CKP acquired a Shatin site for HKD1.953bn, representing thefirst land acquisition in Hong Kong in 2016
Continuing property investment and landbank replenishmentcould help narrow CKP stock's 47% NAV discount
We have an unchanged Buy rating and target price of HKD78
CKP acquired Kau To site for HKD1.953bn. Cheung Kong Property (CKP) outbid17 others and won a residential land site in Kau To, Shatin for HKD1.953bn orHKD8,000psf on 14 September. The transacted price came in 33% above the highendof market valuation (HKD4,500-6,000psf). The site is located along Lai PingRoad, where nine other sites were previously sold for HKD5,332-10,885psf betweenAugust 2011 and September 2013. The latest site bought by CKP consists of a sitearea of 67,802sf and GFA of c244,000sf with project completion by June 2022.First Hong Kong land purchase by CKP in 2016. We estimate the land acquisitionwill increase CKP's Hong Kong landbank (0.7m sqm as of June 2016) by c3% whilethe acquisition cost represents c0.7% of CKP’s book value as of June 2016. Weestimate a breakeven ASP of around HKD14,100psf on saleable area, assumingconstruction and other costs of cHKD5000psf and 10% GFA inflation. This comparesto the ASP of around HKD15,000-22,000psf recorded for most transactions sinceJune 2016 at neighbouring Dragons Range (a JV project between Kerry Properties/Sino Land/Manhattan Group launched in late 2014 with over 95% of 973 units sold).
Continuing property investment in Hong Kong. The Kau To land acquisitionrepresents CKP’s first land purchase in Hong Kong since the acquisition of Phase 8of Lohas Park in Tseung Kwan O in October 2015. In our view, it demonstratesprogress made by CKP with land replenishment as well as the company’s continuinginvestment in property projects, amid some investors’ concerns over CKP’s potentialinvestments in new business areas (while property businesses will remain the coreoperations according to the company). We estimate the Kau To land site acquisitionwill marginally increase CKP gearing by 0.7ppt.With a strong balance sheet (netgearing of 2.6% as of June 2016), we believe the company is well-positioned forfurther investment opportunities.
We have a Buy rating and a target price of HKD78. Our target price (unchanged) isbased on a 25% discount to our NAV estimate of HKD104. CKP currently trades at a47% NAV discount. CKP is one of our preferred HK property names. We believe CKP,with its strong sales track record and 27% of GAV exposure to development propertiesin China, is well-positioned to maintain a fast asset turn. CKP, with most of the HKoffice assets (18% of GAV) located in Central, is also well-placed for more resilientthan-expected office capital value. Potential catalysts include asset/land acquisitions.Key downside risks include macro uncertainties/property regulation in HK/China.