Well-prepared for market volatility. We expect a limited financial impact on CheungKong Property (CKP) from Brexit given the relatively small contributions from itsexisting UK projects (less than 3% of gross asset value and landbank). Meanwhile,with a strong balance sheet (net gearing of 5.7% as of end-2015), we believe thecompany is well placed not only to weather macro uncertainties but also to capturepotential acquisition opportunities arising. With the stock trading at a 55% NAVdiscount, we see a favourable risk-reward profile.
　　Small UK exposure from existing projects. CKP has four projects in the UK,including three projects with residential development and one commercial project,involving a total of c4.7m sf attributable GFA (less than 3% of total) on our estimates.CKP has earlier indicated interest in increasing its investment in overseas markets,such as Singapore and the UK. The existing UK projects account for c2.5% of ourgross asset value estimate, while we expect any impact from the lower GBP-USD FXrate on the value of these projects to be partly offset by project financing in GBP. OurFX research team sees GBP-USD reaching 1.20 by end-2016, down 19% y-o-y vsend-2015 (What “Leave” means for FX, 24 June, by David Bloom). We estimate therevised FX assumption will lower our NAV by less than 1%. Earnings impact will belimited until 2018e (c6% lower) when we assume bookings of UK residential projects.
　　Beneficiary of strong China residential sales YTD. Year-to-date, CKP has seenstrong contracted sales in China, tracking ahead of its full-year target, which shouldoffset slower contracted sales in HK in the absence of major new launches in 1H16.Potential upcoming HK launches include The Zumurud (228 units to be launched ona completed basis likely from end-3Q16) and Phase 1 of the Tsuen Wan West project(c970 projects in Phase 1) by end-2016. We expect CKP’s recurring income to besupported by continuing rental growth from Central office assets and mass retailmalls in HK as well as resilient rental from 1881 Heritage. For hotels, resilientserviced suite operations (c40% of total number of rooms) are expected to partlyoffset the impact of slowing visitor arrivals on HK hotel operations.
　　We have a Buy rating and a target price of HKD78. Our target price (unchanged)is based on a 25% discount to our NAV estimate of HKD104. We believe CKP, withits strong sales track record and 28% of GAV exposure to development properties inChina, is well-positioned to maintain asset turn despite a challenging operatingenvironment. Potential catalysts include asset/land acquisitions. Key downside risksinclude macro uncertainties/property regulation in HK/China.