Stocks viewed as cutting through the talk of gloom

Analysts see promise in the shares of some HK developers, with the negative factors priced in

PUBLISHED : Monday, 06 January, 2014, 12:28am
UPDATED : Monday, 06 January, 2014, 1:51am

Deep discounts to net asset value and the pricing in of negative factors linked to a property downturn have prompted some analysts to take a positive view on the stocks of some Hong Kong developers.

"We think the market is underestimating the resilience of both the physical market and the valuation of developers," said Lee Wee Liat, BNP Paribas' Hong Kong-based head of Asia property research.

The recent strong take-up of primary residential projects on the back of price discounts, stable prices and low supply volumes in the secondary market indicated that market sentiment remained upbeat, he said. Against such a backdrop, Lee said deep discounts to developers' net asset values made property stocks attractive.

Bocom International expects the share prices of Cheung Kong, Henderson Land Development and Wheelock will rise more than 20 per cent this year, while Jefferies says developers with a meaningful, diversified exposure to mainland property and other businesses - such as Cheung Kong and New World - remained attractive.

Lee said BNP Paribas had conducted a stress test on major developers' net asset value by factoring in a worst-case scenario that assumed home prices fell by 40 per cent, a 200 basis point rise in interest rates and 20 per cent fall in investment property rentals. All these factors would lower developers' net asset values by between 9 per cent and 26 per cent, subject to their exposure to the city's residential segment.

"Our analysis shows Cheung Kong's net asset value will be least affected as it has only 21 per cent exposure to the Hong Kong property market," he said.

It was followed by Kerry Properties (35 per cent) and New World Development (44 per cent). Sino Land is expected to the most affected as it has 70 per cent exposure to the city's property market, according to BNP Paribas.

Cheung Kong, with a share price of HK$120.50 on Friday, is trading at a discount of 34 per cent to net asset value of HK$182.30 estimated by BNP Paribas. That is the same as the largest discount of 34 per cent it saw in 2008, when home prices fell more than 60 per cent from their 1997 peak.

Sun Hung Kai Properties' current price discount of 44 per cent to BNP Paribas' estimated NAV compares with a discount of 55 per cent in 2008. Sino Land's current price discount to NAV is about 41 per cent, against 64 per cent in 2008, while New World's current price discount is about 50 per cent, against 72 per cent in 2008.

But BNP Paribas said New World was well positioned to gain market share, given its diversified product mix with 44 per cent of its saleable properties in the most resilient luxury segment on Hong Kong Island and in Kowloon. Its share of the housing market will rise from 4 per cent in 2010-2012 to an estimated 14 per cent in 2013-2015, according to BNP Paribas.

Bocom International, which expects property prices to remain flat until 2017, said the property sector was now trading at a discount of more than 40 per cent to last year's net asset value, after pricing in an 18 per cent decline in net asset value.

Property analyst Alfred Lau said he expected the valuation discount would remain wide.

Bocom rates Henderson Land as the sector's top pick in anticipation of further room for farmland re-rating, with the government becoming more supportive of farmland conversion.