Hong Kong Property Developers:Auction result disappoints, further downgrade in price targets

Site at auction sold at lower than market expectedprice. The auction of the Tung Chung residential site by thegovernment on 11 May was poorly received with literallyone bidder, Nan Fung Development, who finally bought thesite for HK$3.42b (HK$2,400 psf), much below marketexpectations of HK$4-5b.

Developers turn extremely cautious. As expected,developers have become more cautious towards land bankreplenishment after the government's initiatives to increaseland supply in the next few months. In our view, a decline inland prices (or the contraction of premium for open landbidding) will help cool market expectation of further rises inprimary and secondary market property prices. According toCentaline Property, mass residential property prices haverisen circa. 10% year-to-date.

Residential property prices peaked in the near term. Aswe do not expect any further upside in residential propertyprices for 2010, our estimated forward NAV for major HongKong developers have also been revised downward. At thesame time, we are adopting a more conservative targetvaluation to derive our new price targets for the developers.

As such, our price targets for major developers are reviseddownward by 9-16%. Over the next few months, Hong Kongproperty developers are unlikely to outperform the market.

We therefore have downgraded our rating for Hong Kongproperty developers to Neutral from Overweight.

Sino Land (83 HK) is the most vulnerable to the reversalof residential property price growth given its heaviestexposure to Hong Kong residential properties. We have cutits price target by 16% to HK$14.55 from HK$17.38 anddowngraded the stock’s rating to Neutral from Outperform.

It is now trading at a 35.5% discount to its current NAV atHK$20.59/share, versus the historical average of 34.1%.

Our top pick in the sector remains SHK Properties(SHKP, 16 HK) over the medium term given its solidbalance sheet and steady cash flow from its sizeableinvestment property portfolio. The stock is now trading at a25.9% discount to its current NAV at HK$139.63/share,versus the historical average of 13.5%. Based on ourrevised price target at HK$129.74, SHKP still offers 25.5%upside potential.