HLD’s dual-pronged development strategy offers the companya competitive and sustainable advantage in land banking
We expect asset turnover to increase, with Hong Kong salesup from HKD10bn in FY16 to HKD18bn in FY19e
Reiterate Buy with a new target price of HKD52.10 （fromHKD57.27） with 16% upside
　　Timing for payoff closer. We believe HLD’s dual-pronged development strategy ofacquiring old buildings for redevelopment and converting farmland into residentialuse is about to pay off. HLD could be one of the beneficiaries of the government’sdetermination to provide more land to ease the supply-demand imbalance. Its amplereserves in farmland and urban old projects should provide it with a competitiveadvantage, in our view. Separately, land bank replenishment is now becoming one ofthe key challenges for local property companies, given intense competition frommainland China developers. HLD has the largest farmland reserve of c45m sqft. Webelieve this should deliver better growth prospects under its strategy and an aboveaverageprofit margin for most of its projects.
　　Asset turnover to improve. HLD’s Hong Kong contracted sales should improve in thecoming years as its urban redevelopment projects are about to bear fruit, in our view.
　　We estimate its contracted sales should grow from HKD10bn in FY16 to HKD12bn inFY17e, and further to HKD18bn in FY19e. As of end-2016, 39 urban redevelopmentprojects were fully consolidated or with over 80% ownership. Total gross floor area（GFA） of these projects doubled to 3.79m sqft, compared to 1.78m sqft in 2010.
　　More resilient and defensive than peers. HLD owns 41.5% of Hong Kong and ChinaGas Company （HKCG, 3 HK, HKD14.74, Reduce）， one of the largest energy suppliers inHong Kong and China. Its stake accounts for 18% of HLD’s NAV, 39% of market cap,using its attributable value, and contributed c20% of operating profits on average over thepast three years, ensuring a stream of stable recurrent income. HLD should be moredefensive than its peers to cope with the cyclicality of the property development business,in our view.
　　Maintain Buy rating with a new target price of HKD52.10 （from HKD57.27）。 Werevise down our FY18-19e earnings by -11% and -15%, respectively, reflecting lowersales assumptions for Hong Kong residential projects and disposals of several noncoreinvestment properties. Our FY18-19e earnings estimates are 13% and 1%above consensus. Our valuation is based on a target discount of 37% （0.25 SDabove the mean） applied to our revised NAV estimate of HKD82.00/share （fromHKD81.80/share）。 Key downside risks include macro uncertainties, propertyregulations in Hong Kong and China, execution risks and uncertainties in farmlandconversion, and uncertainties in urban redevelopment projects.
　　Investment risks
　　Company-specific risks include uncertainties about the farmlandconversion and urban redevelopment projects
A competitive land market may turn into rising land costs
Other risks include macro uncertainties and policy risks