The Wall Street Journal Interactive Edition -- January 27, 1998
Hong Kong Property Issues
Falling to Attractive Levels
By SHANTHI KALATHIL
Staff Reporter of THE WALL STREET JOURNAL
It's been bad news and more bad news for Hong Kong's property
sector: delays in future projects, rumors of dangerous debt
levels, and of course the ever-present specters of high interest
rates and slumping property prices.
But that may be good news for investors with strong stomachs. As
a result of the doom and gloom, prices of blue-chip developers
have taken a tumble. "Right now, there will be more downside in
the property market, so people seem to be avoiding all the
property counters," says Manfred Ho, property analyst at ING
Baring Securities. Mr. Ho's argument: While blue chips like
Cheung Kong Holdings and New World Development may go lower, they still represent good value by most analysts' reckoning measures.
First, though, the bad news: as Mr. Ho and others say, the bottom
has yet to be sighted in Hong Kong's property market. With high
interest rates damping disposable incomes, and mortgage rates on
the rise, residential flats are becoming less and less
affordable. The government's target of 85,000 new residential
units per year over the next eight years also threatens to absorb
some of the demand that traditionally has kept Hong Kong property
prices near the roof. On top of that, while high interest rates
have badly dented prices, unemployment and tight credit may do
just as much damage this year, according to UBS Securities. Mr.
Ho says his firm expects prices to fall another 20% from current
levels, already roughly 35% off their June peak.
For their part, major developers -- who are more heavily exposed
to the residential market than other property sectors -- haven't
helped boost buyer sentiment recently either. Last week,
developer Sun Hung Kai Properties announced it would be delaying
construction on some of its longer-term projects around Hong
Kong, while a local paper reported that Henderson Land had also
decided to delay some of its projects. Although deeming it
"normal practice for developers to slow construction progress"
during unfavorable conditions, Nikkei Securities analyst Edward
Lui said in a note to clients Friday that investors might
"interpret SHKP's latest move negatively."
All this has taken its toll on the share prices of Hong Kong's
developers: too heavy a toll, say some analysts. Take Cheung
Kong, a blue-chip mainstay of the benchmark Hang Seng Index,
which remains a buy on many lists. Raymond Ngai, an analyst at
UBS, says he maintains a "buy" on the counter despite his gloomy
views on the sector in general.
Cheung Kong "derives a lot of earnings from Hutchison" says Mr.
Ngai, referring to Cheung Kong's roughly 50% stake in
conglomerate Hutchison Whampoa. Plus, according to his
calculations, Cheung Kong's net asset value stands at HK$71
(US$9.17), factoring in the 30% drop in property prices from the
third quarter of 1997. Pricing in an even steeper 50% drop in
property prices from the same period, Cheung Kong's NAV would
stand at HK$59.30 -- still significantly higher than its Monday
closing of HK$37.70.
Still, many analysts remain wary of gauging stock value these
days solely by discount to NAV, noting that although many
property developers are already at historical discounts to NAV,
those assets are likely to slide further. Mr. Ho at Barings
therefore goes a step further and calculates that Cheung Kong
still looks like good value; by buying Cheung Kong, he argues,
investors are essentially getting the land assets and
non-Hutchison businesses of the group thrown in free.
Mr. Ho notes that Cheung Kong holds roughly 1.9 billion shares of
Hutchison, which works out to around 0.83 share of Hutchison for
each share of Cheung Kong. At Hutchison's Monday closing of
HK$44.80, that translates into HK$37.18 of Hutchison for every
Cheung Kong share of HK$37.70, says Mr. Ho. And that means that
investors are getting all of Cheung Kong's non-Hutchison assets
for a cool 52 Hong Kong cents, he points out -- a bargain no
matter how dire your views on the property market.
In other words, says Mr. Ho, you can now buy around HK$29 of
assets per Cheung Kong share for next to nothing; that's Cheung
Kong's net asset value minus Hutchison's contributions. "People
prefer Hutch" in the current environment, he says. "But it would
be better to put [money] into Cheung Kong at the current" levels.
Although the argument isn't as strong for fellow developer New
World, many analysts still contend that its investment mix --
including infrastructure projects in China -- should help shield
it from the full downturn in property prices. According to Mr.
Ngai at UBS, even if investors assume a 50% property price drop
from peak levels, New World is still trading at around a 44%
discount to net asset value, based on a Monday closing of
HK$17.70.
Of course, in these sentiment-driven times, there's no guarantee
that stock prices will reflect their fundamentals -- or even
partially close some of these valuation gaps -- in the near
future. But analysts stress that investors should keep in mind
that some of the most hammered property companies may still be
some of the safest bets in an uncertain market. Peter Churchouse,
managing director at Morgan Stanley in Hong Kong, notes in a
recent report that "the worst-performer list for Hong Kong
contains a considerable number of blue-chip or close-to-blue-chip
companies that are far from bankruptcy."
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