Reiterating Buy on attractive valuation, with PB now at historical low of 0.5x
Following a sharp share price correction in the first three weeks of 2016, SHKPis now trading at a 38% discount to NAV, 11.5x PE, 0.5x PB (a new historicallow) and dividend yield of 4.1%. At such valuation, we believe it has alreadypriced in the three-year bearish outlook on the HK property market. Byreferencing the trading pattern in the last down-cycle (SHKP ranged between+1SD and -1SD in its discount to NAV, PE and PB four times over the cycle),we believe there are still good opportunities to buy into the stock, even in adownturn. In particular, we see a good entry point as being when the stock isclose to the bottom of the range, as seen in the previous down-cycle.
Discount to NAV/PE/PB ranged between +1SD and -1SD 4 times in last cycle
In the HK property market’s last down-cycle from 1997 to 2003, from peak totrough, residential prices plunged by 67%, and retail and office rents fell by41% and 82%, respectively. During this six-year period, SHKP ranged between+1SD and -1SD in its discount to NAV, PE and PB four times. In particular, thediscount to NAV ranged between a 53% discount to 14% premium, PE rangedbetween 7x to 30x and PE ranged between 0.53x and 2.02x. While thediscounts to NAV (currently at 38% versus 53%) and PE (currently at 12xversus 7x) are still higher than the troughs seen in the previous down-cycle, PBis already at a new low of 0.5x versus the last trough of 0.53x.
Earnings cut by 9-39% in FY16-18; NAV cut by 20% to reflect full down-cycle
By factoring in price and rental declines for the full down-cycle in the HKproperty market, i.e. 40% decline in residential prices/retail rents, 20% declinein office rents and higher cap rates of 5% for residential, 5.5% for offices, 6%for retail and 8% for carparks (vs. 20% decline in residential prices and retailrents previously), we trim our earnings projections for FY16-18 by 9-39% andour NAV estimate to HK$132.3/share. In particular, we expect core profit todecline by 31% YoY in FY17 on lower development margins and rental income.
Target price based on 25% discount to our revised NAV of HK$132.3/share
Our target price is based on a 25% discount to our revised NAV estimate ofHK$132.3/share, which implies a 2016 PE of 14x. Our target discount is in linewith SHKP’s historical NAV discount (implied PE is lower than its historicalaverage PE of 16x), which we believe is appropriate given the strong salesexecution track record regardless of market conditions. Key risks: externaleconomic shocks, liquidity outflow, rate hike and government measures.