Downgrading to Hold as near-term catalysts already priced in; TP HK$49.8We downgrade Henderson Land, from Buy to Hold, with a revised target priceof HK$49.8 （HK$56.2）， based upon a new valuation methodology, which webelieve is more appropriate in an ex-growth market with an aging population.
　　We like Henderson’s large agricultural land reserve/good progress in acquiringprojects via urban redevelopment, which we believe is a competitive edge inalternative sourcing of landbank so as to ensure better profitability （which isincreasingly important with intensifying competition from Mainland developersin government tenders）。 However, we believe the near-term catalyst hasalready been priced in at the current price, post a 23% share price rally YTD.
　　New valuation approach – PE preferred to value property developmentWe believe the conventional valuation methodology, of applying an overalltarget discount on the assessed NAV, becomes less relevant in valuingdevelopers, as market fundamentals have changed, so that the historicalaverage may not necessarily serve as a good reference. Taking into accountthat HK developers are likely to diversify their business focus further awayfrom property sales in an ex-growth market, we believe the most appropriatevaluation metric is SOTP, where we adopt PE for the property developmentbusiness and the income capitalization approach for investment properties.
　　Earnings revised by -2-13% in FY17-19E; factoring in our latest ASP assumptionsAs a result of worsening demographic trends, we expect HK to see aprecipitous slide in housing demand, coupled with rising supply, which willinevitably lead to the vacancy rate more than doubling to 9% （from 3.8% now）and prices sliding 48% in 2017-2026 （0% in 2017, -14% in 2018, -11% in 2019,-3% in 2020, -4% in 2021, -5% in 2022, -6% in 2023, -6% in 2024/25 and -7%in 2026）。 Consequently, we revise our earnings estimates by -2% to 13% inFY17-19E, and NAV upwards by 6.9%.
　　Target price of HK$49.8 is based on the sum-of-the parts approachOur target price is based on the sum-of-the-parts approach （previously it wason target discount on overall NAV）， which implies a 2017 PE of 15x. Webelieve applying a 5-7x PE to HK property development and a 34% targetdiscount to our estimated value on the respective investment property portfoliois appropriate in an ex-growth market. Such a methodology is now our newvaluation metric adopted across HK developers under our coverage. Risks:
　　government policy, sales momentum and interest rate trend.