CBRE luncheon takeaways on retail property market in HK and APAC

Transcription

1 Deutsche Bank Markets Research Asia Hong Kong Industry Hong Kong Date Industry Update CBRE luncheon takeaways on retail property market in HK and APAC Flat outlook on the Hong Kong retail property market in 2015 We hosted an investor luncheon with Marcos Chan, Head of Research, Hong Kong, Macau & Taiwan and Jonathan Hsu, Director of Research, Asia Pacific, on the retail property market in Hong Kong and Asia Pacific. In summary, CBRE believes Asia Pacific has the strongest growth prospects with new retailers still keen on expansion. In Hong Kong, CBRE expects a steady outlook in 2015 as improving job market and continuous income growth are to be offset by consolidation among retailers and high vacancy. Specifically, CBRE expects a switch in demand drivers from high-end towards the mid-market focus while overall retail rents are expected to fall by 5%. Expects overall retail rents in Hong Kong to fall by 5% in 2015 In 2014, Hong Kong s total visitor arrivals rose 12% YoY to 60mn, but retail sales recorded no growth, suggesting a decline in tourist spending. In particular, watch & jewellery and electrical goods registered declines of 14% YoY and 8% YoY, respectively, highlighting a change in the consumption pattern of visitors. Consequently, overall rents stayed flat on falling demand from high-margin retailers. Looking ahead, CBRE believes improving job market prospects, continuous income growth and potential wealth effect should help to drive retail sales. Nevertheless, it believes consolidation among retailers, higher vacancy and mainland tourists having more alternative travel destinations will offset the positive factors. Hence, CBRE expects overall rents to fall 5% in 2015, rents in Tier-1 prime to be flat, but rents in Tier-2 prime to fall 10%. Rents in further outer areas are likely to fall even more. Demand driver to shift towards the mid-market segment in Hong Kong CBRE expects 2015 to be market driven more by mid-market consumption as consumer demand shifts from high-end to a mid-market focus. Overall, midmarket tenants would be more cost conscious and there would be increased consolidation of shops (i.e. reducing needs for secondary shops) in This will likely lead to reduced aggregated demand and higher vacancy, and would have an adverse impact on rental growth, especially in non-prime shopping areas. On the other hand, it believes e-commerce will not be a big threat for malls in Hong Kong given its relatively small size, with experience-type and lifestyle consumption being the key element of Hong Kong malls. However, it believes the biggest issue facing Hong Kong is capacity constraint to host more tourists. Tokyo to see the strongest rental growth of 10% in 2015 Globally, retailer sentiment towards APAC has remained fairly positive. Although consumer sentiment fell in 2014, overall consumer sentiment remained positive. Retailers are still keen on expansion in the region. The top four retailer-categories in expanding into APAC are: luxury & business, midrange fashion, specialist clothing, coffee & restaurants. In terms of rental outlook for 2015, CBRE is most positive on Tokyo, expecting rental growth of about 10%, followed by Beijing (about 5%) and Shanghai (4.5%). Meanwhile, CBRE sees low risk of oversupply for Tokyo, and also low risks of oversupply in prime locations in Beijing and Shanghai, but there are medium-high risks of oversupply for suburban areas in Beijing and Shanghai. Tony Tsang Jason Ching, CFA Research Analyst Research Analyst (+852) (+852) tony.tsang@db.com jason.ching@db.com Top picks New World Dev (0017.HK),HKD9.19 SHK Properties Ltd (0016.HK),HKD Henderson Land Dev. Co. (0012.HK),HKD53.95 Sino Land Co (0083.HK),HKD12.52 Source: Deutsche Bank Companies Featured New World Dev (0017.HK),HKD9.19 SHK Properties Ltd (0016.HK),HKD Henderson Land Dev. Co. (0012.HK),HKD53.95 Sino Land Co (0083.HK),HKD12.52 Hongkong Land Holdings Ltd (HKLD.SI),USD7.88 Great Eagle Hldgs (0041.HK),HKD26.80 Hysan Development (0014.HK),HKD37.75 Source: Deutsche Bank Sell Sell Sell 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) 148/04/2014.

2 Hong Kong Key takeaways from CBRE investor luncheon Flat outlook on Hong Kong retail property market in 2015 The following are the key takeaways from the CBRE luncheon: On Asia retail market 1) Globally, CBRE expects retail in Asia Pacific to show stable growth rates in 2015, while the US should show stronger rate of growth, followed by Europe. 2) In Asia Pacific, CBRE expects divergent performances among the different countries. Figure 1: GDP growth in APAC countries Source: CBRE Research 3) Globally, overall retailer sentiment on APAC has remained fairly positive. Although consumer sentiment fell in 2014, overall consumer sentiment remained positive. In addition, consumer sentiment in APAC in general is more positive than other regions. Consumer sentiment is particularly strong in India, Indonesia, Philippines, Thailand, China, Hong Kong, Vietnam, New Zealand and Singapore. 4) In 2014, there were 465 new retailer entrants across APAC, which almost doubled that in 2012, reflecting continuously strong retailer interest in APAC. 5) The top four retailer-categories in expanding into APAC are: luxury & business, mid-range fashion, specialist clothing, coffee & restaurants. CBRE identifies the following key trends: a) top-tier luxury brands have become more cautious on China and Hong Kong and have started to consolidate their sales network in China and Hong Kong due to weakening sales growth; Page 2

3 Hong Kong b) More luxury retailers are expanding into Japan and Australia. c) More mid-range retailers are focusing on gateway cities in Greater China and Japan. d) F&B growth has been strong due to increased sophistication of consumers in APAC. More consumers are spending more on experience consumption. e) Landlords are now keen to introduce more F&B elements to retain and prolong foot traffic. Figure 2: Positive retail sentiment in APAC Source: CBRE Research Figure 3: Number of new retailer entrants across APAC Source: CBRE Research 6) For new retailer entrants in 2014, Tokyo saw the highest demand as a destination for international retailers, followed by Singapore, Taipei, Hong Kong, and Beijing. Page 3

4 Hong Kong 7) Tokyo retail rents rose 21% in 2014, the strongest in APAC, followed by Manila, Sydney CBD, Melbourne CBD, Beijing, Taipei and Shanghai. Hong Kong and Guangzhou saw negative growths in Many retailers are expanding into Tokyo and Seoul to capture the growing mainland tourist arrivals and their consumption. Figure 4: Number of new entrants in major cities of APAC Source: CBRE Research Figure 5: Rental growth in YoY and QoQ in major cities of APAC Source: CBRE Research 8) In terms of rental outlook for 2015, CBRE is most positive on Tokyo, with expected rental growth of about 10%, followed by Beijing (with expected rental of about 5%) and Shanghai (with expected rental growth of 4.5%). On the risk of oversupply, CBRE sees low risk of oversupply for Tokyo, and also low risks of oversupply in prime locations in Beijing and Shanghai, but there are medium-high risks of oversupply for suburban areas in Beijing and Shanghai. On the other hand, CBRE expects rental declines of about 5% for retail properties in Hong Kong. Page 4

5 Hong Kong 9) In China, the Hong Kong landlords are doing better than local property companies because they have stronger experience and expertise. 10) CBRE expects cap rates in Beijing to rise slightly and cap rates in Shanghai to be flat. 11) Overall, CBRE expects slower expansion of retailers with higher focus on prime locations, and there should be more expansion in Australia, Japan, Taiwan, South East Asia and India, while there should be less expansion in China, Hong Kong, and Singapore. 12) The key risks for retailers in APAC in 2015 are rising occupancy costs. The key risk for landlords in APAC is rising new supply. CBRE sees Tokyo, prime areas on Beijing and Shanghai, Taipei, Sydney, Melbourne and Auckland as landlord markets, and hence there will likely be upward rental revisions. On the other hand, CBRE sees Hong Kong, Guangzhou, Shenzhen and suburban areas of Beijing and Shanghai as tenant markets and hence there will likely be more rental downsides. Figure 6: Retail supply, rental and yield outlook in major cities of APAC Source: CBRE Research Hong Kong retail 1) Hong Kong is still the most expensive in terms of retail rents in APAC, with average retail rents of US$4,333psf per annum, followed by Tokyo, with average retail rents of US$984psf. 2) Since the implementation of the individual visit scheme in 2003, Hong Kong has recorded double-digit retail sales growth in 6 out of 10 years, driving strong retail rental growths in Hong Kong. For example, mainland Chinese tourist spending accounted for 34% of total retail sales in Hong Kong in 2013, up sharply from 14% in Page 5

6 Hong Kong Figure 7: Contribution of HK retail sales in 2004 Figure 8: Contribution of HK retail sales in 2013 Source: CBRE Source: CBRE 3) Tourist arrival growth is very important for Hong Kong retail sales. 4) In 2014, 60mn tourists entered Hong Kong. Surprisingly, the Occupy Central movement did not affect tourist arrivals in Hong Kong. Figure 9: Retail rents in major cities of APAC Source: CBRE Research 5) However, there has been a change in consumption pattern of the mainland Chinese they are spending less on luxury items. For example, in 2014, spending on watch & jewellery dropped 14% YoY, while spending on electrical goods fell 8%. Page 6

7 Hong Kong Figure 10: Tourist growth from 2005 to 2014 Figure 11: Retail sales growth from 2012 to 2014 Source: CBRE Source: CBRE 6) Domestic consumption went up by 2% in However, overall retail sales in Hong Kong have gone down by 0.2% in 2014, implying that tourist spending in Hong Kong has declined. The reasons could be: a) Mainland tourists having more other alternative destinations around the world; b) slowing economic growth in China. 7) Luxury retailers are slowing down on their expansions in Hong Kong. However, mid-end retailers are still keen to visit Hong Kong. 8) Shopping centers should be doing fine. However, there are rising vacancies for street-front shops. Retailers have become more cautious on paying up or paying high rents for street-front shops. Vacancy of street-front shops especially in prime shopping areas have continued to go up. More retailers and landlords start to realize this reality. 9) For the full-year of 2014, rents for prime-street shops fell 0.1% YoY on average (down 0.2% YoY in 4Q14). 10) CBRE is not that negative on the retail outlook in Hong Kong is relatively weaker among APAC from a domestic point of view: a) The job market prospect is not that bad. b) Salary rise is likely for 90% of employers surveyed, according to Hudson. c) In the Budget for 2015, there potentially would be tax refund and other tax incentives. d) There could also be a low-base rebound given the weak growth in That said, these factors, though they are positive factors, are unlikely to create a big spin in retail sales and retail rents. 11) However, given the continued economic and structural reform in China (including continued anti-corruption) and that the mainland tourists now have Page 7

8 Hong Kong more alternative travel destinations, luxury consumption in Hong Kong is unlikely to see healthy growth. 12) In addition, retailers also see the lack of warehouse spaces in Hong Kong being a problem. 13) CBRE expects 2015 to be market driven more by mid-market consumption as consumer demand is shifting from high-end to a mid-market focus. Overall, mid-market tenants would be more cost conscious, and there would be more consolidations of shops (i.e. reducing needs for secondary shops) in This will likely lead to reduced aggregated demand and higher vacancy, and would affect occupancy and rents in the non-prime shopping areas. 14) Hence overall, CBRE expects overall rents to fall 5% in 2015, rents in Tier-1 prime to be flat, but rents in Tier-2 prime to fall 10%. Rents in further outer areas would likely fall even more. 15) CBRE expects rents of shopping centers to be more resilient because landlords could choose between fixed and turnover rents and they could alter tenant mix in the mall (due to the presence of a waiting list of tenants wanting to get into the shopping mall). 16) CBRE believes TST and CWB would be doing better than Central because Central is more focusing on very-luxury, big-ticket-consumption types of tenants. 17) On new supply in Hong Kong, CBRE expects 1.2msf of new supply of shopping malls in 2015, and most of this new supply will be in non-core areas. For the new supply in core areas, most of them are in Ginza-style shopping towers, which are mainly good for F&B and service-type of tenants. Hence, overall, CBRE sees no major supply risks in Figure 12: Non-street shop retail completions Source: CBRE Research Page 8

9 Hong Kong 18) E-commerce is not a big threat for malls in Hong Kong, because Hong Kong is small, and experience-type and lifestyle consumption are the key element of Hong Kong malls. 19) CBRE sees capacity constraint the biggest issue for Hong Kong. Page 9

10 Hong Kong Taking a look at valuations Figure 13: HK property valuation table DB Trade Report Mkt Cap 12M Daily T/O 11 Feb Target Implied Est. NAV EPS PE(x) Company Ticker Rating Ccy Ccy USDm USDm Price Price Upside NAV Disc FY14E FY15E FY16E FY14E FY15E FY16E Covered SHKP 16 HK HKD HKD 45, % % MTRC 66 HK HKD HKD 26, % % Wharf 4 HK Hold HKD HKD 23, % % Henderson Land 12 HK HKD HKD 20, % % Hongkong Land HKL SP Sell USD USD 18, % 8.5-8% Link REIT 823 HK HKD HKD 14, % % Hang Lung 101 HK HKD HKD 12, % % New World Dev 17 HK HKD HKD 10, % % Sino Land 83 HK HKD HKD 9, % % Hysan Dev 14 HK Sell HKD HKD 5, % % Kerry Properties 683 HK Hold HKD HKD 5, % % Great Eagle 41 HK Sell HKD HKD 2, % % Shun Tak 242 HK Hold HKD HKD 1, % % Langham Hospitality 1270 HK Hold HKD HKD % % Investments Not Rated Swire Properties 1972 HK NR HKD HKD 19, NA NA NA NA Wheelock 20 HK NR HKD HKD 11, NA NA NA NA Chinese Estates 127 HK NR HKD HKD 5, NA NA NA NA NA NA NA Hopewell 54 HK NR HKD HKD 3, NA NA NA NA K. Wah Int'l 173 HK NR HKD HKD 1, NA NA NA NA Wing Tai Properties 369 HK NR HKD HKD NA NA NA NA Overall average -29% Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Consensus estimates for companies NR Page 10

11 Hong Kong Figure 14: HK property valuations table (cont.) Company Covered EPS growth % BVPS PB(x) DPS Dividends yield % Net gearing % Ticker FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E SHKP 16 HK MTRC 66 HK Wharf 4 HK Henderson Land 12 HK (13) Hongkong Land HKL SP (8) (3) Link REIT 823 HK Hang Lung 101 HK 3 11 (5) New World Dev 17 HK (22) Sino Land 83 HK (25) Hysan Dev 14 HK (7) (1) (4) Kerry Properties 683 HK (16) Great Eagle 41 HK (5) (2) Shun Tak 242 HK 310 (9) Langham Hospitality 1270 HK Investments 15 (7) Not Rated Swire Properties 1972 HK Wheelock 20 HK Chinese Estates 127 HK NA NA NA NA NA NA NA NA NA NA NA NA Hopewell 54 HK (2) K. Wah Int'l 173 HK (50) Wing Tai Properties 369 HK 10 (9) (29) NA NA NA NA NA NA Overall average Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Consensus estimates for companies NR Page 11

12 Jan-92 Jan-92 Jan-92 Hong Kong Figure 15: HK Disc to NAV 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% -80% Sector Disc to NAV -1SD Avg +1SD Source: Deutsche Bank Figure 16: HK P/E 35 Sector P/E -1SD Avg +1SD Figure 17: HK P/B 1.8 Sector P/B -1SD Avg +1SD Source: Company, Deutsche Bank, Bloomberg Finance LP Source: Company, Deutsche Bank, Bloomberg Finance LP Page 12

13 Jan-92 Jan-92 Jan-92 Jan-92 Jan-92 Jan-92 Hong Kong Figure 18: Developer discount to NAV Figure 19: Landlord discount to NAV 80% 60% Developer Disc to NAV -1SD Avg +1SD 40% Landlord Disc to NAV -1SD Avg +1SD 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -80% -60% -80% Source: Company, Deutsche Bank, Bloomberg Finance LP Source: Company, Deutsche Bank, Bloomberg Finance LP Figure 20: Developer P/E 35 Developer P/E -1SD Avg +1SD Figure 21: Landlord P/E 50 Investor P/E -1SD Avg +1SD Source: Company, Deutsche Bank, Bloomberg Finance LP Source: Company, Deutsche Bank, Bloomberg Finance LP Figure 22: Developer P/B Figure 23: Landlord P/B 2.5 Developer P/B -1SD Avg +1SD 1.4 Investor P/B -1SD Avg +1SD Source: Company, Deutsche Bank, Bloomberg Finance LP Source: Company, Deutsche Bank, Bloomberg Finance LP Page 13

14 Hong Kong Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure SHK Properties Ltd 0016.HK (HKD) 12 Feb 15 14,17 *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. Data is sourced from Deutsche Bank and subject companies. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 17. Deutsche Bank and or/its affiliate(s) has a significant Non-Equity financial interest (this can include Bonds, Convertible Bonds, Credit Derivatives and Traded Loans) where the aggregate net exposure to the following issuer(s), or issuer(s) group, is more than 25m Euros. 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 Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Tony Tsang/Jason Ching Page 14

15 Security Price Hong Kong Historical recommendations and target price: SHK Properties Ltd (0016.HK) (as of 2/12/2015) Previous Recommendations Strong Market Perform Underperform Not Rated Suspended Rating Current Recommendations Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9, Feb 13 May 13 Aug 13 Nov 13 Feb 14 Date May 14 Aug 14 Nov /03/2013:, Target Price Change HKD /09/2014:, Target Price Change HKD /09/2013:, Target Price Change HKD /11/2014:, Target Price Change HKD /02/2014:, Target Price Change HKD Equity rating key : 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 shareholder 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 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: : 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 Equity rating dispersion and banking relationships % 23 % 41 % 21 % Hold Sell Companies Covered Asia-Pacific Universe 8 % 15 % Cos. w/ Banking Relationship Page 15

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