Hong Kong Property
Enjoy the rally
Hong Kong
Property
Raymond Ngai, CFAAC
(852) 2800-8527
raymond.ch.ngai@jpmorgan.com
Lucia Kwong, CFAAC
(852) 2800-8526
lucia.yk.kwong@jpmorgan.com
Sunny Tam, CFAAC
(852) 2800-8524
sunny.wy.tam@jpmorgan.com
Steven Li, CFAAC
(852) 2800-8598
steven.mh.li@jpmorgan.com
Billy Ng, CFAAC
(852) 2800-8597
billy.hl.ng@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
See page 30 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
30
50
70
90
110
130
150
170
190
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Property developers
Property investors
Index: 1/1/2007 = 100
Source: Datastream.
• We turn more positive on the Hong Kong economy and raise our
property price forecasts: We increase our residential price growth
forecast to +10% and +5% for 2009 and 2010, respectively, as according
to our house view the Hong Kong economy should gradually recover in
2H09 with unemployment peaking at 6.1% in 2Q09. We also expect
office and retail capital values to bottom out in 2Q09 and stay flat until
4Q09 and rise 5-10% in 2010.
• We raise our NAV and earnings estimates: Based on our latest
assumptions, we revise up our FY10 earnings estimates for the sector by
13% due to higher ASP assumptions and better volume sales. We
increase our Dec-09 NAV estimates by 14% on average due to lower
cap rates (5.5-5.75%) and our slightly less bearish rental assumptions
(down 20% from 2Q-4Q and flat in 2010).
• We prefer developers to investors: We expect 6%-20% upside for
developers; NWD, KPL, Henderson Land and SHKP are our top picks in
the sector. We believe most landlords are fairly valued, and Swire and
Great Eagle are our preferred stocks in this sector.
• We expect the sector to overshoot on the upside with strong
liquidity: Given ample liquidity—which we believe is reflected in the
historical-low one-month interbank rate of only 0.087%—and positive
news flow from new launches, the sector is likely to rise to above-mean
valuations in the near term. However, we do not believe the above-mean
valuation will be sustained in the medium term as the economic
recovery, interest rate outlook, and liquidity remain uncertain.

We turn more positive on Hong Kong property
The worst is over?
Following the release of 1Q09 GDP numbers, our economists have revised their fullyear
GDP forecasts. Although the 1Q09 Y/Y real growth was much worse than
expected (-7.8% Y/Y vs the J.P. Morgan estimate of -5.5%), our economists are
slightly more optimistic on the global economic outlook, and expect a gradual
recovery in the coming quarters. They believe 1Q should mark the bottom of
economic activity due to stabilizing global demand and financial markets, steady
improvement in domestic asset markets, further cross-border economic and financial
integration, as well as accelerating government spending. We forecast the real GDP
will fall 5.5% in 2009 and rise 3.5% in 2010, and the unemployment rate will peak at
6.1% in 2Q09 and gradually improve to 5.3% by end-2009 and 4.3% by end-2010.
Given a less pessimistic outlook on the Hong Kong economy and abundant liquidity
leading to all-time low interest rates, we revise our residential price growth forecasts
for 2009 and 2010 to +10% and +5% Y/Y, respectively. Since residential prices have
already rebounded strongly by 13%, based on Centaline’s weekly price index, we
expect prices to stay flat for the rest of the year. We expect office and retail capital
values to bottom out in 2Q09 and stay flat until 4Q09 and rise 5-10% in 2010.
Against this backdrop, we revise our Dec-09 NAV estimates for the sector by 14%
on average. Our assumptions are based on our more positive view on the economy as
we expect the global economy to gradually recover in 2H09 and interest rates to stay
unchanged at current low levels. Key risks to our view stem from failure of the
economy to recover as expected, an increase in interest rates, and a sharp correction
in the stock market after the recent strong rally.
Valuation and stock calls
We expect 5%-20% upside for developers and for investors
Most Hong Kong property stocks have traded back to near their long-term historical
average discount to NAV after the recent rally. The Hang Seng Property Sub-index
has gained 35% YTD and risen 61% from the recent low on March 9. The stock
prices have to a certain extent priced in property price increases, in our view. In
general, we see 5%-20% potential share price upside for developers and investors at
current levels.