Hong Kong Property:Land pusher,Land prices continue to soften

Sold!

COLI (688 HK) successfully acquired the Lai Chi Shan residential site in TaiPo for HK$2.13bn, equivalent to AV of HK$1.85k psf, below the low end ofmarket est of HK$3.69bn by 42%. 6 developers participated in the landtender. Demand is relatively muted compared to the 18 developers bidding forthe Sham Shui Po site in the city centre last week. We believe it is related toan issue of land, which is currently under judicial review. It could significantlyincrease the cost and lengthen the time of development period in our view.

Implications

Softening of land price boding well for HK developers. We view the keysurprise in this land sale as the softening of the land price following the recentSham Shui Po land sale. It is in contrast to the previous land withdrawal dueto the government’s high land price policy. Land price softening should easeconcerns on margin compression for HK developers. It partially offsets ourprevious concerns of Chinese developers and small/mid scale developersoutbidding key HK developers by paying higher land costs.

Value of farmland conversion seems to have diminished. We view thevalue of farmland as diminishing, as developers can easily replenish landbank at a reasonable cost via the open market, given an increase in landsupply. The time taken for conversion may be much longer than tenders in thepublic market. Henderson Land (12 HK) owns the largest amount of farmlandreserves (44.5m sqft) in Hong Kong and may not be favourable.

Testing of COLI’s execution capability. We are confident on COLI’sexecution capability in HK, as seen by its successful sale of the Green project(253 villas) in 2012. However, this project is under judicial review and thedevelopment period may take longer than expected and incur incrementalcosts. We estimate a GAV accretion of HK$851m, or HK$0.09/sh using anASP assumption of HK$10k psf, construction cost of HK$5.5k psf and adevelopment cycle of 6 years.

COLI’s HK saleable resources reach HK$33bn. Including the Lai Chi Shanproject, we estimate its saleable resources at HK$35bn, sufficient for 5 yearsof development. It should help COLI to build sufficient reserves for a goodsales base in the PRD region after reaching record sales of HK$180.6bn in2015. We expect the company to achieve sales of over HK$6bn pa in thecoming 2 years with the launch of the Marina South & Kai Tak I projects in2016E and Kai Tak II project in 2017E.

Up for sale

Upcoming land sale would be Ho Man Tin Sheung Shing Street project with atender closing date of 26 Feb. We believe it would be an important signpostfor the luxury residential market given its scale (GFA of 586k sqft) and its citycentre location.

We favour developers who can churn the best in tough markets and nameSun Hung Kai (16 HK, HK$80.80, OP, TP HK$137.80) and CK Property (1113HK, HK$39, OP, TP HK$66.24) as our top picks. We view market as overlybearish, presenting good investment opportunities.