nomura_hong kong property_february 2012

Caveat Venditor

2012 looks set to be the mirror image of 2011. Sellers beware.

Unlike the Year of the Rabbit and our Caveat Emptor theme, we are very bullish on HK property stocks for the Year of the Dragon. With consensus bearish on the physical market and stock valuations still 1SD below their norms, there is little slack for any positive surprise.

We are increasingly of the view that HK’s effective property supply is even lower than we thought and this could allow the housing and office market to re-engage at a much faster than expected pace.

Adding to our bullish view on the HK developers, we also turn positive on the landlords. Our top picks for 2012 are SHKP, Henderson Land, Hysan and HK Land. Sellers beware.

Key analysis in this anchor report includes:

• Mirror image: No slack for positive surprises

• V-shaped recovery: Property can re-engage very quickly

• Uneven growth but the solid fundamentals have not changed

• Stock selection: Focus on (i) large cap, (ii) depressed valuation with re-rating potential while (iii) minimizing earnings risk.

EQUITY RESEARCH

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February 14, 2012

Research analysts

Hong Kong Property

Paul Louie - NIHK [email protected] +852 2252 6189

Other contributor

Leo Ng – NIHK [email protected]

+852 2252 6254

Hong Kong property

See Appendix A-1 for analystcertification, important disclosures and the status of non-US analysts.

Hong Kong property

PROPERTY

EQUITY RESEARCH

ANCHOR REPORT: Caveat Venditor

2012 likely to be the mirror image of 2011. Sellers beware.

February 14, 2012

Seller beware: 2012 looks set to be mirror image of 2011 Unlike last year when we started the Year of the Rabbit with our most cautious view in years, we approach the Year of the Dragon very bullish on the HK property stocks. With consensus almost universally bearish and valuations still 1SD below their norm, we believe there is little slack for any positive surprise. If our theme for 2011 was Buyer Beware, then the opposite market conditions in 2012 should mean a switch to Seller Beware: Caveat Venditor.

Three key themes for 2012 We believe three inter-related themes are likely to drive significant outperformance for the HK property stocks in 2012:

Mirror image of 2011 – No slack for positive surprise.

V-shaped recovery is increasingly likely – Housing and office market can re-engage a lot faster than expected.

HK faces uneven growth, but the fundamentals have not changed.

Bullish on housing and office, more cautious on retail Compared to market expectations, we are more bullish on our outlook for the housing and office market, but more cautious on retail. We expect home prices and retail rents to rise 10% and 12.5%, respectively, in 2012F. Although we expect Central office rents to drop 8% in 2012F, we see scope for a faster-than-expected recovery and expect Central rents to resume their uptrend with a 15% gain in 2013F.

Our top picks for 2012: SHKP, HLD, Hysan and HK Land In addition to our existing bullish view on developers, we are also turning bullish on the HK landlords. We upgrade HKL, Hysan and Champion from Neutral to Buy. On stock selection, we focus on (i) large cap, (ii) depressed valuation with re-rating potential while (iii) minimising earnings risk. Our top picks for 2012 are SHKP, HLD, Hysan and HKL.

Fig. 1: Stock for action

Source: Nomura research, price as of 8 Feb 2012; USD for HK Land

Anchor themes

With consensus universally bearish and valuations supportive, 2012 looks set to be the mirror image of 2011 and property stocks may offer asymmetrical reward in 2012. Caveat Venditor.

Nomura vs consensus

In addition to our bullish view on the HK developers, we are now also turning positive on the landlords. With the fundamental drivers still in place, the property market could re-engage much faster than expected.

Research analysts

Hong Kong Property


Other contributor

Leo Ng - NIHK [email protected] +852 2252 6254

Stock Rating Price (HKD) Price target (HKD) Upside (%)SHKP (16 HK) BUY 108.70 155.20 43%Henderson Land (12 HK) BUY 43.80 62.40 42%Hysan (14 HK) BUY ↑ 30.25 40.50 34%HK Land (HKL SP) BUY ↑ 5.33 6.70 26%Champion REIT (2778 HK) BUY ↑ 3.25 4.16 28%Swire Properties (1972 HK) BUY 18.86 23.50 25%NWD (17 HK) NEUTRAL ↓ 8.95 9.90 11%Midland (1200 HK) NEUTRAL ↓ 4.33 4.40 2% See Appendix A-1 for analyst

certification, important disclosures and the status of non-US analysts.

Nomura | HK property February 14, 2012

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Contents

4 Executive summary

6 Caveat Venditor

6 Mirror image: No slack for positive surprises

8 V-shaped recovery: Property can re-engage very quickly

13 Uneven growth – Financial vs. real economy

15 Solid fundamentals remain: Tight supply all the way to 2015

16 Low interest rates extended by 12-18 months to 2014

17 What about policy? Status quo likely to remain

19 Stock picks: Be constructive but safe

19 Turning bullish on the landlords: HKL, Hysan, Champion and Swire Properties all Rated Buys

20 Indifferent between developers and landlords

20 Top picks: SHKP and HLD for developers, Hysan and HK Land for landlords

23 NAV discount charts

25 Price to book ratios

28 Cheung Kong (Holdings)

32 Henderson Land

36 Sun Hung Kai Properties

40 New World Development

44 Sino Land

48 Hang Lung Properties

52 HKR International

56 Kerry Properties

60 Midland Holdings


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64 Wharf Holdings

68 Hysan Development

72 Great Eagle Holdings

76 Swire Properties

81 Hongkong Land

85 Champion REIT

89 Appendix A-1


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Executive summary We believe 2012 is likely to be the mirror image of 2011. Twelve months ago, we started the Year of the Rabbit and found ourselves at our most cautious in years. Now, 12 months later, we find ourselves at the other extreme. We are very bullish on the HK property stocks.

Over the past 12 months, consensus has swung from being universally bullish on the physical property market outlook to universally bearish. Valuations have similarly swung from being stretched (+0.19/+0.82 SD) to very supportive (-1.11/-1.02 SD). Following the reasoning that if 2011 market conditions led us to our buyer beware Caveat Emptor theme, then the opposite conditions should mean that the theme for 2012 should be seller beware: Caveat Venditor.

For 2012, we expect three inter-related themes to drive the performance of property stocks:

• 2012 to be mirror image of 2011 – No slack for potential positive surprise.

• V-shaped recovery is increasingly likely – Scope for a faster-than-expected re-engagement of the property market.

• HK faces uneven growth between the financial and real economy, but the solid fundamentals have not changed

Bullish on housing and office, cautious on retail At the physical property level, we are more bullish than the Street on housing and office, but more cautious on retail. We expect home prices to rise 10% in 2012F. Central rents should start off initially weak with an 8% fall for 2012F, but we see the scope for a faster-than-expected recovery, with rents rising 15% in 2013F. As for retail, although we expect retail rents to rise 12.5% in 2012F, given the high base from 2011, we believe it would be difficult to meet the market’s lofty expectations of high teen’s growth.

Fig. 2: Nomura property forecasts

Source: Centa-City Leading Index, Jones Lang LaSalle, CEIC, Nomura estimates

Turning bullish on the HK landlords, upgrading HKL, Hysan & Champion Reflecting our belief that the office market has scope to re-engage at a faster than expected pace, we are turning more bullish on the HK landlords. We are upgrading HKL, Hysan and Champion from Neutral to BUY.

Relative to the developers, after running an overweight developers versus landlords strategy since June 29, 2011 (for additional information please refer to our Into the crevasse report), we are now turning indifferent between the developers and landlords as valuations have converged with both sector’s trailing PB around 1SD below their norms.

Focus on large caps, re-rating potential and avoid risks From a stock selection perspective, we focus on three criteria for 2012: (1) large cap property stocks, (2) depressed valuations plus re-rating potential and (3) minimise potential earnings risk. Our top picks for the Year of the Dragon are:

Price rise (Dec on Dec) 2011 2012F 2013F

Mass housing 8% 10% 7%

Grade A office Central 21% -8% 15%

Grade A office Overall 20% -4% 4%

Retail - Overall 16% 13% 13%

Change in rents (Dec on Dec) 2011 2012F 2013F






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• SHKP (BUY, PT HK$155.20) – Largest housing and commercial property provider in HK. Current valuations at 0.91x P/B is still 24% below SHKP’s historical average.

• HLD (BUY, PT HK$62.40) – At 0.58x PB versus its historical average of 1.24x, the market appears to have very low expectations on HLD. With the bar set so low, in our view, there is scope for HLD to positively surprise in 2012F.

• Hysan (BUY, PT HK$40.50) – Although we believe its current P/B of 0.69x does not compare well with its historical average of 0.62x, the completion of Hysan Place later this year and renovation of Leighton Centre and One Hysan Avenue has substantially rejuvenated Hysan’s portfolio.

• HKL (BUY, PT US$6.70) – With 70% of its NAV tied to Central offices, we believe HKL would be the key beneficiary to a faster-than-expected re-engagement of the HK office market. On the flipside, with its current P/B at 0.53x and 28% below its historical norm, we believe downside risk is already factored into the price.

Key changes for 2012F We have cut our spot and forward NAV estimates by 3% and 8%, respectively, largely to reflect 2H11 office rental decline and also our new 2012 property forecasts. We have also widened our target discount by 2% on average, shaving our overall price target by 11%. On the earnings front, we have revised our FY11F, FY12F and FY13F earnings estimates by +3%, -8% and +9%, respectively.

Fig. 3: Revisions to NAV, price targets and ratings

Source: Nomura estimates, pricing as of February 8, 2012

In addition to our upgrade for HKL, Hysan and Champion, we also switch our stock coverage from Swire Pacific (from BUY to NR) to Swire Properties (from NR to BUY, PT HK$23.50) post its spin-off. We are downgrading NWD from Buy to Neutral largely on account of the dilutive effect from its earlier rights issue. We also downgrade Midland from Buy to Neutral as we believe transaction volume remains challenging despite our positive view on the housing market.

Share Potential Rating

(HKD) Stock Code Old New Change Old New Change Old New Change Old New Change Price Upside Previous New

Cheung Kong 1 HK 137.2 137.7 0% 181.5 151.9 -16% -10% -10% 0% 163.90 136.70 -17% 107.30 27% Buy BUY

Henderson Land 12 HK 88.3 85.7 -3% 90.5 89.2 -1% -25% -30% -5% 67.90 62.40 -8% 43.80 42% Buy BUY

SHKP 16 HK 171.4 154.3 -10% 185.2 172.5 -7% -10% -10% 0% 166.50 155.20 -7% 108.70 43% Buy BUY

New World Dev 17 HK 26.3 19.0 -28% 31.8 19.7 -38% -36% -50% -14% 20.70 9.90 -52% 8.95 11% Buy NEUTRAL

Sino Land 83 HK 17.7 17.8 1% 19.5 19.5 0% -10% -10% 0% 17.60 17.50 -1% 12.56 39% Buy BUY

Hang Lung Properties 101 HK 31.9 31.0 -3% 34.8 33.1 -5% -15% -15% 0% 29.60 28.10 -5% 27.75 1% Neutral NEUTRAL

HKR Int'l 480 HK 13.6 13.0 -5% 14.5 14.2 -2% -45% -55% -10% 8.00 6.40 -20% 2.87 123% Buy BUY

Kerry 683 HK 61.3 58.9 -4% 68.4 63.9 -7% -24% -35% -11% 52.00 41.50 -20% 31.80 31% Buy BUY

Wharf 4 HK 66.7 65.1 -2% 75.7 69.6 -8% -30% -30% 0% 53.10 48.70 -8% 46.50 5% Neutral NEUTRAL

Hysan 14 HK 50.0 54.6 9% 57.3 57.9 1% -35% -30% 5% 37.20 40.50 9% 30.25 34% Neutral BUY

Swire Properties 1972 HK N/A 31.2 N/A N/A 31.3 N/A N/A -25% N/A N/A 23.50 N/A 18.86 25% N/A BUY

Great Eagle 41 HK 51.7 54.7 6% 57.8 59.8 3% -48% -48% 0% 30.10 31.10 3% 20.20 54% Buy BUY

HK Land (USD) HKL SP 9.1 9.6 5% 11.1 9.6 -13% -36% -30% 6% 7.10 6.70 -6% 5.33 26% Neutral BUY

Average -3% -8% -27% -29% -2% -11% 35%

FY11 DPU/EPS FY12 DPU/EPS Target P/E Target Price Share Potential Rating

REITs/Agents Old New Change Old New Change Old New Change Old New Change Price Upside Previous New

Link REIT 823 HK 1.10 1.10 0% 1.28 1.28 0% N/A N/A N/A 30.12 30.12 0% 28.30 6% Neutral NEUTRAL

Prosperity REIT 808 HK 0.12 0.12 0% 0.13 0.13 0% N/A N/A N/A 2.40 2.40 0% 1.70 41% Buy BUY

Champion REIT 2778 HK 0.22 0.22 -2% 0.26 0.23 -13% N/A N/A N/A 4.90 4.16 -15% 3.25 28% Neutral BUY

Midland 1200 HK 0.50 0.33 -34% 0.63 0.32 -49% 8.0 13.6 70% 5.15 4.40 -15% 4.33 2% Buy NEUTRAL

Current NAV Forward Target Discount Target Price


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Caveat Venditor There is something to be said about the Chinese Zodiac series. 2012 marks the change from the Year of the Rabbit to the Year of the Dragon and visually, there probably could not be two characters as different as a cuddly rabbit and a fire-breathing dragon.

We mention this because we see 2012 as the mirror image of 2011. Twelve months ago, the Street was universally bullish on the HK property market’s outlook, valuations were stretched and we found ourselves at our most cautious in years and advocating a theme of Caveat Emptor or BUYER BEWARE. Now, 12 months later, we find almost the exact opposite conditions. The market is almost universally bearish on its outlook on the physical market, expecting home prices to fall 10-25% and office rents to fall 10-15%. Property stock valuations are still very reasonable, in our opinion, even after the bounce in January. If we were to take an objective view on the market, if the combination of lofty expectations and stretched valuations led us to be cautious at the start of 2011, the opposite conditions of low expectations and supportive valuations should lead us to take the opposite view. For this reason, rather than BUYER BEWARE, 2012 should be the year for SELLER BEWARE or Caveat Venditor.

For 2012, we see three inter-related themes driving property share price performance.

• 2012 to be mirror image of 2011: No slack for potential positive surprise.

• V-Shaped recovery is increasingly likely.

• HK faces uneven growth between the financial and real economy, but the fundamentals have not changed.

Mirror image: No slack for positive surprises

2011 was a very challenging year. The Hang Seng Property Index fell 23.9% and underperformed the Hang Seng Index’s 20.0% decline. But what made for the disappointing performance was not so much the absolute performance of the physical market, instead it was a case of missed expectations. While home prices rose 8% in 2011 and overall office rents gained 15.8%, compared to the market’s lofty expectations and even our more modest expectations, 2011 proved to be a disappointment.

Fig. 4: It’s all about expectations- 2011

Source: CCL, Savills, Rating & Valuation Dept., Nomura Research

Fast forwarding to the present day, we find almost the exact opposite conditions. Except for retail property outlook, market participants are almost universally bearish and expect home prices and office rents to fall in excess of 10-15%.

We do not subscribe to this view. For 2012, we forecast overall home prices to rise by 10%, overall office rents to fall 4%, CBD office rents to fall 8%, while retail rents should rise by 12.5%. In normal circumstances, our forecast would be seen as being very

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moderate, but compared to current market expectations, our forecast is very bullish on both housing and office but very conservative on retail.

Fig. 5: Nomura property forecasts

Source: Centa-City Leading Index, Jones Lang LaSalle, CEIC, Nomura estimates

No slack for positive surprise: Current P/B at 0.65-0.84x, still 1 SD below norm Comparing our physical forecast to a rough tally of Street expectations, we are 20% more bullish on home prices, 6-7% more bullish on office rents and 5-10% more conservative on retail.

Fig. 6: Expectation game: Nomura vs. the Street

Source: Nomura Research, Chinese press

Unlike last year when we viewed the market as priced for perfection, we believe expectations for both the physical property market and property stocks are still so low that there is little slack for any kind of positive surprise. For instance, even after the Hang Seng Property Index’s 15% rally in January, HK developers and HK landlords are still only trading at 0.84x and 0.65x P/B, respectively. Compared to the long run averages of 1.16x and 0.80x, current valuation remains 1.11 SD and 1.02 SD below norm and continues to price in overall market declines of 18-27%.

Price rise (Dec on Dec) 2011 2012F 2013F





Change in rents (Dec on Dec) 2011 2012F 2013F





Market expectations Nomura forecast Nomura Vs. Street

Home price -10-25% +10% +20-35%Office rents - Overall -5-10% -4% +1-6%Office rents - Central -10-15% -8% +2-7%Retail rents +20% +10-15% -5-10%


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Fig. 7: Property stocks trailing price-to-book ratios

Note: * For Swire Properties, historical average PB and SD is based on parent company Swire Pacific’s figures. Pricing as of 8 Feb, 2012.

Source: Reuters Thomson DataStream, Nomura Research

Fig. 8: Developers trailing P/B ratio

Source: Reuters Thomson Datastream, Nomura research

Fig. 9: Landlords trailing P/B ratios


V-shaped recovery: Property can re-engage very quickly

As for positive surprises, we are increasingly of the view that the HK property market’s recovery may be both sharper and earlier than the consensus expects. In our opinion, the reason lies not with any kind of property easing, but with (i) supply and (ii) demand.

Housing rents: Softening or tightening the slack? We begin by looking at what we know and what we do not know. First, we know that the economic outlook is weak and the employment outlook for the financial services and related sectors have been and remain particularly weak. This has led to some recent softness in housing rents, with the Centaline housing rental index falling 5.6% in the 2H11. This softness is also partly attributed by a short-term increase in available for rental units as more home owners decide to lease out their units rather than to sell. According to Midland Holdings, over the past five months, the number of available for rental units has increased by 8% (for additional information please refer to our 12 January 2012 report Midland Holdings: Takeaway from Bento lunch).

Hong Kong Developers / LandlordsAverage PB

(x) One SD (x)Current PB

(x) Vs. Average +/- SD (x)

Trough PB during 08

crisis SD in 08 (x)

Cheung Kong 1.27 0.46 0.84 -34% (0.95) 0.54 (1.59)

Henderson Land 1.24 0.52 0.58 -53% (1.26) 0.37 (1.67)

SHKP 1.20 0.25 0.91 -24% (1.13) 0.60 (2.36)

New World Dev 0.69 0.34 0.47 -33% (0.67) 0.26 (1.27)

Sino Land 0.77 0.37 0.90 18% 0.38 0.41 (0.98)

Hang Lung Properties 0.98 0.35 1.11 13% 0.37 0.85 (0.37)

Kerry Properties 0.78 0.41 0.74 -4% (0.08) 0.37 (1.00)

HKR Int'l 0.58 0.24 0.28 -52% (1.28) 0.19 (1.66)

Midland 2.16 1.15 1.81 -16% (0.30) 0.81 (1.18)

Wharf 0.78 0.18 0.76 -3% (0.15) 0.33 (2.46)

Hysan 0.62 0.15 0.69 12% 0.49 0.33 (1.86)

Great Eagle 0.50 0.16 0.39 -21% (0.66) 0.23 (1.68)

HK Land (US$) 0.73 0.15 0.53 -28% (1.33) 0.34 (2.57)

Swire Prop* 0.96 0.20 0.65 -33% (1.57) 0.43 (2.66)

Link REIT 1.14 0.18 1.08 -5% (0.30) 0.85 (1.56)

Prosperity REIT 0.64 0.15 0.55 -15% (0.62) 0.30 (2.24)

Champion REIT 0.58 0.13 0.44 -25% (1.14) 0.27 (2.47)

Developers (wgt avg) 1.16 0.28 0.84 -27% (1.11) 0.54 (2.16)

Landlords (wgt avg) 0.80 0.14 0.65 -18% (1.02) 0.36 (3.08)

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Fig. 10: Overall HK housing rents

Source: Centaline

No departures and in fact more arrivals But while rents have softened, there has not been any notable change in demand. According to our lunch with property consultant Savills (for additional information please refer to our 13 January 2012 report Savills: Bento lunch takeaways), on the residential leasing front, it has continued to see more expatriate arrivals and not much departures. What has changed is the nature of demand with more leasing interest coming from the luxury retail brands (please refer to the later section “Uneven growth – Financial Vs. real economy”). In addition to more staff arrivals, the luxury brands’ housing allowance budgets have also increased. This surprising strength in physical demand was also noted with Kerry Properties reporting that its luxury residential leasing portfolio in the Mid-Levels of HK is 100% occupied (for additional information please refer to our 9 January 2012 report Kerry Properties: Bento lunch takeaways).

Fig. 11: Housing occupancy is in fact tightening

Source: CEIC

Rental stock is tightening Second, while Midland had reported that available for rental units had risen by 8% over the past five months, we believe this just reflects a short-term rebalancing as some home owners switch from offering their units for sale to for rent. In the longer term context, we believe the number of units held for rental purposes are actually shrinking as investment demand (both long and short term) had been curbed by the HK Government’s Special Stamp Duty from November 2010 onwards.

Over the past 20 odd years, while HK’s private housing stock has increased from some 726,000 units in 1989 to 1.4mn units in 2009, private home ownership ratio has remained very stable, fluctuating between 68% and 72% over the entire period. The

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stable home ownership ratio suggests that roughly 30% of all new homes have been bought by investors (both long term and short term).

Fig. 12: 30% of housing stock is generally held for rental or investment purposes

Source: HK Government, Nomura Research

As we stated back in 28 October, 2009, (for additional information please refer to 28 October 2009 report “Too strong a medicine; downgrade to Neutral”) the problem with property cooling measures are the unintended consequences that may arise. While the Special Stamp Duty has successfully curbed speculative interest, it has also impacted on genuine investment demand as well. Private housing transactions have declined steadily from 10,613 per month (based on the six-month moving average to November 2010) to only 4,255 transactions per month (the six-month moving average up to January 2012) as investors and speculators have migrated from housing to commercial properties.

Fig. 13: Investors have left the housing market: Who will supply the medium-term rental stock?

Source: Centaline, Nomura Research

So while the recent decision by home owners to turn landlord has temporarily increased the available for rental stock, once this short-term excess is absorbed by occupiers, with even fewer available for rent units available in the mid-term, landlords should boast even higher pricing power. At the same time, as HK’s private median household income has continued to increase, rising12.9% y-y to HK$28,800/month in Q3 2011, this opens a lot of headroom for rents to rise. As a comparison, versus 1997 peak levels, for the 12 months ending September 2011, private median household income at HK$27,350/month is now 23% higher while rents remain 0.6% below 1997 peak levels. We believe there is substantial scope for rents to rise once the market begins to re-engage again.

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Fig. 14: Private median household income versus private housing rents

Source: CEIC, Nomura Research

Office supply is less than we think Similarly, on the office side, we believe there is scope for office rental growth to surprise on the upside. By this we believe despite the current weak financial outlook, the decline in CBD rentals could be milder than expected. And once, the downsizing is finished, the pace of recovery may be much faster than the market expects. There are two core reasons behind our belief:

• Much of future supply is already pre-committed or presold.

• Vacancy remains very low despite shadow and surrendered space.

Much of future supply is already pre-committed or presold According to Savills, between 2011 and 2015, HK is likely to see new Grade A office completion around 1.0mn sf per year. While we know that this is much lower than the 2.1mn sf annual completion between 2006 and 2010 and lower than the 1.8mn sf p.a. that HK saw in 2001 to 2010, the effective supply is even lower once strata-title and pre-committed space is excluded. In terms of strata-title supply, Savills estimate that 57% of the Grade A office supply to be completed between 2011 and 2015 are slated for strata-title sales.

Fig. 15: Strata-title as percentage of Grade A office supply, 2011 to 2015

Source: Savills

Further, among this new supply, the amount of pre-commitment either in the form of sales or pre-letting is also significant. For instance, of the 0.8mn sf to be completed in 2012, properties like the Elite Centre (161,025sf) and 55 King Yip St (186,050sf) have already been sold while the 168,750sf from the redevelopment of the Ritz Carlton Hotel is slated for self use.

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12

Fig. 16: Current state of new office supply in 2012

Source: Savills

Demand mismatch: No point to cut rents The second reason why we believe the current rental adjustment may be milder than expected is due to the nature of demand. Looking back at history, our regression analysis suggests that as long as the HK economy grows at 3%, both Central and overall office rents tend to rise. The key difference between Central and the overall office market is the volatility. Central tends to be more volatile where a 1% change in real GDP growth could translate to 8.57% change in rents while the overall market only moves by 3.77%.

If we were to plug in our Economics team’s forecast 2.8% real GDP growth into our regression model, Central rents is likely to remain flat in 2012, while overall office rents correct by 2%. If we were to further consider our affordability model, at 2.8% real GDP growth, Central rents are likely to fall by 16%, while overall office declines by 7%.

Fig. 17: Historical regression of commercial property rents vs. real GDP growth rates

Source: CEIC, JLL, Nomura Research

For our 2012 forecast, we have opted more in favour of our GDP model than our affordability model as we believe the current mismatched state of demand and the divergent growth between HK’s financial and real economy is not lost on the landlords. Office demand right now is both weak but also mismatched. In Central, with the financial services industry still in the midst of scaling back, we believe Central office demand is not price elastic. Even if Central landlords were to cut rents by 30%, we doubt financial services companies would take up more space. And with the Central rents still 88% higher than Wan Chai/CWB, 145% higher than TST, 177% higher than Island East and 292% higher than Kowloon East, there is a long way before Central rents could incentivise more firms to re-Centralise.

Fig. 18: Grade A office rents: Central vs. decentralised areas

Source: JLL, Nomura Research

Office

Ritz Carlton Redevelopment Hysan Place

24-34 Hennessy Rd Elite Centre

55 King Yip St

Developer Lai Sun & CCB Hysan Swire Prop SHKP Billion Dev.GFA 168,750 216,000 110,000 161,025 186,050 OP date May-12 Apr-12 May/June 2012 Q3/Q4 2012 Q1 2012State Self Use 33% (let) 0% 98% (sold) 100% (sold)

Change in: Driver Correlation Volatility Regression R-square PeriodOffice rents - Central Grade A Real GDP growth 0.85 38% y = 8.57 x - 0.24 0.72 1995-nowOffice rents - Overall Grade A Real GDP growth 0.84 17% y = 3.77 x - 0.13 0.71 1995-nowRetail rents Real GDP growth 0.78 7% y = 1.50 x - 0.045 0.61 1995-nowHome prices Real GDP growth 0.40 20% y = 1.94 x + 0.01 0.16 1984-now

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We believe the price inelasticity of Central office demand is not lost on the major landlords. While landlords would rightly have to consider how to deal with the potential amount of backfill space, in the context of the existing low vacancy, we believe Central landlords are likely to opt to let vacancy rise rather than to aggressively cut rents. For instance, Savills estimates the amount of backfill space in Central for 2012 at around 400,000sf. While this is not a small amount, compared to Central’s 23mn sf office stock, this only represents roughly 1.7%. Assuming this entire space remains vacant, this would only result in Central’s overall vacancy rising from 3.6% to 5.3%. Even on Jones Lang Lasalle’s more pessimistic forecast that Central tenants may surrender 800,000sf in Grade A office space, under this scenario, this would only take Central’s vacancy up to 7.0%, still substantially below the natural vacancy rate of 10%.

Fig. 19: Central vacancy could rise to 5.3-7.0%, but this is still well below natural rate

Source: JLL, Nomura Research

Uneven growth – Financial vs. real economy

Third, there is also the issue of the uneven growth between HK’s financial and real economy. This is a point best illustrated by the past quarters’ employment surveys. Using data from the Hudson Report, net hiring expectations peaked out in Q2 2011 (April 2011 release) at 68% (69% hiring less 1% firing). Since then, net hiring has fallen to 60% in Q3, 30% in Q4 and 25% in Q1 2012.

Fig. 20: Net hiring expectations vs. Central office rents

Source: Hudson Report, JLL, Nomura Research

What is interesting is the divergent performance of the various industries. While the financial services and related industries like legal and media were relatively weak, the

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real economy industries like consumer, manufacturing and IT & Telecom have held up relatively well with even some increase in hiring over the past quarters.

Fig. 21: Hudson net hiring expectations: Financial vs. real economy sectors

Source: Hudson Report

We believe the dichotomy between the financial and real industries can be partly explained by their different investment horizons. For real economy MNCs that have longer investment horizons, the short term headwinds from low trading volume and liquidity conditions are less likely to affect their medium term hiring plans. This divergent performance has led to an interesting phenomenon where pay and bonus expectations for general staff are rising even as net hiring is falling.

According to the Q1 Hudson Report, 90% of the firms said they would pay a discretionary bonus for 2011 – this is up from 82% last year. Among the sectors, this was led by the Financial Services sector at 95%, Consumer sector at 93% and the IT & Telecom sector at 64%.

Even more surprisingly, the survey found that bonuses are likely to be bigger than in 1Q11. The number of firms willing to pay a discretionary bonus of more than 10% increased from 45% last year to 58% this year. Those paying less than 5% declined from 18% to 8%.

Fig. 22: Firms paying a discretionary year-end bonus in 2011


Fig. 23: Range of discretionary year-end bonus in 2011


Further, last year’s introduction of minimum wages in HK has caused the low end of the labour market to tighten further. Overall unemployment is very low at 3.3% and this has helped to drive up overall household income levels.

Q111 Q211 Q311 Q411 Q112Banks & Fin.Services 74% 72% 61% 19% 13%Manufacturing & Ind 53% 56% 46% 36% 38%IT & Telecom 75% 79% 52% 31% 31%Consumer 52% 62% 68% 46% 54%Legal 100% 88% 90% 48% -4%Media/PR/Advertising 65% 63% 47% 50% 22%All industries 65% 68% 60% 30% 25%

Yes, 90%

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Fig. 24: HK’s labour market is still very tight

Source: CEIC

For 2012, this uneven growth is likely to result in a three tier market. With pay levels rising and decent employment prospect, the low end mass market is likely to be relatively resilient. At the other extreme, the super high end market (i.e. houses on the peak) is likely to continue to benefit from scarcity value and continued inflow of Mainland Chinese demand. It is the mid-end market, those related to financial services and related industries that are likely to be weak.

Normally, property tends to be a macro-driven sector but the divergent growth of the financial and real economy means that there is a greater need for stock/location selection. Firstly, landlords with offices in the decentralised areas that cater to consumer companies are likely to do better. Secondly, developers with lower end mass market products are also likely to see stronger demand for their launches. Thirdly, although retail landlords are still likely to see retail sales in their properties rise, given the weak mid-market, retail sales growth is likely to undershoot the market’s lofty expectations.

Fig. 25: HK retail sales growth

Source: CEIC

Solid fundamentals remain: Tight supply all the way to 2015

The bottom line is that we estimate that housing and office supply should remain low until at least 2015 with average completions at just about 50% of the historical absorption levels, there is very little slack for any kind of positive surprise. At these levels, it just barely meets end users’ needs for shelter. Should either investment or external (i.e., Mainland) demand starts to re-surface, we believe our V-Shaped recovery could turn out to be a lot sharper than we expect.

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Fig. 26: HK housing supply and demand


Fig. 27: HK Grade A office supply and demand


Low interest rates extended by 12-18 months to 2014

Last but not least, one key reason why we believe HK’s property market could re-engage a lot faster than expected is the Fed’s latest statement that it intends to keep interest rates low until 2014. Compared to its previous guidance of mid-2013, the low interest rate environment has just been extended by 12- 18 months.

For potential home buyers, the implications are two-fold. First, for those who were hoping for home prices to correct as interest rates increase, rather than waiting for a little over one year, the waiting period is now extended to 2.5 years. We believe this will encourage more potential home buyers to step off the sidelines and execute on their home purchase plan.

Second, despite the poor sentiment on the housing market, fundamentally, the HK housing market still enjoys positive carry and real interest rates remain negative. Although mortgage rates have increased over 2011, with the latest mortgages priced at 2.54% (HKMA’s December mortgage survey), against overall housing yield of 3.46%, there is still positive carry in the market.

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Fig. 28: Positive carry still remain


On the real interest rates front, even as inflation appears to be moderating (HK Government forecast underlying inflation at 4.0% in 2012, headline inflation at 3.5%), against HK’s composite interest rate at 0.53% and nominal mortgage rates at 2.54%, real interest rates is still in negative territory and there is no theoretical change to the call to switch away from saving to consumption and from cash to real estate.

Fig. 29: Negative real interest as well


What about policy? Status quo likely to remain

Ever since the HK government first acted to cool the property market in Q4 2009, potential policy measures have been an overhang on both the physical property and property stocks prices. While one can never rule out further policy moves, we believe 2012 is likely to be relatively quiet on the policy front. We believe the Government’s property cooling measures are dynamic in nature and responds to rapid changes in home prices. With home prices largely stable and transaction greatly reduced, there is little incentive to tighten further. Conversely, there is also little incentive for the Government to loosen.

We believe the recent 2012/13 Budget Speech has spelt out the government’s policy stance in very clear terms.

“I am pleased to see that these measures have achieved some results. Speculative activities have abated, the average loan-to-value ratio of new residential mortgages has been falling gradually, and flat prices have started to come down since last June. Despite the recent stabilisation of the property market, the low-interest environment persists, and the developed countries may again resort to quantitative easing policies to boost their

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sluggish economies. I shall, therefore, continue the strategy that has proven to be effective in facilitating the healthy and stable development of the property market.” 2012/13 Budget speech

If our forecast for a 10% increase in home prices were to materialise, whether the government will need to act again, we believe would depend on the trajectory of the rise. If our 10% materialises over say 10 months with a 1% gain per month, there is little cause for more measures. However, if our entire 10% were to materialise over say a three-month period, there would then be more cause for additional tightening. However, more fundamentally, with current LTV ratios already lowered to 50% (for homes above HK$10mn) and the very punitive Special Stamp Duty, we believe the HK government’s property cooling measures are already strong enough and any additional measures are likely to see their unintended consequences outweigh their benefits.


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Stock picks: Be constructive but safe Given our belief that 2012 is likely to be a mirror image of 2011, we continue to advocate a constructive and bullish view on the HK developers. But with the increasing prospect that the office market could re-engage at a faster than expected pace, we also turn positive on the HK landlords, in particular the office landlords. We are upgrading HK Land, Hysan and Champion REIT all from Neutral to Buy.

Turning bullish on the landlords: HKL, Hysan, Champion and Swire Properties all Rated Buys

• HK Land (from Neutral to Buy) – While our new 2012 Central rental forecast results in a 15% cut in our forward NAV estimate from US$11.1 to US$9.6, we believe HK Land’s current share price has more than reflected the near-term challenging outlook of the office market. Once the cost cutting completes, we expect HK Land’s discount to NAV to revert back to its long run average of 30%. Our price target of HK$6.70 offers 26% upside, upgrade to Buy.

• Hysan (from Neutral to Buy) – Hysan, with its exposure to the Causeway Bay area, sees some of the least downward revision to its NAV estimates. Further, with Hysan Place expected to complete this year and starting to contribute to earnings, we are compressing our target discount from 35% to 30%, same as HK Land and Wharf. Our price target of HK$40.50 is raised by 9% and offers potential upside of 34%. Upgrade to Buy.

• Champion REIT (from Neutral to Buy) – While we have cut Champion REIT’s FY12 and FY13 DPU estimates by 13% and 10% and our fair value by 15% to HK$4.16, we believe Champion’s 33% decline in 2H 2011 had more than reflected its earnings risk. With 28% potential upside, we upgrade Champion from Neutral to Buy.

• Swire Properties (from Not Rated to Buy) – With the spin-off of its properties business into a separate entity, we switch our coverage from Swire Pacific (19 HK, previously Buy to NR) to Swire Properties (1972 HK). We start with a Buy rating. Our target discount of 25% is 5% lower than the fair value discount that we apply towards HK Land and Wharf as we believe Swire Properties portfolio faces less of the finance headwind that HK Land faces and less of the China risk that Wharf faces. Our price target of HK$23.50 offers 25% potential upside.

In order to reflect the slower-than-expected office rental growth in 2H11 and the spot rental decline in 2012, we have cut our forward NAV and price targets by 8% and 11%. But as most property stocks have corrected by a larger magnitude, we find that the developers and landlords still offer 40% and 29% upside respectively. However, for two stocks under our coverage, their estimates have been cut more drastically and result in a downgrade in their ratings.

• New World Development (downgrade from Buy to Neutral) - The dilution effect of NWD’s rights issue results in a 38% downgrade in our forward NAV. Together with a 14% widening of our target discount to 50%, we have cut our price target by 52% to only HK$9.90. With only 11% upside to our price target, we downgrade NWD from Buy to Neutral.

• Midland Holdings (downgrade from Buy to Neutral) – While we are positive on home prices, the continued impact of the Special Stamp Duty on volume poses a big earnings challenge for Midland. We have cut our FY11 and FY12 earnings estimates by 34% and 49% respectively. This lowers our target PB from 2.14x to 1.90x and cuts our price target by 15% from HK$5.15 to HK$4.40. We downgrade Midland from Buy to Neutral.


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Fig. 30: Revisions to NAV, price targets and ratings

Source: Nomura estimates, pricing as of February 8, 2012

Indifferent between developers and landlords

In terms of our relative preference between developers and landlords, after running a strong preference for developers over landlords since 29 June, 2011, we are now indifferent between the two. Valuations levels have largely converged with the developers and landlords 0.84x PB and 0.65x PB both around 1 SD below their norms.

Top picks: SHKP and HLD for developers, Hysan and HK Land for landlords

From a stock selection perspective, we focus on three criteria for 2012:

• Large-cap property companies – As the divergence between the physical property market and property stocks has now been in place for over a year and in light of how bearish market expectations are, we believe investors are still very underweight the sector. While small cap companies may offer cheaper valuations, large cap property stocks would be important for overall portfolio performance.

• Depressed valuation plus re-rating potential – We look for property stocks that are still trading at substantial discounts to their historical valuations. Using P/B ratios as a guide and applying a US$4bn market cap filter, the larger-cap property stocks that are most undervalued include HLD (53% below), CK (34% below), Swire Prop (-33% below vs. Swire Pacific’s history), NWD (33% below), HK Land (28% below), and SHKP (24% below).

Share Potential Rating

(HKD) Stock Code Old New Change Old New Change Old New Change Old New Change Price Upside Previous New

Cheung Kong 1 HK 137.2 137.7 0% 181.5 151.9 -16% -10% -10% 0% 163.90 136.70 -17% 107.30 27% Buy BUY

Henderson Land 12 HK 88.3 85.7 -3% 90.5 89.2 -1% -25% -30% -5% 67.90 62.40 -8% 43.80 42% Buy BUY

SHKP 16 HK 171.4 154.3 -10% 185.2 172.5 -7% -10% -10% 0% 166.50 155.20 -7% 108.70 43% Buy BUY

New World Dev 17 HK 26.3 19.0 -28% 31.8 19.7 -38% -36% -50% -14% 20.70 9.90 -52% 8.95 11% Buy NEUTRAL

Sino Land 83 HK 17.7 17.8 1% 19.5 19.5 0% -10% -10% 0% 17.60 17.50 -1% 12.56 39% Buy BUY

Hang Lung Properties 101 HK 31.9 31.0 -3% 34.8 33.1 -5% -15% -15% 0% 29.60 28.10 -5% 27.75 1% Neutral NEUTRAL

HKR Int'l 480 HK 13.6 13.0 -5% 14.5 14.2 -2% -45% -55% -10% 8.00 6.40 -20% 2.87 123% Buy BUY

Kerry 683 HK 61.3 58.9 -4% 68.4 63.9 -7% -24% -35% -11% 52.00 41.50 -20% 31.80 31% Buy BUY

Wharf 4 HK 66.7 65.1 -2% 75.7 69.6 -8% -30% -30% 0% 53.10 48.70 -8% 46.50 5% Neutral NEUTRAL

Hysan 14 HK 50.0 54.6 9% 57.3 57.9 1% -35% -30% 5% 37.20 40.50 9% 30.25 34% Neutral BUY

Swire Properties 1972 HK N/A 31.2 N/A N/A 31.3 N/A N/A -25% N/A N/A 23.50 N/A 18.86 25% N/A BUY

Great Eagle 41 HK 51.7 54.7 6% 57.8 59.8 3% -48% -48% 0% 30.10 31.10 3% 20.20 54% Buy BUY

HK Land (USD) HKL SP 9.1 9.6 5% 11.1 9.6 -13% -36% -30% 6% 7.10 6.70 -6% 5.33 26% Neutral BUY

Average -3% -8% -27% -29% -2% -11% 35%

FY11 DPU/EPS FY12 DPU/EPS Target P/E Target Price Share Potential Rating

REITs/Agents Old New Change Old New Change Old New Change Old New Change Price Upside Previous New

Link REIT 823 HK 1.10 1.10 0% 1.28 1.28 0% N/A N/A N/A 30.12 30.12 0% 28.30 6% Neutral NEUTRAL

Prosperity REIT 808 HK 0.12 0.12 0% 0.13 0.13 0% N/A N/A N/A 2.40 2.40 0% 1.70 41% Buy BUY

Champion REIT 2778 HK 0.22 0.22 -2% 0.26 0.23 -13% N/A N/A N/A 4.90 4.16 -15% 3.25 28% Neutral BUY

Midland 1200 HK 0.50 0.33 -34% 0.63 0.32 -49% 8.0 13.6 70% 5.15 4.40 -15% 4.33 2% Buy NEUTRAL

Current NAV Forward Target Discount Target Price


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Fig. 31: Property stocks trailing price-to-book ratios

Source: Reuters Thomson DataStream, Nomura Research Note: * For Swire Properties, historical average PB and SD is based on parent company Swire Pacific’s figures

• Minimise potential earnings risk – Given how difficult market conditions were in 2H11, we are also mindful of potential earnings risk for the upcoming reporting season. With the Hang Seng Index falling 17.7% in 2H 2011, one potential risk area is investment securities and potential mark-to-market losses. Based on the latest financial results (June 2011 for most companies), property companies with the largest investment securities portfolios are Cheung Kong with HK$11.5bn, NWD with HK$7.5bn and SHKP with HK$4.5bn. But relative to their shareholders’ funds, the companies with the largest investments portfolios are NWD with 7%, Hysan with 5% and Cheung Kong with 4%.

Fig. 32: HK Property companies: Investment securities portfolio

Source: Company data Note * Great Eagle also has HK$3.2bn in the form of Champion REIT’s convertible bonds

Using the above three filters, our top picks for 2012 are SHKP and HLD for the developers and Hysan and HK Land for the landlords.

• SHKP (Buy, PT of HK$155.20) – According to our estimates, with a market share of 28%, SHKP is HK’s largest new homes developers. SHKP is also HK’s largest office landlord and second-largest shopping mall owner after Link REIT. Compared to its

Hong Kong Developers / LandlordsAverage PB

(x) One SD (x)Current PB

(x) Vs. Average +/- SD (x)

Trough PB during 08

crisis SD in 08 (x)

Cheung Kong 1.27 0.46 0.84 -34% (0.95) 0.54 (1.59)

Henderson Land 1.24 0.52 0.58 -53% (1.26) 0.37 (1.67)

SHKP 1.20 0.25 0.91 -24% (1.13) 0.60 (2.36)

New World Dev 0.69 0.34 0.47 -33% (0.67) 0.26 (1.27)

Sino Land 0.77 0.37 0.90 18% 0.38 0.41 (0.98)

Hang Lung Properties 0.98 0.35 1.11 13% 0.37 0.85 (0.37)

Kerry Properties 0.78 0.41 0.74 -4% (0.08) 0.37 (1.00)

HKR Int'l 0.58 0.24 0.28 -52% (1.28) 0.19 (1.66)

Midland 2.16 1.15 1.81 -16% (0.30) 0.81 (1.18)

Wharf 0.78 0.18 0.76 -3% (0.15) 0.33 (2.46)

Hysan 0.62 0.15 0.69 12% 0.49 0.33 (1.86)

Great Eagle 0.50 0.16 0.39 -21% (0.66) 0.23 (1.68)

HK Land (US$) 0.73 0.15 0.53 -28% (1.33) 0.34 (2.57)

Swire Prop* 0.96 0.20 0.65 -33% (1.57) 0.43 (2.66)

Link REIT 1.14 0.18 1.08 -5% (0.30) 0.85 (1.56)

Prosperity REIT 0.64 0.15 0.55 -15% (0.62) 0.30 (2.24)

Champion REIT 0.58 0.13 0.44 -25% (1.14) 0.27 (2.47)

Developers (wgt avg) 1.16 0.28 0.84 -27% (1.11) 0.54 (2.16)

Landlords (wgt avg) 0.80 0.14 0.65 -18% (1.02) 0.36 (3.08)

(HKDmn) As of ST investments LT investmentsTotal

investmentsAs % of total

assets

As % of shareholders'

funds'

Cheung Kong Jun-11 290 11,173 11,463 3% 4%New World Dev Jun-11 1 7,517 7,519 3% 7%SHKP Jun-11 1,126 3,362 4,488 1% 1%Henderson Land Jun-11 - 3,203 3,203 1% 2%Wharf Jun-11 - 3,162 3,162 1% 2%Hysan Jun-11 580 1,617 2,197 4% 5%Kerry Jun-11 215 1,850 2,065 2% 3%Sino Land Jun-11 880 1,058 1,938 2% 2%HKR Int'l Sep-11 124 112 237 1% 2%Great Eagle* Jun-11 85 102 186 1% 1%Midland Jun-11 0 16 17 0% 1%Prosperity REIT Jun-11 - - - 0% 0%Link REIT Sep-11 - - - 0% 0%Hang Lung Properties Dec-11 - - - 0% 0%Champion REIT Jun-11 - - - 0% 0%HK Land (USD) Jun-11 - - - 0% 0%


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historical average P/B of 1.20x, SHKP’s current 0.91x P/B is still 24% cheaper and offers substantial re-rating potential if our positive view of the local property market proves correct.

• HLD (Buy, PT of HK$62.40) – Among the large-cap property stocks, we believe HLD has the biggest scope for a positive surprise as its valuations are the most depressed. HLD’s current P/B ratio of 0.58x is 53% below its historical average of 1.24x. Further, with several large scale property projects like Wu Ka Sha and Tai Tong Rd set for presales in 2012, there is some scope for HLD to convince the market of its HK development strategy.

• Hysan (Buy, PT of HK$40.50) – Although Hysan’s 0.69x PB does not compare well against its historical average of 0.62x, we believe there is still scope for Hysan to re-rate. The completion of Hysan Place later this year and the renovations of One Hysan Avenue and Leighton Centre have substantially rejunvenated Hysan CWB portfolio and should help contribute to Hysan’s earnings.

• HK Land (Buy, PT of US$6.70) – Trading at 0.53x PB and 28% below its historical norm, we believe HK Land’s current share price already reflect the challenging outlook of the Central office market. While demand is uncertain, with Central supply sustainably low, if and when demand begins to recover, we believe Central office rents could re-engage a lot faster. With 70% of its NAV tied to Central office, HK Land would be a key beneficiary on a turnaround.

Fig. 33: HK property stocks comp table

Note ** Midland is a property broker

Source: Nomura Research.

Fig. 34: Historical NAV discounts

Source: Nomura Research

Mkt Discount DiscountCap Share Target Current -Current Forward Forward

(USDmn) Curr. Price Price NAV NAV NAV NAV FY2010A FY2011A/F FY2012F FY2010A FY2011A/F FY2012F FY2010A FY2011A/F FY2012F

HK Property Developers0001.HK Cheung Kong 31,862 HKD 107.30 136.70 27% BUY 137.7 -22% 151.9 -29% -10% Dec 11.6x 6.3x 12.2x 2.7% 2.9% 3.1% -5% -6% -7%0012.HK Henderson Land 13,302 HKD 43.80 62.40 42% BUY 85.7 -49% 89.2 -51% -30% Dec 18.8x 16.1x 15.5x 2.3% 2.4% 2.4% -20% -18% -14%0016.HK SHKP 36,445 HKD 108.70 155.20 43% BUY 154.3 -30% 172.5 -37% -10% Jun 20.1x 13.0x 13.2x 2.5% 3.1% 3.1% -14% -17% -14%0017.HK New World Dev 7,002 HKD 8.95 9.90 11% NEUTRAL 19.0 -53% 19.7 -55% -50% Jun 4.5x 6.5x 9.6x 4.2% 4.2% 2.9% -32% -35% -18%0083.HK Sino Land 9,483 HKD 12.56 17.50 39% BUY 17.8 -29% 19.5 -35% -10% Jun 17.4x 14.6x 15.2x 3.2% 3.6% 3.6% -22% -8% -14%0101.HK Hang Lung Properties 15,913 HKD 27.75 28.10 1% NEUTRAL 31.0 -10% 33.1 -16% -15% Jun 17.2x 27.6x 14.4x 2.6% 3.2% 2.7% 5% 2% 8%0480.HK HKR Int'l 497 HKD 2.87 6.40 123% BUY 13.0 -78% 14.2 -80% -55% Mar 5.0x 4.6x 29.3x 6.3% 6.3% 0.0% -2% -8% -20%0683.HK Kerry Properties 5,864 HKD 31.80 41.50 31% BUY 58.9 -46% 63.9 -50% -35% Dec 13.8x 11.2x 8.2x 2.7% 3.1% 3.1% -17% -26% -19%1200.HK **Midland Holdings 397 HKD 4.33 4.40 2% NEUTRAL NA NA NA NA NA Dec 6.3x 13.2x 13.3x 13.6% 5.7% 5.6% 87% 94% 94%

HK Property Investors

0004.HK Wharf 18,059 HKD 46.50 48.70 5% NEUTRAL 65.1 -29% 69.6 -33% -30% Dec 16.2x 18.3x 14.8x 2.2% 2.2% 2.2% -20% -22% -20%0014.HK Hysan 4,110 HKD 30.25 40.50 34% BUY 54.6 -45% 57.9 -48% -30% Dec 27.7x 25.0x 22.2x 2.4% 2.4% 2.8% -6% -7% -7%0041.HK Great Eagle 1,628 HKD 20.20 31.10 54% BUY 54.7 -63% 59.8 -66% -48% Dec 9.0x 9.7x 9.0x 2.8% 3.0% 3.1% -7% -4% -1%1972.HK Swire Properties 14,145 HKD 18.86 23.50 25% BUY 31.2 -40% 31.3 -40% -25% Dec 22.4x 23.6x 16.5x 2.3% 9.1% 2.6% -23% -14% -17%HKLD.SI HK Land (US$) 12,462 USD 5.33 6.70 26% BUY 9.6 -45% 9.6 -45% -30% Dec 14.8x 16.3x 19.1x 3.0% 3.0% 3.4% -12% -12% -13%

Mkt Dividend Potential Spread Cap Share Target Yield Total on 10 Yr

(USDmn) Curr. Price Price ($mn) 2011 Return Bond (bps) FY2010A/F FY2011F FY2012F FY2010F FY2011F FY2012F FY2010A/F FY2011F FY2012F

HK REITs0808.HK Prosperity REIT 298 HKD 1.70 2.40 41% BUY 4,042 7.1% 48% 2.70 583 Dec 3.5x 15.2x 14.7x 6.5% 7.1% 7.4% -29% -26% -23%0823.HK Link REIT 8,208 HKD 28.30 30.12 6% NEUTRAL 73,551 4.4% 11% 26.14 312 Mar 29.2x 25.7x 22.0x 3.4% 3.9% 4.5% -20% -15% -16%2778.HK Champion REIT 2,065 HKD 3.25 4.16 28% BUY 31,013 6.8% 35% 6.63 551 Dec -38.2x 15.2x 17.7x 6.7% 6.8% 6.9% -32% -30% -30%

Net Debt/EquityP/E

P/E

Upside RatingsTarget

DiscountYearEnd

Dividend Yield

Gross Debt/Assets

Upside RatingsEV

BVPSYear End

Dividend Yield

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Ch

eun

g K

ong

Hen

d L

and

SH

KP

New

Wo

rld

Dev

Sin

o L

and

Han

g L

ung

Pro

p

Ker

ry P

rop

ertie

s

Dev

elo

pers

Lan

dlo

rds

Wh

arf

Hys

an

Sw

ire

Pro

per

ties

Gre

at E

agle

HK

Lan

d

Forward Discount Historical avg disc.Developers Landlords

Current gap7%

Historical Gap12%


23

NAV discount charts

Fig. 35: Cheung Kong NAV discoun

Source: Nomura research

Fig. 36: Henderson Land NAV discount


Fig. 37: SHKP NAV discount


Fig. 38: New World Dev NAV discount


Fig. 39: Sino Land NAV discount


Fig. 40: Hang Lung Prop NAV discount


-50%

-40%

-30%

-20%

-10%

0%

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20%

Aug

-94

Aug

-95

Aug

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NAV Discount Average Discount

Average Disc.= -15%

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0%

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Aug

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Average Disc. = -20%

-80%

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Aug

-94

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Average Disc. = -8%

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Aug

-94

Aug

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Average Disc.= -38%

-80%

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0%

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Aug

-94

Aug

-95

Au g

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Au g

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Au g

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Au g

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Average Disc.= -32%

-80%

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Aug

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Average Disc.= -19%


24

Fig. 41: Kerry Prop NAV discount


Fig. 42: Wharf Holdings NAV discount


Fig. 43: Hysan NAV discount


Fig. 44: Great Eagle NAV discount


Fig. 45: HK Land NAV discount


Fig. 46: Developers & landlords NAV discount


-100%

-80%

-60%

-40%

-20%

0%

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Aug

-96

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Dec

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Average Disc.= -31%

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Dec

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-100%

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Dec

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Average Disc.= -49%

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Dec

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Dec

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Average Disc.= -29%

-80%

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0%

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Aug

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Developers NAV Disc.

Landlords NAV Disc.


25

Price to book ratios

Fig. 47: Cheung Kong P/B chart


Fig. 48: Henderson Land P/B chart


Fig. 49: SHKP P/B chart


Fig. 50: New World Dev P/B chart


Fig. 51: Sino Land P/B chart


Fig. 52: Hang Lung Prop P/B chart


0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan

-91

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-11

Cheung Kong Avg +1SD -1SD

0.0

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Henderson Land Avg +1SD -1SD

0.0

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Jan

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SHKP Avg +1SD -1SD

0.0

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Jan

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New World Dev Avg +1SD -1SD

0.0

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Jan

-91

Jan

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Jan

-95

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-11

Sino Land Avg +1SD -1SD

0.0

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Jan

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-09

Jan

-11

Hang Lung Properties Avg

+1SD -1SD


26

Fig. 53: HKR Int’l P/B chart


Fig. 54: Kerry Properties P/B chart


Fig. 55: Wharf P/B chart


Fig. 56: Hysan P/B chart


Fig. 57: Great Eagle P/B chart


Fig. 58: HK Land P/B chart


0.0

0.5

1.0

1.5

2.0

2.5

3.0Ja

n-9

5

Jan

-97

Jan

-99

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-01

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-11

HKR Avg +1SD -1SD

0.0

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Aug

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Kerry Properties Avg +1SD -1SD

0.0

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Jan

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-93

Jan

-95

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Wharf Avg +1SD -1SD

0.0

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Jan

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Jan

-95

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-11

Hysan Avg +1SD +1SD

0.0

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0.4

0.6

0.8

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Jan

-91

Jan

-93

Jan

-95

Jan

-97

Jan

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Jan

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Jan

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-11

Great Eagle Avg +1SD -1SD

0.0

0.2

0.4

0.6

0.8

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1.4

Jan

-91

Jan

-93

Jan

-95

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Jan

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-05

Jan

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Jan

-11

HK Land (USD) Avg +1SD -1SD


27

Fig. 59: Change in our estimates

Source: Nomura estimates, Bloomberg consensus estimates

Underlying

Net Profit (HKDmn) FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13

Cheung Kong 39,198 21,955 25,311 39,495 20,437 25,557 1% -7% 1% 23,632 22,330 25,873 67% -8% -1%

Henderson Land 6,031 6,691 na 6,173 6,710 8,085 2% 0% na 6,093 6,777 6,725 1% -1% 20%

SHKP 21,479 20,274 20,265 21,479 21,223 19,467 0% 5% -4% - 20,620 19,637 na 3% -1%

New World Dev 4,136 4,590 5,449 5,472 4,661 6,317 32% 2% 16% - 5,535 5,704 na -16% 11%

Sino Land 4,401 3,542 4,813 4,401 4,659 4,810 0% 32% 0% - 4,586 5,584 na 2% -14%

Hang Lung Properties 2,741 8,633 10,678 4,391 8,596 10,556 60% 0% -1% - 4,242 5,893 na 103% 79%

HKR Int'l 769 1,120 531 838 132 1,233 9% -88% 132% - 1,120 531 na -88% 132%

Kerry Properties 4,767 4,812 na 4,068 5,576 4,603 -15% 16% na 4,057 4,670 4,146 0% 19% 11%

Wharf 7,567 9,525 12,198 7,573 9,487 11,664 0% 0% -4% 7,989 9,545 11,043 -5% -1% 6%

Hysan 1,294 1,582 1,862 1,275 1,436 1,786 -1% -9% -4% 1,274 1,462 1,710 0% -2% 4%

Swire Properties na na na 4,546 6,694 5,779 na na na 4,974 6,701 5,913 -9% 0% -2%

Great Eagle 1,320 1,725 na 1,299 1,397 1,441 -2% -19% na 1,401 1,339 1,286 -7% 4% 12%

HK Land (US$mn) 736 651 759 734 627 829 0% -4% 9% 692 675 776 6% -7% 7%

Midland 359 457 515 237 235 394 -34% -49% -24% 292 324 344 -19% -27% 14%

Link REIT 2,458 2,890 3,159 2,458 2,890 3,159 0% 0% 0% 2,869 3,148 3,364 -14% -8% -6%

Prosperity REIT 168 178 189 168 178 189 0% 0% 0% 154 163 170 9% 9% 12%

Champion REIT 1,170 1,366 1,183 1,146 1,188 1,071 -2% -13% -10% 931 1,026 1,019 23% 16% 5%

Average 3% -8% 9% Average 4% 0% 17%

EPS (HKD)

FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13

Cheung Kong 16.92 9.48 10.93 17.05 8.82 11.03 1% -7% 1% 9.496 9.713 11.201 80% -9% -1%

Henderson Land 2.81 3.12 na 2.72 2.83 3.41 -3% -9% na 2.864 2.946 2.871 -5% -4% 19%

SHKP 8.37 7.90 7.90 8.36 8.26 7.57 0% 4% -4% - 8.039 7.649 na 3% -1%

New World Dev 1.06 1.17 1.39 1.39 0.93 1.06 31% -20% -24% - 1.042 0.960 na -10% 10%

Sino Land 0.86 0.63 0.83 0.86 0.83 0.83 -1% 32% 0% - 0.806 1.003 na 3% -17%

Hang Lung Properties 0.63 1.94 2.40 1.01 1.93 2.37 60% 0% -1% - 1.040 1.397 na 86% 70%

HKR Int'l 0.57 0.83 0.39 0.62 0.10 0.91 9% -88% 132% - 0.830 0.390 na -88% 134%

Kerry Properties 3.34 3.37 na 2.83 3.88 3.21 -15% 15% na 2.877 3.335 3.016 -2% 16% 6%

Wharf 2.54 3.14 4.03 2.54 3.13 3.85 0% 0% -4% 2.684 3.140 3.669 -5% 0% 5%

Hysan 1.23 1.50 1.77 1.21 1.36 1.70 -1% -9% -4% 1.212 1.404 1.618 0% -3% 5%

Swire Properties na na na 0.80 1.14 0.99 na na na 0.853 1.163 1.047 -6% -2% -6%

Great Eagle 2.12 2.77 na 2.09 2.24 2.31 -2% -19% na 2.294 2.186 2.102 -9% 3% 10%

HK Land (US$) 0.33 0.29 0.34 0.33 0.28 0.37 0% -4% 9% 0.299 0.292 0.337 9% -5% 9%

Midland 0.50 0.63 0.71 0.33 0.32 0.54 -34% -49% -24% 0.369 0.431 0.440 -11% -25% 24%

Link REIT 1.10 1.28 1.40 1.10 1.28 1.40 0% 0% 0% 1.270 1.363 1.473 -13% -6% -5%

Prosperity REIT 0.11 0.12 0.10 0.11 0.12 0.10 0% 0% 0% 0.112 0.108 0.117 0% 7% -16%

Champion REIT 0.18 0.22 0.20 0.21 0.18 0.18 21% -15% -10% 0.173 0.197 0.189 24% -7% -5%

Average 4% -11% 5% Average 5% -2% 14%

DPS (HKD) FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13

Cheung Kong 3.15 3.35 3.43 3.15 3.35 3.43 0% 0% 0% 3.08 3.18 3.31 2% 5% 4%

Henderson Land 1.05 1.05 na 1.05 1.05 1.05 0% 0% na 1.02 1.05 1.06 3% 0% -1%

SHKP 3.35 3.35 3.35 3.35 3.35 3.35 0% 0% 0% - 3.46 3.45 na -3% -3%

New World Dev 0.38 0.38 0.38 0.38 0.26 0.26 0% -32% -32% - 0.33 0.33 na -21% -21%

Sino Land 0.45 0.45 0.45 0.45 0.45 0.45 0% 0% 0% - 0.43 0.47 na 4% -4%

Hang Lung Properties 0.71 0.74 0.76 0.88 0.74 0.76 24% 0% 0% - 0.71 0.73 na 4% 4%

HKR Int'l 0.20 0.22 0.24 0.18 - 0.18 -10% -100% -25% - 0.22 0.24 na -100% -25%

Kerry Properties 1.00 1.00 na 1.00 1.00 1.00 0% 0% na 0.96 1.06 1.07 4% -6% -6%

Wharf 1.00 1.02 1.10 1.00 1.02 1.10 0% 0% 0% 1.02 1.06 1.10 -2% -3% 0%

Hysan 0.74 0.86 0.96 0.74 0.86 0.96 0% 0% 0% 0.78 0.86 0.98 -5% 0% -2%

Swire Properties na na na 1.71 0.49 0.49 na na na 1.87 0.55 0.53 -8% -11% -6%

Great Eagle 0.60 0.75 na 0.60 0.62 0.62 0% -17% na 0.61 0.62 0.60 -1% 0% 4%

HK Land (US$) 0.16 0.18 0.19 0.16 0.18 0.19 0% 0% 0% 0.16 0.16 0.17 0% 11% 12%

Midland 0.37 0.47 0.53 0.25 0.24 0.41 -34% -49% -24% 0.28 0.28 0.34 -13% -12% 21%

Link REIT 1.10 1.28 1.40 1.10 1.28 1.40 0% 0% 0% 1.27 1.38 1.47 -13% -7% -4%

Prosperity REIT 0.12 0.13 0.13 0.12 0.13 0.13 0% 0% 0% 0.12 0.13 0.13 0% 1% 2%

Champion REIT 0.22 0.26 0.22 0.22 0.23 0.20 -2% -13% -10% 0.22 0.23 0.21 0% 0% -2%

Average -1% -13% -7% Average -3% -8% -2%

Consensus

Consensus Variance

Variance

Previous estimate New estimate Change Consensus Variance

Previous estimate

Previous estimate

New estimate

New estimate

Change

Change

Key company data: See page 2 for company data and detailed price/index chart.

Cheung Kong (Holdings) 0001.HK 1 HK

PROPERTY

EQUITY RESEARCH

TP lowered to HKD136.70, maintain Buy

Property continues to tick along, but lower Hutchison fair value reduces our TP

February 14, 2012

Rating Remains

Buy

Target price Reduced from 163.90

HKD 136.70

Closing price February 8, 2012

HKD 107.30

Potential upside +27.4%

Property stub trading at a 31% discount to NAV Although we cut our TP for Cheung Kong by 17% from HKD163.90 to HKD136.70, we maintain our Buy rating. At the property level, we believe there is little change as Cheung Kong’s projects like La Splendeur and Festival City III have continued to sell well. Our lower target price mainly reflects an 18% decline in the consensus fair value for Hutchison from HKD106.79 to HKD87.77. If we were to strip out CK’s stake in Hutchison using a 15% holding company discount, it leaves its property business trading at a 31% discount to NAV, broadly in line with SHKP’s 30% and Sino Land’s 29% discount to NAV.

Changes to our estimates In light of CK’s steady property sales in HK and limited exposure to CBD offices (ie, The Center), we have only made minor revisions to our FY11-13F earnings estimates, from +1% to -7%. As we base our forward NAV estimate on the consensus fair value for Hutchison, we have had to cut our forward NAV by 16% from HKD181.51 to HKD151.91. For our spot and forward NAV, Hutchison makes up 51% and 53% of Cheung Kong’s overall NAV.

Valuation: TP at HKD136.70 after 10% NAV discount, maintain Buy Keeping our target discount unchanged at 10%, our 16% downward NAV revision flows straight through to our TP. Our revised HKD136.70 TP offers 27% upside. We maintain our Buy rating on Cheung Kong.

31 Dec FY10 FY11F FY12F FY13F

Currency (HKD) Actual Old New Old New Old New

Revenue (mn) 32,863 40,546 42,468 39,907 38,161 43,241 53,009

Reported net profit (mn) 26,478 39,198 39,495 21,955 20,437 25,311 25,557

Normalised net profit (mn) 21,454 39,198 39,495 21,955 20,437 25,311 25,557

Normalised EPS 9.26 16.92 17.05 9.48 8.82 10.93 11.03

Norm. EPS growth (%) 35.2 82.7 84.1 -44.0 -48.3 15.3 25.1

Norm. P/E (x) 11.6 N/A 6.3 N/A 12.2 N/A 9.7

EV/EBITDA (x) 11.3 7.2 6.3 12.0 11.2 10.4 8.7

Price/book (x) 0.9 N/A 0.8 N/A 0.8 N/A 0.8

Dividend yield (%) 2.7 N/A 2.9 N/A 3.1 N/A 3.2

ROE (%) 10.4 14.0 14.1 7.3 6.8 8.0 8.1

Gearing (%) 11.3 8.6 7.8 8.4 8.3 7.0 4.5

Source: Company data, Nomura estimates

Anchor themes

With consensus universally bearish and valuation supportive, 2012 looks set to be the mirror image of 2011 and property stocks may offer asymmetrical rewards in 2012. Caveat Venditor.

Nomura vs consensus

We expect HK home prices to rise 10% in 2012, much higher than consensus forecasts for a 10-25% fall. As a leading supplier of new homes, CK stands to benefit if our view proves correct. We are 19% above consensus TP.

Research analysts

Hong Kong Property


See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Cheung Kong (Holdings) February 14, 2012

29

Key data on Cheung Kong (Holdings) Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F

Investment properties 1,155 1,264 1,391 1,451 1,600Property development 21,513 29,297 38,444 33,934 48,474

Hotels/serviced apartments 1,399 2,037 2,368 2,511 2,670Other Revenue 226 265 265 265 265

Revenue 24,293 32,863 42,468 38,161 53,009

EBIT contributions

Investment properties 1,062 1,131 1,252 1,306 1,440

Property development 5,501 5,631 6,564 4,850 8,564

Hotels/serviced apartments 360 617 831 888 952Other income 1,738 1,442 2,605 880 886

Management expenses

EBITDA 8,661 8,821 11,252 7,924 11,843

Depreciation and amortisation

EBIT 8,661 8,821 11,252 7,924 11,843Net interest expense -233 -222 -536 -1,038 -994

Associates & JCEs 10,624 14,298 31,258 16,076 17,543

Other income 144 3,277 0 0 0Earnings before tax 19,196 26,174 41,974 22,962 28,392

Income tax -2,910 -4,397 -2,402 -2,080 -2,637Net profit after tax 16,286 21,777 39,571 20,882 25,755

Minority interests -422 -323 -77 -445 -197

Other items

Preferred dividends

Normalised NPAT 15,864 21,454 39,495 20,437 25,557

Extraordinary items 3,754 5,024 0 0 0Reported NPAT 19,618 26,478 39,495 20,437 25,557

Dividends -6,254 -6,833 -7,296 -7,759 -7,944Transfer to reserves 13,364 19,645 32,199 12,678 17,613

Valuation and ratio analysis

FD normalised P/E (x) 15.7 11.6 6.3 12.2 9.7

FD normalised P/E at price target (x) 20.0 14.8 8.0 15.5 12.4

Reported P/E (x) 12.7 9.4 6.3 12.2 9.7Dividend yield (%) 2.5 2.7 2.9 3.1 3.2

Price/cashflow (x) 17.0 20.3 18.6 85.0 12.8Price/book (x) 1.0 0.9 0.8 0.8 0.8

EV/EBITDA (x) 14.1 11.3 6.3 11.2 8.7

EV/EBIT (x) 14.1 11.3 6.3 11.2 8.7EBIT margin (%) 35.7 26.8 26.5 20.8 22.3

Effective tax rate (%) 15.2 16.8 5.7 9.1 9.3

Dividend payout (%) 31.9 25.8 18.5 38.0 31.1ROA (pretax %) 6.9 7.8 13.2 6.9 8.2

Growth (%)

Revenue 47.8 35.3 29.2 -10.1 38.9

EBITDA 40.4 1.8 27.6 -29.6 49.4EBIT 40.4 1.8 27.6 -29.6 49.4

Normalised EPS 25.1 35.2 84.1 -48.3 25.1

Normalised FDEPS 25.1 35.2 84.1 -48.3 25.1

Per share

Reported EPS (HKD) 8.47 11.43 17.05 8.82 11.03

Norm EPS (HKD) 6.85 9.26 17.05 8.82 11.03

Fully diluted norm EPS (HKD) 6.85 9.26 17.05 8.82 11.03Book value per share (HKD) 104.95 114.71 127.25 132.72 140.33

DPS (HKD) 2.70 2.95 3.15 3.35 3.43


Relative performance chart (one year)

Source: ThomsonReuters, Nomura research

(%) 1M 3M 12M

Absolute (HKD) 17.1 12.2 -15.7

Absolute (USD) 17.3 12.4 -15.4

Relative to index 5.5 6.3 -6.0

Market cap (USDmn) 32,050.7

Estimated free float (%) 59.0

52-week range (HKD) 131.8/79.1

3-mth avg daily turnover (USDmn)

43.77

Major shareholders (%)

Li Ka Shing 43.3

Source: Thomson Reuters, Nomura research

Notes

FY11 earnings benefited from one-off gains from the spin-off of Hutchison’s ports business as well as the Huixian REIT


30

Cashflow (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 8,661 8,821 11,252 7,924 11,843

Change in working capital 6,235 5,090 5,194 -1,704 11,446

Other operating cashflow -238 -1,668 -3,091 -3,297 -3,895Cashflow from operations 14,658 12,243 13,355 2,923 19,394

Capital expenditure -953 -173 -1,000 -1,000 -1,000Free cashflow 13,705 12,070 12,355 1,923 18,394

Reduction in investments

Net acquisitions 3,161 -713 -12,291 1,000 1,000Reduction in other LT assets -1,699 -2,169 -1,023 -1,000 -1,000

Addition in other LT liabilities 652 379 0 0 0

Adjustments 1,201 1,574 1,023 1,000 1,000Cashflow after investing acts 17,020 11,141 64 2,923 19,394

Cash dividends -545 -1,240 -2,488 -2,806 -2,737Equity issue 0 0 0 0 0

Debt issue -9,760 2,665 -9,722 2,882 -13,656

Convertible debt issue

Others -2,465 1,158 -3,000 -3,000 -3,000

Cashflow from financial acts -12,770 2,583 -15,211 -2,923 -19,394

Net cashflow 4,250 13,724 -15,147 0 0Beginning cash 7,173 11,423 25,147 10,000 10,000

Ending cash 11,423 25,147 10,000 10,000 10,000Ending net debt 23,066 12,007 17,432 20,314 6,658


Balance sheet (HKDmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13F

Cash & equivalents 11,423 25,147 10,000 10,000 10,000

Properties held for sale 62,999 65,679 61,453 62,591 51,811Accounts receivable 2,799 2,459 2,459 2,459 2,459

Other current assets 2,010 592 592 592 592Total current assets 79,231 93,877 74,504 75,642 64,862


Other fixed assets (net) 10,696 10,399 11,399 12,399 13,399Associates 180,133 193,548 232,621 242,461 254,013

Other LT assets 7,470 9,639 10,662 11,662 12,662

Total assets 296,963 328,633 351,626 365,950 370,149Short-term debt 9,210 15,127 6,858 7,579 4,164

Accounts payable 12,538 18,945 18,945 18,945 18,945Other current liabilities 1,028 633 1,601 1,035 1,701

Total current liabilities 22,776 34,705 27,404 27,559 24,811

Long-term debt 25,279 22,027 20,574 22,736 12,493Convertible debt 0 0 0 0 0

Other LT liabilities 2,011 2,390 2,390 2,390 2,390

Total liabilities 50,066 59,122 50,368 52,684 39,694Minority interest 3,805 3,815 6,529 5,858 5,435

Preferred stock 0 0 0 0 0Shareholders' Equity 10,489 10,489 10,489 10,489 10,489

Other equity and reserves 232,603 255,207 284,241 296,919 314,532

Total shareholders' equity 243,092 265,696 294,730 307,408 325,021Total equity & liabilities 296,963 328,633 351,626 365,950 370,149

Leverage

Interest cover 37.17 39.73 20.97 7.63 11.92

Gross debt/property assets (%) 11.6 11.3 7.8 8.3 4.5Net debt/EBITDA (x) 2.7 1.4 1.5 2.6 0.6

Net debt/equity (%) 9.5 4.5 5.9 6.6 2.0

Dupont decomposition

Net margin (%) 80.8 80.6 93.0 53.6 48.2

Asset utilisation (x) 0.1 0.1 0.1 0.1 0.1ROA (%) 6.8 8.5 11.6 5.7 6.9

Leverage (Assets/Equity x) 1.2 1.2 1.2 1.2 1.2ROE (%) 8.38 10.41 14.09 6.79 8.08


Notes

In our view, Cheung Kong’s balance sheet is healthy with net debt-to-equity at around 5-6%

Notes

Cheung Kong’s BVPS is likely to rise strongly in FY11F on account of strong profit contributions from Hutchison and its own property business


31



Fig. 61: NAV breakdown


Valuation methodology and risks On our 16% downward NAV revision, our TP falls to HKD136.70, from HKD163.90. We continue to apply a 10% discount to our end-FY12F NAV forecast of HKD151.91. This is, in turn, premised on the consensus target price for Cheung Kong’s 49.9% associate Hutchison. Historically, Cheung Kong has traded at an average 14% discount to NAV with a standard deviation of 10%.

In terms of risks: 1) Cheung Kong’s 49.9% associate Hutchison accounts for 51% of Cheung Kong’s NAV. A turnaround in Hutchison’s 3G business would be important for a re-rating of Hutchison and if this were delayed, it could be a drag on Cheung Kong’s own performance. 2) Cheung Kong has many joint development projects with MTR Corporation. Profit-sharing arrangements for MTR projects are kept under confidentiality arrangements. A larger profit-sharing ratio in favour of MTR may result in earnings disappointment for Cheung Kong.

Net Profit (HKDmn) DPS (HKD) Forward

2011F 2012F 2013F 2011F 2012F 2013F NAV (HKD)

CK previous estimate 39,198 21,955 25,311 3.15 3.35 3.43 181.5

CK new estimates 39,495 20,437 25,557 3.15 3.35 3.43 151.9

Change 297 -1,518 247 0.00 0.00 0.00 -29.6

Change (%) 1% -7% 1% 0% 0% 0% -16%

Current NAV End-12 NAV

(Hutch at (Hutch at

(in HKDmn) Methodology HKD76.95) % NAV HKD87.77) % NAV

HK development properties DCF at 8% 73,541 23% 81,956 23%

PRC development properties DCF at 8% 39,574 12% 42,739 12%

Inv. Prop under dev DCF at 8% 4,863 2% 0 0%

Investment Properties 41,929 13% 43,284 12%

...Residential Cap rate at 4.00% 1,042 0% 1,147 0%

...Commercial Cap rate at 4.75% 17,473 5% 19,581 6%

...Office Cap rate at 4.75% 17,696 6% 16,281 5%

...Industrial Cap rate at 8.00% 253 0% 265 0%

...Service Apt. Cap rate at 4.00% 5,465 2% 6,011 2%

Hotels 31,140 10% 32,812 9%

Hutchision (MV) @HKD76.95/share 163,919 51% 186,968 53%

Prosperity REIT (MV) @HKD1.70/share 300 0% 423 0%

HuiXian REIT (MV) @CNY4.02/share 4,874 2% 4,874 1%

F-REIT (MV) @HKD4.03/share 523 0% 523 0%

CK Life Science (MV) @HKD0.45/share 1,255 0% 1,255 0%

Tom Group (MV) @HKD0.70/share 329 0% 329 0%

Treasury latest book value 7,134 2% 7,134 2%

Gross Assets 369,380 116% 402,297 114%

Net debt (30,311) -10% (30,311) -9%

Other assets/liabilities (20,137) -6% (20,137) -6%

Total Net Asset 318,932 100% 351,849 100%

Shares in issue (m) 2,316 2,316

NAV per share (HKD) 137.70 151.91

Share price (HKD) 107.30 136.70

Discount -22% -10%


Henderson Land 0012.HK 12 HK

PROPERTY

EQUITY RESEARCH

Low expectations could be easy to beat

At 0.58x P/B and 49% discount to NAV, expectations are low and easy to beat, in our view

February 14, 2012

Rating Remains

Buy


HKD 62.40


HKD 43.80


Action/Catalysts: Low expectations could be easy to beat At HKD43.80, HLD currently trades at a 49% discount to our spot NAV and 0.58x P/B. While some may argue that this reflects the slow development pace in HK, it also suggests to us that expectations are low and could be easy to beat. As large projects like Wu Kai Sha and Tai Tong Rd, as well as some urban redevelopment projects, enter their presales window, we believe there is scope for HLD’s discount to NAV to narrow from the current 49% to levels of its more active development peers such as SHKP, Sino Land and Cheung Kong (all around 30%). We reiterate our Buy rating on HLD.

Changes to our estimates We have only made very minor revisions to our earnings estimates for HLD. FY11F earnings are raised by 2% while there are no changes to FY12F. Our NAV estimates are also broadly stable, with our forward NAV lowered by only 1.4% from HKD90.49 to HKD89.20.

Valuation: Widening target discount by 5% but reiterating Buy While we have only cut our forward NAV by 1.4%, we have widened our target discount from 25% to 30%. Until HLD begins to presale its major projects and convince the market of its development strategy, it would be difficult for its NAV discount to narrow beyond the landlords historical average discount level of 30%, in our view. That said, compared to its current discount of 49%, a 19% narrowing would already imply significant re-rating. We maintain our Buy rating on Henderson Land.



Revenue (mn) 7,737 17,458 15,842 25,344 22,766 31,001

Reported net profit (mn) 15,820 6,031 6,173 6,691 6,710 8,085

Normalised net profit (mn) 5,042 6,031 6,173 6,691 6,710 8,085

Normalised EPS 2.33 2.81 2.72 3.12 2.83 3.41

Norm. EPS growth (%) -16.9 49.8 16.4 10.9 4.3 20.5

Norm. P/E (x) 18.8 N/A 16.1 N/A 15.5 N/A 12.8

EV/EBITDA (x) 20.2 19.2 15.4 15.9 13.4 10.2



ROE (%) 10.5 3.9 3.6 4.0 3.6 4.1

Gearing (%) 18.1 18.4 18.3 14.3 14.7 10.9


Anchor themes

With consensus universally bearish and valuation supportive, 2012 looks set to be the mirror image of 2011 and property stocks may offer asymmetrical reward in 2012. Caveat Venditor.

Nomura vs consensus

As HLD's projects enter their presales window and it proves its execution capabilities, there is scope for HLD's NAV discount to revert closer to its historical mean. Our TP is 31% above consensus.

Research analysts

Hong Kong Property



Nomura | Henderson Land February 14, 2012

33

Key data on Henderson Land Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F


Hotels/serviced apartments

Other Revenue 2,379 1,413 1,414 1,414 1,415

Revenue 14,695 7,737 15,842 22,766 31,001

EBIT contributions


Property development 3,171 -211 2,924 3,340 5,580

Hotels/serviced apartments 32 35 36 37 38Other income 1,026 2,132 886 898 847

Management expenses -1,536 -1,038 -1,090 -1,144 -1,202EBITDA 5,314 2,851 5,249 6,025 8,437


EBIT 5,314 2,851 5,249 6,025 8,437Net interest expense -1,341 -970 -1,153 -1,134 -599

Associates & JCEs 2,965 3,423 3,001 3,107 2,797

Other income 919 178 0 0 0Earnings before tax 7,857 5,482 7,097 7,998 10,635

Income tax -1,003 -711 -770 -950 -1,875Net profit after tax 6,854 4,771 6,327 7,048 8,759

Minority interests -827 271 -154 -337 -674

Other items

Preferred dividends

Normalised NPAT 6,027 5,042 6,173 6,710 8,085







Price/cashflow (x) na na na 17.1 10.0Price/book (x) 0.7 0.6 0.6 0.5 0.5

EV/EBITDA (x) 14.6 20.2 15.4 13.4 10.2




Growth (%)

Revenue 8.9 -47.4 104.8 43.7 36.2

EBITDA 19.7 -46.3 84.1 14.8 40.0EBIT 19.7 -46.3 84.1 14.8 40.0

Normalised EPS 0.9 -16.9 16.4 4.3 20.5

Normalised FDEPS 0.9 -16.9 16.4 4.3 20.5

Per share

Reported EPS (HKD) 7.20 7.32 2.72 2.83 3.41

Norm EPS (HKD) 2.81 2.33 2.72 2.83 3.41


DPS (HKD) 1.30 1.00 1.05 1.05 1.05




(%) 1M 3M 12M

Absolute (HKD) 13.2 1.7 -16.5

Absolute (USD) 13.4 2.0 -16.2

Relative to index 1.5 -4.1 -6.8





14.67


Lee Shau Kee 61.8


Notes

Property development should begin to accelerate in FY13 when Wu Kai Sha and Tai Tong Rd are completed.


34


Change in working capital -6,817 -16,709 -10,823 3,171 5,175

Other operating cashflow -5,010 -4,732 -3,020 -3,128 -3,255Cashflow from operations -6,513 -18,590 -8,594 6,067 10,356

Capital expenditure -736 -377 178 178 178Free cashflow -7,249 -18,967 -8,416 6,245 10,534


Net acquisitions 932 21 0 0 0Reduction in other LT assets 654 -2,162 0 0 0

Addition in other LT liabilities -4,230 12,313 0 0 0

Adjustments 3,774 -10,273 0 0

Cashflow after investing acts -6,119 -19,068 -8,416 6,245 10,534

Cash dividends 1,095 1,367 -1,722 -1,823 -1,823Equity issue 0 5 10,000 0 0

Debt issue 383 5,630 5,222 -9,422 -8,711


Others -617 11,411 0 0 0

Cashflow from financial acts 861 18,413 13,500 -11,245 -10,534

Net cashflow -5,258 -655 5,084 -5,000 0Beginning cash 15,829 10,571 9,916 15,000 10,000






Other current assets 5,894 6,925 7,064 7,205 7,349Total current assets 65,567 82,055 98,093 90,056 85,017



Other LT assets 3,099 5,261 5,261 5,261 5,261


Accounts payable 5,359 5,812 5,928 6,047 6,168Other current liabilities 752 733 748 763 778


Long-term debt 31,151 34,123 39,345 29,923 21,212Convertible debt



Preferred stock

Shareholders' Equity 34,076 35,479 46,534 46,534 46,534



Leverage

Interest cover 3.96 2.94 4.55 5.31 14.09


Net debt/equity (%) 17.9 19.9 17.6 14.4 9.0


Net margin (%) 105.2 204.5 39.0 29.5 26.1




Notes

Majority shareholder, Mr. Lee Shau Kee’s decision to exercise his bonus warrants have contributed HKD10bn to HLD’s cash position.

Notes

Gearing ratio falls from 17.6% in 2011 to 9.0% in 2013.


35

Fig. 62: Changes to our estimates

Source: Nomura estimates



Valuation methodology Our revised target price of HKD62.40 is based on a 30% discount to forward NAV of HKD89.20. Historically, Henderson Land has traded at 20% discount during midcycle.

Risks Henderson Land has been aggressively building up its HK development landbank through the acquisition and redevelopment of old buildings. There has been discussion that the HK Government may begin to regulate the presales of such buildings. This could potentially push back the presales timing for some of HLD's projects.

FY11E FY12F FY13F FY11F FY12F FY13F Current ForwardPrevious estimate 6,031 6,691 NA 1.05 1.05 NA 88.34 90.49Revised estimates 6,173 6,710 8,085 1.05 1.05 1.05 85.69 89.20Change 142 19 NA 0.00 0.00 NA -2.65 -1.29Change 2% 0% NA 0% 0% NA -3.0% -1.4%

Net Profit (HKDmn) DPS (HKD) NAV (HKD)

(HKDmn) Methodology Current % of NAV End-12F % of NAVDevelopment properties DCF at 8% 29,760 15% 32,498 15%Investment prop under development DCF at 8% 415 0% 937 0%Investment properties 88,921 44% 93,749 44%...office Cap rate = 4.75% 27,926 14% 25,692 12%...retail Cap rate = 4.75% 51,587 25% 58,036 27%...residential Cap rate = 3.25% 6,138 3% 6,752 3%...Industrial Cap rate = 7.25% 1,124 1% 1,124 1%...others 2,144 1% 2,144 1%Agricultural land @ HKD300psf 12,000 6% 12,000 6%China Dev Properties DCF at 10% 24,841 12% 27,325 13%China Inv Properties Cap rate = 7.0% 25,636 13% 27,725 13%China IP under dev DCF at 10% 4,858 2% 4,858 2%Hotels 3,468 2% 3,468 2%HK & C Gas (MV) @ $18.34 per share 43,489 21% 39,126 19%HK Ferry (MV) @ $6.25 per share 698 0% 698 0%Miramar (MV) @ $8.19 per share 2,090 1% 2,090 1%Sunlight Reit (MV) @ $2.47 per share 167 0% 167 0%Infrastructure (HL's attr.) Book value 577 0% 577 0%Instalment receivable Book value 704 0% 704 0%Gross asset 237,623 117% 245,922 116%Net debt -34,649 -17% -34,649 -16%Net asset 202,974 100% 211,273 100%# of shares 2,369 2,369NAV (HKD) 85.69 89.20Share price (HKD) 43.80 62.40Discount -49% -30%


Sun Hung Kai Properties 0016.HK 16 HK

PROPERTY

EQUITY RESEARCH

Top pick among HK developers

A key beneficiary of a faster-than-expected re-engagement of the property market

February 14, 2012

Rating Remains

Buy


HKD 155.20


HKD 108.70


Action/Catalysts: Still our top pick among the developers We continue to rate SHKP as our top pick among the developers. While there are stocks that offer cheaper valuation and higher potential upside, considering SHKP’s strong execution track record and high level of transparency, we still believe SHKP offers the best risk-reward ratio. Even after SHKP’s 12% bounce, it is still trading at a 30% discount to spot NAV and 0.91x P/B. Compared to SHKP’s historical average discount of 8% and 1.20x P/B, current valuations are still nearly 22% to 24% cheaper. As one of HK’s largest home producers and commercial property owners, we believe SHKP is a good play on a potential faster-than-expected re-engagement of the property market. Buy.

Changes to our estimates On account of the higher-than-expected ASPs and sales at The Wings and Imperial Cullinan, we have raised our FY12F earnings by 5% to HKD21.2bn. On the other hand, we have revised down FY13F and FY14F by 4% and 2%, respectively, to reflect a later sales timing for SHKP’s super luxury projects such as Shouson Peak and Mt. Kellet Road, as well as to reflect our expectation of a 4-8% decline in office rents in FY12. Our new office rental outlook results in a 7% decline in our forward NAV estimate to HKD172.46.

Valuation: HKD155.20 TP at 10% NAV discount, reiterate Buy Keeping our target discount unchanged at 10%, our target price is similarly reduced by 7% from HKD166.50 to HKD155.20. With potential upside of 43%, SHKP remains one of top picks among the HK developers.

30 Jun FY11 FY12F FY13F FY14F


Revenue (mn) 62,553 61,614 63,001 57,079 55,963 58,678 58,224



Normalised EPS 8.36 7.90 8.26 7.90 7.57 7.94 7.73

Norm. EPS growth (%) 54.4 -5.6 -1.2 0.0 -8.3 0.6 2.1

Norm. P/E (x) 13.0 N/A 13.2 N/A 14.4 N/A 14.1

EV/EBITDA (x) 12.2 10.5 11.5 10.4 12.6 9.8 12.0



ROE (%) 16.9 6.4 6.7 6.0 5.7 5.7 5.5

Gearing (%) 14.6 11.7 12.7 10.6 13.1 7.0 10.8


Anchor themes

With consensus universally bearish and valuation supportive, 2012 looks set to be the mirror image of 2011, and property stocks may offer asymmetrical reward in 2012. Caveat Venditor.

Nomura vs consensus

Our 10% target NAV discount is narrower than consensus and reflects our more constructive outlook on the HK residential market.

Research analysts

Hong Kong Property



Nomura | Sun Hung Kai Properties February 14, 2012

37

Key data on Sun Hung Kai Properties Income statement (HKDmn) Year-end 30 Jun FY10 FY11 FY12F FY13F FY14F


Hotels/serviced apartments 1,409 2,055 1,822 1,905 1,993Other Revenue 10,428 14,390 14,088 14,489 14,489

Revenue 33,211 62,553 63,001 55,963 58,224

EBIT contributions



Hotels/serviced apartments 238 362 401 419 439Other income 2,465 3,239 3,342 3,653 3,837

Management expenses -905 -1,284 -1,310 -1,336 -1,363EBITDA 13,842 21,366 26,371 23,899 24,329


EBIT 13,842 21,366 26,371 23,899 24,329Net interest expense -639 -1,033 -1,054 -861 -861

Associates & JCEs 1,901 5,949 1,962 2,276 2,357

Other income 1,998 477 0 0 0Earnings before tax 17,102 26,759 27,280 25,314 25,826


Minority interests -335 -603 -1,261 -1,513 -1,563

Other items

Preferred dividends

Normalised NPAT 13,883 21,479 21,223 19,467 19,881







Price/cashflow (x) 29.2 na 9.5 15.1 8.9Price/book (x) 1.1 0.9 0.8 0.8 0.8

EV/EBITDA (x) 20.1 12.2 11.5 12.6 12.0




Growth (%)

Revenue -3.0 88.4 0.7 -11.2 4.0

EBITDA -0.4 54.4 23.4 -9.4 1.8EBIT -0.4 54.4 23.4 -9.4 1.8

Normalised EPS 11.8 54.4 -1.2 -8.3 2.1

Normalised FDEPS 11.8 54.4 -1.2 -8.3 2.1

Per share

Reported EPS (HKD) 11.71 18.71 8.26 7.57 7.73

Norm EPS (HKD) 5.41 8.36 8.26 7.57 7.73


DPS (HKD) 2.70 3.35 3.35 3.35 3.35




(%) 1M 3M 12M

Absolute (HKD) 10.7 2.9 -14.6

Absolute (USD) 10.9 3.2 -14.3

Relative to index -1.0 -2.9 -4.9



52-week range (HKD) 129.9/85.45


56.42


Kwok Family 42.9


Notes

Strong sales of The Wings and Imperial Cullinan have helped to lock in FY12F earnings for SHKP


38

Cashflow (HKDmn) Year-end 30 Jun FY10 FY11 FY12F FY13F FY14FEBITDA 13,842 21,366 26,371 23,899 24,329

Change in working capital -5,112 -26,573 9,616 2,401 3,531

Other operating cashflow 817 4,848 -6,550 -7,778 3,432Cashflow from operations 9,547 -359 29,438 18,522 31,292

Capital expenditure -7,798 -8,718 -8,758 -12,307 -12,307Free cashflow 1,749 -9,077 20,680 6,215 18,985


Net acquisitions 1,097 3,489 -1,052 -1,052 -1,052Reduction in other LT assets -192 -429 263 263 263

Addition in other LT liabilities 1,714 3,521 1,428 1,800 1,950

Adjustments -438 -4,690 -5,213 -2,289 -2,490Cashflow after investing acts 3,930 -7,186 16,105 4,936 17,655

Cash dividends -5,943 -7,491 -8,611 -8,611 -8,611Equity issue -1,635 -1,635 -1,556 -1,556 -1,555

Debt issue 3,363 15,047 -6,262 4,302 -8,418

Convertible debt issue 0 0 0 0 0Others 346 959 928 928 928

Cashflow from financial acts -3,869 6,880 -15,501 -4,936 -17,655

Net cashflow 61 -306 604 0 0Beginning cash 8,143 8,204 7,898 8,502 8,502



Balance sheet (HKDmn) As at 30 Jun FY10 FY11 FY12F FY13F FY14F



Other current assets 850 1,126 1,182 1,241 1,303Total current assets 110,037 131,817 125,776 124,255 121,103



Other LT assets 8,257 8,686 8,423 8,160 7,897


Accounts payable 28,339 23,977 24,386 24,803 25,229Other current liabilities 5,266 5,141 7,703 8,166 8,118




Total liabilities 86,921 101,002 99,138 106,121 100,030Minority interest 4,804 5,230 -917 -9,490 -6,887

Preferred stock




Leverage

Interest cover 21.66 20.68 25.03 27.77 28.27


Net debt/equity (%) 14.1 17.1 13.9 14.3 11.2


Net margin (%) 90.4 76.9 33.7 34.8 34.1




Notes

Strong sales from Imperial Cullinan and The Wings have helped to fund SHKP land buys over the past six months.

Notes

We expect SHKP net debt to equity ratio to remain in the teens.


39





Valuation methodology Our revised target price of HKD155.20 is based on a 10% discount to forward NAV of HKD172.46. Historically, SHKP has traded at a 8% discount to NAV at mid-cycles and a 3% premium during up-cycles.

Risks Over the next few years, SHKP has several large commercial complexes in China to be completed. These include the Shanghai ICC complex. The Shanghai office market is currently suffering from oversupply. Should new office demand remain weak, take up and occupancy rates may fall short of our estimate, leading to a rental earnings shortfall.

Underlying Net Profit (HKDmn) EPS (HKD) DPS (HKD) Spot Forward

FY12F FY13F FY14F FY12F FY13F FY14F FY12F FY13F FY14F NAV NAVPrevious estimate 20,274 20,265 20,381 7.90 7.90 7.94 3.35 3.35 3.35 171.4 185.2New estimate 21,223 19,467 19,881 8.26 7.57 7.73 3.35 3.35 3.35 154.3 172.5Change 949 (798) (501) 0.35 (0.33) (0.21) 0.00 0.00 NA (17.1) (12.7)Change (%) 5% -4% -2% 4% -4% -3% 0% 0% NA -10% -7%

(HKDmn) Methodology Current % of NAV Forward % of NAVDevelopment properties DCF at 8% 129,930 33% 143,982 32%... Hong Kong DCF at 8% 93,031 23% 104,131 23%...China DCF at 8% 36,899 9% 39,851 9%Agricultural land @HKD350psf 9,100 2% 9,100 2%Inv prop under dev DCF at 8% 26,186 7% 26,573 6%...Retail @ Cap Rate = 5.0% 5,070 1% 5,072 1%...Office @ Cap Rate = 5.0% 2,325 1% 2,374 1%…China 17,174 4% 18,145 4%...Others 1,617 0% 982 0%Investment properties 195,970 49% 224,543 51%...Retail @ Cap Rate = 5.0% 110,532 28% 124,228 28%...Office @ Cap Rate = 5.0% 61,348 15% 62,839 14%...Residential @ Cap Rate = 4.3% 8,883 2% 9,772 2%…China 12,519 3% 24,585 6%...Others 2,687 1% 3,120 1%Investment properties - associates 63,957 16% 66,832 15%...Retail 19,790 5% 21,149 5%...Office 28,717 7% 28,693 6%...Residential 5,767 1% 6,344 1%…China 9,640 2% 10,604 2%...Others 43 0% 42 0%Hotels 20,381 5% 21,521 5%Other business @10.00x P/E 16,197 4% 16,440 4%Loans receivable 346 0% 346 0%Transport Int'l (MV) @ HKD16.82/share 2,259 1% 2,259 1%Smartone (MV) @ HKD15.06/share 10,386 3% 9,655 2%Sunevision (MV) @ HKD0.93/share 1,602 0% 1,602 0%Gross assets 476,315 120% 522,853 118%Less: Net debt (74,457) -19% (74,457) -17%Receivables less payables (5,186) -1% (5,186) -1%Net assets 396,672 100% 443,210 100%# of shares 2,570 2,570NAV per share (HKD) 154.35 172.46Share price (HKD) 108.70 155.20Premium/(Discount) -30% -10%


New World Development 0017.HK 17 HK

PROPERTY

EQUITY RESEARCH

Downgrade to Neutral

NAV and price target cut largely on account of dilutive rights issue

February 14, 2012

Rating Down from Buy

Neutral


HKD 9.90


HKD 8.95


Action: Dilution from rights issue; downgrade to Neutral We are cutting our price target for NWD from HK$20.70 to HK$9.90 and downgrading our rating from BUY to Neutral. This downward revision mainly reflects the dilutive nature of NWD’s 1-for-2 rights issue that was done in Q4 2011. In addition to cutting our forward NAV by 38% from HK$31.83 (pre-rights) to HK$19.75 (post-rights), we have also widened our target discount by 14% from 36% to 50%. As our HK$9.90 price target only offers 10.6% upside, we downgrade NWD from BUY to Neutral.

Changes in our estimates NWD’s 1-for-2 rights issue at HK$5.68 was very dilutive. Our spot and forward NAV have been reduced by 28% and 38% respectively to HK$18.96 and HK$19.75. On the earnings front, we have actually raised FY13F by 16% to reflect higher profit contributions from NWD’s HK property projects but post the dilutive effect of the rights issue, FY13F EPS is actually cut by 24%.

Valuation: Price target cut to HK$9.90, downgrade to Neutral Given the dilutive nature of the rights issue, we have widened our target discount from 36% to 50%. This is 13% wider than NWD’s historical average discount of 38%. Our HK$9.90 price target implies a 0.53x PB against NWD’s pro-forma NTA per share, roughly 0.5 standard deviation below NWD’s historical norm of 0.69x PB.



Revenue (mn) 32,882 35,370 35,462 40,105 44,712 40,594



Normalised EPS 1.39 1.17 93.45c 1.39 1.06 1.15

Norm. EPS growth (%) -30.2 11.0 -32.6 18.7 12.9 9.0

Norm. P/E (x) 6.8 N/A 10.1 N/A 8.8 N/A 8.1

EV/EBITDA (x) 7.1 8.5 5.4 10.1 5.7 4.2



ROE (%) 9.5 5.1 4.2 5.9 5.3 5.5

Gearing (%) 25.8 27.7 25.6 28.9 26.4 28.7


Anchor themes


Nomura vs consensus

Our FY12 earnings is 16% below consensus while our FY13F earnings are 11% above. This largely reflect a difference in the timing of HK property sales.

Research analysts

Hong Kong Property



Nomura | New World Development February 14, 2012

41

Key data on New World Development Income statement (HKDmn) Year-end 30 Jun FY10 FY11 FY12F FY13F FY14F



Revenue 30,219 32,882 35,462 44,712 40,594

EBIT contributions




Management expenses -1,612 -1,629 -1,881 -1,720 -1,733EBITDA 6,370 6,619 7,527 6,776 7,444


EBIT 6,370 6,619 7,527 6,776 7,444Net interest expense -338 -466 -577 -537 -697

Associates & JCEs 4,227 3,758 3,148 3,638 4,390

Other income 2,548 2,133 0 0 0Earnings before tax 12,806 12,043 10,098 9,877 11,138


Minority interests -3,269 -3,590 -3,411 -1,677 -2,269

Other items

Preferred dividends

Normalised NPAT 7,716 5,472 4,661 6,317 6,884








EV/EBITDA (x) 6.2 7.1 5.4 5.7 4.2




Growth (%)

Revenue 23.8 8.8 7.8 26.1 -9.2

EBITDA 159.4 3.9 13.7 -10.0 9.9EBIT 159.4 3.9 13.7 -10.0 9.9

Normalised EPS 117.6 -30.2 -32.6 12.9 9.0

Normalised FDEPS 105.7 -30.2 -32.2 13.9 9.0

Per share

Reported EPS (HKD) 3.19 2.32 93.45c 1.06 1.15

Norm EPS (HKD) 1.99 1.39 93.45c 1.06 1.15

Fully diluted norm EPS (HKD) 1.88 1.31 88.97c 1.01 1.10Book value per share (HKD) 22.82 26.01 19.57 20.36 21.21

DPS (HKD) 0.38 0.38 0.26 0.26 0.30




(%) 1M 3M 12M

Absolute (HKD) 34.6 14.7 -32.5

Absolute (USD) 34.8 15.0 -32.3






23.73


Chow Tai Fook Enterprises 42.1


Notes

We expect NWD to keep its total dividend burden unchanged. Given the larger shareholder base, we have lowered our DPS estimates by 32%.


42


Change in working capital -104 -3,410 762 -3,037 7,208

Other operating cashflow 1,673 -2,426 725 375 330Cashflow from operations 7,939 783 9,013 4,114 14,982

Capital expenditure -2,352 -4,764 -3,834 -3,834 -3,834Free cashflow 5,587 -3,981 5,179 280 11,148


Net acquisitions 4,468 -1,300 -283 -263 -211Reduction in other LT assets -560 -571 1,755 0 0

Addition in other LT liabilities 4,541 62 0 0 0

Adjustments -3,108 1,105 -1,473 282 282Cashflow after investing acts 10,928 -4,685 5,178 298 11,219

Cash dividends -2,046 -1,336 -1,877 -1,371 -1,413Equity issue 0 0 12,439 0 0

Debt issue 2,320 7,976 4,000 4,000 10,000


Others -1,938 -1,462 0 0 0

Cashflow from financial acts -1,665 5,178 14,562 2,629 8,587

Net cashflow 9,262 493 19,740 2,928 19,806Beginning cash 14,337 23,600 24,093 43,833 46,760






Other current assets 465 542 558 575 592Total current assets 95,392 100,523 119,619 126,644 140,686



Other LT assets 10,327 10,898 9,143 9,143 9,143




Long-term debt 32,437 31,851 37,851 43,851 53,851Convertible debt 6,469 6,857 6,857 6,857 6,857



Preferred stock




Leverage

Interest cover 18.82 14.21 13.04 12.62 10.68


Net debt/equity (%) 30.3 33.7 16.4 16.7 8.3


Net margin (%) 41.0 27.8 13.1 14.1 17.0




Notes

Net of its NWD’s contribution to NWCL’s own rights issue, NWD and NWCL raised some HK$12.4bn from their rights issue in Q4 2011

Notes

Net debt to equity drops from 34% to around 16% post the rights issue.


43

Fig. 66: Changes in our estimates


Fig. 67: NWD NAV breakdown


Valuation Methodology Our target price of HKD9.90 is based on a 50% discount to NWD’s forward NAV of HKD19.75. Historically, NWD has traded at a 38% discount during mid-cycles.

Risks NWD’s stakes in listed subsidiaries such as NWCL, NWS and NWDS account for 39% of its NAV. A change in outlook for these entities could impact not only NAVs but also NAV discounts. If their outlook improves, this will provide upside risk to our target price. The converse is true if the outlook worsens.

FY12F FY13F FY14F FY12F FY13F FY14F Spot ForwardOld 4,590 5,449 NA 38 38 NA 26.3 31.8New 4,661 6,317 6,884 26 26 30 19.0 19.7Change 71 868 NA -12 -12 NA -7.3 -12.1Change (%) 2% 16% NA -32% -32% NA -28% -38%

Net profit (HKDmn) DPS (HK cents) NAV and valuation (HKD)

(HKDmn) Methodology Current HKD/share % of NAV End-12 HKD/share % of NAV

Property development - HK DCF 36,066 6.03 32% 40,551 6.78 34%

Agricultural land @HK$300 psf site area 6,000 1.00 5% 6,000 1.00 5%

Property investment - HK Cap rate = 4.5% - 8.5% 43,743 7.31 39% 46,419 7.76 39%

Residential Cap rate = 4.0% 1,024 0.17 1% 1,101 0.18 1%

Office Cap rate = 5.0% 4,447 0.74 4% 4,423 0.74 4%

Retail Cap rate = 5.0% 19,507 3.26 17% 20,705 3.46 18%

Carparks Cap rate = 8.0% 1,386 0.23 1% 1,420 0.24 1%

NW Centre Redev 17,379 2.90 15% 18,770 3.14 16%

Hotel properties Cap rate = 10.0% 11,945 2.00 11% 11,945 2.00 10%

NWCL (71% owned) EV @ HK$1.96 per share 16,084 2.69 14% 16,084 2.69 14%

NWS Holdings (59.8% owned) EV @ HK$12.82 per share 31,125 5.20 27% 28,641 4.79 24%

NW Dept Stores (72% owned) @ HK$4.81 per share 1,710 0.29 2% 1,710 0.29 1%

Telecoms 1,771 0.30 2% 1,771 0.30 1%

148,444 24.80 131% 153,121 25.58 130%

Less: Net (debt) /cash (34,935) -5.84 -31% (34,935) -5.84 -30%

NAV (HK$m) 113,509 18.96 100% 118,186 19.75 100%

No of shares (m) 5,985 5,985

NAV per share (HK$) 18.96 19.75

Discount -53% -50%

Current price (HK$) 8.95 9.90


Sino Land 0083.HK 83 HK

PROPERTY

EQUITY RESEARCH

Still one of our preferred developers

Good earnings visibility and decentralised commercial exposure

February 14, 2012

Rating Remains

Buy


HKD 17.50


HKD 12.56


Action/Catalysts: Good earnings discipline; maintain Buy Among our Hong Kong property coverage, Sino Land sees one of the smallest downward revisions to our forward NAV estimates, down by only 0.4%. This is partly due to better-than-expected property presales in the past six months and its decentralised office and retail investment property portfolio. Further, we like Sino Land’s discipline in landbank acquisition. Keeping our discount to forward NAV unchanged at 10%, our HKD17.50 target price offers a 39% upside potential; maintain Buy.

Changes to estimates: NAV broadly unchanged at HKD19.46 We raise our FY12F net profit estimate by 32%, but cut our FY14F estimate by 13%. The hike in our FY12F estimate largely reflects Sino Land’s better-than-expected pricing and sales at projects like One Mayfair and Marinella. Whereas the changes to our FY13-14F estimates reflect new completion timing for projects such as The Coronation and the future phases of Providence Bay. On the NAV side, we have made only very minor revisions with a 1% increase in our spot NAV estimate, while we lower our forward NAV estimate by 0.4% from HKD19.54 to HKD19.46.

Valuation: HKD17.50 target price; maintain Buy We continue to apply a 10% discount to Sino Land’s forward NAV, ranking it on a par with sector leader SHKP. We continue to like Sino Land’s asset exposure with its focus on Hong Kong and decentralised commercial properties. Further, its strong sales over the past six months have greatly enhanced its earnings and dividend visibility. Our HKD17.50 target price represents 39% upside potential; maintain Buy.



Revenue (mn) 5,944 8,561 8,227 7,254 8,811 27,747 28,364



Normalised EPS 85.95c 62.91c 82.74c 82.88c 82.84c 98.35c 85.63c

Norm. EPS growth (%) 19.2 -27.2 -3.7 31.8 0.1 18.7 3.4

Norm. P/E (x) 14.6 N/A 15.2 N/A 15.2 N/A 14.7

EV/EBITDA (x) 15.0 15.9 13.2 13.7 13.8 8.7 10.4



ROE (%) 14.4 4.4 5.7 5.9 5.7 6.8 5.8

Gearing (%) 13.4 13.4 14.3 17.8 18.0 6.2 6.6


Anchor themes


Nomura vs consensus

While demand visibility is limited, as effective supply continues to tighten, we believe the property market could re-engage at a faster-than-expected pace, benefiting property stocks. Our TP is 36% above consensus.

Research analysts

Hong Kong Property



Nomura | Sino Land February 14, 2012

45

Key data on Sino Land Income statement (HKDmn) Year-end 30 Jun FY10 FY11 FY12F FY13F FY14F


Hotels/serviced apartments 440 678 814 854 897Other Revenue 771 861 921 964 1,009

Revenue 7,698 5,944 8,227 8,811 28,364

EBIT contributions



Hotels/serviced apartments 170 268 325 342 359Other income 505 360 380 392 405

Management expenses -548 -794 -815 -837 -859EBITDA 3,728 2,633 3,666 3,376 4,433



Associates & JCEs 274 1,873 1,887 2,336 1,739


Income tax -490 -566 -677 -606 -818Net profit after tax 3,615 4,764 4,699 4,852 5,133


Other items

Preferred dividends

Normalised NPAT 3,506 4,401 4,659 4,810 4,972







Price/cashflow (x) na 84.0 na na 4.3Price/book (x) 0.9 0.8 0.9 0.9 0.8

EV/EBITDA (x) 18.9 15.0 13.2 13.8 10.4




Growth (%)

Revenue -20.6 -22.8 38.4 7.1 221.9

EBITDA -14.7 -29.4 39.3 -7.9 31.3EBIT -14.7 -29.4 39.3 -7.9 31.3

Normalised EPS -3.1 19.2 -3.7 0.1 3.4

Normalised FDEPS -3.1 19.2 -3.7 0.1 3.4

Per share

Reported EPS (HKD) 1.25 2.06 82.74c 82.84c 85.63c

Norm EPS (HKD) 72.09c 85.95c 82.74c 82.84c 85.63c

Fully diluted norm EPS (HKD) 72.09c 85.95c 82.74c 82.84c 85.63cBook value per share (HKD) 13.32 15.28 14.28 14.65 15.06

DPS (HKD) 0.40 0.45 0.45 0.45 0.45




(%) 1M 3M 12M

Absolute (HKD) 10.6 16.7 -13.9

Absolute (USD) 10.7 17.0 -13.6

Relative to index -1.1 10.9 -4.1





13.17


TST Properties 50.5


Notes

FY12 project completions include One Mayfair, The Marinella and Baker Court


46


Change in working capital -1,477 -522 -5,693 -5,670 13,557

Other operating cashflow -2,451 -1,345 -1,299 -860 -899Cashflow from operations -200 766 -3,325 -3,154 17,092

Capital expenditure -327 -442 -50 -54 -58Free cashflow -527 323 -3,375 -3,207 17,033


Net acquisitions -570 257 0 0 0Reduction in other LT assets -777 -242 -200 -200 -200

Addition in other LT liabilities 957 1,160 0 0 0

Adjustments -2,637 2,225 400 400 400Cashflow after investing acts -3,554 3,724 -3,175 -3,007 17,234

Cash dividends -549 -858 -2,428 -2,613 -2,613Equity issue -488 4,965 0 0 0

Debt issue 885 -4,362 1,646 5,620 -14,621


Others 410 -142 0 0 0

Cashflow from financial acts 258 -397 -782 3,007 -17,234

Net cashflow -3,295 3,327 -3,956 0 0Beginning cash 8,163 4,867 8,194 4,238 4,238






Other current assets 867 933 977 1,023 1,071Total current assets 29,603 34,303 36,109 41,850 28,364



Other LT assets 2,286 2,529 2,729 2,929 3,129






Total liabilities 29,956 27,605 29,320 35,012 20,463Minority interest 379 659 768 964 2,109

Preferred stock




Leverage

Interest cover 174.50 343.84 20.60 13.35 19.98


Net debt/equity (%) 21.5 7.9 14.4 20.7 3.4


Net margin (%) 79.2 177.4 56.6 54.6 17.5




Notes

June 2011 gearing was very low at around 7.9%

Notes

Sino Land has been very disciplined in land banking. The Kau To Shan project was bought with a 30% entry margin


47





Valuation methodology and risks On fine-tuning our forward NAV estimates for Sino Land, our target price slips to HKD17.50. We continue to apply a 10% discount to Sino Land’s forward NAV, which we have revised to HKD19.46, from HKD19.54. While Sino Land has historically traded at a 32% discount to its NAV at the mid-cycle and 17% during the up-cycle, we believe this was distorted by the mid- to late 1990s, when Sino Land’s gearing was much higher. Our target discount of 10% puts Sino Land nearly at par with sector leader SHKP’s 10% discount.

Sino Land has the highest proportionate exposure to the Hong Kong housing market among its peers. Hong Kong housing accounts for 45% of its NAV. When times are good, this allows Sino Land’s NAV to rise faster than its peers, but during bad times, its NAV and earnings become much more volatile compared with peers.

(figures in HKDmn) FY12F FY13F FY14F FY12F FY13F FY14F FY12F FY13F FY14F

Previous estimates 3,542 4,813 5,711 0.629 0.829 0.983 0.450 0.450 0.450 17.66 19.54New estimates 4,659 4,810 4,972 0.827 0.828 0.856 0.450 0.450 0.450 17.77 19.46Change 1,117 (3) (739) 0.198 (0.000) (0.127) 0.000 0.000 0.000 0.11 0.08)Change (%) 32% 0% -13% 32% 0% -13% 0% 0% 0% 1% 0%

Net Profit (HKDmn) EPS (HKD) DPS (HKD) Current NAV (HKD)

Forward NAV (HKD)

(HKDmn) Methodology Current % of NAV End-12 % of NAV

Development properties (incl assoc) DCF at 8% 53,792 52% 58,510 52%…HK DCF at 8% 46,319 45% 50,439 45%…China DCF at 8% 7,473 7% 8,071 7%Investment properties (incl assoc) 63,175 61% 67,894 60%..Office Cap rate at 5.00% 15,626 15% 15,613 14%..Retail Cap rate at 5.25% 39,452 38% 43,980 39%..Residential Cap rate at 4.00% 2,874 3% 3,116 3%..Car Park Cap rate at 7.50% 1,030 1% 1,017 1%..Industrial Cap rate at 8.00% 4,194 4% 4,169 4%Investment prop under dev DCF at 8% 1,359 1% 1,359 1%Hotel @HK$5.5m/room 4,250 4% 4,675 4%Investment securities 1,938 2% 1,938 2%Gross assets 124,515 121% 134,377 119%Net debt (9,122) -9% (9,122) -8%Receivables less payables (5,444) -5% (5,444) -5%Contingent liability - 0% - 0%Associate debt (6,780) -7% (6,780) -6%NAV 103,169 100% 113,031 100%# of shares (m) 5,807 5,807 NAV per share (HKD) 17.77 19.46 Discount/target discount -29% -10%Share price (HKD) 12.56 17.50


Hang Lung Properties 0101.HK 101 HK

PROPERTY

EQUITY RESEARCH

Waiting for BVPS growth to re-accelerate

Price target cut to HK$28.10, maintain Neutral

February 14, 2012

Rating Remains

Neutral


HKD 28.10


HKD 27.75


Waiting for BVPS growth to re-accelerate We are reducing our fair value for HLP from HK$29.60 to HK$28.10 and maintaining our Neutral rating. As highlighted in our Dec-11 result note, we believe a re-acceleration of HLP’s BVPS growth is key to its re-rating. With HLP’s BVPS only rising by 1.6% between June-11 to Dec-11, even after adjusting for the embedded profit of HLP’s HK development properties, we believe HLP’s current 1.11x trailing PB is already fairly valued. As and when BVPS growth starts to rise, we will revisit our 15% target discount on HLP.

Change in our estimates In light of HLP’s recent change in financial period end from June to December, we have realigned our FY12-FY14F estimates for the shift in the reporting period. Our FY12-FY13 earnings only see a minor 0-1% change. On the NAV front, we have lowered our forward NAV by 5% in order to reflect our latest property market outlook. Our forward NAV is shaved from HK$34.84 to HK$33.10.

Valuation: Price target lowered to HK$28.10, maintain Neutral Keeping our target NAV discount unchanged at 15%, we have lowered our price target for HLP by 5% from HK$29.60 to HK$28.10. With potential upside limited to only 1.3%, there is no change to our Neutral rating on HLP.

31 Dec Dec-11 FY12F FY13F FY14F


Revenue (mn) 3,069 14,980 14,927 18,517 18,338 8,630 8,376



Normalised EPS 37.84c 1.94 1.93 2.40 2.37 1.08 1.04

Norm. EPS growth (%) -39.8 208.4 410.1 23.7 22.8 -54.8 -56.0

Norm. P/E (x) 74.9 N/A 14.4 N/A 11.7 N/A 26.6

EV/EBITDA (x) 54.3 13.0 10.6 10.1 8.1 22.3 18.4



ROE (%) 2.3 7.5 7.4 8.5 8.5 3.6 3.5

Gearing (%) 10.0 6.8 9.6 2.5 4.9 5.3 7.1


Anchor themes


Nomura vs consensus

Our FY12F and FY13F earnings estimates are 17% and 42% higher than consensus but our FY14F earnings are 36% lower. We believe our HK property sales assumption is more front loaded compared to the street.

Research analysts

Hong Kong Property



Nomura | Hang Lung Properties February 14, 2012

49

Key data on Hang Lung Properties Income statement (HKDmn) Year-end 31 Dec Jun-11 Dec-11 FY12F FY13F FY14F

Investment properties 5,161 2,876 5,499 6,099 7,126Property development 3 193 9,428 12,240 1,250


Other Revenue 0 0 0 0 0

Revenue 5,164 3,069 14,927 18,338 8,376

EBIT contributions


Property development 2 150 6,862 8,866 889


Other income 0 12 0 0 0



EBIT 3,684 2,193 10,753 13,187 5,980Net interest expense 138 73 101 101 101

Associates & JCEs 98 42 105 110 114

Other income -32 -30 0 0 0Earnings before tax 3,888 2,278 10,960 13,398 6,195

Income tax -698 -408 -2,008 -2,458 -1,125Net profit after tax 3,190 1,870 8,952 10,940 5,070


Other items

Preferred dividends 0 0 0 0 0

Normalised NPAT 2,741 1,650 8,596 10,556 4,650

Extraordinary items 3,051 915 0 0 0Reported NPAT 5,792 2,565 8,596 10,556 4,650

Dividends -3,162 -757 -3,295 -3,384 -3,384Transfer to reserves 2,630 1,808 5,301 7,171 1,265






EV/EBITDA (x) 30.0 54.3 10.6 8.1 18.4




Growth (%)

Revenue -57.2 -40.6 386.4 22.9 -54.3

EBITDA -56.8 -40.5 390.4 22.6 -54.7EBIT -56.8 -40.5 390.4 22.6 -54.7

Normalised EPS -60.9 -39.8 410.1 22.8 -56.0

Normalised FDEPS -60.4 -41.8 421.0 22.8 -56.0

Per share

Reported EPS (HKD) 1.33 58.83c 1.93 2.37 1.04

Norm EPS (HKD) 62.87c 37.84c 1.93 2.37 1.04

Fully diluted norm EPS (HKD) 63.66c 37.05c 1.93 2.37 1.04Book value per share (HKD) 24.64 25.46 26.67 29.31 30.66

DPS (HKD) 0.71 0.17 0.74 0.76 0.76




(%) 1M 3M 12M

Absolute (HKD) 22.0 0.4 -15.4

Absolute (USD) 22.2 0.6 -15.1




52-week range (HKD) 36.25/20.85


18.66


Hang Lung Group 50.7


Notes

The realisation of embedded profit in development properties will boost net profit


50

Cashflow (HKDmn) Year-end 31 Dec Jun-11 Dec-11 FY12F FY13F FY14FEBITDA 3,684 2,193 10,753 13,187 5,980

Change in working capital -179 -531 3,631 3,900 -893

Other operating cashflow 302 -118 -1,127 -2,366 -1,033Cashflow from operations 3,807 1,544 13,258 14,720 4,054

Capital expenditure -6,316 -6,963 -5,366 -4,446 -4,861Free cashflow -2,509 -5,419 7,892 10,274 -807


Net acquisitions -826 0 0 0 0Reduction in other LT assets -869 0 0 0 0


Adjustments 305 -35 -682 -789 -829Cashflow after investing acts -3,350 -5,419 7,892 10,274 -807

Cash dividends -2,981 -2,376 -1,530 -3,267 -3,356Equity issue 11,232 0 0 0 0

Debt issue 10,278 -2,207 438 -7,007 4,163


Others 488 0 0 0 0

Cashflow from financial acts 19,017 -4,583 -1,092 -10,274 807

Net cashflow 15,667 -10,002 6,800 0 0Beginning cash 11,535 27,202 17,200 24,000 24,000

Ending cash 27,202 17,200 24,000 24,000 24,000Ending net debt -10,466 -2,671 -9,033 -16,041 -11,878


Balance sheet (HKDmn) As at 31 Dec Jun-11 Dec-11 FY12F FY13F FY14F


Properties held for sale 5,963 5,920 3,747 374 13Accounts receivable 1,983 1,569 2,082 2,186 2,296



Other fixed assets (net) 22,719 29,682 35,071 39,541 44,427Associates

Other LT assets 897 897 897 897 897

Total assets 144,682 145,481 156,012 161,723 171,094Short-term debt 4,500 4,500 300 300 300

Accounts payable 3,430 3,230 3,602 3,782 3,971Other current liabilities 1,196 408 2,008 2,458 1,125








Leverage

Interest cover na na na na na

Gross debt/property assets (%) 11.6 10.0 9.6 4.9 7.1Net debt/EBITDA (x) net cash net cash net cash net cash net cash

Net debt/equity (%) net cash net cash net cash net cash net cash


Net margin (%) 112.2 83.6 57.6 57.6 55.5




Notes

Capex remains high for the coming few years in view of the continuous investment in China IPs

Notes

HLP remains at net cash position as of Dec-2011


51





Valuation Methodology Our target price of HKD28.10 is based on a 15% discount to forward NAV of HKD33.10. Our 15% target discount is somewhere between Hang Lung’s historyical average discount of 19% and sector leader SHKP’s 10% target discount.

Risks For Hang Lung Properties’ China projects under construction, we have taken an NPV approach. Their valuation would be contingent on: 1) timing of completions; 2) achieved rents; 3) cap rate assumptions and 4) outstanding construction costs. Any change in these variables could significantly alter our valuation of these projects.

FY12F FY13F FY14F FY12F FY13F FY14F Spot ForwardPrevious estimate 8,633 10,678 4,823 0.71 0.71 0.71 31.9 34.8New estimate 8,596 10,556 4,650 0.74 0.76 0.76 31.0 33.1Change -37 -122 -173 0.03 0.05 0.05 -0.8 -1.7Change (%) 0% -1% -4% 4% 7% 7% -3% -5%

Net Profit (HKDmn) DPS (HKD) NAV (HKD)

(HKDmn) Methodology Current % of NAV End-FY12F % of NAVInvestment properties 89,817 65% 95,615 65%...Office Cap rate = 5.0% 19,203 14% 18,438 12%...Retail Cap rate = 5.0% 33,980 25% 37,378 25%...Residential Cap rate = 4.0% 7,930 6% 8,766 6%...Industrial Cap rate = 7.0% 1,183 1% 1,183 1%...CP Cap rate = 7.5% 2,274 2% 2,274 2%...China Cap rate = 6.0% 25,248 18% 27,577 19%Shenyang Palace 66 Cap rate = 5.0% 3,168 2% 3,421 2%Jinan Parc 66 Cap rate = 5.0% 4,562 3% 4,963 3%Tianjin Riverside 66 NPV 2,577 2% 2,804 2%Shenyang Forum 66 NPV 2,180 2% 2,372 2%Wuxi Centre 66 NPV 4,691 3% 5,104 3%Dalian Olympia 66 NPV 301 0% 328 0%Trading properties Today's selling prices 20,669 15% 22,736 15%Total assets 127,965 92% 137,343 93%Net cash 10,466 8% 10,466 7%Other liabilities -35 0% -35 0%Net assets 138,396 100% 147,774 100%No. of shares (mn) 4,464 4,464NAV/share (HKD) 31.00 33.10Discount -10% -15%Share price (HKD) 27.75 28.10


HKR International 0480.HK 480 HK

PROPERTY

EQUITY RESEARCH

A timing issue

Value is there, the realisation just depends on sales and completion timing

February 14, 2012

Rating Remains

Buy


HKD 6.40


HKD 2.87


A timing issue We are lowering our target price for HKR from HKD8.00 to HKD6.40 but maintain our Buy rating. Over the past year, the Hong Kong government’s property cooling measures and the floods in Thailand have caused the sales and completion timing of The Amalfi in HK and The Sukhothai Residences in Bangkok to be delayed. At the NAV level, there is little impact from this timing change. We continue to see value in HKR but in order to reflect the timing for earnings to be realised, we widen our target discount from 45% to 55%. Maintain Buy.

Changes to our estimates As stated in our initiation report, HKR’s earnings are dependent on the sales/completion timing of the Amalfi in HK and The Sukhothai Residences in Bangkok. With the Hong Kong government’s property measures dampening sentiment and the floods in Thailand impacting construction, this has pushed back both projects. Instead of FY12, we now expect both projects to contribute to earnings in FY13F. Further, we have also pushed back the sales for Yi Pak Ph 15 to FY14-15. Overall, this results in earnings slippage from FY12 to FY13. As this is simply a timing issue, there is less impact on our NAV estimates. We have lowered our spot/forward NAV by 5%/2% to HKD12.99/HKD14.20, respectively.

Valuation: Target price lowered to HKD6.40; maintain BUY While we have lowered our forward NAV by only 2%, we have widened our target discount by 10pp to 55%. Against HKR’s September 2011 BVPS of HKD10.27, our HKD6.40 price target implies P/BV of 0.62x, broadly in line with HKR’s historical average of 0.58x.

31 Mar FY11 FY12F FY13F FY14F


Revenue (mn) 1,801 4,622 1,630 3,122 5,322 2,751

Reported net profit (mn) 1,648 1,120 132 531 1,233 488

Normalised net profit (mn) 741 1,120 132 531 1,233 488

Normalised EPS 54.85c 82.91c 9.81c 39.35c 91.31c 36.11c

Norm. EPS growth (%) -4.6 45.6 -82.1 -52.5 830.8 -60.5

Norm. P/E (x) 5.2 N/A 29.3 N/A 3.1 N/A 7.9

EV/EBITDA (x) 15.1 3.1 37.7 5.9 2.3 7.8


Dividend yield (%) 6.3 N/A na N/A 6.3 N/A 6.3

ROE (%) 13.0 8.9 1.0 4.1 9.1 3.4

Gearing (%) 16.5 11.8 22.3 13.9 14.5 20.1


Anchor themes


Nomura vs consensus

HKR is very under-covered, with just one other house covering the stock.

Research analysts

Hong Kong Property



Nomura | HKR International February 14, 2012

53

Key data on HKR International Income statement (HKDmn) Year-end 31 Mar FY10 FY11 FY12F FY13F FY14F

Investment properties 327 365 287 303 318Property development 209 57 0 3,578 884

Hotels/serviced apartments 290 344 228 238 247Other Revenue 1,015 1,034 1,115 1,203 1,301

Revenue 1,840 1,801 1,630 5,322 2,751

EBIT contributions

Investment properties 240 297 244 258 270

Property development 11 42 0 1,802 513

Hotels/serviced apartments 13 16 52 54 56Other income 93 5 -27 39 47

Management expenses -76 -100 -110 -121 -133EBITDA 281 260 159 2,032 754


EBIT 281 260 159 2,032 754Net interest expense -80 -32 -17 -21 -21


Other income 611 640 0 0 0Earnings before tax 892 940 155 2,024 823

Income tax -54 -64 -23 -481 -117Net profit after tax 838 877 132 1,543 706

Minority interests -62 -136 0 -310 -218

Other items

Preferred dividends

Normalised NPAT 777 741 132 1,233 488

Extraordinary items 1,114 907 0 0 0Reported NPAT 1,891 1,648 132 1,233 488

Dividends -243 -243 0 -243 -243Transfer to reserves 1,648 1,405 132 990 244




Reported P/E (x) 2.0 2.4 29.3 3.1 7.9Dividend yield (%) 6.3 6.3 na 6.3 6.3

Price/cashflow (x) 6.6 3.5 na 1.3 naPrice/book (x) 0.3 0.3 0.3 0.3 0.3

EV/EBITDA (x) 11.5 15.1 37.7 2.3 7.8




Growth (%)

Revenue -29.1 -2.1 -9.5 226.5 -48.3

EBITDA -54.3 -7.5 -38.6 1,175.0 -62.9EBIT -54.3 -7.5 -38.6 1,175.0 -62.9

Normalised EPS 665.8 -4.6 -82.1 830.8 -60.5

Normalised FDEPS 665.8 -4.6 -82.1 830.8 -60.5

Per share

Reported EPS (HKD) 1.40 1.22 9.81c 91.31c 36.11c



DPS (HKD) 0.18 0.18 0.00 0.18 0.18




(%) 1M 3M 12M

Absolute (HKD) 17.6 -8.9 -43.5

Absolute (USD) 17.8 -8.7 -43.3


Market cap (USDmn) 499.8




0.16


CCM Trust 44.1

LBJ Regents 6.4


Notes

HKR’s earnings are very lumpy and depend on the timing of The Amalfi sales and completion of The Sukhothai Residences


54

Cashflow (HKDmn) Year-end 31 Mar FY10 FY11 FY12F FY13F FY14FEBITDA 281 260 159 2,032 754

Change in working capital 618 -701 -933 1,099 -954

Other operating cashflow -311 1,550 109 -100 -147Cashflow from operations 587 1,109 -665 3,032 -347

Capital expenditure -288 -1,135 -667 -1,202 -1,240Free cashflow 300 -26 -1,332 1,830 -1,587


Net acquisitions 1,447 1,340 0 0 0Reduction in other LT assets 157 -95 -200 -200 -200

Addition in other LT liabilities -321 230 0 0 0

Adjustments -1,269 -892 1,815 -1,514 2,051Cashflow after investing acts 314 557 283 116 264

Cash dividends -81 -257 -149 -95 -243Equity issue 0 0 0 0 0

Debt issue


Others -80 -32 -17 -21 -21

Cashflow from financial acts -161 -289 -166 -116 -264

Net cashflow 152 268 117 0 0Beginning cash 1,962 2,115 2,383 2,500 2,500

Ending cash 2,115 2,383 2,500 2,500 2,500Ending net debt 286 1,140 2,629 906 2,749


Balance sheet (HKDmn) As at 31 Mar FY10 FY11 FY12F FY13F FY14F


Properties held for sale 1,766 2,745 3,250 2,163 3,130Accounts receivable 381 315 321 328 334




Other LT assets 222 318 518 718 918

Total assets 18,122 21,334 22,984 23,492 26,148Short-term debt 1,000 1,521 1,282 852 1,312






Preferred stock




Leverage

Interest cover 3.50 8.08 9.22 94.81 35.18


Net debt/equity (%) 2.4 8.4 20.2 6.4 19.1


Net margin (%) 102.8 91.5 8.1 23.2 17.7




Notes

Acquisition of Japan and Thai properties have increased net debt. Sale of The Amalfi and completion of The Sukhothai Residences should return cash and lower gearing levels

Notes

BVPS stood at HKD10.27 as of September 2011


55



Fig. 73: HKR Int’l NAV breakdown


Valuation methodology and risks Our revised target price of HKD6.40 is based on a 55% discount to HKR’s March-2013 NAV estimate of HKD14.20. We have widened our target discount to NAV to 55%, from 45%, to reflect the timing for earnings to be realised. Our HKD6.40 target price implies P/BV of 0.62x, which is roughly equal to HKR’s historical average P/BV of 0.58x.

Building large-scale commercial complexes in urban locations is always difficult. Resettlement and the need to fit the project into local infrastructure plans have at times resulted in project delays. This is not distinctive to HKR and even applies to companies with strong execution capability like SHKP and Hang Lung Properties. We estimate that for every year that the Dazhongli project is delayed, this would result in an 8% decline to Dazhongli’s valuation or HKD0.43 per HKR share.

Underlying net profit (HKDmn) DPS (HKD) NAV (HKD)

FY12 FY13 FY14 FY12 FY13 FY14 Current Forward

Previous 1,120 531 NA 0.22 0.24 NA 13.64 14.46

Current 132 1,233 488 - 0.18 0.18 12.99 14.20

Change ($) (988) 702 NA (0.22) (0.06) NA (0.65) (0.26)

Change (%) -88% 132% NA -100% -25% NA -5% -2%

(in HKDmn) Methodology Current % of NAV Mar-13 % of NAV

Development properties (incl assoc) DCF at 8% 6,289 36% 6,289 33%

…HK DCF at 8% 1,930 11% 1,930 10%

…Thailand DCF at 8% 3,751 21% 3,751 20%

Discovery Bay (LP outstanding) @HKD400psf 608 3% 608 3%

Investment properties (incl assoc) 4,983 28% 5,211 27%

..Office Cap rate at 4.50% 387 2% 387 2%

..Retail Cap rate at 5.50% 968 6% 1,017 5%

..Residential Cap rate at 4.00% 2,111 12% 2,217 12%

..Others Cap rate at 10.00% 37 0% 37 0%

..Industrial Cap rate at 7.00% 1,479 8% 1,553 8%

Investment prop under dev DCF at 8% 7,919 45% 8,521 44%

Hotel @HKD2.3mn/room 1,073 6% 1,073 6%

Investment securities 213 1% 213 1%

Gross assets 20,476 117% 21,307 111%

Net debt (1,786) -10% (1,786) -9%

Receivables less payables (1,154) -7% (344) -2%

NAV 17,537 100% 19,177 100%

# of shares (m) 1,350 1,350

NAV per share (HKD) 12.99 14.20

Discount/target discount -78% -55%

Share price (HKD) 2.87 6.40


Kerry Properties 0683.HK 683 HK

PROPERTY

EQUITY RESEARCH

Target price cut to HKD41.50; maintain Buy

Steep discount to NAV already reflects China risk

February 14, 2012

Rating Remains

Buy


HKD 41.50


HKD 31.80


Action/Catalysts: Target price cut to HKD41.50, maintain Buy We cut our target price for Kerry Properties from HKD52.00 to HKD41.50, but maintain our Buy rating. Looking at Kerry’s NAV composition, China and Hong Kong properties have almost an even split, with China making up 49% and Hong Kong making up 48%. While it is uncertain when the China property market will pick up, Kerry’s Hong Kong assets, such as Megabox and Enterprise Square, have continued to benefit from the development of Kowloon East. Further, with gearing at just 13% as of June 2011, we believe that Kerry’s current 46% discount to NAV and 0.74x P/BV already reflect the uncertain outlook on the China side. Maintain Buy.

Changes to our estimates Reflecting the completion slippage of Lions Rise from 2011 to 2012, we have revised down FY11F earnings by 15%, but raised FY12F earnings by 16%. On the NAV front, we lower our forward NAV by 7% from HKD68.40 to HKD63.85 to reflect our latest property rental outlook.

Valuation: TP cut by around 20% to HKD41.50; reiterate Buy In addition to the 7% cut in our forward NAV estimates, we also widen our target discount for Kerry from 24% to 35%. Our new target discount is in line with Kerry’s historical average discount of 36%. We believe this level of discount is fair until Kerry’s China property pipeline starts to come on line at a quicker pace. With 31% potential upside to our target price, we maintain our Buy rating on Kerry.



Revenue (mn) 21,226 19,165 18,001 24,848 30,694 15,881



Normalised EPS 2.30 3.34 2.83 3.37 3.88 3.21

Norm. EPS growth (%) 53.7 47.1 23.0 1.0 37.1 -17.5

Norm. P/E (x) 14.3 N/A 11.6 N/A 8.5 N/A 10.3

EV/EBITDA (x) 9.4 8.4 10.8 6.8 7.0 6.9



ROE (%) 11.6 7.0 6.7 5.7 8.3 6.2

Gearing (%) 19.8 16.1 19.9 14.4 19.7 19.3


Anchor themes


Nomura vs consensus

While demand visibility is limited, as effective supply continues to tighten, we believe the property market could re-engage faster than expected, benefiting property stocks. Our fair value is 19% above consensus.

Research analysts

Hong Kong Property




Nomura | Kerry Properties February 14, 2012

57

Key data on Kerry Properties Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F


Hotels/serviced apartments 245 294 309 324 340Other Revenue 7,791 11,027 13,390 14,061 653

Revenue 12,938 21,226 18,001 30,694 15,881

EBIT contributions

Investment properties 999 913 1,222 1,520 1,729


Hotels/serviced apartments 34 45 77 81 85Other income 766 1,238 1,155 1,207 1,261


Depreciation and amortisation -229 -272 -285 -299 -314

EBIT 3,539 4,310 3,217 7,518 7,156Net interest expense -1 30 23 36 33

Associates & JCEs 921 1,295 2,226 536 651



Minority interests -525 -450 -174 -579 -1,242

Other items

Preferred dividends

Normalised NPAT 2,139 3,301 4,068 5,576 4,603







Price/cashflow (x) 8.4 7.4 na 6.3 7.4Price/book (x) 0.9 0.8 0.7 0.6 0.6

EV/EBITDA (x) 11.6 9.4 10.8 7.0 6.9




Growth (%)

Revenue -1.4 64.1 -15.2 70.5 -48.3

EBITDA 5.9 21.6 -23.5 123.2 -4.4EBIT 6.1 21.8 -25.3 133.7 -4.8

Normalised EPS -4.1 53.7 23.0 37.1 -17.5

Normalised FDEPS -4.2 54.0 23.0 37.1 -17.5

Per share

Reported EPS (HKD) 3.07 4.40 2.83 3.88 3.21

Norm EPS (HKD) 1.50 2.30 2.83 3.88 3.21


DPS (HKD) 0.70 0.87 1.00 1.00 1.00




(%) 1M 3M 12M

Absolute (HKD) 22.3 5.5 -21.0

Absolute (USD) 22.5 5.7 -20.7






8.09


Kerry Group 55.0


Notes

Earnings revisions reflect the delayed completion of Larvotto to FY11 and Lions Rise to FY12


58


Change in working capital -3,532 2,257 -6,686 312 -403

Other operating cashflow 5,403 -491 733 -590 -650Cashflow from operations 5,639 6,347 -2,450 7,539 6,418

Capital expenditure -412 -679 -679 -679 -679Free cashflow 5,227 5,668 -3,129 6,860 5,739

Reduction in investments 4 8 0 0 0

Net acquisitions -1,165 -5,286 -2,000 -2,000 -2,000Reduction in other LT assets -261 -858 0 0 0

Addition in other LT liabilities 634 1,167 0 0 0

Adjustments -494 -506 0 0 0Cashflow after investing acts 3,945 193 -5,129 4,860 3,739

Cash dividends -1,103 -1,179 -1,436 -1,436 -1,436Equity issue 24 42 0 0 0

Debt issue -364 4,789 1,000 1,000 1,000

Convertible debt issue -10 132 0 0 0Others 130 -83 0 0 0

Cashflow from financial acts -1,323 3,701 -436 -436 -436

Net cashflow 2,622 3,895 -5,565 4,424 3,303Beginning cash 4,083 6,704 10,599 5,034 9,458









Other LT assets 2,062 2,920 2,920 2,920 2,920

Total assets 88,346 104,662 108,925 115,213 122,731Short-term debt 431 7,952 7,952 7,952 7,952



Long-term debt 12,860 10,129 11,129 12,129 13,129Convertible debt 2,462 2,595 2,595 2,595 2,595



Preferred stock




Leverage

Interest cover 3,936.58 na na na na


Net debt/equity (%) 17.9 17.5 25.9 18.7 14.0


Net margin (%) 33.9 29.7 22.6 18.2 29.0




Notes

Higher cashflow from operation lowering net debt level

Notes

Gearing ratio set to fall from 17.5% in 2010 to 14.0% in 2013F


59





Valuation methodology We lower our forward NAV by 7% from HKD68.40 to HKD63.85 to reflect our latest property rental outlook. In addition, we widen our target discount for Kerry from 24% to 35% to be in line with Kerry’s historical mid-cycle average discount of 36%. We believe this level of discount is fair until Kerry’s China property pipeline starts to come on line at a quicker pace. All in, our target price falls to HKD41.50, from HKD52.00 previously.

Risks With 49% of NAV tied to China property, we expect Kerry's share price performance to be vulnerable to uncertainties surrounding China's housing policy.

Underlying Net Profit (HKDmn) Spot ForwardFY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F NAV (HKD) NAV (HKD)

Previous estimate 4,767 4,812 NA 3.34 3.37 NA 1.00 1.00 NA 61.3 68.4New estimate 4,068 5,576 4,603 2.83 3.88 3.21 1.00 1.00 1.00 58.9 63.9Change -699 764 NA -0.50 0.52 NA 0.00 0.00 NA -2.5 -4.5Change (%) -15% 16% NA -15% 15% NA 0% 0% NA -4% -7%

EPS (HKD) DPS (HKD)

(in HKDmn) Methodology Current % of NAV End-12 % of NAVDevelopment properties in HK DCF at 8% 15,005 18% 16,489 18%Investment properties in HK 24,721 29% 26,553 29%..Office Cap rate at 4.75% 5,363 6% 5,149 6%..Retail Cap rate at 4.75% 5,842 7% 6,572 7%..Residential Cap rate at 3.00% 13,070 15% 14,377 16%..Car Park Cap rate at 8.00% 446 1% 455 0%Investment prop under dev in HK DCF at 8% 757 1% 817 1%Development properties in China DCF at 8% 6,209 7% 6,705 7%Investment properties in China 20,617 24% 21,267 23%..Office Cap rate at 7.25% 10,750 13% 11,288 12%..Retail Cap rate at 6.75% 3,822 5% 4,204 5%..Residential Cap rate at 4.50% 5,831 7% 5,540 6%..Car Park Cap rate at 9.00% 214 0% 235 0%Investment prop under dev in China DCF at 8% 14,819 18% 16,069 17%Overseas Properties 2,281 3% 2,435 3%Hotel 3,048 4% 3,323 4%Warehouse and Logistics 16,459 19% 17,276 19%..Warehouse (incl. car parks) Cap rate at 8.00% 5,612 7% 5,887 6%..Logistics business 15.0x P/E 10,847 13% 11,389 12%Infrastructure 616 1% 634 1%Investment securities 611 1% 761 1%Gross assets 105,143 124% 112,330 122%Net debt 12,023- -14% 12,023- -13%Receivables less payables 3,645- -4% 3,645- -4%Associate debt 4,818- -6% 4,818- -5%NAV 84,658 100% 91,844 100%# of shares (m) 1,438 1,438 NAV per share (HKD) 58.86 63.85 Discount/target discount -46% -35%Share price (HKD) 31.80 41.50


Midland Holdings 1200.HK 1200 HK

PROPERTY

EQUITY RESEARCH

Downgrade to Neutral; new TP of HKD4.40

Fairly valued now; needs earnings recovery for next leg up

February 14, 2012

Rating Down from Buy

Neutral

Target price Reduced from 5.15 HKD 4.40

Closing price February 8, 2012 HKD 4.33

Potential downside 1.6%

Action/Catalyst: Need earnings recovery for next leg up; downgrade to Neutral We are downgrading Midland Holdings to Neutral from Buy and cutting our price target by 15% from HKD5.15 to HKD4.40. Although Midland has historically been a good proxy for the HK housing market, benefiting from both price and volume increases, the HK Government’s SSD has caused volume to remain sustainably low. Further, given Midland’s traditional lag in cost reduction, as the profit warning on 12 January 2012 highlighted, earnings remain under pressure. Overall, we believe Midland is now fairly valued and for its next leg up, it would require earnings to recover either from a sustained pick up in transaction volume or a reduction in its cost base. We downgrade Midland to Neutral.

Change in our estimates We cut our FY11F/12F/13F earnings estimates for Midland by 34%/49%/24% to reflect: (i) lower secondary transaction levels; and (ii) a slower adjustment to Midland’s cost base. Keeping the dividend payout ratio unchanged, we also lower our FY11-13F DPS estimates by the same magnitudes.

Valuation: Target price lowered to HKD4.40 on earnings cut As we value Midland Holdings using a P/BV approach, given our earnings cut for FY12F and FY13F, the lower ROE results in a decline in our target P/B ratio from 2.14x to 1.90x. We lower our target price to HKD4.40 from HKD5.15. Our fair value implies a FY11F and FY12 P/E around 13.4x.



Revenue (mn) 3,737 3,810 3,474 4,045 3,178 4,302 3,331

Reported net profit (mn) 533 359 237 457 235 515 394

Normalised net profit (mn) 495 359 237 457 235 515 394


Norm. EPS growth (%) -26.2 -27.4 -52.1 27.2 -1.0 12.7 67.5

Norm. P/E (x) 6.3 N/A 13.2 N/A 13.3 N/A 8.0

EV/EBITDA (x) 2.3 2.6 4.6 1.9 4.5 1.5 2.8



ROE (%) 30.4 20.5 14.0 25.2 14.3 26.3 22.7

Gearing (%) 0.4 0.4 0.4 0.4 0.4 0.3 0.4


Anchor themes


Nomura vs consensus

Our FY11F and FY12F earnings estimates are now 19% and 27% below consensus estimates.

Research analysts

Hong Kong Property



Nomura | Midland Holdings February 14, 2012

61

Key data on Midland Holdings Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F

Investment properties

Property development


Other Revenue 3,405 3,737 3,474 3,178 3,331

Revenue 3,405 3,737 3,474 3,178 3,331

EBIT contributions

Investment properties

Property development


Other income 788 627 286 282 476

Management expenses

EBITDA 821 661 324 323 519

Depreciation and amortisation -33 -35 -38 -41 -44

EBIT 788 627 286 282 476Net interest expense 2 4 16 17 17


Other income 4 -5 0 0 0Earnings before tax 812 650 327 324 517

Income tax -118 -119 -54 -54 -89Net profit after tax 694 531 272 270 429


Other items

Preferred dividends

Normalised NPAT 671 495 237 235 394

Extraordinary items 20 37 0 0 0Reported NPAT 691 533 237 235 394

Dividends -590 -426 -178 -176 -295Transfer to reserves 102 106 59 59 98






EV/EBITDA (x) 2.0 2.3 4.6 4.5 2.8




Growth (%)

Revenue 51.0 9.8 -7.0 -8.5 4.8

EBITDA 1,609.7 -19.5 -51.0 -0.4 60.8EBIT 27,143.3 -20.5 -54.3 -1.4 68.6

Normalised EPS 4,312.6 -26.2 -52.1 -1.0 67.5

Normalised FDEPS 4,312.6 -26.2 -52.1 -1.0 67.5

Per share

Reported EPS (HKD) 95.44c 73.58c 32.77c 32.45c 54.35c



DPS (HKD) 0.81 0.59 0.25 0.24 0.41




(%) 1M 3M 12M

Absolute (HKD) 6.9 10.7 -33.4

Absolute (USD) 7.1 11.0 -33.1


Market cap (USDmn) 404.4




1.22


Marathon Asset Mgmt 14.0



62

Cashflow (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 821 661 324 323 519

Change in working capital 98 45 138 -20 -69

Other operating cashflow -131 -92 -72 -71 -106Cashflow from operations 788 615 390 232 345

Capital expenditure 0 0 0 0 0Free cashflow 788 615 390 232 345

Reduction in investments 0 0 0 0 0

Net acquisitions -2 -3 0 0 0Reduction in other LT assets 79 13 0 0 0


Adjustments -54 -31 -33 -21 -24Cashflow after investing acts 810 594 357 211 321


Debt issue 4 -10 0 0 0


Cashflow from financial acts -274 -517 -378 -159 -267

Net cashflow 535 77 -20 52 54Beginning cash 942 1,477 1,554 1,534 1,585

Ending cash 1,477 1,554 1,534 1,585 1,639Ending net debt -1,455 -1,541 -1,521 -1,573 -1,627




Properties held for sale 0 0 0 0 0Accounts receivable 1,114 1,259 1,152 1,051 1,102



Other fixed assets (net) 150 162 174 172 169Associates 52 60 84 109 133

Other LT assets 46 33 33 33 33

Total assets 2,909 3,192 3,105 3,079 3,205Short-term debt 2 1 1 1 1



Long-term debt 21 12 12 12 12Convertible debt 0 0 0 0 0

Other LT liabilities 1 2 2 2 2

Total liabilities 1,094 1,310 1,340 1,220 1,202Minority interest 75 110 146 181 216

Preferred stock 0 0 0 0 0Shareholders' Equity 72 72 72 72 72



Leverage


Gross debt/property assets (%) 0.8 0.4 0.4 0.4 0.4Net debt/EBITDA (x) net cash net cash net cash net cash net cash

Net debt/equity (%) net cash net cash net cash net cash net cash


Net margin (%) 20.3 14.3 6.8 7.4 11.8




Notes

Midland is still sitting on substantial net cash

Notes

Balance sheet is healthy


63



Fig. 77: Midland share price vs. 35 housing estates transaction volume

Source: Midland Holdings, Nomura research

Valuation methodology and risks. Our revised target price of HKD4.40 is based on a 1.90x (was 2.14x) FY12F BVPS of HKD2.32, reflecting our lower ROE forecast. Given Midland's earnings volatility, we believe a P/B-based valuation which considers its sustainable ROE, COE and growth better reflects its medium-term outlook. The introduction of the Special Stamp Duty (SSD) in November 2010 significantly impacted investment demand for housing. Volume has declined as a result. While we do not expect any significant policy shifts this year, any easing or tightening measures could boost or depress housing volumes, thus impacting on Midland's agency business.

Net profit (HKDmn) EPS (HKD) DPS (HKD)

FY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F

Previous 359 457 515 0.50 0.63 0.71 0.37 0.47 0.53

New 237 235 394 0.33 0.32 0.54 0.25 0.24 0.41

Change (HKD) (122) (222) (122) (0.17) (0.31) (0.17) (0.13) (0.23) (0.13)

Change (%) -34% -49% -24% -34% -49% -24% -34% -49% -24%

0

2

4

6

8

10

12

14

16

0

100

200

300

400

500

600

Jan

-02

Jun

-02

No

v-02

Ap

r-03

Sep

-03

Feb

-04

Jul-

04

Dec

-04

May

-05

Oct

-05

Mar

-06

Au g

-06

Jan

-07

Jun

-07

No

v-07

Ap

r-08

Sep

-08

Feb

-09

Jul-

09

Dec

-09

Ma y

-10

Oct

-10

Mar

-11

Au g

-11

Jan

-12

35 housing estates secondary volume index (LHS)

Midland share price (RHS)


Wharf Holdings 0004.HK 4 HK

PROPERTY

EQUITY RESEARCH

Price target cut to HK$48.70, maintain Neutral

Not expensive but also not cheap. Maintain Neutral

February 14, 2012

Rating Remains

Neutral


HKD 48.70


HKD 46.50


Need stronger China for next leg up Over the past year, Wharf’s Harbour City and Times Square shopping malls have continued to register impressive growth while its China property sales have fallen behind. Although Wharf’s current valuation at 0.76x PB is not expensive compared to its long run average of 0.78x, it also leaves limited upside. We believe a reacceleration of its China development sales is key for the next leg up. We maintain Neutral.

Changes in our estimates We have cut our spot and forward NAV estimates by 3% and 8% to HK$65.13 and HK$69.61, respectively. This primarily reflects a more conservative development and price growth assumption for Wharf’s China development properties. On the earnings front, we have revised down FY13 earnings by 4% to reflect a slower China development sales timetable.

Valuation: Price target cut to HK$48.70, maintain Neutral Keeping our target discount unchanged at 30%, we have cut our fair value by 8.3% to HK$48.70. Against Wharf’s June 2011 BVPS of HK$61.59, our fair value implies a PB ratio of 0.79x in line with Wharf’s long run average PB of 0.78x. With potential upside limited to only 4.7%, we maintain our Neutral rating on Wharf.



Revenue (mn) 19,380 20,911 20,917 27,975 27,929 37,935 35,727



Normalised EPS 2.87 2.54 2.54 3.14 3.13 4.03 3.85

Norm. EPS growth (%) 1.1 -11.6 -11.6 24.0 23.4 28.1 22.9

Norm. P/E (x) 16.2 N/A 18.3 N/A 14.8 N/A 12.1

EV/EBITDA (x) 17.0 17.3 16.8 13.0 12.7 10.2 10.4



ROE (%) 24.5 4.2 4.2 4.7 4.7 5.6 5.4

Gearing (%) 20.5 22.2 22.2 20.7 20.7 18.6 18.7


Anchor themes

With consensus universally bearish and valuations supportive, 2012 looks set to be the mirror image of 2011 and property stocks may offer asymmetrical reward in 2012. Caveat Venditor.

Nomura vs consensus

Although we are positive on retail sales and retail rents, our estimate of a 12.5% increase in retail rents is below the market's expected high teens growth.

Research analysts

Hong Kong Property



Nomura | Wharf Holdings February 14, 2012

65

Key data on Wharf Holdings Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F


Hotels/serviced apartments 963 1,156 1,214 1,274 1,338Other Revenue 6,296 7,102 6,495 6,501 6,519

Revenue 17,553 19,380 20,917 27,929 35,727

EBIT contributions






EBIT 8,554 9,809 10,625 14,106 16,466Net interest expense -338 -996 -1,163 -973 -1,031

Associates & JCEs 356 385 721 791 1,417

Other income 1,771 199 -293 -994 -1,206Earnings before tax 10,343 9,397 9,891 12,930 15,646

Income tax -1,928 -777 -1,703 -2,364 -2,778Net profit after tax 8,415 8,620 8,187 10,566 12,868

Minority interests -598 -715 -614 -1,079 -1,205

Other items

Preferred dividends

Normalised NPAT 7,817 7,905 7,573 9,487 11,664








EV/EBITDA (x) 18.2 17.0 16.8 12.7 10.4




Growth (%)

Revenue 10.1 10.4 7.9 33.5 27.9

EBITDA 13.4 14.7 8.3 32.8 16.7EBIT 13.4 14.7 8.3 32.8 16.7

Normalised EPS 85.8 1.1 -11.6 23.4 22.9

Normalised FDEPS 85.8 1.1 -11.6 23.4 22.9

Per share

Reported EPS (HKD) 6.99 12.98 2.54 3.13 3.85

Norm EPS (HKD) 2.84 2.87 2.54 3.13 3.85


DPS (HKD) 1.00 1.00 1.00 1.02 1.10




(%) 1M 3M 12M

Absolute (HKD) 25.7 10.1 -15.1

Absolute (USD) 25.9 10.3 -14.8




52-week range (HKD) 59/33.15


26.19


Wheelock & Co 50.0


Notes

Although HK rental income should grow steadily, China property sales are the key driver to Wharf’s future earnings growth


66


Change in working capital -2,754 -5,123 -10,024 -186 -256

Other operating cashflow -345 -3,686 3,997 -4,108 -4,355Cashflow from operations 5,455 1,000 4,598 9,812 11,855

Capital expenditure -2,245 -3,774 -29,013 -5,095 -5,095Free cashflow 3,210 -2,774 -24,415 4,717 6,760


Net acquisitions 143 1,644 0 0 0Reduction in other LT assets -855 -2,030 74 70 67

Addition in other LT liabilities -11,231 1,999 3,575 1,554 1,632

Adjustments 12,371 -170 -3,649 -1,624 -1,698Cashflow after investing acts 3,638 -1,331 -24,415 4,717 6,760

Cash dividends -1,993 -2,649 -2,877 -2,914 -3,091Equity issue 292 49 10,052 0 0

Debt issue 1,835 9,745 11,016 -1,807 -3,673

Convertible debt issue 0 0 6,220 0 0Others -1,246 -7,326 4 4 4

Cashflow from financial acts -1,112 -181 24,415 -4,717 -6,760

Net cashflow 2,526 -1,512 0 0 0Beginning cash 15,886 18,412 16,900 16,900 16,900






Other current assets 1,094 277 277 277 277Total current assets 41,857 50,427 65,004 67,623 70,244



Other LT assets 2,813 4,843 4,769 4,699 4,632




Long-term debt 31,516 41,760 50,581 49,046 45,923Convertible debt 0 0 6,220 6,220 6,220



Preferred stock




Leverage

Interest cover 25.31 9.85 9.14 14.50 15.97


Net debt/equity (%) 16.7 20.0 25.7 23.1 19.8


Net margin (%) 109.7 184.5 36.2 34.0 32.6




Notes

Wharf net debt was HK$42.5bn as of June 2011

Notes

Wharf issued a HK$6.2bn CB in 1H 2011 with an exercise price of HK$90.0


67



Fig. 79: Wharf NAV breakdown


Valuation Methodology Our HKD48.70 TP is based on a 30% discount to forward NAV of HKD69.61. Our target discount of 30% is in line with Wharf's historical midcycle average of 31%.

Risks Over the past years, Wharf has made significant investments in the China property market (both development and investment). Any change in China's property policy from tightening to easing or vice versa would help swing sentiment and impact on Wharf's discount to NAV.

Current Forward Net Profit (HKDmn) DPS (HKD)

NAV NAV FY11F FY12F FY13F FY11F FY12F FY13FPrevious 66.70 75.65 7,567 9,525 12,198 1.00 1.02 1.10Current 65.13 69.61 7,573 9,487 11,664 1.00 1.02 1.10Change (1.56) (6.05) 5.56 (37) (535) 0.00 0.00 0.00Change (%) -2% -8% 0% 0% -4% 0% 0% 0%

(HKDmn) Methodology Current NAV % of NAV Forward NAV % of NAVInvestment Properties in HK 157,196 80% 165,936 79%....Retail Cap rate = 4.9% 88,028 45% 97,673 46%....Office Cap rate = 4.3% 52,513 27% 50,412 24%....Residential Cap rate = 4.5% 14,522 7% 15,611 7%....Industrial Cap rate = 7.3% 2,133 1% 2,240 1%Hotels in HK @HKD3.8mn to HKD5.0mn per room 6,427 3% 6,427 3%Development Prop in HK DCF at 8% 10,806 5% 10,806 5%Hotels in China (Under construction) @HKD1.8mn per room 195 0% 211 0%Development Properties in China DCF at 10% 26,343 13% 28,977 14%China Inv Properties Cap rate = 7.0% - 8.1% 12,297 6% 12,925 6%China Inv Prop Under Construction Cap rate = 7.0% - 8.1% 12,957 7% 13,993 7%Modern Terminals At 10.0x P/E 6,882 3% 6,538 3%Modern Terminals China DCF 5,182 3% 5,596 3%Other 1,009 1% 1,210 1%iCable (MV) @ $0.44 per share 644 0% 644 0%Harbour Centre (MV) @ $9.24 per share 3,072 2% 3,072 1%Wharf New T&T 1,927 1% 2,152 1%Long Term Investment At book value 3,362 2% 3,362 2%Gross assets 248,300 126% 261,851 124%Net Liabilities (50,994) -26% (50,994) -24%Total net assets 197,306 100% 210,857 100%No of Shares Issued 3,029 3,029NAV per share 65.13 69.61Share price (HKD) 46.50 48.70NAV discount (%) -29% -30%


Hysan Development 0014.HK 14 HK

PROPERTY

EQUITY RESEARCH

Target price raised to HKD40.50

Entering the harvesting stage, upgrade to Buy

February 14, 2012

Rating Up from Neutral

Buy

Target price Increased from 37.20

HKD 40.50


HKD 30.25


Action/Catalysts: Entering the harvesting stage, upgrade to Buy While we have always liked Hysan’s commercial property exposure in CWB and growth from the completion of Hysan Place in 2012, valuations have not always been reasonable. However, after 2011’s 30% pullback, Hysan now trades at a 45% discount to NAV. With its clean balance sheet and a rejuvenated investment property portfolio, we believe Hysan should trade in line with the likes of HK Land and Wharf at a 30% discount. Our HK$40.50 price target represents 34% potential upside; upgrade to Buy.

Changes to our estimates Reflecting our latest rental outlook, we have made some minor revisions to Hysan’s earnings. FY11/12/13F earnings have been cut by -1%/-9%/-4%, respectively. On the NAV front, our forward NAV is largely unchanged at HK$57.90, as the completion of Hysan Place should help offset the 4% decline in spot rents that we have factored in.

Valuation: TP at HKD40.50; upgrade from Neutral to Buy We have compressed our target NAV discount for Hysan from 35% to 30%. As Hysan Place nears completion and other renovation programs like the facelift of Leighton Centre and One Hysan Avenue now done, Hysan’s commercial portfolio is now substantially rejuvenated. Together with its strong balance sheet with gearing at only 6-7%, we believe Hysan’s fair discount should be at least in line with HK Land’s and Wharf’s long-run discount of 30%. We have raised our price target by 9% from HKD37.20 to HKD40.50.



Revenue (mn) 1,764 1,905 1,903 2,353 2,180 2,738 2,695



Normalised EPS 1.09 1.23 1.21 1.50 1.36 1.77 1.70

Norm. EPS growth (%) 2.6 12.5 10.9 22.3 12.6 17.7 24.3

Norm. P/E (x) 27.7 N/A 25.0 N/A 22.2 N/A 17.8

EV/EBITDA (x) 19.4 24.5 20.5 20.2 18.2 17.4 14.8



ROE (%) 9.9 3.0 2.9 3.3 3.0 3.7 3.6

Gearing (%) 9.4 9.5 9.5 8.1 9.5 8.0 9.5


Anchor themes


Nomura vs consensus

While demand visibility is still limited, as effective supply continuing to tighten we believe the property market could re-engage at a faster than expected pace. Our fair varlue is 41% higher than consensus.

Research analysts

Hong Kong Property




Nomura | Hysan Development February 14, 2012

69

Key data on Hysan Development Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F

Investment properties 1,680 1,764 1,903 2,180 2,695Property development 0 0 0 0 0


Other Revenue 0 0 0 0 0

Revenue 1,680 1,764 1,903 2,180 2,695

EBIT contributions


Property development 0 0 0 0 0


Other income 35 7 49 59 70




Associates & JCEs 768 394 175 184 193

Other income -552 -102 0 0 0Earnings before tax 1,432 1,556 1,552 1,745 2,163

Income tax -189 -201 -199 -225 -285Net profit after tax 1,243 1,355 1,353 1,519 1,878


Other items

Preferred dividends

Normalised NPAT 1,113 1,148 1,275 1,436 1,786


Dividends -711 -778 -780 -906 -1,011Transfer to reserves 2,202 3,066 496 530 775






EV/EBITDA (x) 15.9 19.4 20.5 18.2 14.8




Growth (%)

Revenue 2.6 5.0 7.9 14.6 23.6

EBITDA -10.0 2.5 10.5 14.5 25.1EBIT -10.0 2.5 10.5 14.5 25.1

Normalised EPS -7.9 2.6 10.9 12.6 24.3

Normalised FDEPS -7.9 2.6 10.9 12.6 24.3

Per share

Reported EPS (HKD) 2.79 3.65 1.21 1.36 1.70

Norm EPS (HKD) 1.06 1.09 1.21 1.36 1.70


DPS (HKD) 0.68 0.74 0.74 0.86 0.96




(%) 1M 3M 12M

Absolute (HKD) 15.0 15.2 -16.4

Absolute (USD) 15.2 15.5 -16.1






5.05


Lee Hysan Co. 40.9


Notes

Hysan Place should start to make a full year earnings contribution in FY13F


70


Change in working capital 837 326 116 39 42

Other operating cashflow -1,396 -471 -340 -403 -492Cashflow from operations 788 1,236 1,301 1,382 1,734

Capital expenditure -250 -878 -1,100 -800 -900Free cashflow 538 358 201 582 834

Reduction in investments -72 -263 0 0 0

Net acquisitions 44 50 0 0 0Reduction in other LT assets 206 -657 0 0 0

Addition in other LT liabilities -3,640 59 26 52 96

Adjustments 4,173 268 -26 -52 -96Cashflow after investing acts 1,249 -185 201 582 834


Debt issue 140 696 584 225 79


Cashflow from financial acts -280 194 -195 -575 -827

Net cashflow 969 9 6 7 8Beginning cash 1,015 1,984 1,993 1,999 2,006





Properties held for sale

Accounts receivable 83 98 106 121 150



Other fixed assets (net) 396 429 408 387 368Associates 2,517 3,014 3,014 3,014 3,014

Other LT assets 1,210 1,867 1,867 1,867 1,867

Total assets 44,042 48,554 54,159 57,067 57,590Short-term debt 400 650 1,000 1,000 1,000

Accounts payable 314 433 433 433 433Other current liabilities 499 552 682 742 820




Total liabilities 5,310 6,237 6,977 7,315 7,567Minority interest 1,516 1,640 903 544 40




Leverage

Interest cover 10.28 11.80 10.27 9.40 10.17


Net debt/equity (%) 5.1 6.4 6.9 6.9 6.9


Net margin (%) 173.4 217.9 67.0 65.9 66.3




Notes

Balance sheet is very strong with net debt to equity at only 6-7%.

Notes

Hysan’s BVPS stood at HKD43.67 as at June 2011


71





Valuation Methodology Our target price of HKD40.50 is based on a 30% discount to Hysan’s forward NAV of HKD57.91. With its strong balance sheet and the ongoing investment property pipeline, we believe Hysan's fair discount should be at least in line with HK Land's and Wharf's long run discount of 30%.

Risks Hysan Place is due for opening in 3Q12. Should completion be delayed, it could impact earnings and our valuation. Conversely, if achieved rents prove higher than expected, this could represent a potential upside risk. With over 45% of NAV attributable to retail (with a high-end focus), Hysan’s property portfolio is well positioned to benefit from stronger-than-expected growth in mainland tourist spending, a key driver of retail sales and rental growth in HK in recent years, which could lead to upside risks to Hysan’s retail rental growth.

Spot ForwardFY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F NAV (HKD) NAV (HKD)

Previous estimate 1,294 1,582 1,862 1.23 1.50 1.77 0.74 0.86 0.96 50.0 57.3New estimate 1,275 1,436 1,786 1.21 1.36 1.70 0.74 0.86 0.96 54.6 57.9Change (%) -1% -9% -4% -1% -9% -4% 0% 0% 0% 9% 1%

Underlying Net Profit (HKDmn) EPS (HKD) DPS (HKD)

(HKDmn) Methodology Current % of NAV End-12 NAV % of NAV...Office Cap rate = 5.00% 22,893 40% 22,541 37%...Retail Cap rate = 5.25% 26,145 45% 28,991 48%...Residential Cap rate = 4.00% 8,943 16% 9,837 16%...Car Park Cap rate = 7.00% 491 1% 501 1%...China Cap rate = 7.50% 2,706 5% 2,842 5%Investment properties 61,178 106% 64,711 106%Treasury portfolio At Market Value 1,851 3% 1,851 3%Gross Assets 63,029 110% 66,563 109%Net Debt (4,357) -8% (4,357) -7%Other liabilities (1,208) -2% (1,208) -2%Net Assets 57,464 100% 60,998 100%No. of shares 1,053 1,053NAV (HKD) 54.55 57.91Share price (HKD) 30.25 40.50Discount (%) -45% -30%


Great Eagle Holdings 0041.HK 41 HK

PROPERTY

EQUITY RESEARCH

Double discount should unwind

Double discount should compress on more positive view on Champion REIT

February 14, 2012

Rating Remains

Buy

Target price Increased from 30.10

HKD 31.10


HKD 20.20

Potential upside +54%

Action/Catalyst: Discount on discount should unwind Champion REIT currently trades at 0.44x P/B and makes up 24% of Great Eagle’s NAV. In turn, Great Eagle trades at a 63% discount to its MV-based NAV. This double discount makes Great Eagle’s valuation one of the steepest in our coverage universe. As we now turn more positive towards Champion REIT with our upgrade to Buy, we believe some of this double discount should start to compress. Should Great Eagle simply revert back to its historical average discount of 48%, we expect this would help drive significant share price performance.

Change in our estimates We have cut our FY11F and FY12F earnings estimates by 2% and 19% respectively. The bigger 19% cut for FY12F reflects the change in completion timing for Great Eagle’s Dalian project from 2012 to 2015. While our forward NAV has been reduced by the cut in our fair value for Champion from HKD4.90 to HKD4.16, for Great Eagle, this is mitigated by 1) higher hotel valuation; and 2) a larger stake in Champion REIT. Overall, our forward NAV has been raised by 4% from HKD57.80 to HKD59.82.

Valuation: 3% TP rise to HKD31.10, maintain Buy Keeping our target discount unchanged at 48%, we have raised our target price by 3% from HKD30.10 to HKD31.10 to reflect the revision to our NAV. Our new target price represents 54% potential upside. We maintain our Buy rating on Great Eagle.



Revenue (mn) 4,694 4,992 4,910 5,211 5,122 5,259



Normalised EPS 2.24 2.12 2.09 2.77 2.24 2.31

Norm. EPS growth (%) 46.9 -5.3 -6.8 30.6 7.5 3.2

Norm. P/E (x) 9.0 N/A 9.7 N/A 9.0 N/A 8.7

EV/EBITDA (x) 4.6 7.6 9.3 5.4 8.0 7.2



ROE (%) 16.4 4.5 4.6 5.5 4.8 4.7

Gearing (%) 10.3 9.7 9.4 7.1 6.6 4.0


Anchor themes


Nomura vs consensus

Given the tight office supply, we believe Central office rents could re-engage faster than the market expects. This should benefit Champion and in turn Great Eagle. Our fair value is 56% above consensus.

Research analysts

Hong Kong Property



Nomura | Great Eagle Holdings February 14, 2012

73

Key data on Great Eagle Holdings Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F

Investment properties 251 265 259 270 280Property development 0 0 0 0 0


Revenue 3,958 4,694 4,910 5,122 5,259

EBIT contributions



Hotels/serviced apartments 429 660 856 942 1,037Other income 925 967 935 960 910

Management expenses -562 -561 -539 -539 -539EBITDA 956 1,245 1,424 1,544 1,598


EBIT 956 1,245 1,424 1,544 1,598Net interest expense 40 52 61 54 66

Associates & JCEs 16 1,852 23 29 35

Other income -6 -1,640 0 0 0Earnings before tax 1,006 1,509 1,507 1,627 1,699

Income tax -68 -115 -208 -231 -258Net profit after tax 938 1,393 1,299 1,397 1,441

Minority interests 0 0 0 0 0

Other items

Preferred dividends

Normalised NPAT 938 1,393 1,299 1,397 1,441

Extraordinary items 244 2,786 0 0 0Reported NPAT 1,183 4,179 1,299 1,397 1,441

Dividends -320 -355 -374 -386 -386Transfer to reserves 862 3,824 926 1,010 1,055






EV/EBITDA (x) 15.4 4.6 9.3 8.0 7.2




Growth (%)

Revenue -16.7 18.6 4.6 4.3 2.7

EBITDA -25.6 30.2 14.4 8.5 3.5EBIT -25.6 30.2 14.4 8.5 3.5

Normalised EPS 0.1 46.9 -6.8 7.5 3.2

Normalised FDEPS 0.0 46.7 -6.7 7.5 3.4

Per share

Reported EPS (HKD) 1.92 6.71 2.09 2.24 2.31

Norm EPS (HKD) 1.52 2.24 2.09 2.24 2.31


DPS (HKD) 0.52 0.57 0.60 0.62 0.62




(%) 1M 3M 12M

Absolute (HKD) 27.4 19.5 -24.3

Absolute (USD) 27.6 19.8 -24.1




52-week range (HKD) 29/14.24


1.18


K. S. LO 53.5


Notes

Despite economic uncertainty, Great Eagle’s hotel portfolio performed very well in 1H 2011.


74

Cashflow (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 956 1,245 1,424 1,544 1,598

Change in working capital -663 484 -9 4 9

Other operating cashflow 92 -498 262 216 158Cashflow from operations 385 1,231 1,677 1,764 1,765

Capital expenditure -434 -753 -468 -536 -536Free cashflow -49 478 1,209 1,229 1,229

Reduction in investments -648 172 0 0 0

Net acquisitions 13 558 0 0 0Reduction in other LT assets -3,139 8,170 0 0 0


Adjustments 3,216 -8,468 0 0 0Cashflow after investing acts -799 1,038 1,209 1,229 1,229


Debt issue 81 -1,029 -395 -849 -843

Convertible debt issue 0 0 0 0 0Others -619 4 0 0 0

Cashflow from financial acts -701 -1,344 -763 -1,229 -1,229

Net cashflow -1,500 -306 447 0 0Beginning cash 3,359 1,860 1,553 2,000 2,000

Ending cash 1,860 1,553 2,000 2,000 2,000Ending net debt 2,654 1,931 1,089 240 -603




Properties held for sale

Accounts receivable 340 396 414 432 443



Other fixed assets (net) 9,875 10,409 7,424 7,310 7,197Associates 59 13,490 14,165 14,873 15,616

Other LT assets 11,770 3,600 3,600 3,600 3,600



Total current liabilities 959 1,642 1,625 1,435 1,244




Preferred stock




Leverage


Gross debt/property assets (%) 16.0 10.3 9.4 6.6 4.0Net debt/EBITDA (x) 2.8 1.6 0.8 0.2 net cash

Net debt/equity (%) 11.9 6.7 3.9 0.8 net cash


Net margin (%) 29.9 89.0 26.5 27.3 27.4




Notes

Great Eagle’s interim net debt position of HKD1,596mn translates to a gearing level of only 5% as at June 2011

Notes

Great Eagle’s BVPS stood at HKD51.4 as at June 2011


75





Valuation methodology Our revised HKD31.10 target price is based on a 48% discount (unchanged) to GE’s forward NAV of HKD59.82 (was HKD57.80). Our target discount of 48% is based on Great Eagle's historical mid-cycle discount.

Risks Downside risks include: 1) any delay in the Dalian project could disappoint the market and widen Great Eagle’s NAV discount, reflecting execution risks. 2) Also, as Champion REIT makes up 24% of Great Eagle’s NAV, if Champion disappoints, this could impact Great Eagle’s performance. On the upside, 1) Great Eagle has close to 49% of its NAV contributed from the hotel business. A faster-than-expected hotel market recovery on continuing economic improvement could lead to upside earnings surprises; 2) new China acquisitions could represent further NAV upside, as well as opportunities for re-rating on option value from China growth.

Net profit (HKDmn) DPS (HK cents) NAV

FY11 FY12 FY13 FY11 FY12 FY13 Spot ForwardPrevious estimate 1,320 1,725 NA 60 75 NA 51.70 57.80New estimate 1,299 1,397 1,441 60 62 62 54.72 59.82Change (HKD) (21) (328) NA 0 (13) NA 3.02 2.02Change (%) -2% -19% NA 0% -17% NA 6% 4%

(HKDmn) Methodology Current NAV % of NAV End-12 NAV % of NAVGreat Eagle Centre 2,940 9% 2,937 8%

Office Cap rate = 5.25% 2,143 6% 2,057 6%Retail Cap rate = 5.25% 618 2% 695 2%CP 180 1% 185 0%

Eaton House & Others Cap rate = 4.10% 1,423 4% 1,566 4%US Office 884 3% 928 2%HK Hotels 8,046 24% 8,046 22%Overseas Hotels 8,488 25% 8,640 23%Other assets 575 2% 575 2%Champion REIT @ MV 8,280 24% 10,598 28%Champion REIT CB at amortised cost 3,073 9% 3,266 9%Development Properties in China DCF 1,086 3% 1,302 3%China Hotels under Construction 28 0% 30 0%Fee Income Based on 10x P/E 1,941 6% 2,057 6%Total Assets 36,765 108% 39,945 107%Net Debt (1,931) -6% (1,931) -5%Other liabilities (755) -2% (755) -2%Net Assets 34,079 100% 37,259 100%# of shares 623 623NAV/share (HKD) 54.72 59.82Discount -63% -48%Price 20.20 31.10


Swire Properties 1972.HK 1972 HK

PROPERTY

EQUITY RESEARCH

Initiating coverage with Buy rating

Quality portfolio without the finance and China worries

February 14, 2012

Rating Starts at

Buy

Target price Starts at

HKD 23.50


HKD 18.86


Action: Initiating coverage with a Buy rating and HKD23.50 TP With the spin-off of Swire Pacific’s property business into Swire Properties (1972 HK) in January, we are shifting our coverage from Swire Pacific (19 HK) to Swire Properties. We initiate coverage on Swire Properties with a Buy rating. Our HKD23.50 price target offers 25% potential upside.

86% of HKD31.23 NAV comes from HK investment properties Our valuation puts Swire Properties’ spot and end-12 NAV at HKD31.23 and HKD31.32. Both are 7% higher than the Jun-11 pro-forma NTA of HKD29.21. HK investment properties like Pacific Place and its Island East portfolio make up 86% of our NAV and China makes up 13%. Split between asset classes, office makes up 62% of Swire Prop’s NAV while retail accounts for 29%.

Catalyst: Watch net hiring expectations Given the overhang from the contraction of the financial services industry, stabilisation of hiring expectations will be key to narrowing NAV discounts.

Valuation: HK Land and Wharf as closest comparables Conceptually, we view HK Land (HKL SP-Buy) and Wharf (4 HK-Neutral), as Swire Properties’ closest comparables. Historically, HK Land and Wharf have traded at 29% and 31% discounts, respectively, to NAV through the cycle. For Swire Properties, we have set our target discount at 25%. This is 5pp narrower than our target discount for both Wharf and HK Land as we believe Swire Properties’ portfolio faces less headwind than that of HK Land (uncertainty from financial services sector contraction) or Wharf (uncertainty from the China property sector).



Revenue (mn) 8,871 8,683 14,498 13,901

Reported net profit (mn) 26,045 20,809 6,694 5,779

Normalised net profit (mn) 4,782 4,546 6,694 5,779

Normalised EPS 84.04c 79.89c 1.14 98.79c

Norm. EPS growth (%) 23.9 -4.9 43.2 -13.7

Norm. P/E (x) 22.4 N/A 24.3 N/A 16.5 N/A 19.1

EV/EBITDA (x) 20.3 23.7 14.7 17.7



ROE (%) 18.1 12.6 3.9 3.3

Gearing (%) 18.4 12.5 14.4 12.8


Anchor themes


Nomura vs consensus

HK Office properties make up 60% of Swire Prop's NAV. On our theme of a faster-than-expected re-engagement of the HK office market, Swire Prop should benefit. Our price target is 10% above consensus fair value.

Research analysts

Hong Kong Property



Nomura | Swire Properties February 14, 2012

77

Key data on Swire Properties Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F

Investment properties 7,433 7,875 7,772 8,119 8,721Property development 643 400 180 5,458 4,202

Hotels/serviced apartments 172 518 649 835 888Other Revenue 83 78 82 86 90

Revenue 8,331 8,871 8,683 14,498 13,901

EBIT contributions


Property development 144 133 130 3,481 1,182

Hotels/serviced apartments -160 -25 96 89 170Other income 49 49 49 52 54

Management expenses -876 -1,046 -1,196 -1,004 -1,054EBITDA 5,227 5,564 5,452 9,194 7,417


EBIT 5,227 5,564 5,452 9,194 7,417Net interest expense -1,110 -1,237 -1,098 -863 -703

Associates & JCEs 186 1,686 198 241 309


Income tax -1,225 -1,324 -697 -1,333 -1,074Net profit after tax 3,822 4,831 4,643 7,239 5,949


Other items

Preferred dividends

Normalised NPAT 3,726 4,782 4,546 6,694 5,779

Extraordinary items 13,531 21,263 16,263 0 0Reported NPAT 17,257 26,045 20,809 6,694 5,779

Dividends -25 -2,426 -10,014 -2,878 -2,890Transfer to reserves 17,232 23,619 10,795 3,816 2,890






EV/EBITDA (x) 26.8 20.3 23.7 14.7 17.7




Growth (%)

Revenue 4.8 6.5 -2.1 67.0 -4.1

EBITDA 3.8 6.4 -2.0 68.6 -19.3EBIT 3.8 6.4 -2.0 68.6 -19.3

Normalised EPS 4.1 23.9 -4.9 43.2 -13.7

Normalised FDEPS -86.0 3.3 -7.5 47.3 -13.7

Per share

Reported EPS (HKD) 3.14 4.58 3.66 1.14 98.79c

Norm EPS (HKD) 67.83c 84.04c 79.89c 1.14 98.79c

Fully diluted norm EPS (HKD) 81.32c 84.04c 77.71c 1.14 98.79cBook value per share (HKD) 28.33 27.75 29.50 29.32 31.20

DPS (HKD) 0.01 0.43 1.71 0.49 0.49




(%) 1M 3M 12M

Absolute (HKD)

Absolute (USD)

Relative to index





42.62


Swire Pacific 82.0


Notes

On dividends, Swire Properties intends to pay out 50% of its underlying profit over an economic cycle.


78


Change in working capital -686 -1,821 -1,030 -389 371

Other operating cashflow -910 -831 -1,952 -1,730 -1,759Cashflow from operations 3,631 2,912 2,470 7,075 6,029

Capital expenditure -3,329 -4,741 -1,901 -650 -650Free cashflow 302 -1,829 569 6,425 5,379


Net acquisitions -106 266 18,800 0 0Reduction in other LT assets -44 -1 -212 0 0

Addition in other LT liabilities 982 633 -84 0 0

Adjustments -3,561 1,731 -11,225 4,665 -2,371Cashflow after investing acts -2,427 800 7,848 11,090 3,008

Cash dividends -1,779 -9 -10,023 -10,973 -2,891Equity issue 3,970 0 4,500 0 0

Debt issue


Others -17 -815 -867 -117 -117

Cashflow from financial acts 2,174 -824 -6,390 -11,090 -3,008

Net cashflow -253 -24 1,458 0 0Beginning cash 1,319 1,066 1,042 2,500 2,500









Other LT assets 819 820 1,032 1,032 1,032






Total liabilities 44,156 47,356 36,860 41,197 38,941Minority interest 424 479 1,610 2,155 1,807

Preferred stock




Leverage

Interest cover 4.71 4.50 4.97 10.66 10.54


Net debt/equity (%) 26.6 23.3 13.8 16.6 14.3


Net margin (%) 207.1 293.6 239.6 46.2 41.6




Notes

Sale of Festival Walk returned some HKD18.8bn to Swire Properties and should help to lower its gearing to around 14%.

Notes

Swire Properties pro-forma NTA as at June 2011 was HKD29.2


79

Background: The spin-off of Swire’s property business On December 21, 2011, the board committee of Swire Pacific (19 HK) declared a conditional special interim dividend to its qualifying shareholders whereby its qualifying shareholders would receive a distribution in specie of 18% of Swire Properties issued share capital. Qualifying shareholders of Swire Pacific would receive 7 shares of Swire Properties for every 10 Swire Pacific ‘A’ shares held and 7 shares of Swire Properties for every 50 Swire Pacific ‘B’ shares held.

As Swire Pacific is 42.54% held by The JSS Group, post the spin-off, Swire Properties ownership would be 82% held by Swire Pacific, 8% held by Swire Pacific’s parent The JSS Group and 10% held by public shareholders. Swire Properties was listed on the HK Stock Exchange by introduction on January 18, 2012.

Fig. 84: Shareholding before the spin-off

Source: Company data

Fig. 85: Shareholding after the spin-off

Source: Company data

With the exception of an industrial property located at Tsing Yi Town Lot No. 48 and a 12-storey residential building at 53 Stubbs Rd (“The Opus”), Swire Properties effectively holds all of Swire Pacific’s properties interest.

With the spin-off of Swire Pacific’s property business into a separate entity, we also shift our stock coverage from parent Swire Pacific (from BUY to NR) to Swire Properties (from NR to BUY).

Valuation methodology: Benchmarking to HK Land and Wharf

We estimate Swire Properties’ spot and forward NAV at HKD31.23 and HKD31.32. HK investment properties like Pacific Place and Swire’s Island East portfolio contribute to 86% of our NAV estimate. China property assets make up 13% of our NAV.

Given Swire Properties is a pure property company, we believe HK Land and Wharf are its best comparables. Historically, through the property cycle, HK Land and Wharf have traded at average discounts of 29% and 31%, respectively. In valuing Swire Properties, we have adopted a 25% target discount to NAV. This is 5pp narrower than the 30% target discount that we apply for both HK Land and Wharf as we believe Swire Properties’ portfolio faces less headwind than that of either HK Land (pressure from the financial services sector contraction) or Wharf (uncertainty from the China property business).

Our HKD23.50 price target offers 25% potential upside, we initiate coverage on Swire Properties with a Buy rating.

Risks: HK investment properties make up 86% of Swire Properties’ NAV, the valuation of which is dependent on rental growth and cap rate assumptions. While we believe our current cap rate assumption of 4.75% already provides a generous cushion against 10

The JSS Group

Swire Pacific

Swire Properties

58.26% voting rights42.54% share capital

100%

The JSS Group

Swire Pacific

Swire Properties

58.26% voting rights42.54% share capital

82%

Public shareholders

8%

10%


80

UST yields of less than 2.0% (historically the spread was only 38bps), should cap rates expand by 50bps, this would lower our capital values by 10%.

Fig. 86: Swire Properties NAV breakdown

As of 8 February 2012 Source: Nomura estimates

Fig. 87: HK Land historical discount to NAV


Fig. 88: Wharf historical discount to NAV

ource: Nomura research

(HKDmn) Methodology Current % NAV End-12 % NAV

HK Inv. Prop 156,577 86% 153,506 84%

...Office Cap rate = 4.8% 109,486 60% 100,727 55%

...Retail Cap rate = 4.8% 39,132 21% 44,023 24%

...Residential Cap rate = 3.0% 7,958 4% 8,756 5%

HK Dev. Prop DCF at 8% 8,756 5% 9,391 5%

Other land 5,936 3% 5,936 3%

China Inv Prop 16,734 9% 18,960 10%

...Retail Cap rate = 6.8% 13,578 7% 15,384 8%

...Office Cap rate = 6.3% 3,137 2% 3,555 2%

...Residential Cap rate = 4.8% 18 0% 21 0%

China IP Under dev DCF at 10% 7,331 4% 8,065 4%

Hotel At HKD 4.4mn per room 11,205 6% 11,206 6%

Gross Asset Value 206,539 113% 207,064 113%

Net Debt -23,857 -13% -23,857 -13%

Net Asset Value 182,682 100% 183,207 100%

No. of shares 5,850 5,850

NAV per share 31.23 31.32

NAV discount -40% -25%

Price 18.86 23.50

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Dec

-89

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-90

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-91

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-92

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-93

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-94

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-95

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-96

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-97

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-98

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-99

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-00

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-04

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-05

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-07

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-10

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-11

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-12


Average Disc.= -29%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

Dec

-89

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-90

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-91

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-92

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-93

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-94

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-95

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-96

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-97

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-98

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-99

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-00

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-01

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-10

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-11

Dec

-12


Average Disc.= -31%


Hongkong Land HKLD.SI HKL SP

PROPERTY

EQUITY RESEARCH

Risk in the share price, upgrade to Buy

Conditions are challenging now but there is scope for a faster-than-expected office recovery

February 14, 2012


Buy


USD 6.70


USD 5.33


Action/catalyst: risk in share price; upgrade to Buy Compared to its 2011 intra-year peak, HK Land’s share price has corrected by 30% (vs. the Hang Seng Index of 11%). Although we believe the near-term CBD leasing outlook remains challenging with financial services still contracting, this risk appears to be already well reflected in HK Land’s current 0.53x P/B ratio. Instead, as discussed in our Caveat Venditor sector report, with solid underlying fundamentals, we believe there is scope for the office market to re-engage at a faster-than-expected pace and as demand starts to materialise, we expect HK Land’s NAV discount to revert to its historical mean of 29%. Our US$6.70 TP offers 26% potential upside. We upgrade HK Land to Buy.

Changes to our estimates We cut our forward NAV by 13% from US$11.08 to US$9.64 to reflect our latest outlook that Central rents are apt to fall by 8% in 2012F. We revise down our FY12F earnings by 4%, but raise our FY13F earnings by 9% to reflect higher development bookings in FY13F.

Valuation: New TP of US$6.70 While we have cut our forward NAV by 13%, we have also compressed our target discount from 36% back to 30%, closer in line with HK Land’s historical average discount of 29% as HK is now further along into the rental adjustment cycle. Our TP has been revised downwards by 6% from US$7.10 to US$6.70. With 26% potential upside, we upgrade HK Land to Buy.


Currency (USD) Actual Old New Old New Old New

Revenue (mn) 1,341 1,205 1,201 1,054 1,017 1,322 1,687

Reported net profit (mn) 4,739 736 734 651 627 759 829

Normalised net profit (mn) 810 736 734 651 627 759 829


Norm. EPS growth (%) 4.3 -9.2 -9.5 -11.5 -14.6 16.5 32.3

Norm. P/E (x) 14.8 N/A 16.3 N/A 19.1 N/A 14.5

EV/EBITDA (x) 14.7 19.2 16.0 21.0 18.2 19.0 14.6



ROE (%) 27.6 3.5 3.7 2.7 3.0 3.0 3.7

Gearing (%) 15.4 11.7 12.8 11.9 13.7 13.2 13.7


Anchor themes


Nomura vs consensus

As HK's office supply remains very tight, once net hiring starts to stabilise, we believe there is scope for Central rental growth to re-engage much faster than expected, benefiting HK Land.

Research analysts

Hong Kong Property



Nomura | Hongkong Land February 14, 2012

82

Key data on Hongkong Land Income statement (USDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F

Investment properties 669 682 711 724 760Property development 558 557 385 185 816

Hotels/serviced apartments 0 0 0 0 0Other Revenue 95 102 105 108 112

Revenue 1,323 1,341 1,201 1,017 1,687

EBIT contributions



Hotels/serviced apartments 0 0 0 0 0Other income 2 5 2 3 3

Management expenses -73 -82 -86 -90 -94EBITDA 815 831 755 701 825


EBIT 815 831 755 701 825Net interest expense -52 -77 -78 -114 -131

Associates & JCEs 178 174 178 142 252

Other income 4 51 0 0 0Earnings before tax 944 978 855 728 946


Minority interests -47 -46 -14 -3 0

Other items

Preferred dividends

Normalised NPAT 777 810 734 627 829

Extraordinary items 1,036 3,929 0 0 0Reported NPAT 1,813 4,739 734 627 829

Dividends -360 -360 -360 -405 -428Transfer to reserves 1,453 4,379 374 221 401






EV/EBITDA (x) 15.0 14.7 16.0 18.2 14.6




Growth (%)

Revenue 29.4 1.4 -10.4 -15.3 65.8

EBITDA 41.4 2.0 -9.0 -7.2 17.8EBIT 41.4 2.0 -9.0 -7.2 17.8

Normalised EPS 110.5 4.3 -9.5 -14.6 32.3

Normalised FDEPS 110.5 4.3 -9.5 -14.6 32.3

Per share

Reported EPS (USD) 80.60c 2.11 32.61c 27.84c 36.83c

Norm EPS (USD) 34.55c 36.02c 32.61c 27.84c 36.83c

Fully diluted norm EPS (USD) 34.55c 36.02c 32.61c 27.84c 36.83cBook value per share (USD) 6.64 8.64 9.20 9.57 10.57

DPS (USD) 0.16 0.16 0.16 0.18 0.19




(%) 1M 3M 12M

Absolute (USD) 8.8 6.6 -22.8

Absolute (USD) 8.8 6.6 -22.8




52-week range (USD) 7.53/4.17


8.48


Jardine Strategic Holdings 50.0


Notes

Our estimated 8% decline in Central rents should slow HK Land’s net rental growth but should not cause overall rents to drop.


83

Cashflow (USDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 815 831 755 701 825

Change in working capital 106 -342 11 -41 68

Other operating cashflow -18 202 133 84 37Cashflow from operations 903 690 899 743 930

Capital expenditure -34 -35 -149 -149 -149Free cashflow 869 656 751 594 781

Reduction in investments -38 -2 0 0 0

Net acquisitions -42 -160 0 0 0Reduction in other LT assets -5 -11 0 0 0

Addition in other LT liabilities -1,923 51 184 109 406

Adjustments 1,921 -79 -184 -109 -406Cashflow after investing acts 783 455 751 594 781


Debt issue -76 81 -503 406 406

Convertible debt issue 0 0 0 0 0Others -301 -29 -504 -641 -782

Cashflow from financial acts -676 -314 -1,367 -594 -781

Net cashflow 107 141 -617 0 0Beginning cash 1,119 1,226 1,367 750 750

Ending cash 1,226 1,367 750 750 750Ending net debt 2,417 2,358 2,471 2,878 3,284


Balance sheet (USDmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13F

Cash & equivalents 1,226 1,367 750 750 750

Properties held for sale 787 1,184 1,152 1,185 1,121Accounts receivable 315 245 250 255 260

Other current assets

Total current assets 2,329 2,796 2,152 2,190 2,131


Other fixed assets (net) 4 4 4 4 4Associates 2,352 3,178 3,681 4,322 5,104

Other LT assets 117 128 128 128 128



Total current liabilities 1,054 1,652 938 954 983




Preferred stock 0 0 0 0 0Shareholders' Equity 225 230 225 225 225



Leverage

Interest cover 15.66 10.77 9.69 6.14 6.29


Net debt/equity (%) 16.2 12.1 11.9 13.4 13.8


Net margin (%) 137.1 353.5 61.1 61.6 49.2




Notes

We expect HK Land’s 2011 net debt to equity to remain stable at 11-12%.

Notes

We expect HK Land to give back most of the 1H investment property revaluation gains as Central rents soften in the 2H.


84



Fig. 90: HK Land NAV breakdown


With 70% of its NAV attributable to its Central office portfolio, we estimate that every 10% change in office prices would move its NAV by 7.0%. Should the Hong Kong economy expand more slowly/strongly than we expect, this could mean lower/faster growth in Central office rents in 2012F.

Spot Forward

FY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F NAV (USD) NAV (USD)

Previous estimate 736 651 759 0.33 0.29 0.34 0.16 0.18 0.19 9.13 11.08

New estimate 734 627 829 0.33 0.28 0.37 0.16 0.18 0.19 9.61 9.64

Change 0% -4% 9% 0% -4% 9% 0% 0% 0% 5% -13%

Underlying Net Profit (USDmn) EPS (USD) DPS (USD)

(USDmn) Methodology Current % of NAV End-12 NAV % of NAV

HK Investment Assets 18,445 85% 17,644 81%

Office Cap rate = 4.50% 15,153 70% 13,941 64%

Retail Cap rate = 4.50% 3,292 15% 3,703 17%

Overseas Investment Assets 4,330 20% 5,869 27%

Office Cap rate between 4.0% to 7.5% 3,775 17% 5,290 24%

Retail Cap rate between 5.5% to 8.0% 545 3% 569 3%

Others 10 0% 10 0%

Dev Properties 2,739 13% 2,092 10%

Residential - HK DCF 100 0% 100 0%

Residential - China DCF 1,416 7% 1,712 8%

Residential - S'pore DCF 254 1% 254 1%

MBFC - Phase 2 DCF 943 4% - 0%

Others DCF 27 0% 27 0%

Landmark Mandarin @ USD0.85/room 96 0% 96 0%

Other Investments 4 0% 4 0%

Current Liabilities 527- -2% 527- -2%

Gross Assets 25,088 116% 25,178 116%

Net Debts 3,484- -16% 3,484- -16%

Net Assets 21,604 100% 21,694 100%

Shares in Issue 2,251 2,251

NAV per Share (USD) 9.61 9.64

Premium/(Discount) -45% -30%

Share Price 5.33 6.70


Champion REIT 2778.HK 2778 HK

PROPERTY

EQUITY RESEARCH

Upgrade to BUY, new price target of HK$4.16

Difficult outlook more than reflected in the price, upgrade to BUY

February 14, 2012


Buy


HKD 4.16


HKD 3.25


Soft patch risk now in the price, upgrade to BUY Champion REIT corrected by 33% in 2H 2011. This is almost double the Hang Seng Index’s 17.7% decline over the same period. While office demand visibility remains low with net hiring expectations still falling for financial firms, we believe this risk is now reflected in Champion’s unit price. At HK$3.25, Champion currently trades at a 56% discount to its BVPS and offers a FY12F distribution yield of 6.92% and FY13F yield of 6.25%. We believe risk-reward is now in favour of Champion and upgrade our rating from Neutral to Buy. Our HK$4.16 price target offers potential upside of 28%.

Change in our estimates We have cut our FY11/12/13F DPU estimates by -2%/-13%/-10% to reflect our latest 2012 office rental outlook (-8%). Our 10 year DDM fair value has also been reduced by 15% from HK$4.90 to HK$4.16.

Valuation: New price target of HK$4.16, upgrade to BUY We value Champion REIT using a 10-year dividend-discount model assuming a terminal yield of 5.25%. Our HK$4.16 fair value implies a 5.28% and 5.41% distribution yield for FY11F and FY12F.



Revenue (mn) 1,907 2,057 1,945 2,274 2,019 2,464 2,106

Income for distribution (mn)

4,480 872 4,308 1,076 912 987 894

Normalised dist income (mn)

1,124 1,170 1,146 1,366 1,188 1,183 1,071

Normalised DPU 0.2 0.2 0.2 0.3 0.2 0.2 0.2

Norm. DPU growth (%) -17.2 3.3 1.5 15.7 2.5 -13.4 -9.9

Norm. P/E (x) 14.1 N/A 14.0 N/A 13.6 N/A 15.2

BVPU 6.4 7.8 6.6 8.7 6.3 9.2 7.1


DPU yield (%) 6.7 5.0 6.8 5.8 6.9 5.1 6.2

ROE (%) 15.3 2.5 13.4 2.6 2.8 2.2 2.7

Gearing (%) 33.7 27.9 31.1 25.8 32.0 24.7 29.4


Anchor themes

With consensus universally bearish and valuations supportive, 2012 looks set to be the mirror image of 2011 and propety stocks may offer asymmetrical reward in 2012. Caveat Venditor.

Nomura vs consensus

While the current office leasing outlook is unclear, should demand begin to stabilise, HK's tight office supply could mean a much faster recovery than the market expects, benefitting Champion.

Research analysts

Hong Kong Property



Nomura | Champion REIT February 14, 2012

86

Key data on Champion REIT Income statement (HKDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13F

Rental income 1,856 1,736 1,764 1,831 1,909Other Revenue 179 171 181 188 197

Revenue 2,035 1,907 1,945 2,019 2,106Land rent & property tax -53 -61 -58 -56 -56

Property management fees -180 -184 -186 -199 -207

Other operating expenses -92 -122 -146 -116 -139Management expenses -205 -181 -187 -198 -204

Trust expenses -16 -14 -17 -17 -17

Other operating expenses

EBITDA 1,488 1,345 1,352 1,434 1,482

Depreciation

Amortisation of intangible assets

EBIT 1,488 1,345 1,352 1,434 1,482

Net property income 1,709 1,540 1,555 1,648 1,704Net interest expense -752 -751 -514 -341 -411


Other income 0 0 0 0 0Earnings before tax 736 594 838 1,092 1,071


Minority interests

Other & non tax deductible items 665 597 423 276 176Preferred dividends

Normalised income for distn 1,312 1,124 1,146 1,188 1,071

Extraordinary items 2,432 3,356 3,163 -276 -176Income for distribution 3,745 4,480 4,308 912 894



FD normalised P/E at price target (x) 14.7 18.0 18.0 17.4 19.5Reported P/E (x) 4.0 3.5 3.7 17.7 18.2

Dividend yield (%) 8.1 6.7 6.8 6.9 6.2

Price/book (x) 0.6 0.5 0.5 0.5 0.5EV/EBITDA (x) 19.4 22.3 22.1 21.0 20.5



ROA (pretax %) 3.5 2.8 2.6 2.8 2.8

Growth (%)

Revenue 26.1 -6.3 2.0 3.8 4.3EBITDA 28.6 -9.6 0.5 6.0 3.4

EBIT 28.6 -9.6 0.5 6.0 3.4Normalised EPU -1.1 -18.7 0.5 3.1 -10.5

Normalised FDEPU -1.1 -18.7 0.5 3.1 -10.5

DPU -17.7 -17.2 1.5 2.5 -9.9

Per unit

Reported EPU (HKD) 80.89c 91.86c 87.15c 18.34c 17.87cNorm EPU (HKD) 28.35c 23.06c 23.17c 23.89c 21.39c

Fully diluted norm EPU (HKD) 28.35c 23.06c 23.17c 23.89c 21.39cBook value per unit (HKD) 5.67 6.36 6.63 6.29 7.11

DPU (HKD) 0.26 0.22 0.22 0.23 0.20




(%) 1M 3M 12M

Absolute (HKD) 10.9 1.2 -31.9

Absolute (USD) 11.1 1.5 -31.6

Relative to index -0.7 -4.6 -22.1





1.79


Great Eagle 51.2


Notes

Despite the challenging office outlook, we expect Champion’s rental income to continue to rise. Earnings decline is largely on account of higher interest costs in future years


87


Change in working capital 146 -90 0 0 0

Other operating cashflow -340 -146 -281 -522 -588Cashflow from operations 1,294 1,109 1,071 912 894

Capital expenditure -35 -1 -44 -45 -47Free cashflow 1,259 1,108 1,027 867 847

Acquisition of investment properties 0 0 0 0 0

Net acquisitions

Reduction in other LT assets 9 32 11 0 0


Adjustments -1,233 -2,221 -11 0 0Cashflow after investing acts 394 -100 1,027 867 847

Cash dividends -541 -941 -1,021 -1,069 -1,092Equity issue 0 0 0 0 0

Debt issue 10 911 -857 4,689 47

Convertible debt issue 853 336 0 -4,644 0Others

Cashflow from financial acts 322 306 -1,877 -1,024 -1,045

Net cashflow 717 206 -851 -157 -198Beginning cash 1,115 1,832 2,038 1,188 1,030

Ending cash 1,832 2,038 1,188 1,030 833Ending net debt 13,863 14,904 14,898 15,100 15,345



Cash & equivalents 1,832 2,038 1,188 1,030 833

Accounts receivable 156 162 162 162 162Other current assets

Total current assets 1,988 2,200 1,350 1,193 995Investment properties 40,049 44,241 50,223 51,729 50,449

Acquisitions 0 0 0 0 0

Capital expenditure 44 43 44 45 47Net appreciation in value 4,148 5,939 1,462 -1,325 4,493

Associates

Other LT assets 45 13 1 1 1Total assets 46,274 52,436 53,080 51,643 55,985

Short-term debt 0 7,898 0 7,134 0Accounts payable 1,200 1,212 1,212 1,212 1,212

Other current liabilities 1,013 917 917 917 917

Total current liabilities 2,213 10,027 2,129 9,263 2,129Long-term debt 9,433 2,446 9,488 7,043 14,224

Convertible debt 6,262 6,598 6,598 1,954 1,954

Other LT liabilities 1,006 1,987 1,987 1,987 1,987Total liabilities 18,914 21,058 20,202 20,247 20,294

Minority interest

Preferred stock

Common stock 27,359 31,377 32,878 31,396 35,691

Retained earnings

Proposed dividends

Other equity and reserves

Non convertible prefs

Total unitholders' funds 27,359 31,377 32,878 31,396 35,691

Total units' funds & liabilities 46,274 52,436 53,080 51,643 55,985

Leverage

Interest cover 2.0 1.8 2.6 4.2 3.6Gross debt/property assets (%) 35.5 33.7 31.1 32.0 29.4

Net debt/EBITDA (x) 9.3 11.1 11.0 10.5 10.4

Net debt/equity (%) 50.7 47.5 45.3 48.1 43.0


Net margin (%) 184.0 234.9 221.5 45.2 42.5

Asset utilisation (x) 0.05 0.04 0.04 0.04 0.04

ROA (%) 8.5 9.1 8.2 1.7 1.7Leverage (Assets/Equity x) 1.7 1.7 1.6 1.6 1.6

ROE (%) 14.6 15.3 13.4 2.8 2.7


Notes

Champion currently pays out 90% of distributable income.

Notes

Gross debt to asset ratio still comfortable in the low 30s


88



Fig. 92: Champion REIT valuation summary


Key risks include 1) Interest rate fluctuation: With interest costs associated with 67% of Champion’s debt profile currently left unhedged, a faster-than-expected hike in interest rate could further offset rental growth, thus leading to downside risks to our DPU and DDM estimates; 2) Office take-up at Citibank Plaza: We see potential downside risks to our DPU estimates should office take-up at Citibank Plaza improve more slowly than expected during the office up-cycle. On the other hand, we believe Champion is well-positioned, should office demand come in stronger than expected, which would allow it to possibly fill up Citibank Plaza sooner than expected at rentals higher than our assumptions.

DPU (HKD) DDM Value

Distributable income (HKDmn) FY11F FY12F FY13F FY11F FY12F FY13F HKD

Old estimate 1,170 1,366 1,183 0.224 0.259 0.224 4.90

New estimate 1,146 1,188 1,071 0.220 0.225 0.203 4.16

Change (%) -2% -13% -9% -2% -13% -10% -15%

FY ending Dec-09 Dec-10 Dec-11F Dec-12F Dec-13F

Distribution per unit 0.262 0.217 0.220 0.225 0.203

...growth -17.7% -17.2% 1.5% 2.5% -9.9%

Distribution yield - on book NAV 3.94% 3.26% 3.31% 3.39% 3.06%

Distribution yield - on current price 8.05% 6.67% 6.77% 6.93% 6.25%

Distribution yield - on fair value 6.29% 5.21% 5.28% 5.41% 4.88%

Differential - on book NAV (bps) 259 191 195 204 170

Differential - Current price (bps) 670 531 541 558 489

Differential - Fair price (bps) 493 385 393 406 352

CAPM Fair Value Key valuation statistics

Terminal Yield 5.25% DDM 4.50 Current Price 3.25

Long run risk free rate 3.25% Potential dilution from CB -8% Book NAV 6.64

Market risk premium 5.50% Fair value 4.16 Price/Book NAV -51%

Estimated beta 0.75

Equity Risk Premium 4.13% Growth rate 2010-12F 0.0% Upside/Downside 28.1%

Cost of Equity 7.38% PV of terminal value 2.84 2011F Dividend yield 6.8%

10 year HK bond yield 1.36% Terminal value % of DDM 63% Total Return 34.9%


89

Appendix A-1

Analyst Certification

I, Paul Louie, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory DisclosuresMentioned companies Issuer name Ticker Price Price date Stock rating Sector rating Disclosures Cheung Kong (Holdings) 1 HK HKD 105.20 09-2-2012 Buy Not rated 4,58 Hang Lung Properties 101 HK HKD 28.10 09-2-2012 Neutral Not rated 4,58 Henderson Land 12 HK HKD 43.40 09-2-2012 Buy Not rated 4,58 Midland Holdings 1200 HK HKD 4.52 09-2-2012 Buy Not rated Hysan Development 14 HK HKD 30.60 09-2-2012 Neutral Not rated Sun Hung Kai Properties 16 HK HKD 110.10 09-2-2012 Buy Not rated 4,58 New World Development 17 HK HKD 9.26 09-2-2012 Buy Not rated 4 CHAMPION REIT 2778 HK HKD 3.32 09-2-2012 Neutral Not rated Wharf Holdings 4 HK HKD 46.45 09-2-2012 Neutral Not rated 4,58 Great Eagle Holdings 41 HK HKD 20.20 09-2-2012 Buy Not rated HKR International 480 HK HKD 2.90 09-2-2012 Buy Not rated Kerry Properties 683 HK HKD 32.80 09-2-2012 Buy Not rated Prosperity REIT 808 HK HKD 1.71 09-2-2012 Buy Not rated Link REIT 823 HK HKD 28.65 09-2-2012 Neutral Not rated Sino Land 83 HK HKD 12.88 09-2-2012 Buy Not rated 4,58 Hongkong Land HKL SP USD 5.54 09-2-2012 Neutral Not rated 4

Disclosures required in the European Union

4 Market maker Nomura International plc or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer.

Disclosures required in Hong Kong

58 Nomura financial interest/business relationships disclosures: Nomura International (Hong Kong) Limited or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer.


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Previous Rating Issuer name Previous Rating Date of change Cheung Kong (Holdings) Neutral 22-1-2010 Hang Lung Properties Buy 22-9-2010 Henderson Land Neutral 01-6-2010 Midland Holdings Neutral 29-8-2011 Hysan Development Buy 28-1-2011 Sun Hung Kai Properties Neutral 22-1-2010 New World Development Neutral 28-1-2011 CHAMPION REIT Buy 21-7-2011 Wharf Holdings Buy 28-1-2011 Great Eagle Holdings Not Rated 24-3-2009 HKR International Not Rated 04-1-2011 Kerry Properties Neutral 22-1-2010 Prosperity REIT Neutral 17-8-2009 Link REIT Buy 13-12-2010 Sino Land Neutral 22-1-2010 Hongkong Land Buy 10-8-2011

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