Hong Kong Property:Kai Tak fantasy

We are positively surprised to see a higher percentage of investors in thedebut launch of K Wah’s (173 HK) K City in Kai Tak. Out of 208 units sold,~46% of units were sold to buyers with multiple apartment purchases, whichwe believe are investors. One investor spent ~HK$130m in purchasing 15apartments via the stage payment scheme. We believe the good sales areattributed to 1) the project situated in the urban district; 2) the region withfuture long-term development concepts; 3) product offering of primarily 1 or 2-bedroom apartments (>70% of total) and 4) a positive outlook expectation inthe district given recent land costs of the district surging to above HK$10k psf.

While we are surprised to see a higher percentage of investors in K City, wedo not expect a similar event to happen in most of the other new launches.

Sales performance of two new recent launches is strong, especially the K Cityproject in the Kai Tak CBD2 district. Strong sales momentum persists in theKai Tak district after COLI’s One Kai Tak Phase I & II over the past 6 months.

K Wah successfully launched the K City project with 208 units sold (23% of900 units in total) in its debut, which fetched sales of ~HK$2.0bn. Thecompany schedules to launch another 86 units for sale on 22 Feb. CKProperty sold 30 houses (45% of 67 units) of its Crescendo project andtargets to launch another 20 houses for sale on 23 Feb.

Views on K Wah. We view K Wah as a growing small-cap HK developer thatis set to attain a sustainable annual earnings base of HK$2bn in FY16E afteran 85% earnings CAGR over 2014-16E.

What to expect in 2017 HK primary sales? We expect the share of primarymarket sales to increase gradually in coming years, after reaching a 12-yearhigh of 44%, and it might exceed HK$180bn. Most of the developers are likelyto adopt faster asset turnover given more new launches. We believe most ofthe buyers, especially first-time upgraders, have become more prudent whenmaking home purchases after the introduction of a 15% stamp duty on nonfirsttime local upgraders last year.

What may happen on policy? Currently some investors avoided paying BuyerStamp Duty by combining multiple apartment purchases into one sales contract,as long as they do not own any apartment under their personal identity. Weexpect the government to consider modifying the ordinance of stamp duty toavoid this loophole in the coming future. However, we expect the impact wouldnot be material to the overall property market as it is not prevalent.

Recap of “Double Stamp Duty”. Non-first time home buyers are required topay 15% of property value under the new measures introduced in November2016. According to the HKSAR government, % of residential transactionssubject to DSD fall from >30% to around 11% in Dec-16 and Jan-17.