Downgrading to Hold on valuation following strong rally in the past two weeks
While we view the upcoming completion of Victoria Dockside (formerly knownas New World Centre redevelopment) a key near-term catalyst for NWD, whererental revenue is expected to mostly double from the current level, and itsability to raise dividend payout will improve correspondingly, we believe suchcatalyst has already priced-in following the strong 12% rally in the past twoweeks (Vs. Hang Seng up 2%). Consequently, we downgrade NWD to Hold(from Buy) with a TP of HK$11.1 based upon a new valuation methodology,which we believe is more appropriate in an ex-growth market on an agingpopulation in Hong Kong.
New valuation approach – PE preferred to value property development
We believe the conventional valuation methodology of applying an overalltarget discount on the accessed NAV becomes less relevant in valuingdevelopers as market fundamentals have changed and that historical averagemay not necessarily serve as a good reference. By taking into account that HKdevelopers are likely to diversify their business focus further away fromproperty 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.
FY17-19E earnings revised by -2-9% factoring in our latest ASP assumptions
As a result of worsening demographic trends, we expect HK to see aprecipitous slide in housing demand, coupled with rising supply, which shouldpush the vacancy rate to more than double to 9% (from 3.8% now) and pricesto slide 48% in 2017-26 (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 9% in FY17-19E,and NAV upwards by 8.7%.
Target price of HK$11.1 is based on the sum-of-the-parts approach
Our target price is based on the sum-of-the-parts approach (previously targetdiscount on overall NAV), which implies a 2017 PE of 14x. We believe applyinga 5-7x PE to HK property development and a 34% target discount to ourestimated value on the respective investment property portfolio are appropriatein an ex-growth market. This is the new valuation metric adopted for all HKdevelopers under our coverage. Risks: government policy, sales momentumand interest rate trend.