Buy: Making progress with landbank replenishment in HK
Acquisition of Phase 8 of Lohas Park marks the firstsuccess with landbank replenishment in HK since 2014
Further land acquisitions in HK could help narrow CKPstock's 43% NAV discount
We have a Buy rating with a target price of HKD83
Cheung Kong Property (CKP) won Phase 8 of Lohas Park (GFA 1.04m sf) in TseungKwan O for HKD2,955m or HKD2,830psf with a profit sharing ratio reported to be 15% bythe local press. The site, which enjoys a seaview, was sold at the highest residentialaccommodation value (AV) among phases of the Lohas Park project. The transacted AVcompares to HKD2,269psf/HKD3,147psf recorded for Phase 6/ Phase 7 (with commercialcomponent) of Lohas Park sold in January/June 2015. CKP plans to invest HKD10bn todevelop the project into no more than 1,430 residential units with project completion expectedby 2021.
First success with replenishment HK landbank since 2014. We view the latest acquisitionas a positive, which should increase investors' confidence in CKP's landbank replenishmentplan in HK (7.5m sf as of June 2015). We estimate that the Lohas Park Phase 8 site wouldboost CKP's HK landbank by 14%. This site represents CKP’s maiden land acquisition in HKsince its spin-off in June 2015. Cheung Kong (before restructuring in 2015) last purchased aHK residential site in December 2014.
Strong sales track record in Tseung Kwan O. We estimate the land acquisition cost torepresent 1% of CKP’s book value as of June 2015 and that it will boost CKP gearing by 1pp(last reported at 11% as of June 2015). We estimate a breakeven ASP of around HKD8,500psfon saleable area, assuming construction and other costs of cHKD5000psf and 10% GFAinflation. The latest land acquisition, located in Tseung Kwan O, should also allow CKP tobuild on its strong track record in residential sales following successes with sales of otherprojects in the neighbourhood earlier this year, namely The Beaumount II and Hemera (LohasPark Phase 3), achieving ASP of HKD9,000-10-000psf on average. We believe further landacquisitions in HK could serve as potential catalysts for the CKP stock.
We have a Buy rating and a target price of HKD83. Our target price (unchanged) is basedon a 20% discount to our NAV estimate of HKD104. CKP currently trades at 43% NAVdiscount. We view CKP as a leading HK property company with a proven track record inresidential sales and asset monetisation. Key downside risks include macrouncertainties/property regulation in HK/China and interest rate hikes, which may affectresidential market sentiment and in turn ASP and sales pace of CKP projects