Property

Leung Chun-ying

Leung Chun-yingProperty developers supporting Henry Tang and those supporting Leung Chun-ying were favored by investors at different points of time ahead of the Chief Executive election. Developers who backed Tang include SHK PPT (0016), CHEUNG KONG (0001), HENDERSON LAND (0012), NEW WORLD DEV (0017) and SINO LAND (0083) while those preferring Leung were, namely, HANG LUNG PPT (0101) and SHUI ON LAND (0272). Peace has now been restored after a wave of hustle and bustle. Just as what the designated Chief Executive Leung Chun-ying says, there is no distinction between ‘Tang’s camp’ and ‘Leung’s camp’ any more. By the same token, property developers should be taken as belonging to the very same sector too. In fact, brokerages do point out the implications on developers backing Tang or Leung after the election. Although Tang lost in the election, brokerages does not unanimously hold bearish outlook over developers backing Tang. Fundamentals of individual developers and external conditions are critical to the stocks’ upcoming trend.

Bank of America deems that Leung’s victory will not pose negative impact to the local real estate market. It says the recent softening of stock prices of property developers was attributable to profit-taking and belonged to a normal market correction. According to the brokerage’s report, CHEUNG KONG, SHK PPT and NEW WORLD DEV are its top picks among local property developers. Analyst says NEW WORLD DEV’s spot price represents a 40% discount on the developer’s net asset value HK$21.6. Coupling with the third generation of management coming to stage, the brokerage expects NEW WORLD DEV to create a brand new environment for the group. NEW WORLD DEV’s ‘Signature’ project and Che Kung Temple project will be launched in the primary housing market soon. Rumor has it that 9 units from ‘Signature’ were already reserved for prospective buyers at high prices. Che Kung Temple project also received eager responses from buyers when pre-sale began in July 2011. The more important thing is that NEW WORLD DEV has a land bank of 6.5 million square meters, more than double of SINO LAND’s land reserve, which equals 3.5 million square meters. The New World Centre redevelopment project in Tsim Sha Tsui East involves 3 million square meters of space and is likely to provide more upside momentum for the group’s stock price in the medium term. In contrast to Bank of America’s anticipation towards the property developers stocks, Goldman Sachs publishes an analysis report saying Leung will bring pressure on these stocks during the initial period of his term. Property developers stock take up 35% and 8% respectively in MXHK and Hang Seng Index in terms of weight while the overall property sector’s market value is at 32% discount on the net asset value, the brokerage says, adding the sector will need to shoulder certain selling pressure. Nevertheless, analyst says Goldman Sachs is bullish on SHK PPT and WHARF HOLDINGS (0004). It was said that WHART HOLDINGS’ chairman Peter Woo sent his congratulation to Leung with a view to showing his cordial attitude, quitting ‘Tang’s camp’ in a high-profile manner. A surveyor also believes the local property market has a solid foundation and it is hard for the election to affect the sector’s performance in the stock market by too large an extent. Hong Kong’s inflation rate has been running between 4% and 5% and there is no reason for the real estate market to fare worse amid the negative interest rate environment, the surveyor says. The local unemployment rate, which currently stands at 3.4%, is going to touch the floor soon, he says, adding he foresees the local economy to grow by 3.9% in 2012 with more steam. ‘Mortgage war’ among Hong Kong banks, which put forward mortgage rates as low as 2.1 -2.2%, intensified with the backdrop of sustaining low interest rate environment, adding fuel to the local property market, he says. Therefore, the chance of a property market slump is slim, according to the surveyor.

As to Deutsche Bank, its research report says Leung’s coming to power will directly benefit SHK PPT, WHARF HOLDINGS, KERRY PPT and LINK REIT, who hold relatively more projects in the New Territories, in the medium to long term as the next Chief Executive has been promoting development of New Territories North for years. An academic from the Hong Kong Polytechnic University agrees with Deutsche Bank’s report about the smaller likelihood of an outburst of property bubble on Leung’s winning. The academic also agrees that lands with high potential value in northern part of New Territories may be released. SHK PPT possesses a relatively large agricultural land reserve in New Territories and may help lay down the framework of property development in the New Territories. Deutsche Bank’s report also says the stock prices of both CHEUNG KONG and SINO LAND will inevitably pressure on Leung’s victory as the incomes of these two developers mainly stem from the local market. Nonetheless, the brokerage still views the two stocks bullishly in the medium to long term. HANG LUNG PPT and SHUI ON LAND, both are of a medium scale, saw their management support Leung publicly and were thus termed ‘constituents from Leung’s camp’. It should be noted that, by looking at the fundamentals, brokerages hold back their recommendations for these two stocks at the moment. Investors should formulate their investment strategies after analyzing these two developers’ gains from property sales and land banks so as to pocket profits in the stock market.