Upgrading to Hold on valuation; target price HK$49.7
We upgrade Henderson Land to Hold （from Sell） with a target price ofHK$49.7, and a revised NAV estimate at HK$65.8 as of end-FY18. In particular,our upward revision in target price is on the back of higher ASPs achieved fromits primary launches in Hong Kong in FY17 （earnings growth will mostly bereflected from FY18 onwards） and higher PER adopted on the Chinadevelopment portfolio in our sum-of-the-parts approach, following a re-ratingin the sector. In our view, the current share price is mostly at fair value, withour revised target price implying 2% downside.
Revising FY18 core earnings by 30% on higher ASPs achieved in Hong Kong
Performance in the primary residential market was stronger than expected in2017, driven by developers’ payment options （i.e. vendor financing） andfavorable market sentiment, in particularly boosted by aggressive bidding ondevelopment land in Hong Kong by Chinese developers. Consequently,achieved ASPs in primary launches during the year came in stronger thanexpected. Meanwhile, we revise our earnings projections by 30% in FY18 （asmost of these projects are booked as revenue）， inclusive of an estimateddisposal gain of HK$5bn （from the disposal of 18 King Wah Road）。
End-FY18 NAV estimated at HK$65.8; with higher ASP/re-rating in China prop
Boosted by a favorable credit and policy environment, overall residential salesvolume rose to a new record-high in 2017. As a result, the sector was re-ratedin FY17 （sector was up by 60%） with the current valuation at 8x 2018 PER.Hence, we believe applying a higher multiple at 8x （on a par with sectoraverage） is appropriate （formerly 7x）。 Together with higher ASPs achieved inHong Kong, we revise our target price upwards by 4.6%.
Target price of HK$49.7 is based on the sum-of-the parts approach
Our target price is based on the sum-of-the-parts approach, which implies a2018 PE of 13x. We believe applying a 5-7x PE to HK property developmentand a 34% target discount to our estimated value on the respective investmentproperty portfolio is appropriate in an ex-growth market. Such a methodologyis now our new valuation metric adopted across HK developers under ourcoverage. Risks: government policy, sales momentum and interest rate trends.