2023.02.13 Hong Kong market to further consolidate in the short term

Geopolitical risks are rising again. In addition to the news that the U.S may impose 200% tariffs on Russian-made aluminum, U.S has also shot down a Chinese balloon over the United States. U.S. bond yield curve has shown the biggest inversion in nearly 40 years, reflecting the increase in risks of recession. Coupled with market concerns that the Fed will continue to aggressively raise interest rates as the labor market is still going strong, all of which have affected market investment sentiment. Although China and Hong Kong have fully reopened their borders and China is returning to normal, it is expected that the overall economic activities will still take time to recover. Investors should pay attention to whether the retail sales data can continue to rebound. Hong Kong exchange rate has weakened recently, we expect Hong Kong market to further consolidate in the short term.

Primary home sales in China during Jan dropped 30% YoY and 50% MoM. After the Lunar New Year, there has been improvements, with sales from January 30 to February 5 increasing by 332% WoW and 1,521% YoY. Wuhan has relaxed purchase restrictions and market expects more cities to follow, however, property sales still depend on the recovery of buyers’ confidence. We expect the sales may not improve significantly until 2H23. If investors speculate that the policies will continue to be relaxed, they should focus on state-owned real estate companies with more promising sales. Recently, the market has hyped the concept of ChatGPT, and the stock prices of Microsoft rose significantly. Since it is expected that the development of artificial intelligence will also drive demand for data centers, chips and memory devices, stocks in related industries are also worthy of attention. Hong Kong stocks corrected recently, staying below the 10-days and 20-days SMA, and the technical trend weakened. We expect investors to focus on companies’ results and兩會 (NPC, CPPCC) which will be held in early March. Given the drop in trading volume, it is expected that Hong Kong market will continue to consolidate. We expect 22,000 points to be the main resistance and 20,500 points to be the support.

Utilities and telecommunications sectors outperformed the market, reflecting conservative capital flows. However, Hong Kong’s property market sentiment has improved recently. If the new home sales continue to pick up, Hong Kong property sector is worth investors’ attention.

Kerry Properties (683); Company focuses on luxury projects, which is expected to be less affected by the economy and more depends on mainland buyers. The company is going to launch 4 projects including Wong Chuk Hang Station package 4A & 4B (800 units), Happy Valley projects (106 units), Yuen Long projects (676 units) and Sai Ying Pun projects (158 units) in 23E. As most are luxury projects (ASP for Wong Chuk Hang Station, Happy Valley projects and Sai Ying Pun projects are expected to be >HK$30K/s.qft), company will likely benefit from borders reopening.

Company has high revenue visibility. The unbooked revenue as of 30 June 22 amounted to HK$18.1bn (FY21 rev was HK$15bn), meanwhile Kerry also has 13.9 m s.qft GFA for development in HK and China (enough for 3 to 4 yrs sales). Furthermore, rental income accounts for ~53% of total revenue, higher than peers average and is expected to be stable income. GFA from rental is expected to reach 20.32m. sqft by 2028 (currently ~9.9 m. sqft), the increase in GFA can support rental income growth. As Kerry Properties focuses on luxury projects, with a strong investment property pipeline, we expect it to outperform peers. We recommend investors to buy at $20.0, target $22.5, and stop loss at $19.0. Risk: Sales lower than expected. 

Sino Land (83): Company is going to launch 5 projects with >3,000 units in 23E, including MTR projects of Grand Mayfair III (680 units), Villa Garda III (644 units), Wong Chuk Hang Station Phase 4 (800 units) and Yau Tong Development (792 units). We believe the demand for MTR projects to be more promising. Moreover, the One Central Place (121 units) is also likely to be launched in 1H23.

Sino is the only major developer with a net cash position, it has cash amounted to ~ HK$40bn, and with the increase in interest rate, we expect the net interest income to surge to ~HK$1 bn in FY23E (FY22 was ~ HK$340m). The area for Investment property (IP) is ~12.1m s.qft, management targets to have ~16% area increase for IP business in the longer term. As rental income accounts for ~20% of revenue, the stable IP pipeline can provide solid cash flow. We recommend investors to buy at $10.2, target $11.5, and stop loss at $9.6. Risk: The office vacancy rate in Hong Kong to further increase, which may impact office rental performance.