Hong Kong Property
Hope or Pain
Hopes of investors/speculators — In the near term, as a bubble mentality has
resurfaced in the HK property market, we believe strong liquidity and momentum
will spur prices beyond the means of an average household – likely shooting up to
the Mar 2008 peak, or a 15% rise from current levels.
Pain of end-users — No matter how much the housing market may be driven by
investment/speculative demand in the intermediate term, eventually the properties
have to be passed back to end-users, and so job security and income growth
prospects should remain important considerations. In our view, it will take a
relatively long time for current weak economic fundamentals to realign with
current property price levels (same as Dec 2007), or the March 2008 peak.
What if residential prices return to Mar 2008 peak? — As a reference, under a
scenario where property prices rise a further 15% from here, our estimated NAV
would be HK$120.2 for Cheung Kong, HK$93.9 for SHKP, HK$67 for Henderson
Land, HK$26.4 for Hang Lung Prop, HK$51 for Kerry Prop, and HK$15.3 for Sino
Land. On latest share prices, SHKP and Sino Land do not look attractive at all.
China properties as an alternative asset class — With the China economy now
being the main driver of the Hong Kong economy, and with ample liquidity in
China and surging land prices in prime-locations in the Tier-1 cities, China
properties should present better investment prospects, hence attracting liquidity
from HK properties. On our analysis, high-quality properties in Tier-1 cities in
China are still trading at respectable discounts to similar properties in Hong Kong.
Demand-supply picture not as rosy — According to the latest statistics of the
Transport and Housing Bureau in HK, at end-1Q09, there are 54,000 units that
we believe could be available for sale in next three years, or about 18,000 units
per year. This compares to a YTD take-up (up to May 21, 2009) of about 5,000
units in the primary market, or an annualized take-up rate of about 13,000 units.
Top Sells — SHKP and Sino Land, as upside looks limited given our view that the
stocks already are pricing in a “back to Mar 2008” scenario.
Our Top Picks — Cheung Kong, Hang Lung Group, Hang Lung Properties,
Henderson Land and Kerry Properties for their relatively cheaper valuations and
potential NAV growth via farmland conversions or urban redevelopments in Hong
Kong and new landbank acquisitions in China.

A Compressed Mini Housing Bubble 3
Base-case, Best-case and Worst-case scenarios 4
Buy two developers, three HK/China hybrids and sell two developers 6
Over flowing liquidity drives up property prices and transaction volume 9
A quick return of bubble mentality 10
But don’t be too carried away by liquidity 11
Economic fundamentals still weak though 14
Significant negative correlation between unemployment and
property prices 14
Gap between housing prices and household income indices 17
China property as alternative asset class 19
Ample liquidity to drive asset prices in China 19
Property prices in China still way lower than property prices in HK 19
Shanghai to become an International Financial Center and
International Shipping and Transportation Hub by 2020 22
Government Policies in China: From Tightening to Supportive 24
Demand-supply picture not that rosy 28
Estimated 31,500 of new supply from now till end-2010 29
And there is no structural shortage at all 31
Population growth likely to remain slow 32
Unexciting wage outlook 34
Indoor efficiency gaps affect end-user demand 35
Secondary market transacted prices 46
Hong Kong Island 46
Kowloon 47
New Territories 49
Discount to NAV (Individual stocks) 53
Appendix A-1 58