Sun Hung Kai Properties - just waiting for the right opportunity

Since 1984, the Hong Kong housing market and SHKP have endured six crises of varying magnitudes. Through the Joint Declaration of the 1980s, the Asian Crisis of the 1990s and SARS in this decade, SHKP has emerged bigger and stronger each time. SHKP’s share price has risen 1,978% since 1984, outperforming the 486% rise in physical home prices and the Hang Seng Index’s 922% gain.

SHKP’s strong balance sheet and prudent financial management allowed it not only to weather each crisis but to exploit the market’s weakness in picking up new projects that ultimately became the firm and Hong Kong’s trophy assets, in our view. The 1980s brought New Town Plaza, the 1990s brought IFC, while the 2000s brought the ICC complex.

We believe this recent crisis is no different. The challenges presented by the near-term economic outlook should also present attractive opportunities and we believe SHKP will be ready to move.


Over the past seven months, SHKP has already started to build up its war chest with some HK$20bn of presales. In addition to providing cash for potential acquisitions, the presales have also helped SHKP to substantially lock in more than 90% of FY09F earnings and some 23% of FY10F earnings.

In the next 12 months, SHKP pipeline of new launches remains strong. Projects such as, Yoho Midtown in Yuen Long, Aria in Ngau Chi Wan, Tuen Mun Town Lot 465 and Kwu Tung in Sheung Shui could bring in another HK$17bn of sales proceeds.

The one missing ingredient now is the opportunity to replenish its landbank either via farmland conversion or a public land auction. Back in March 2009, SHKP had stated that the government land premium offers still remain too high and expected that a better opportunity may be available in 6-12 months time. This narrow window should now be approaching, in our view. Success in locking in reasonable land costs now for some of SHKP’s 24mn sf farmland should help sow the seeds for future growth.

SHKP has one of the strongest balance sheets among the Hong Kong developers. SHKP’s gearing is only 19%, while its interest cover is 9.1x. Even excluding any development income, SHKP’s recurrent EBIT comes to HK$6.5bn. SHKP has been very prudent with its debt profile. Of its gross debt of HK$47bn (against gross assets of HK$302bn), SHKP only has a 4% maturing by December 2009F and a 14% maturing by December 2010F.

SHKP is currently trading at a 30% discount to its end-FY10F NAV of HK$128.20. The 25% gap to SHKP’s historical average discount of 5% makes it the most undervalued developer among the HK developers, by our estimates. Our HK$121.80 price target is based on mid-cycle discount of 5% against SHKP’s end-FY10F NAV. Historically through the cycles, SHKP has traded at an average 10% discount during downcycles, a 5% discount during mid-cycles and a 3% premium during upcycles.

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