Hong Kong Property
Buying opportunities should emerge after a 10-20%
further share price drop
Hong Kong
Property
Raymond Ngai, CFAAC
(852) 2800-8527
raymond.ch.ngai@jpmorgan.com
Lucia Kwong, CFA
(852) 2800-8526
lucia.yk.kwong@jpmorgan.com
Matthew Chow, CFA
(852) 2800-8529
matthew.yh.chow@jpmorgan.com
Sunny Tam, CFA
(852) 2800-8524
sunny.wy.tam@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
See page 127 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Property developers vs investors
50
100
150
200
250
300
350
400
450
500
2003 2004 2005 2006 2007 2008
Property developers
Property investors
Index: 1/1/2003 = 100
Source: Datastream
• Latest property price assumptions: In view of our latest forecasts of -
1.3% real GDP growth in 2009 and an unemployment rate of 7.3% in
mid-09, we lower our property price assumptions. Hong Kong has
official entered into a recession. We expect residential prices to fall 35%
from the peak in 2Q08 to Jun-09, office rents to drop 40-50%, and retail
rents to fall 15% from the peak in 3Q08 to Dec-09.
• Cut in our earnings and NAV estimates: We cut our earnings
forecasts by 23%/39% for FY09/FY10 and our NAV estimates by 17%
on average. We expect most developers to post an earnings decline of
13-17% in FY09. We also expect their book value to decline by an
average of 7% in FY09 due to the revaluation deficit on investment
properties.
• Stay defensive as sector continues to underperform: We downgrade
our ratings for five stocks. Having dropped 62% from the peak, the
sector has priced in at least a 40% property price drop from the current
level, which should be sufficient. We see trading opportunities if share
prices fall 10-20% below the current level (Cheung Kong: HK$60-80;
and SHKP: HK$50-70). For exposure, we prefer stocks with low beta
and low gearing, such as Link REIT.

Table of Contents
Rating, earnings and NAV estimate cuts .....................................................................3
It is all about the economy ...........................................................................................4
Property developers appear better positioned than in 1998 .........................................6
Have share prices already priced in the property price drop? ......................................7
Buying opportunities could arise if shares fall 10-20% below current
trading prices................................................................................................................8
Valuations: Price-to-adjusted-book band charts.................10
Cut in earnings and NAV estimates...........................................................................12
Assumptions: What have we changed?......................................................................15
Residential ..............................................................................16
Luxury will be hit more seriously ..............................................................................16
Land supply is limited and the government intends to keep a tight land supply........16
The residential supply outlook is more favorable than in 1997/98 ............................17
Office: Capital values are most at risk in Kowloon East ...........................................18
Retail: Prefer staple to discretionary-tenant focused malls ........................................20
Office/retail rental and capital value trends ...............................................................22
Grade A office completions/take-up/vacancy............................................................23
Property developers
Cheung Kong Holdings..............................................................................................26
Sun Hung Kai Properties ...........................................................................................35
Henderson Land Development...................................................................................45
Sino Land...................................................................................................................50
New World Development ..........................................................................................55
Kerry Properties.........................................................................................................60
Kowloon Development Company Limited ................................................................68
Pacific Century Premium Developments ...................................................................72
K. Wah International Holdings ..................................................................................78
Property investors/REITs
Hang Lung Properties ................................................................................................86
Hang Lung Group ......................................................................................................92
Hongkong Land .........................................................................................................97
Hysan Development Co ...........................................................................................103
Great Eagle ..............................................................................................................107
Far East Consortium ................................................................................................113
Swire Pacific............................................................................................................117
Wharf (Holdings).....................................................................................................120
Link REIT................................................................................................................123

Rating, earnings and NAV estimate cuts
• We are bearish on the Hong Kong property sector as we believe it will continue
to underperform the HSI due to falling property prices.
• We expect residential prices to drop 35% from the 2Q08 peak to the trough in
2Q09 as the Hong Kong economy has officially entered into a recession, with the
unemployment rate expected to rise to 7.3% by mid-09 from the current 3.6%.
• We foresee a 40-50% drop in office rents and a 15% fall in retail rents on the
worsening economic outlook.
• We downgrade five stocks to Neutral or Underweight, cut our Dec-09 NAV
estimates by 17% and our FY09 EPS estimates by 23%. We also trim our price
targets by an average of 38% to factor in our lower NAV/BV and wider NAV
discount assumptions.
• The current property downturn should not be worse than during the 1998 Asian
financial crisis due to a much lower supply and low interest rates. Property
companies’ strong balance sheet puts them in a better position than they were
during the 1998-2003 downturn.
• We do not expect stocks to trade back to the 1998 trough valuation, and we see
buying opportunities if shares fall 10-20% below the current trading prices (for
example, Cheung Kong at HK$60 and SHKP at HK$50).
• We prefer property stocks with low beta, low gearing and low exposure to
property, such as Link REIT and Henderson Land, to outperform in the
downturn.
• Five rating downgrades
(1) Kerry Properties => downgraded to Neutral from Overweight.
(2) PCPD => downgraded to Underweight from Neutral.
(3) K. Wah International => downgraded to Neutral from Overweight.

(4) Great Eagle => downgraded to Underweight from Neutral.
(5) Far East Consortium => downgraded to Underweight from Neutral.