Rating Company Buy CK Property - jrj.com.cnpg.jrj.com.cn/acc/Res/HK_RES/STOCK/2016/2/1/8332ebd1-0f2a-44a… · 6/15 12/15 CK Property HANG SENG INDEX (Rebased) Performance (%) 1m

Deutsche Bank Markets Research

Rating

Buy Asia

Hong Kong

Property

Property

Company

CK Property

Date

1 February 2016

Forecast Change

Strong balance sheet, cheap valuations; Buy

Reuters Bloomberg Exchange Ticker 1113.HK 1113 HK HSI 1113

Forecasts And Ratios

Year End Dec 31 2014A 2015E 2016E 2017E

Sales (HKDm) 47,987.0 57,164.1 62,245.7 74,523.5

EBITDA(HKDm) 15,160.0 19,950.0 18,645.6 19,223.7

Reported NPAT(HKDm) 47,276.0 14,668.6 13,687.2 12,328.6

DB EPS FD (HKD) 3.64 3.80 3.55 3.19

PER (x) – 11.0 11.7 13.0

DPS (net) (HKD) 0.00 1.44 1.60 1.44

Yield (net) (%) – 3.5 3.8 3.5

Source: Deutsche Bank estimates, company data

Reiterating Buy on strong cash position, well positioned for acquisitions

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Price at 29 Jan 2016 (HKD) 41.65

Price target - 12mth (HKD) 50.00

52-week range (HKD) 74.10 - 38.85

HANG SENG INDEX 19,683

Jason Ching, CFA

Research Analyst

(+852) 2203 6205

[email protected]

Tony Tsang

Research Analyst

(+852) 2203 6256

[email protected]

Key changes

Price target 75.00 to 50.00 ↓ -33.3%

Sales (FYE) 57,441 to 57,164 ↓ -0.5%

Op prof margin(FYE)

33.6 to 33.7 ↑ 0.4%

Net profit(FYE) 14,777.4 to 14,668.6

↓ -0.7%

Source: Deutsche Bank

Price/price relative

30

40

50

60

70

80

6/15 12/15

CK Property

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute -18.3 -24.3 –

HANG SENG INDEX -10.5 -13.7 -20.0

Source: Deutsche Bank

Following the recent sell-off, CK Property now trades at an attractive 38% discount to NAV, 11x PE and 0.7x PB, which we believe prices in the three-year bearish outlook in the HK property market. With HK$46bn cash on-hand or 17% of net assets, we believe this strong cash position will greatly enhance its ability to make more acquisitions when land prices fall in HK and lead to better NAV/earnings growth ahead. Meanwhile, following the reorganization of the CK Group in 2015, with CKP almost doubling the size of its IP portfolio, we expect the dividend payout to rise under the new structure. At the current share price, CKP is trading at a dividend yield of 3.6%/4% 2015/16.

Strong cash position enhances its ability to acquire NAV-accretive projects As of mid-15, CK Property had gross debt amounting to HK$74.5bn and cash balance of HK$46.1bn, equivalent to 17% of its net assets and net gearing of 11%. On the back of a strong sales performance in 2H15 (achieved attributable sales of HK$9.1bn, according to Centaline), we expect CKP’s cash balance to exceed HK$50bn by end-15. In our view, this strong cash position makes CKP stand out from peers and should greatly enhance its ability to make NAV-accretive acquisitions when land prices in Hong Kong fall. Consequently, these acquisitions should lead to better NAV and earnings growth ahead.

Dividend payout to increase following reorganization/higher revenue from IP Dividend payout for the former CK Holdings used to be markedly below peers’ as a sizeable portion of its earnings were non-distributable. Following the reorganization in 2015, we expect CKP to increase its dividend payout under the new structure. Moreover, as CKP has almost doubled its IP portfolio (second largest in terms of GFA and rental revenue), higher contribution from investment properties/other recurring income sources (from 16% before the reorganization to 28% thereafter) will also help to boost dividend payout. In particular, we expect DPS to rise to HK$1.6 in FY16 (HK$1.44 in FY15) and dividend yield to rise to 3.8% correspondingly (from 3.5%).

Target price at 25% discount to our revised NAV estimate of HK$66.7/share Our target price is based on a 25% discount to our revised NAV estimate of HK$66.7/share, which implies a 2015 PE of 13x. Our target discount is below the historical NAV discount of the former CK Holdings and is in line with other industry leaders such as SHKP (also at 25%), which we believe is appropriate. Risks: government policy, sales momentum and interest rate trend.

1 February 2016

Property

CK Property

Page 2 Deutsche Bank AG/Hong Kong

Model updated:31 January 2016

Running the numbers

Asia

Hong Kong

Property

CK Property Reuters: 1113.HK Bloomberg: 1113 HK

Buy Price (29 Jan 16) HKD 41.65

Target Price HKD 50.00

52 Week range HKD 38.85 - 74.10

Market Cap (m) HKDm 160,756

USDm 20,640

Company Profile

As a fully-integrated, multi-discipline property developer, the Group is one of the largest developers of residential, office, retail, industrial, and hotel property in Hong Kong. With its long history of property development expertise, the Group has built many of Hong Kong's most notable landmark buildings and complexes.

Price Performance

30

40

50

60

70

80

Jun 15 Sep 15 Dec 15

CK Property HANG SENG INDEX (Rebased)

Margin Trends

24

28

32

36

14 15E 16E 17E

EBITDA Margin EBIT Margin

Growth & Profitability

0

5

10

15

20

25

0

5

10

15

20

25

14 15E 16E 17E

Sales growth (LHS) ROE (RHS)

Solvency

0

5

10

15

0

10

20

30

40

14 15E 16E 17E

Net debt/equity (LHS) Net interest cover (RHS)

Jason Ching, CFA

+852 2203 6205 [email protected]

Fiscal year end 31-Dec 2014 2015E 2016E 2017E

Financial Summary

DB EPS (HKD) 3.64 3.80 3.55 3.19

Reported EPS (HKD) 12.25 3.80 3.55 3.19

DPS (HKD) 0.00 1.44 1.60 1.44

BVPS (HKD) 58.7 61.1 63.0 64.8

Weighted average shares (m) 3,860 3,860 3,860 3,860

Average market cap (HKDm) na 160,756 160,756 160,756

Enterprise value (HKDm) na 197,416 189,365 189,076

Valuation Metrics P/E (DB) (x) na 11.0 11.7 13.0

P/E (Reported) (x) na 11.0 11.7 13.0

P/BV (x) 0.00 0.68 0.66 0.64

FCF Yield (%) na 21.4 2.3 0.6

Dividend Yield (%) na 3.5 3.8 3.5

EV/Sales (x) nm 3.5 3.0 2.5

EV/EBITDA (x) nm 9.9 10.2 9.8

EV/EBIT (x) nm 10.2 10.5 10.2

Income Statement (HKDm)

Sales revenue 47,987 57,164 62,246 74,524

Gross profit 17,882 22,865 21,742 22,646

EBITDA 15,160 19,950 18,646 19,224

Depreciation 629 660 693 728

Amortisation 0 0 0 0

EBIT 14,531 19,290 17,952 18,496

Net interest income(expense) -2,360 -1,739 -1,503 -1,370

Associates/affiliates 952 1,000 1,050 1,102

Exceptionals/extraordinaries 38,957 0 0 0

Other pre-tax income/(expense) 0 0 0 0

Profit before tax 52,080 18,550 17,499 18,228

Income tax expense 3,739 2,720 2,632 3,682

Minorities 1,065 1,161 1,180 2,217

Other post-tax income/(expense) 0 0 0 0

Net profit 47,276 14,669 13,687 12,329

DB adjustments (including dilution) -33,231 0 0 0

DB Net profit 14,045 14,669 13,687 12,329

Cash Flow (HKDm)

Cash flow from operations 443 35,280 4,522 1,736

Net Capex 231 -800 -800 -800

Free cash flow 674 34,480 3,722 936

Equity raised/(bought back) 0 0 0 0

Dividends paid 0 0 -1,900 -5,080

Net inc/(dec) in borrowings -520 0 0 0

Other investing/financing cash flows -102 0 35,183 5,116

Net cash flow 52 34,480 37,005 972

Change in working capital 0 25,661 -3,015 -6,818

Balance Sheet (HKDm)

Cash and other liquid assets 32,358 50,666 47,290 42,720

Tangible fixed assets 0 0 0 0

Goodwill/intangible assets 0 0 0 0

Associates/investments 14,957 15,957 17,006 18,108

Other assets 368,725 345,466 348,270 357,572

Total assets 416,040 412,089 412,567 418,401

Interest bearing debt 118,294 102,122 90,566 84,592

Other liabilities 71,160 73,125 76,452 79,262

Total liabilities 189,454 175,247 167,018 163,854

Shareholders' equity 226,586 235,681 243,209 249,989

Minorities 0 1,161 2,340 4,558

Total shareholders' equity 226,586 236,841 245,549 254,547

Net debt 85,936 51,456 43,275 41,871

Key Company Metrics

Sales growth (%) nm 19.1 8.9 19.7

DB EPS growth (%) na 4.4 -6.7 -9.9

EBITDA Margin (%) 31.6 34.9 30.0 25.8

EBIT Margin (%) 30.3 33.7 28.8 24.8

Payout ratio (%) 0.0 38.0 45.0 45.0

ROE (%) 20.9 6.3 5.7 5.0

Capex/sales (%) 1.4 1.4 1.3 1.1

Capex/depreciation (x) 1.1 1.2 1.2 1.1

Net debt/equity (%) 37.9 21.7 17.6 16.4

Net interest cover (x) 6.2 11.1 11.9 13.5

Source: Company data, Deutsche Bank estimates

1 February 2016

Property

CK Property

Deutsche Bank AG/Hong Kong Page 3

Investment thesis

Outlook

Following the reorganization of Cheung Kong Group, CK Property has emerged

as the largest pure-play property company in Hong Kong. In our view, CK

Property is the best property proxy as all its revenue is derived from property-

related businesses. Moreover, the diversified and transparent property portfolio

in terms of geography and property business types is indeed an enhanced

platform that could provide better flexibility in business focus adjustment

within the sector (based on different property cycles across different cities).

Following the recent sell-off, CK Property is now trading at an attractive

valuation that we believe already prices in the bearish outlook in the HK

property market in the next three years (40% decline in residential prices and

retail rents, 20% decline in office rents and higher cap rates). With HK$46bn

cash on-hand or 17% of net assets, we believe this strong cash position should

greatly enhance its ability to make more acquisitions when land prices fall in

HK and lead to better NAV/earnings growth ahead.

Meanwhile, following the reorganization of the CK Group in 2015 when CKP

almost doubled the size of its IP portfolio, we expect the dividend payout to

rise under the new structure. In particular, we expect DPS to rise to HK$1.6 in

FY16 and dividend yield to rise to 3.8% correspondingly (from 3.5%).

Valuation

Our target price of HK$50 is based on a 25% discount to our revised NAV

estimate of HK$66.7/share, which implies a 2015 PE of 13x. Our target

discount is below the historical NAV discount of the former CK Holdings and is

in line with other industry leaders such as SHKP (also at 25%), which we

believe is appropriate. While such multiple is markedly higher than the

historical average PER of Cheung Kong Holdings, we believe it is not

unreasonable on the back of the higher contribution from investment

properties/other recurring income source (i.e. from 16% prior to the

reorganization to 28% after the reorganization).

Risks

1) Government policies: Introduction of additional policy by the Hong

Kong/Chinese governments could have an adverse impact on CK Property’s

sales performance, earnings and profitability;

2) External shocks/interest rate trend: In our view, external shocks/interest rate

hike would likely result in a turnaround in market sentiment and weaker

housing demand, which could consequently trigger a sizeable correction in

the property market in the key markets in which CK Property operates;

3) Development margins: CK Property has more actively participated in a JV

with MTR, where profit-sharing agreements are often very high; this could

drag down CK Property’s development EBIT margins on a portfolio basis.

1 February 2016

Property

CK Property


Well positioned to make acquisitions when HK land prices fall

Strong cash position at HK$46bn by mid-15

As of mid-15, CK Property had gross debt amounting to HK$74.5bn and cash

balance of HK$46.1bn, equivalent to 17% of its net assets and net gearing of

11%. These metrics make CKP the strongest in terms of absolute cash position

and highest cash to net asset ratio among the major developers. Moreover, we

expect CKP’s cash balance to exceed HK$50bn by end-15 on the back of a

strong sales performance in 2H15. In our view, this strong cash position makes

CKP stand out from peers and should greatly enhance its ability to make NAV-

accretive acquisitions when land prices in Hong Kong fall. Consequently, these

acquisitions should lead to better NAV and earnings growth ahead.

Figure 1: Summary of financial position among major Hong Kong developers

SHKP Sino-Land Henderson Land CK Property NWD*

Gross debt 83,132 6,040 43,086 74,453 53,354

Cash balance 55,147 19,503 10,022 46,102 31,180

Net debt 27,986 (13,464) 33,064 28,351 22,174

Net gearing 13.4% Net Cash 13.5% 11.0% 32.2%

Market cap 233,933 58,920 141,364 151,494 57,734

Cash as % of market cap 23.6% 33.1% 7.1% 30.4% 54.0%

Total assets 604,110 141,803 325,257 382,844 397,391

Cash as % of total assets 9.1% 13.8% 3.1% 12.0% 7.8%

Net assets 456,818 119,026 250,986 268,004 221,818

Cash as % of net assets 12.1% 16.4% 4.0% 17.2% 14.1%

Source: Company; Deutsche Bank

CK Property achieved attributable sales of HK$9.1bn in 2H15

According to Centaline, CK Property achieved attributable contracted sales of

HK$9.1bn from Hong Kong residential sales in 2H15, placing it in the second

rank in the sales league table. For the full-year 2015, CKP achieved attributable

sales of HK$28,251m, making it the top selling developer for the year. The

strong sales performance in 2015 was in line with its strong track record in

sales execution. In particular, CKP has a good track record in previous cycles

of being the price leader. With its renowned flexible pricing strategy, it is more

responsive about adjusting prices to suit prevailing market conditions, leading

to strong sales execution regardless of market conditions. Consequently, CKP

is able to expand its market share even in difficult market conditions.

1 February 2016

Property

CK Property


Figure 2: Attributable sales by unit for major HK developers in 2015

-

500

1,000

1,500

2,000

2,500

SHKP CK Property Henderson Wheelock Sino New World Dev

Hang Lung

1Q15 2Q15 3Q15 4Q15 Source: Centaline; Deutsche Bank

Figure 3: Attributable sales by value for major HK developers in 2015 (HK$m)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

SHKP CK Property Sino Henderson New World Dev

Wheelock Hang Lung

1Q15 2Q15 3Q15 4Q15 Source: Centaline; Deutsche Bank

CKP’s market share in HK residential sales (in terms of number of units) grew

from 9% in 2000 to 32% in 2015. The average market share of 22% for the

period is indeed the highest in the sector, beating SHKP’s 20%. Meanwhile,

market share by value has averaged at 20% since 2000 (consistently putting it

in the second rank in the sales league table), just shy of SHKP at 21%.

1 February 2016

Property

CK Property


Figure 4: CK Property HK market share by units Figure 5: CK Property HK market share by value

0%

5%

10%

15%

20%

25%

30%

35%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Average: 22%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Average: 20%

Source: Centaline; Deutsche Bank


Figure 6: Market share trend by units for major HK developers

0%

5%

10%

15%

20%

25%

30%

35%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

SHKP CK Property/ Cheung Kong Henderson Sino New World Dev


Figure 7: Market share trend by value for major HK developers

0%

5%

10%

15%

20%

25%

30%

35%

40%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

SHKP CK Property Henderson Sino New World Dev


1 February 2016

Property

CK Property


With a launch pipeline of 3,532 units in 2016 (2nd highest in the sector), CKP is

well positioned to continue with this strong sales momentum ahead.

Figure 8: Summary of new project launch pipeline by developer in 2016

Projects District Units

Sun Hung Kai Properties

Tseung Kwan O No.66D2 Project Tseung Kwan O 628

Kau Tou Shan Project Sha Tin 60

Belcher's Street Project Kennedy Town 128

23 Babington Path Project Mid-Levels 79

North Point Estate Redevelopment Proj North Point 355

Church Lane Project Shau Kei Wan 650

Ultima II Ho Man Tin 271

Shouson Peak (Inventory) Shouson Hill 20

Leung Tak Street Project Tuen Mun 321

Park Vista 1B Yuen Long 499

Nan Cheong Station Kowloon West 1,000

Pak Shek Project 1A Project Ma On Shan 430

Grand YOHO Development Yuen Long 1,100

Twin Regency Yuen Long 523

Sub-Total 6,064

Cheung Kong Property

Wu Kai Sha Project Wu Kai Sha 452

Repulse Bay Project Southern 11

Oil Street Project North Point 400

The Zumurud Ma Tau Wai 228

Tsuen Wan Station West Project Tsuen Wan 2,400

La Mansion Yuen Long 41

Sub-Total 3,532

New World Development

Mount Pavilia Sai Kung 680

Bohemian House Sai Ying Pun 191

Sai Yuen Lane Project Sai Ying Pun 250

Conduit Road Project Mid-Levels 35

Fleur Pavilia North Point 611

TW6 Project Tsuen Wan 983

Double Cove Phase 5 Ma On Shan 176

Park Villa Yuen Long 51

Sub-Total 2,977

Henderson Land

Double Cove Phase 5 Ma On Shan 176

Wellesley Mid-Levels 90

Eltanin Square Mile Phase 2 Tai Kok Tsui 500

Harbourpark Sham Shui Po 161

Victory Avenue Project Ho Man Tin 200

Sheung Shui Kwu Tung Project Sheung Shui 515

Sub-Total 1,642

1 February 2016

Property

CK Property


Projects District Units

Sino-Land

Tuk Hong Chuen Road Project Sai Kung 286

The Spectra Yuen Long 912

Luen Wo Hui Project Fanling 300

Sub-Total 1,498

Chinachem

Tseung Kwan O Area 68B1 Project Tseung Kwan O 857

Inverness Road Project Kowloon Tong 139

Tsuen Wan West (TW5) Cityside Project Tsuen Wan 949

Sub-Total 1,945

Wheelock

Chi Shin Street Project Tseung Kwan O 800

Sheung Foo Street Project Ho Man Tin 561

So Kwun Wat Road Project Tuen Mun 460

Sub-Total 1,821

Total 19,479


1 February 2016

Property

CK Property


Dividend payout to increase following reorganization/higher revenue from IP

CK Property has mostly doubled its total leasable area to 1.5mn sqm GFA

following the reorganization (from 0.74mn sqm GFA), which ranked second

among the listed Hong Kong property names, behind SHKP. In terms of rental

revenue, CK Property also ranks second among the listed Hong Kong property

names at HK$6.8bn in FY14. There are a few trophy assets in the portfolio

including Cheung Kong Center, The Center, 1881 Heritage and Wonderful

Worlds of Whampoa.

Figure 9: Rental revenue from investment properties in FY14

18,489

6,800 5,445

3,474 2,348

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

SHKP CK Property Henderson Land

Sino Land NWD


Figure 10: CK Property - Major investment properties held by CK Property

Investment properties Description Type of properties Att. Interest Annual passing rent (HK$ mn)

Gross rental yield

1 Cheung Kong Center Flagship commercial complex in Hong Kong with 62-storey Grade A commercial building located in Central

Office and retail 100% 1,513 5.60%

2 The Center An 80-storey Grade A commercial building with a central core design that maximizes the options available for office layout and subdivision

Office and retail 100% 837 4.70%

3 1881 Heritage A cultural and shopping complex which was revitalized and transformed from the original site of the Former Marine Police Headquarters

Retail and hotel 100% 833 6.10%

4 Wonderful Worlds of Whampoa

One of the largest shopping, dining and entertainment centres in Hong Kong located within the Whampoa Garden residential estate in Kowloon, Hong Kong

Retail 100% 628 4.90%

5 Hutchison Logistics Centre

Multi-storey drive-in freight distribution centre strategically located at Terminal 4 in Kwai Tsing Container Terminals, one of the busiest container ports in the world

Industrial and office 100% 548 5.60%

Source: Company, Deutsche Bank

1 February 2016

Property

CK Property


Dividend payout for the former CK Holdings used to be markedly below peers

as a sizeable portion of its earnings being non-distributable (i.e CKH has a

dividend payout ratio of 23% in 2014, lower than peers like SHKP at 42%,

Henderson Land at 35%, Sino-Land at 60% and New World Development at

56%). Following the reorganization in 2015, we expect CK Property to increase

its dividend payout under the new structure. Moreover, we expect higher

contribution from investment properties/other recurring income sources (from

16% before the reorganization to 28% thereafter) will also help to boost

dividend payout. In particular, we expect DPS to rise to Hk$1.6 in FY16

(HK$1.44 in FY15) and dividend yield rising to 4% correspondingly (from 3.6%).

Figure 11: Dividend payout ratio of major HK developers

2011 2012 2013 2014

Cheung Kong 16% 23% 23% 23%

Other key HK developers

SHKP 37% 37% 42% 42%

Henderson 42% 36% 32% 35%

Sino Land 44% 51% 45% 60%

New World Development 32% 46% 43% 56%

Average 39% 43% 41% 48%


1 February 2016

Property

CK Property


Financial Analysis

Earnings revised downwards by 17-33% in FY16-17 to reflect price/rental declines for full down cycle

By factoring in price and rental declines for the full down cycle in the HK

property market, i.e. 40% decline in residential prices and retail rents, 20%

decline in office rents as well as higher cap rates of 5% for residential, 5.5% for

offices, 6% for retail and 8% for carparks (versus our previous assumption of

20% decline in residential prices and retail rents and cap rates of 4% for

residential, 5% for office, 5.25% for retail and 4% for carparks), we trim our

earnings projection for FY16-17 by 17-33%.

Figure 12: Summary of earnings revision

2015F 2016F 2017F

New Old % New Old % New Old %

Property sales 42,685 42,485 0% 47,732 50,970 -6% 60,109 61,957 -3%

Property rental 6,867 6,916 -1% 6,749 7,003 -4% 6,402 7,160 -11%

Hotel and serviced suite operation

5,593 5,593 0% 5,645 5,645 0% 5,786 5,786 0%

Property and project management

569 569 0% 598 598 0% 627 627 0%

Investment and other income

1,450 1,450 0% 1,523 1,523 0% 1,599 1,599 0%

Revenue 57,164 57,013 0% 62,246 65,738 -5% 74,524 77,130 -3%

Gross profit 22,865 22,721 1% 21,742 25,617 -15% 22,646 29,255 -23%

Pre-tax profit 18,550 18,431 1% 17,499 21,242 -18% 18,228 24,752 -26%

Underlying profit 14,669 14,662 0% 13,687 16,485 -17% 12,329 18,298 -33%

Core EPS (HK$/shr) 3.80 3.80 0% 3.55 4.27 -17% 3.19 4.74 -33%

DPS (HK$/shr) 1.44 1.48 -3% 1.60 1.71 -7% 1.44 1.90 -24%

Source: Deutsche Bank estimates

In particular, we still expect core profit to grow by 4% YoY to HK$14,669mn in

FY16 on booking of development projects sold before the market downturn.

Meanwhile, while we expect core profits to decline by 7% YoY to

HK$13,687mn in 2016 and further by 10% YoY to HK$12,329mn in 2017 on

lower development margins due to falling property prices and negative rental

reversion in its investment property portfolio.

1 February 2016

Property

CK Property


Figure 13: CK Property - Income statement (HK$ mn)

For year ended Dec 31 2014A 2015F 2016F 2017F

Property sales 33,679 42,685 47,732 60,109

Property rental 6,821 6,867 6,749 6,402

Hotel and serviced suite 5,564 5,593 5,645 5,786

Property/project management 542 569 598 627

Investment and others 1,381 1,450 1,523 1,599

Revenue 47,987 57,164 62,246 74,524

Cost of sales (30,105) (34,299) (40,503) (51,878)

Gross Profit 17,882 22,865 21,742 22,646

Gross interest expenses 2,360 2,553 2,264 2,115

Capitalized interest (638) (566) (529)

Net interest expense/(income) 2,360 1,915 1,698 1,586

Depreciation expense 629 660 693 728

Interest income 175 195 216

Salary and related expenses (2,341) (2,515) (2,677) (2,981)

Others (381) (400) (420) (441)

SG&A (2,722) (2,740) (2,902) (3,206)

Revaluation gains 33,683 - - -

Other adjustments 5,274 - - -

Profit from operations 51,128 17,550 16,449 17,126

Associates 952 1,000 1,050 1,102

Pre-tax profit 52,080 18,550 17,499 18,228

Taxation (3,739) (2,720) (2,632) (3,682)

Minority interests (1,065) (1,161) (1,180) (2,217)

Net attributable profit 47,276 14,669 13,687 12,329

Adjustment for non-recurring items (33,231) - - -

Core net profit 14,045 14,669 13,687 12,329

Core EPS (HK$) - 3.80 3.55 3.20

DPS (HK$) - 1.48 1.42 1.28 Source: Company, Deutsche Bank Estimates

1 February 2016

Property

CK Property


Figure 14: CK Property - Balance sheet (HK$ mn)

As of Dec 31 2014A 2015F 2016F 2017F

Non-current assets 142,091 141,108 142,197 143,076

Investment properties 119,398 119,538 119,644 119,716

Land use rights - - - -

Fixed Asset - - - -

Other assets 22,693 21,570 22,553 23,360

Associates 14,957 15,957 17,006 18,108

Other investments 5,491 5,491 5,491 5,491

Current assets 253,501 249,553 246,872 251,725

Properties for sale 162,125 164,720 168,124 174,142

Debtors & deposits/receivables/others 59,018 34,148 32,458 34,863

Bank balances & cash 32,358 50,666 47,290 42,720

Current liabilities (139,235) (85,228) (72,249) (64,535)

Bank loans and overdrafts 5,277 19,749 15,799 12,640

Amounts due to group companies 101,492 31,048 18,691 11,327

Creditors, deposits & accruals/others 29,177 31,440 31,123 33,536

Taxation 3,289 2,991 2,176 2,105

Proposed dividend - 4,459 4,927

Total assets less current liabilities 276,805 326,860 340,318 353,866

Non-current liabilities 40,938 80,738 85,488 90,038

Long term bank loans 11,525 51,325 56,075 60,625

Amounts due to / (from) group companies 29,310 29,310 29,310 29,310

Others 103 103 103 103

Deferred income tax 9,281 9,281 9,281 9,281

Share premium 226,586 226,586 226,586 226,586

Retained profits - 9,095 16,623 23,403

Shareholders' funds 226,586 235,681 243,209 249,989

Minority interests - 1,161 2,340 4,558

Total capital employed 276,805 326,860 340,318 353,866

Source: Company, Deutsche Bank Estimates

1 February 2016

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CK Property


Valuation

Our revised NAV estimate is HK$66.7/share

We adopt NAV as our primary valuation metric for CK Property, in line with the

methodology we adopt for its peers under our coverage. Our approach is

based on sum-of-the-parts, where we apply DCF for property developments for

sales as to estimate the value of its development projects by taking the

estimated cash inflows from property sales minus the outstanding costs,

including any outstanding land costs, construction costs, and related taxes for

each of the development projects. We take into account only the existing land

bank and do not assume any terminal value in the DCF analysis. For

investment properties, we use the income capitalization approach, taking the

estimated rental revenues of the properties and dividing this figure by the

estimated cap rates.

Our estimated rents and cap rates vary between the different types of

properties and their locations. When arriving at the NAV for the company, we

take the aggregate estimated value for the above business segments and add

the company’s net cash position or subtract its net debt position. By factoring

in price and rental declines for the full down cycle in the HK property market,

i.e. 40% decline in residential prices and retail rents, 20% decline in office rents

as well as higher cap rates of 5% for residential, 5.5% for offices, 6% for retail

and 8% for carparks, our estimated NAV is HK$66.7/share.

Figure 15: CK Property - NAV breakdown

(HK$ mn) (HK$/share) %

Development property

Residential 148,752 38.54 57.8%

Retail 4,832 1.25 1.9%

Car Park 2 0.00 0.0%

Office 4,176 1.08 1.6%

Others 17,733 4.59 6.9%

175,495 45.47 68.2%

Investment property

Retail 23,968 6.21 9.3%

Car Park 143 0.04 0.1%

Office 58,412 15.13 22.7%

Hotel 20,543 5.32 8.0%

Other 8,189 2.12 3.2%

111,255 28.82 43.2%

Other assets

Stakes in Hui Xian REIT 5,213 1.35 2.0%

Stakes in Fortune REIT 4,084 1.06 1.6%

Stakes in Prosperity REIT 739 0.19 0.3%

10,035 2.60 3.9%

Gross asset value (GAV) 296,786 76.89 115.3%

Net cash / (debt) (39,444) (10.22) -15.3%

Net asset value (NAV) - fully diluted 257,342 66.7 100.0%


1 February 2016

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Target price based on 25% discount to our estimated NAV

Our target price of HK$50 is based on a 25% discount to our revised NAV

estimate of HK$66.7/share, which implies a 2015 PE of 13x. Our target

discount is below the historical NAV discount of the former CK Holdings and in

line with other industry leaders such as SHKP (also at 25%), which we believe

is appropriate.

As a cross check, our target price implies a 2015 PER of 13x. While such

multiple is markedly higher than the historical average PER of Cheung Kong

Holdings, we believe it is not unreasonable on the back of the higher

contribution from investment properties/other recurring income source (i.e.

from 16% prior to the reorganization to 28% after the reorganization).

Following the recent sell-off, CK Property is now trading at an attractive 38%

discount to NAV, 11x PE and 0.7x PB.

Figure 16: HK Prop – NAV discount on target prices

Company Ticker NAV Discount on target price

SHKP 0016.HK -25%

MTRC 0066.HK -30%

CK Property 1113.HK -25%

Henderson Land 0012.HK -30%

Hongkong Land HKLD.SI -26%

Wharf 0004.HK -40%

Link REIT 0823.HK -15%

Hang Lung 0101.HK -25%

Sino Land 0083.HK -30%

New World Dev 0017.HK -35%

Hysan Dev 0014.HK -40%

Kerry Properties 0683.HK -45%

Great Eagle 0041.HK -60%


1 February 2016

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Figure 17: Discount to NAV of CK Property

-45%

-40%

-35%

-30%

-25%

-20%

-15%

Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16

Discount to NAV -1SD Average +1SD

Source: Bloomberg Finance LP; Deutsche Bank estimates

Figure 18: P/E Band of CK Property Figure 19: P/B Band of CK Property

10

11

12

13

14

15

16

17

18


PE -1SD Average +1SD

0.50

0.60

0.70

0.80

0.90

1.00

1.10


PB -1SD Average +1SD



1 February 2016

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Figure 20: HK property – valuation table

DB Trade Report Mkt Cap

12M Daily T/O

29 Jan Target Implied Est. NAV EPS PE(x)

Company Ticker Rating Ccy Ccy USDm USDm Price Price Upside NAV Disc FY15E FY16E FY17E FY15E FY16E FY17E

Covered

SHKP 16 HK Buy HKD HKD 30,030 64.1 83.80 99.20 18% 132.3 -37% 7.07 7.26 5.02 11.4 11.1 16.1

MTRC 66 HK Buy HKD HKD 26,133 15.7 35.10 40.74 16% 58.2 -40% 1.95 1.87 2.19 17.8 18.5 15.9

CK Property 1113 HK Buy HKD HKD 19,447 79.8 39.25 50.00 27% 66.7 -41% 3.80 3.55 3.19 11.0 11.7 13.0

Henderson Land 12 HK Buy HKD HKD 18,147 23.2 42.00 47.88 14% 68.4 -39% 2.86 2.94 2.71 15.0 14.5 15.8

Hongkong Land HKL SP Hold USD USD 14,258 19.8 6.24 7.20 15% 9.7 -36% 0.36 0.38 0.38 16.9 16.0 15.9

Wharf 4 HK Hold HKD HKD 13,910 33.7 36.00 49.82 38% 83.0 -57% 3.83 4.09 3.78 9.3 8.7 9.5

Link REIT 823 HK Hold HKD HKD 12,517 32.4 44.35 42.00 -5% 49.1 -10% 1.77 1.93 2.00 24.4 22.4 21.7

Hang Lung 101 HK Buy HKD HKD 8,371 16.7 14.59 22.66 59% 30.2 -53% 1.14 1.15 1.16 12.7 12.6 12.5

Sino Land 83 HK Buy HKD HKD 7,564 8.2 9.88 13.45 69% 19.2 -49% 0.88 0.80 0.87 11.0 12.0 11.1

New World Dev 17 HK Buy HKD HKD 7,411 20.8 6.30 8.67 38% 13.3 -53% 0.75 0.68 0.58 8.3 9.1 10.7

Hysan Dev 14 HK Sell HKD HKD 3,981 6.5 30.00 27.66 -8% 46.1 -35% 2.07 2.03 1.98 14.3 14.5 14.9

Kerry Properties 683 HK Hold HKD HKD 3,252 7.0 17.88 19.26 8% 38.5 -53% 2.44 2.03 1.92 7.9 8.8 9.3

Great Eagle 41 HK Sell HKD HKD 1,856 1.2 21.75 19.10 -12% 47.8 -54% 2.43 2.36 2.28 9.0 9.2 9.6

Shun Tak 242 HK Hold HKD HKD 988 2.1 2.60 3.80 46% 11.0 -76% 0.43 0.44 NA 5.9 5.7 NA

Not Rated

Swire Properties 1972 HK NR HKD HKD 14,869 7.7 19.80 NA NA NA NA 1.32 1.29 1.35 15.0 15.3 14.7

Wheelock 20 HK NR HKD HKD 7,538 6.5 28.90 NA NA NA NA 4.95 5.37 5.30 5.8 5.4 5.5

Chinese Estates 127 HK NR HKD HKD 4,383 0.3 17.90 NA NA NA NA NA NA NA

Hopewell 54 HK NR HKD HKD 2,648 1.7 23.70 NA NA NA NA 1.70 2.14 1.59 14.0 11.1 14.9

K. Wah Int'l 173 HK NR HKD HKD 966 0.9 2.65 NA NA NA NA 0.32 0.51 0.57 8.3 5.2 4.6

Wing Tai Properties 369 HK NR HKD HKD 713 0.1 4.14 NA NA NA NA 0.30 0.30 0.32 13.8 13.8 12.9

Langham Hospitality Investments

1270 HK NR HKD HKD 653 0.6 2.49 NA NA NA NA 0.17 0.17 0.17 14.6 14.6 14.6

Overall average -47% 12.5 12.0 12.5 Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Consensus estimates for companies NR

1 February 2016

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Figure 21: HK property – valuations table (cont.)

EPS growth % BVPS PB(x) DPS Dividends yield % Net gearing %

Company Ticker FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

Covered

SHKP 16 HK -11 3 -31 153.0 156.4 157.6 0.5 0.5 0.5 3.4 3.4 3.4 4.1 4.1 4.1 11.2 11.7 12.2

MTRC 66 HK -2 -4 17 28.7 29.4 30.3 1.2 1.2 1.1 1.2 1.2 1.3 3.3 3.5 3.6 12.0 14.8 11.8

CK Property 1113 HK 5 -7 -10 61.0 63.2 65.1 0.6 0.6 0.6 1.5 1.4 1.3 3.6 4.0 3.6 10.4 11.2 13.2

Henderson Land 12 HK -8 3 -8 81.1 82.9 84.5 0.5 0.5 0.5 1.1 1.1 1.1 2.7 2.7 2.7 14.9 12.9 11.0

Hongkong Land HKL SP -9 6 1 11.9 12.0 12.2 0.5 0.5 0.5 0.2 0.2 0.2 3.3 3.3 3.4 12.7 12.7 12.8

Wharf 4 HK 13 7 -8 102.9 105.3 107.4 0.3 0.3 0.3 1.8 1.8 1.8 5.1 5.1 5.1 18.1 13.6 8.5

Link REIT 823 HK 7 9 3 51.5 51.5 51.5 0.8 0.8 0.8 1.8 1.9 2.0 4.2 4.5 4.6 11.5 20.6 20.5

Hang Lung 101 HK -51 1 1 29.9 30.3 30.7 0.5 0.5 0.5 0.8 0.8 0.8 5.2 5.2 5.2 2.2 4.1 6.1

Sino Land 83 HK 5 -9 9 19.5 19.8 20.2 0.5 0.5 0.5 0.5 0.5 0.5 5.2 5.2 5.2 NA NA NA

New World Dev 17 HK 0 -9 -15 19.9 20.5 21.1 0.3 0.3 0.3 0.4 0.4 0.4 6.7 6.7 6.4 32.2 41.3 38.9

Hysan Dev 14 HK 2 -2 -3 63.6 64.3 65.1 0.5 0.5 0.5 1.3 1.3 1.3 4.2 4.2 4.2 3.1 3.1 3.3

Kerry Properties 683 HK -5 17 17 57.0 58.8 61.0 0.3 0.3 0.3 0.9 0.7 0.7 5.0 4.1 3.8 31.8 31.5 25.4

Great Eagle 41 HK -19 -3 -4 84.6 88.1 91.5 0.3 0.2 0.2 0.6 0.6 0.6 2.9 2.7 2.6 21.0 19.1 17.5

Shun Tak 242 HK -40 4 NA 9.2 9.5 NA 0.3 0.3 NA 0.1 0.1 NA 5.0 5.3 NA NA NA NA

Not Rated

Swire Properties 1972 HK 12 -2 4 36.1 36.7 37.29 0.5 0.5 0.5 0.7 0.7 0.7 3.4 3.5 3.6 17.1 16.9 16.3

Wheelock 20 HK 9 8 -1 99.6 103.6 106.88 0.3 0.3 0.3 1.2 1.3 1.4 4.1 4.3 4.7 41.5 37.2 43.8

Chinese Estates 127 HK NA NA NA NA NA NA NA NA NA NA NA NA

Hopewell 54 HK 17 26 -26 50.8 54.6 55.01 0.5 0.4 0.4 1.1 1.2 1.2 4.8 5.1 5.2 NA NA 0.7

K. Wah Int'l 173 HK 28 58 12 8.4 8.9 9.51 0.3 0.3 0.3 0.2 0.2 0.2 5.7 5.7 5.7 36.4 21.4 28.0

Wing Tai Properties 369 HK -12 0 7 NA NA NA 0.1 0.1 0.1 3.4 3.4 3.4 NA NA 11.2

Langham Hospitality Investments

1270 HK -26 0 0 5.2 5.1 5.07 0.5 0.5 0.5 0.2 0.2 0.2 9.6 9.6 9.6 63.0 63.0 62.3

Overall average -4 5 -2 0.5 0.5 0.5 4.6 4.7 4.7 21.2 20.9 19.1 Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Consensus estimates for companies NR

1 February 2016

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Risks

Macro risks

Further government tightening policies towards the property sector

The Hong Kong government has introduced numerous measures targeted at

cooling down the property market over the past 24 months. Moreover, the

Central government of China has repeatedly emphasized its desire to avoid an

overheated property market. The introduction of additional policy by the Hong

Kong/Chinese governments could have an adverse impact on Cheung Kong’s

earnings and profitability.

External shocks could trigger a sizeable price correction

In our view, external shocks would likely result in a turnaround in market

sentiment and weaker housing demand, which could consequently trigger a

sizeable correction in the property market in Hong Kong. Likewise, any

unexpected fluctuations in the economy would likely affect demand in the

Hong Kong property market and the business of developers.

Company-specific risks

Higher proportion of MTR projects could drag overall development margins

CK Property has more actively participated in joint ventures with MTR

compared with its peers. As profit sharing agreements with MTR often as high

as 75% of profits, it could drag down CK Property’s development EBIT margins

on a portfolio basis.

1 February 2016

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CK Property


Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

CK Property 1113.HK 41.55 (HKD) 29 Jan 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=1113.HK

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Jason Ching

Historical recommendations and target price: CK Property (1113.HK) (as of 1/29/2016)

1

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Jun 15 Sep 15 Dec 15

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 25/08/2015: Buy, Target Price Change HKD75.00

1 February 2016

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Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

53 %

36 %

11 %21 %17 % 20 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

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1 February 2016

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CK Property


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1 February 2016

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Documents

Rating Company Buy CK Property - jrj.com.cnpg.jrj.com.cn/acc/Res/HK_RES/STOCK/2016/2/1/8332ebd1-0f2a-44a… · 6/15 12/15 CK Property HANG SENG INDEX (Rebased) Performance (%) 1m