20210420-招银国际-HK_Property_Market-Fasten_the_seat_belt_68页_3mb

CMB International Securities | Equity Research | Sector Initiation - HK Property Market

Core Content

CMB International Securities has initiated coverage on the Hong Kong (HK) property sector with an Outperform Rating, highlighting the long-term potential despite short-term challenges. The report outlines both short-term threats and long-term growth drivers for the HK property market and provides an analysis of the four leading developers: HLD, SHKP, NWD, and CK Asset, all of which are rated BUY.

Main Points

Short-Term Threats

• Market Volatility: The CCL Index gained 2.3% in 1Q21 due to the start of vaccination in HK, but the market is still considered fragile in 1H21 due to weak employment and uncertain pandemic conditions.
• Unemployment Concerns: The unemployment rate rose to 7.2% in Feb 2021, the highest since 2004. The report suggests the rate may increase further.
• Brain Drain: The UK's new visa route for HK residents with BNO passports could lead to emigration, which may pressure the property market. However, the UK's economic situation and pandemic restrictions may limit the impact.

Long-Term Growth Drivers

• Low Interest Rates: The HK property market benefits from a low interest rate environment, expected to last at least three years, which supports affordability and investment.
• Limited Housing Supply: Housing supply in HK remains low, with annual completions declining from 20,968 units in 2018 to 13,600 in 2019, and a rebound to 20,890 in 2020. Supply is expected to remain tight through 2021, with pressure increasing in 2022 and 2023.
• Strong Pent-Up Demand: Despite the pandemic, primary and secondary property sales show strong pent-up demand, which could rebound once the market stabilizes.
• Mainland Capital Influx: The report forecasts an increase in purchasing power from mainland buyers once the China-HK border reopens and the pandemic is under control.
• Economic Outlook: The HK economy is expected to grow by 4-5% in 2021, with a recovery in 2H21 as vaccination progresses and economic activities resume.

Key Information

Property Price Forecast

• The report forecasts an 8% rise in HK property prices in 2021, with the CCL Index expected to reach 190.3 by end-2021.
• HK property prices have consistently ranked among the most expensive globally, with a median multiple of 20.7x in 2021, up from 11.4x in 2011.

Valuation Highlights

• CK Asset is highlighted as the top pick among the Big Four due to its trend-capturing ability, hidden assets (e.g., hotel conversions), and a HK$19.4bn share buy-back plan.
• SHKP holds the largest market share (18.6%) in the HK primary property market and has a premium valuation.
• NWD is given a higher valuation due to Adrian Cheng's stewardship.
• HLD is also rated BUY with a target price (TP) of HK$40.5.

Policy and Market Conditions

• Mortgage Policy: HK's MReferral mortgage rate is low, with a decline from 2.45% to 1.94% in 2020. Hibor-based mortgages dominate, with 94.6% of new loans in Dec 2020 using Hibor.
• Affordability Ratio: The affordability ratio stood at 61.7% for Prime-based and 56.0% for Hibor-based mortgages in Feb 2021, indicating still relatively healthy conditions compared to the 1997 period.
• Stamp Duty Adjustments: The Mortgage Insurance Programme was adjusted to allow higher property values to be eligible for mortgage loans, increasing demand for properties under HK$10m.
• Public Housing Strategy: The HK government plans to increase public housing supply to 70% of total new housing supply, with 101,400 units expected from 2021 to 2026.

Key Risks

• Changes in Global and Local Conditions: Political, economic, and social changes could affect the market.
• Pandemic Impact: Continued effects of COVID-19 may prolong economic and market uncertainties.
• Government Policies: New regulations or changes in policy could influence market dynamics.
• Interest Rate Fluctuations: A rise in interest rates could negatively impact affordability and investment interest.

Major Players in HK Property Market

• SHKP (16 HK): Market leader with 18.6% share in primary property sales, highest rental income among local developers, and a large landbank.
• CK Asset (1113 HK): Has hidden assets like hotel conversions and pub properties, and a strong buy-back plan.
• HLD (12 HK) and NWD (17 HK): Both are rated BUY with strong financials and diversified business models.
• Sino Land (83 HK) and Swire PPT (1972 HK): Not rated, but still active in the market.

Summary of Valuation Table