We initiate coverage on HK property sector with Outperform Rating. Although there may be short-term uncertainties due to COVID-19 and weak employment market, we are bullish on its long-term development because of low interest rate, supplies shortage, influx of capital from mainlanders and strong pent-up demand. We initiate four HK leading property companies, HLD, SHKP, NWD and CK Asset (the Big Four). All of them have BUY rating.
- Short-term threat. CCL Index gained by 2.3% in 1Q21 because vaccination started in HK in Feb 2021. However, we believe HK property market is fragile in 1H21 due to weak employment environment and uncertain COVID-19 situation. Despite that, the pent-up demand is strong, reflected by the recent primary and secondary property sales. We doubt bottom may be seen in 1Q21 if the outbreak or labour market does not further deteriorate in the coming future.
- Long-term gain. In the long run, HK property market will benefit from low interest rate environment, limited housing supply and strong pent-up demand. Furthermore, HK economic outlook ties with China economy. Our economist forecasts China real GDP to grow by 8.2% in 2021. It will support HK property market long-term development. We expect annual performance of HK property market will outpace inflation.
- Forecast around 8% rise in HK property price in 2021. CCL Index gained 2.3% to 180 in 1Q21. It may become weak in 1H21 but rebound in 2H21 due to vaccination of majority people in HK. Furthermore, we expect a new round of purchasing power from mainlanders if China-HK border reopens once COVID-19 outbreak is under control. We forecast CCL Index to gain 8% to 190.3 as at end-21.
- CK Asset is our top pick. SHKP is the leading player with 18.6% market share in HK primary property market. It always enjoys premium over other players, no matter in property selling price or stock valuation. However, we like CK Asset most among the Big Four. We believe CK Asset is a good trend catcher in property market. Furthermore, the Company owns many hidden jewels in its landbank, such as hotel conversion and pub property asset. In addition, CK Asset has proposed HK$19.4bn share buy-back plan that will strongly support its share price. We also give a higher valuation for NWD (TP at mean + 1 S.D.) because of strong stewardship of Adrian Cheng.
- Key risks: 1) Changes in global and local economic, political and social conditions; 2) COVID-19 pandemic; 3) Government policy; and 4) Interest rate.
