Hong Kong Property:Sales divergence to sustain

Conclusion

Weak sales performance of Henderson Land’s Eden Manor and satisfactorysales of K Wah’s K City confirm our view that sales performance of individualprojects will be divergent in 2017. We believe buyers, especially first-timeupgraders, have become more prudent in buying homes after the introductionof the 15% stamp duty on non-first time local upgraders last year.

We summarise four key characteristics of projects doing well in 2017:

Projects situated in urban districts, preferably atop metro stations;

Regions with future long-term development concepts;

1- or 2-bedroom apartments, preferably valued below HK$7m/unit;

Finance schemes offering buyers a lower downpayment.

Reality behind the scene: price hikes only for unsold inventories. Somedevelopers raised ASPs of their projects by 3-5% in general, after record highland sales transactions and 20% price growth expectation by Centaline. Wenote that most of the developers raised prices only for their inventories but notnewly launched units. We believe they are trying to enhance profits by takingadvantage of recent positive sentiment, and not necessarily turning bullish onthe overall HK property sector.

Investment view in 2017: be selective and stick with the winners. Weexpect property prices to rise by a modest 5% in 2017 (YTD: +1.3%) due tothe abundant liquidity in the interbank system, bucking the trend of sloweconomic growth. We suggest investing in companies with growing rentalincome portfolios and good execution in asset enhancement initiatives (AEI).

Those with more new commercial completions should deliver additionalrecurrent income and growth. Developers with diversified project mixes shouldoutperform their peers and enjoy a competitive edge in expanding theirmarket shares in property sales. Our picks are Sun Hung Kai Properties, NewWorld and Link REIT.

Impact

The surprise: Kerry raises ASP of Mantin Heights by 1-10%. Kerry raisedASP of Mantin Heights by 1-10% for its 96 units and is scheduled to launch 86units for sale on 6 March. While sales momentum seems to have picked upagain since late February 2017, we are cautious on its sustainability. Thismid-range to high-end project targets primarily upgraders (average apartmentprice of HK$12m/unit), who are highly impacted by the latest round of coolingmeasures. Since its debut in March 2016, the company sold ~657 units, or~46% of the project, fetching sales of >HK$7bn.

More launches in the near term. We estimate ~5.2k units will be launchedshortly. Key launches are: 1) SHKP’s Cullinan West in Nam Cheong; 2) Poly’sVibe Centro in Kai Tak (930 units); and, 3) Wheelock’s Monterey (926 units) inTseung Kwan O and CK Property’s Seanorama (454 units) in Ma On Shan.

Outlook

Our picks are Sun Hung Kai Properties, New World and Link REIT.