D/g to Hold as valuation is at historical average NAV discount in downturns
We downgrade SHKP to Hold (from Buy) following a 44% share price rally inthe past 2.5 months. At current levels, SHKP is trading mostly at the historicalaverage NAV discount seen in previous downturns and close to the valuationpeak seen in short-lived rebounds during downturns, thus we believe furtherupside is limited. On the other hand, while we appreciate SHKP’s strong salesperformance YTD, we see there is less need for a sizeable landbank as the HKresidential market enters an inventory accumulation cycle. Moreover, weremain cautious on its relatively high exposure to the China retail sector wheregrowth is slowing on a softening economy/increasing threat from e-commerce.
Hong Kong residential market enters an inventory accumulation cycle
Residential prices in HK have been well supported by supply shortage in thepast 10 years where completions (averaging 11,124/year) were markedlybelow the respective demand, but we believe this favorable market condition ischanging with completions expected to reach a 10-year high in 2016 at 17,321units (+54% YoY). In our view, with the government having accelerated theland development program since 2013; we should see better equilibrium in thesupply/demand dynamics ahead. In such an environment, there is less need tobuild up large landbank as price appreciation is likely to be capped by theample supply ahead.
Exposure to China retail grew to 11% of GAV; up from 6% five years ago
On the back of aggressive expansion in China over the past five years, SHKP’sChina portfolio now accounts for 22% of its gross assets, of which half is retail(up from 6% five years ago). While we do not have much doubt about SHKP’sexecution capability, given its strong track record as one of the best retail malloperators, we remain cautious on the macro environment where retail salesgrowth in China is slowing down on the back of a softening economy and alsogiven the increasing threat from e-commerce.
Target price based on 35% discount to our revised NAV of HK$174.4/share
We base our HK$113.4 target price on a 35% discount (formerly 25%) to ourNAV estimate of HK$174.4/share, which implies a 2016E PE of 14x. Ourrevised target discount is larger than the peer average (at 30%) on its relativelyhigh exposure to the China retail sector where growth is slowing down on asoftening economy and increasing threat from e-commerce. Key risks: externaleconomic shocks, liquidity outflow, rate hikes and government measures.