Under different scenarios. Residential sales volume and the accompanied price increase have surprised us on the upside. But we continue to question the sustainability of this rebound, which has been caused purely by the inflow of hot money in our opinion, given the economic backdrop is still worsening. Moreover, after rallying 84% from the bottom, the debate even in the bullish camp is whether SHKP is now fairly priced.
The table below shows the intrinsic value (NAV) of SHKP under three scenarios: a) as things currently stand, b) if the property market recovers further, and c) our base-case which assumes property prices will correct from here. Under each scenario, we compute its fair price under a normal market and a liquidity-driven market. As can be seen from the table, there is still another 9% upside if property prices stay flat. But for any meaningful share price upside, either property prices will have to go up further or hot money continues to come in to boost valuation.
Slight upgrade in our base-case- for residential, from -24% from peak to - 20%, from -24% to -15% for retail, office remains at -40%, and from -15% to -10% for China. The changes reflect the somewhat improved economic prospects brought on by the vibrant stock and property markets.
Fair price 9% higher. These new assumptions raise SHKP’s NAV from HK$101.31 to HK$109.99, and our fair price, which is based on the 12% historical discount to NAV, by 9% to HK$96.79. The by far biggest risk to our fair price is the accuracy of our property price assumptions.
SHKP willing to sell flats. The table below shows SHKP’s new launches ytd and the projects that are scheduled for presale for the rest of the year. While there are less than 5,000 units in total, this list of projects represents some 77% of the floor area that will be completed in the three years to FY11.
Although the precise timing of project launches will depend very much on market conditions, this intended presale timetable looks aggressive in what eventually is still a downcycle, especially given it is well known that residential supply in Hong Kong will continue to dwindle.
Rental properties in Hong Kong. Despite the weakening office market, IFC is only 3% vacant with rents down 25% from the peak’s HK$125psf to HK$95psf. The new ICC is also 90% leased. On the other hand, SHKP’s offices in East Kowloon are facing fierce competition from new buildings. In order to retain tenants, SHKP has cut rents by more than 25% in less than a year to around HK$14psf. Retail rents, on the other hand, have continued to be resilient. Except for IFC mall where turnover has fallen 15-20%, the regional malls have only reported 1-3% decline in turnover.
In China. SHKP has 52.3m sf (70% residential and 30% commercial/hotel) of landbank under development in China, plus another 3m completed rental portfolio. The Group has not replenished landbank in this financial year and we do not expect to see any in the near future given the cautious management. We estimate China will only contribute 5-10% to bottom line until meaningful contributions are generated from Shanghai IFC in 2H11.
Office leasing market in Shanghai is extremely sluggish at present. Hence apart from the 22 floors taken up by HSBC, only about 10-15% of the remaining space in phase 1 has been leased. The slow leasing progress is partly due to foreign companies, SHKP’s target tenants, halting expansion plans. Current rent is about Rmb200psm and SHKP does not see any need to cut rents drastically now as it aims to attract quality tenants.
We maintain FY09 earnings forecast but raise FY10’s by 15% to take into account faster sales at The Cullinan. Our FY09 projection is some 10% ahead of consensus, which we believe has yet to take into account the rapid sales of The Cullinan in recent weeks. Development profit in FY09 has been fully secured while only 20% of that in FY10 has been locked in by presales.
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