Improved valuations – the balance of risk lies more on the upside
Summary
􀂃 Shares of property developers consolidated in August and for the June-August period, and
underperformed the Hang Seng Index (HSI) by an average of 7% from 1 June to 21 September.
Meanwhile, residential and commercial-property market fundamentals have improved over the
past few months, with progress on what we see as the three challenges facing the sector: the
scale of new launches, secondary-market volume, and the overall economy.
􀂃 These improvements appear to have removed the gap between expectations and near-term
fundamentals that we saw a few months ago. Overall, we think developers’ valuations have
returned to reasonable levels, and we think they are attractively valued based on our view of
continued improvement in the outlook of the residential property market in 4Q09 and 2010.
􀂃 With residential-property prices nearing their peaks of March 2008, we believe the market has
reached a critical point. We expect a near-term consolidation of prices, reinforced by a potential
rise in mortgage rates. That said, we would not expect any such consolidation to last for long.
Indeed, after examining 10 major factors, we think the risk lies more to the upside (we have
revised up our residential property-price forecasts to 30% from 25% for 2009, and to 15% from
5% for 2010), and believe concerns related to the above would create an opportunity to buy
property developer shares.
􀂃 Given the improved sector valuations and outlook, we have upgraded our sector rating to
Positive from Neutral. We have also upgraded our rating for SHK Properties (SHKP) to 2
(Outperform) from 3 (Hold), and still believe Henderson Land, Cheung Kong and Midland are
undervalued.

Valuations have improved after recent price consolidation..............................................3
Sector progress on three fronts .........................................................................................5
At a critical point: risks more to the upside ....................................................................11
Appendix: Comparison of the current downturn with previous ones .............................32
Company section
Cheung Kong (1 HK)...............................................................................................36
SHK Properties (16 HK)..........................................................................................38
Henderson Land (12 HK) ........................................................................................40
Sino Land (83 HK) ..................................................................................................42
MTR Corporation (66 HK)......................................................................................44
Midland (1200 HK) .................................................................................................46