolidated Hong Kong property market.

With the worst of the coronavirus pandemic likely over and the return of social stability from the passing of the National Security Law, the Hong Kong Government’s 2021 policy address again focuses on housing and land related measures, and long-term economic growth initiatives. Regarding housing and land supply, key initiatives include Northern Metropolis in New Territories North, aiming to increase housing supply in the long term. The area, including recently identified new land supply, is expected to yield 565,000 units to 686,000 units over a 10 to 15 year period, from 2031 onward. The area is expected to be connected by rail, from the extension of MTR’s Northern Link. Separately, plans and feasibility for the Hong Kong and Qianhai railway will be assessed. Previously announced long-term initiatives to increase housing supply are continuing and include near shore land reclamation, the development of artificial islands at Lantau and extension of higher plot ratios for the redevelopment of industrial buildings. A working group is also being set up to lower the threshold for compulsory sale of village land in New Territories.

The share prices of Hong Kong developers declined sharply on Monday following a Reuters news report the Chinese government expects greater social contributions from Hong Kong developers in future, given tight land and housing supply, and high property prices. With housing affordability issues having persisted for an extended period of time, the high property prices were cited by mainland China state media as a contributing factor to antigovernment protests in late 2019. The primary market concern is developers’ holdings of agricultural farmland, which is able to be developed once land conversion takes place. The latter would result in a land premium being paid but prices are usually below land auction prices. However, the share price reaction appears to factor in the risk of "land resumption" by the Hong Kong government, in our view.