Concessions on Land Premium Yet to Come, Initiate with Neutral

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1 Henderson Land (12 HK) Property Sector Equity Research Report Company Report Equity Research 股票研究 Company Report: Henderson Land (12 HK) Johnny Wong 王俊浩 公司报告 : 恒基地产 (12 HK) johnny.wong@gtjas.com.hk 公司报告证券研究报告 29 January 218 Concessions on Land Premium Yet to Come, Initiate with Neutral 补地价优惠尚未来临, 首予 中性 评级 HLD is a leading property developer with businesses in Hong Kong and throughout mainland China. In addition to property development and property investment, HLD also has department store operations, hotel operations, ferry operations and a utility business through 4 listed companies. HLD has a wide variety in its land bank in Hong Kong including agricultural land in New Territories (44.9 million sq.ft.), old buildings acquired for redevelopment and land purchased through government land auctions (24.2 million sq.ft.). We estimate underlying net profit to be HKD15,282 million, HKD9,929 million and HKD1,432 million in , respectively. Since we expect that HLD s property development revenue recognized in 218 will decrease, the reduction will drive down the underlying net profit in that year. Underlying net margins are expected to be 57.2%, 51.% and 44.% in , respectively. Initiate with Neutral rating and a TP of HKD54.8, which represents a 32.% discount of our 218 NAV estimate. HLD has secured its project pipelines in the next few years through the redevelopment of old buildings and the conversion of agricultural land into residential development. The bloom in the residential property market in Chinese tier-2 cities will be reflected gradually in HLD s residential development business. Nevertheless, the government has rejected the idea to offer concessions on land premium in the starter homes scheme. In our view. HLD s current share price has already priced in the improvements in fundamentals. Rating: Neutral Initial 评级 : 中性 ( 首次研究 ) 6-18m TP 目标价 : HK$54.8 Share price 股价 : Stock performance 股价表现 % of return HK$55.2 (1.) Feb-17 May-17 Jul-17 Oct-17 Jan-18 HSI index Henderson Land 房地产行业 恒基地产是香港和中国大陆业务的领先房地产开发商 除了物业发展和物业投资外, 恒基地产还通过 4 家上市公司进行百货公司, 酒店, 渡轮和公用事业业务 恒基地产在香港有各类的土地储备, 包括新界农地 (44.9 百万平方呎 ), 市区重建土地和通过政府卖地的土地 (24.2 百万平方呎 ) 我们估计 年度的基础净利润分别为 亿港元,99.29 亿港元和 亿港元 我们预计恒基地产 218 年的物业发展收入入账将有所下降, 因此该年度的基础净利润将回落 我们预计 年恒基地产的基础净利润率为 57.2%,51.% 和 44.% 首予 中性 评级, 目标价为 54.8 港元, 较我们 218 年估值有 32.% 折让 恒基地产通过市区重建和将农地转为住宅开发, 确保了未来几年的项目发展 中国二线城市的住宅物业市场繁荣将逐步反映在公司的住宅开发业务中 不过, 政府已经表明无意为首置上车盘计划提供地价优惠 我们认为公司的股价已充分反映了公司的基本面改善 Change in Share Price 股价变动 1 M 1 个月 3 M 3 个月 1 Y 1 年 Abs. % 绝对变动 % Rel. % to HS index 相对恒指变动 % (5.6) (1.7) (3.4) Avg. share price(hk$) 平均股价 ( 港元 ) Source: Bloomberg, Guotai Junan International. 恒基地产 Underlying EPS 每股核心 Underlying EPS 每股净利 Underlying ROE 核心净资产收益率 Year End 年结 Turnover 收入 Underlying Net Profit 核心净利 净利 变动 Underlying PER 核心市盈率 BPS 每股净资产 PBR 市净率 DPS 每股股息 Yield 股息率 12/31 (HKD m) (HKD m) (HKD) ( %) (x) (HKD) (x) (HKD) (%) (%) 215A 23,641 11, (8.) A 25,568 14, F 26,718 15, F 19,486 9, (35.) F 23,692 1, Shares in issue (m) 总股数 (m) 4,1.1 Major shareholder 大股东 Dr. Lee Shau Kee 72.82% Market cap. (HK$ m) 市值 (HK$ m) 22,86.7 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( ) 3,422.1 FY18 Net gearing (%) FY18 净负债 / 股东资金 (%) Weeks high/low (HK$) 52 周高 / 低 56. / FY18 Est. NAV (HK$) FY18 每股估值 ( 港元 ) 79.5 See the last page for disclaimer Page 1 of 35

2 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Table of contents Company History, Developments and Strategy... 3 Industry Analysis Overview of the Property Market in Hong Kong Residential Property Office Property Industrial Property Retail Property Overview of Property Markets of Selected Cities in China... 2 Guangzhou... 2 Shanghai Beijing Overall Residential Property Market in China Financial Analysis Revenue Analysis Margin Analysis Net Profit Analysis ROA and ROE Analysis Liquidity Analysis Valuation Major Risk Factors See the last page for disclaimer Page 2 of 35

3 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Company History, Developments and Strategy Henderson Land Development Company Limited ( HLD or the Company ) is a leading property developer with businesses in Hong Kong and throughout mainland China. HLD was founded in 1976 by Dr. Lee Shau Kee, who is still the Company s chairman today. In addition to property development and property investment businesses, HLD also has department store operations, hotel operations, ferry operations and a utility business through Henderson Investment Limited (97 HK, 69.32% equity interest), Miramar Hotel and Investment Company Limited (71 HK, 46.27% equity interest), Hong Kong Ferry (Holdings) Company Limited (5 HK, 33.41% equity interest) and the Hong Kong and China Gas Company Limited (3 HK, 41.53% equity interest). HLD has a wide variety in its land bank in Hong Kong, as evidenced by its agricultural land holding in New Territories, old buildings acquired for redevelopment and land purchased through government land auctions. HLD has 24 urban redevelopment projects in which ownership has been fully consolidated as at 3 June 217, providing an attributable GFA of 2.3 million sq.ft. mainly for sale in 218 and 219. In addition, HLD also has 21 urban redevelopment projects with over 8% ownership secured, which is expected to provide 1.7 million sq.ft. for sale in 218 and beyond. Figure-1: HLD s Shareholder Structure as at 3 June 217 Dr. Lee Shau Kee and/or his family trust The Public 73.8% 26.92% Henderson Land Development Company Limited (12 HK) 33.41% 69.32% 41.53% 46.27% Hong Kong Ferry (Holdings) Company (5 HK) Limited Henderson Investment Limited (97 HK) The Hong Kong and China Gas Company Limited (3 HK) 64.56% Miramar Hotel and Investment Company Limited (71 HK) Towngas China Company Limited (183 HK) Source: HLD s 217 Interim Results Investor Presentation. HLD adopts a three pillars model to diversify its business. HLD adopts a three pillars model, which comprises property investment, strategic investments and property development in both Hong Kong and mainland China. Property investment business and strategic investments provide a reliable and growing income source to the Group, while property development business acts as a dynamic profit driver. See the last page for disclaimer Page 3 of 35

4 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Figure-2: HLD s Business Structure Hong Kong Business China Business Strategic Investments Property Investment Commercial Office Residential/ Hotels and Serviced Apartments Industrial Car Park Property Sales Residential Commercial Industrial Property Investment Commercial Office Car Park Property Sales Residential Commercial Industrial Department store business (Henderson Investment) Town gas and utility business (HKCG) Hotel and travel agency business (Miramar Hotel) Ferry business (HK Ferry) Source: the Company. Property Development in Hong Kong HLD differentiates itself from other local developers through active participation in urban redevelopment projects in Hong Kong. The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, effective in April 21, cut the threshold of individual property ownerships of old buildings, requiring compulsory sale from 9% to 8%, which significantly reduces the cost involved in urban redevelopment projects. HLD has 5 existing urban redevelopment projects as at 3 June 217, with an expected GFA of 1.4 million sq.ft. HLD also holds 24 projects with fully acquired ownership, yielding an expected GFA of 2.3 million sq.ft. for sale in HLD plans to have a total GFA of 2. million sq.ft. for sale in 217, among which.8 million sq.ft. or 4% of the supply came from urban redevelopment projects according to the Company s 216 annual financial report. HLD s redevelopment strategy mainly involves acquisition and subsequent redevelopment of old buildings in core city areas and on the fringe of urban areas into luxurious residential buildings. HLD branded its small-scale project under The H Collection, including High Park in Cheung Sha Wan and AXIS in Hung Hom. Table-1: Breakdown of HLD s Land Bank from Urban Redevelopment Projects in Hong Kong GFA, mil sq.ft H17 Existing urban redevelopment projects Newly acquired urban redevelopment projects -Ownership fully consolidated % or above ownership secured %-8% ownership secured* n.a. n.a. n.a Estimated acquisition costs for projects with over 8% ownership (HKD/sq.ft., ballpark figures) 3,923 4,96 4,5 5,6 6,3 6,4 6,9 7, Source: the Company. Note:*pro-rata attributable gross floor area is calculated based on the Government s latest town planning upon redevelopment and the Company s latest ownership status. Projects with ownerships below 8% are not qualified for compulsory sale application, with higher uncertainty that the Company may not be able to consolidate all their ownerships. HLD has the largest land reserves in the New Territories among developers in Hong Kong. At the end of 3 June 217, HLD held approximately 44.9 million sq.ft. of land in the New Territories. HLD disclosed that a total land area of over 8, sq.ft. of its land holding was eligible for in-situ land exchange due to the government s new town projects in Kwu Tung North and Fanling North. HLD also benefits from the proposed Hung Shui Kiu New Development Area as HLD holds approximately 6.35 million sq.ft. of land there. Besides, HLD has land reserves in Yuen Long, Kam Tin South and Pat Heung, which will receive higher valuations once the government passes development plans in these 3 locations. See the last page for disclaimer Page 4 of 35

5 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Table-2: Breakdown of HLD s Land Bank in Hong Kong GFA, million sq.ft H17 Properties under development Unsold units from major launched projects Completed properties for rental (including hotels) Total New Territories land (attributable land area) Source: the Company. HLD emphasizes high turnover in its Hong Kong property development business. HLD raises its turnover in its Hong Kong property development business by reducing the idle time after land acquisition and pre-sale of its properties under development. Take Eltanin Square Mile as an example. HLD completed the acquisition of old buildings along Li Tak Street in Tai Kok Tsui and initiated demolition work in 212. The project was pre-sold in phases starting from October 215 and the construction process is expected to be completed in 2Q17.The project only took about 5 years since HLD unified interests in the old buildings and basically locked in selling prices through pre-sales. On top of the fast construction and sales cycle, HLD s wide sources of land have enabled the Company to launch properties every year. The high turnover strategy gives HLD a good leverage position in the expansion phase of the real estate cycle in Hong Kong. Property Development in China HLD has property development projects across tier-1 cities to tier-2 cities in China. In terms of lank bank, HLD has a developable GFA of 4.8 million sq.ft. in Shanghai and Guangzhou (tier-1 cities). HLD also has a developable GFA of 34.1 million sq.ft. in tier-2 cities. Given the fact that some projects have land plots that are quite sizable, HLD has developed these in phases. For instance, 3 plots of land containing a total GFA of 6.4 million sq.ft. for residential property development and 1 million sq.ft. for commercial property development in Suzhou were bought in 27 for the Riverside Park project. The residential segment of the project was developed in 6 phases with the first phase completed in 212. The first 4 phases have been completed while phase 5 and phase 6 are still under construction. The long period of development allowed HLD to enjoy the property market boom in Suzhou over the years but has extended HLD s payback period. However, we note that the land appreciation tax in China actually devours part of the economic benefits brought by the increase in property prices over the years. HLD unloaded a number of property development projects in 217. HLD sold equity interest in investment companies holding land in the process of resettlement and clearance in Fangcun, Guangzhou, to Country Garden Holdings Company Limited which has an initially planned area of over 12 million sq.ft. for the consideration of approximately HK$1,946 million. The transaction was completed in March 217. Also, another 9 property development projects located in Anshan, Dalian, Guangzhu, Tieling and Shenyang was sold by HLD, for a total consideration of HKD8,6 million. The 9 projects contained a planned area of about 39 million sq.ft. and the transaction was completed in July 217. After these projects were unloaded, HLD s development land bank shrank to 38.9 million sq.ft. Table-3: Details of HLD s Non-core Investment Properties Sold Date Name of the Property Location Amount (HKD million) March 217 Land Site in Fangchun Guangzhou 1,946. July Property Development Projects Note: * Subject to adjustment. Anshan, Dalian, Guangzhou, Tieling and Shenyang 8,6.* Table-4: Breakdown of HLD s Land Bank in Mainland China GFA, million sq.ft H17 Properties held/under development Completed stock for sale Completed properties for rental Total Source: the Company. See the last page for disclaimer Page 5 of 35

6 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Table-5: Breakdown of HLD s Development Land Bank in Mainland China (By Location) GFA, million sq.ft H17 Prime cities Shanghai Guangzhou Subtotal Second-tier cities Anshan Changsha Chengdu Chongqing Dalian Fuzhou Hangzhou Nanjing Shenyang Suzhou Tieling Xian Xuzhou Yixing Subtotal Total Source: the Company. Table-6: Breakdown of HLD s Development Land Bank in Mainland China (By Usage) GFA, million sq.ft H17 Residential Commercial Office Others (including clubhouses, schools and community facilities) Total Source: the Company. Since real estate markets in China vary from city to city, HLD cooperates with mainland China property developers in some of their projects to achieve synergy. As stated in the Chairman s statement in the 216 Annual Results, HLD enhanced its co-operation with mainland China property developers so that it could contribute its experience in property development, brand recognition and financial know-how and mainland China developers could at the same time expedite development progress of projects and lower construction costs. HLD has cooperated with a few well-known mainland property developers, including Country Garden, Longfor properties and CIFI Holdings. Among those mainland property developers, HLD and CIFI Holdings have been long-term strategic partners since 213. On 5 September 216, CIFI Holdings entered into a contractual cooperative agreement to invest an aggregate amount of RMB1,37.4 million in exchange for 3%, 5%, and 3% of economic interest from HLD in the Suzhou Riverside Park project, Changsha Grand Lakeview project and the Yixing Arch of Triumph project. In our view, the cooperation between HLD and developers in China enabled HLD to diversify its risks, monitor development costs more effectively and speed up the sales process through Chinese developer sales channels, which in turns raises HLD s profit margin in the property development business in china. See the last page for disclaimer Page 6 of 35

7 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Table-7: Selected HLD Projects with Other Developers in Cooperation Project Name Location Name of Developers in Cooperation with HLD's interest Cooperating Companies' Interest Chengdu ICC Chengdu Sun Hung Kai Properties, The Wharf 3.% SHK: 4%; Wharf: 3% La Botanica Xian CapitaLand Township Pte Ltd 5.% 5.% Henderson Country Eagle Jin Shi Tan Project Dalian Country Garden 5.% n.a. 3 Henderson CIFI Palace 1 Hangzhou CIFI Holdings 51.% 49.% Henderson CIFI Centre Shanghai CIFI Holdings 5.% 5.% Amber Garden Shanghai CIFI Holdings, Longfor Properties 35.% CIFI: 35%; Longfor: 3% Henderson CIFI City Suzhou CIFI Holdings 5.% 5.% Riverside Park (Phase 5 (Block Nos. 24 and 3) and Phase 6) Suzhou CIFI Holdings 7.% 2 3.% 2 The Arch of Triumph (Phases 3B and 3C) Changsha CIFI Holdings 7.% 2 3.% 2 Grand Lakeview (Phases 2A, 2B and 3 at Site F and Phases 2 and 3 at Site B1) Yixing CIFI Holdings 5.% 2 5.% 2 1. HLD's 51% interest in Henderson CIFI Palace was sold to CIFI Holdings in July 215 for USD66.3 million. 2. CIFI Holding issued an announcement that the Company acquired 3%, 5%, and 3% of economic interest from HLD in the Suzhou Riverside Park project, Changsha Grand Lakeview project and the Yixing Arch of Triumph project for RMB 1.4billion 3. Neither HLD nor Country Garden disclosed Country Garden's interest in the project. Property Investment in Hong Kong HLD has a diversified leasing portfolio in Hong Kong. HLP has a series of iconic shopping malls, office towers, hotels and residential apartments in Hong Kong. One of HLD s most notable investment properties in Hong Kong would be the One and Two International Finance Centre ( IFC ) in Central where HLD has 4.77% equity interest. The IFC project alone contributed gross rental income of HKD1,918 million to HLD in 216, representing 29.3% of the Company s HKD6,54 million in rental income (including the attributable contribution from subsidiaries, associates and joint ventures) in the year. Apart from the IFC, HLD has a number of well-known shopping centers in the New territories, these include KOLOUR Tsuen Wan I and II, Shatin Plaza, Shatin Centre and Metro City Phase II & III Shopping Arcade. HLD also has GFA of approximately 3.4 million sq.ft. of office space, mainly scattered around non-core business districts in Hong Kong, except for the IFC office tower and FWD Financial Centre. The diversified leasing portfolio provides HLD with a stable stream of cash flow and enables HLP to cash in on various opportunities in different property markets. Table-8: Breakdown of Investment Properties in Hong Kong (by Location) GFA, million sq.ft H17 Hong Kong Island Kowloon New Territories Total Source: the Company. Table-9: Breakdown of Investment Properties in Hong Kong (by Usage) GFA, million sq.ft H17 Shopping arcade or retail Office Industrial/Office Residential and hotel apartment Total Average Committed Occupancy Rate 95% 97% 98% 96% 98% 97% 97% 96% Source: the Company. HLD has 4 major investment properties with planned completion set from 217 to 219. The 4 projects are redevelopment projects that will add a total GFA of 649,74 sq.ft. to HLD s investment property portfolio in Hong Kong upon completion. The land site at 218 Electric Road came from HLD s Newton Hotel Hong Kong to boost investment yield as the tourist segment in Hong Kong entered into a downturn since 215. See the last page for disclaimer Page 7 of 35

8 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Table-1: Details of Major Investment Properties to be Completed from 217 to 219 HLD's Commercial Name of the Project Location Year of Completion Interest (sq.ft.) Office (sq.ft.) 18 King Wah Road North Point % 329, ,752 Eltanin Square Mile Tai Kok Tsui % 4, 4, 45 Pottinger Street Central % 135, , Electric Road North Point % n.a. * n.a.* 143,993* Note: *The project will contain a 22-storey Grade-A office tower and 2 floors of shops, supported by a podium garden and a two-level underground car park. However, HLD did not disclose the breakdown of GFA for each usage. Total (sq.ft.) HLD has disposed of its non-core investment properties. HLD sold a number of its non-core investment properties in Hong Kong, including an office tower, a shopping mall, 2 hotels and 12 shopping premises in 216 and 217, cashing out HKD8.1 billion. The release of non-core investment properties raises HLD s financial flexibility in identifying new investment and development projects. Table-11: Details of HLD s Non-core Investment Properties Sold Date Name of the Property Location Amount (HKD million) December 216 Golden Centre Sheung Wan 4,368. January 217 Fairview Height (12 shops) Mid-Levels 56.* February 217 Newton Place Hotel Kwun Tong 2,248.* February 217 Newton Inn North Point 1,. Note: * Subject to adjustment. HLD won the land tender of the site situated on Murray Road on 16 May 217 for a record high price of HKD23.28 billion. The commercial land site on Murray Road contains a maximum gross floor area of 465, sq.ft, implying an accommodation value of HKD5,65 per sq.ft. The investment project involves a landmark office building and retail facilities, with projected total investment over HKD26 billion. The project is expected to be completed in 222 and is expected to be held for long-term leasing. According to Jones Lang LaSalle ( JLL ; a professional services and investment management firm), the accommodation value of HKD5,65 per sq.ft of the transaction exceeded the currently achievable value of office spaces in the vicinity (around HKD25, to HKD4, per sq.ft., GFA), even before taking construction cost into account. Property Investment in China HLD has 6.4 million sq.ft. of investment properties in tier-1 cities across China after Henderson Centre in Beijing was sold. HLD s investment properties in China are located in prime locations in Beijing, Shanghai and Guangzhou. Strategic locations are in high demand for commercial and office spaces, which enhances HLD s rental growth potential. HLD also has over 2,8 car parking spaces associated with these investment properties. In 216, overall occupancy rates for investment properties in China were at or above 9%, except for Guangzhou Heng Bao Plaza. HLD entered into an agreement to dispose of Henderson Centre shopping mall and car parking spaces in Beijing by the end of 216 for about HK$3,261 million. The sale was completed in February 217. See the last page for disclaimer Page 8 of 35

9 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Table-12: Details of HLD s Core Investment Properties in China Name of the Properties Beijing HLD's Interest (%) Commercial* (sq.ft.) Office* (sq.ft.) Total* (sq.ft.) Attributable no. of car park spaces Average Committed Occupancy Rate World Financial Centre 1 212,644 1,999,947 2,212,591 1,163 96% Shanghai Henderson Metropolitan 1 46, ,98 834, % Henderson ,87 66,829 71, % 2 Grand Gateway 1 687, ,981 9% Centro 1 65, , , % Greentech Tower 1 52, ,882 48, % Skycity 1 293, , , % Guangzhou Heng Bao Plaza 1 653, , % Total 1,734,463 4,643,63 6,378,93 2,87 n.a. Source: the Company. Note: * Attributable gross floor area to HLD. Henderson Centre in Beijing was excluded. HLD will have 2 commercial complexes completed in 219 for investment purposes. HLD is developing 2 new investment properties in Guangzhou and Shanghai. The Guangzhou Haizhu Square Station Project will be developed into a commercial complex consisting of a high-end shopping mall with a GFA of approximately 8, sq.ft. and 2 office towers with GFA of approximately 9, sq.ft. The commercial complex is located atop Haizhu Square subway station and is scheduled to be completed by the end of 219. The other investment property in Shanghai will be a commercial complex comprising of grade A office building covering GFA of approximately 2.6 million sq.ft., and a shopping mall of GFA of approximately 3, sq.ft. The project is located at the Bund extension along the Huang Pu River and is scheduled to be completed in two phases. Table-13: Details of HLD s Investment Properties in China in 219 Year of Name of the Project Location Completion HLD's Interest Commercial (sq.ft.) Office (sq.ft.) Haizhu Square Station Project Guangzhou % 8, 9, 1,7, Xu Hui Riverside Commercial Project Shanghai % 3, 2,6, 2,9, Total (sq.ft.) Figure-3: The Design of the Guangzhou Haizhu Square Station Project Figure-4: Location of the Guangzhou Haizhu Square Station Project The project Source: The Company. Source: The Company. See the last page for disclaimer Page 9 of 35

10 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Figure-5: The Design of the Shanghai Xu Hui Riverside Commercial Project Figure-6: Location of the Shanghai Xu Hui Riverside Commercial Project The project Source: the Company. Source: the Company. Strategic investments HLD has strategically invested in 4 listed companies with different businesses to diversify risk and provide stable cash flow. Henderson Investment Limited (97 HK), a subsidiary of HLD, now operates department store business in Hong Kong under the brand Citistore. There are 6 Citistores scattered in densely-populated residential districts such as Tsuen Wan and Yuen Long which primarily targets local consumers. The local customer oriented strategy effectively cushioned headwinds during the downturn of retail sales led by the plummet in visitor arrivals in 216. Henderson Investment Limited originally operated a toll road named Hangzhou Qianjiang Third Bridge in China through a joint venture, but the payment of toll fees has suspended since March 212. Henderson Investment Limited subsequently acquired Citistore business from HLD for HKD934.5 million in 214 to replace its toll road business in China. In April 215, Hangzhou Municipal People s Government was judged to pay Henderson Investment Limited RMB376 million to buy back Hangzhou Qianjiang Third Bridge and Henderson Investment Limited has dissociated from the toll road business ever since. The Hong Kong and China Gas Company Limited, an associate of HLD, operates town gas business in Hong Kong and utility business in mainland China. The town gas business in Hong Kong is basically mature and stable after decades in operation, while the utility business in mainland China, including piped city-gas projects, upstream and midstream gas projects, water supply and wastewater treatment, natural gas filling stations, and new energy exploration and utilization, are still on the expansion phase. In 216, the number of customers increased 1.1% yoy to 1.86 million in Hong Kong, which is significantly slower than the 11.% yoy increase to 23.1 million in China. The Hong Kong and China Gas Company Limited contributes steadily growing cash flow to HLD through dividend payments every year. See the last page for disclaimer Page 1 of 35

11 Henderson Land 恒基地产 (12 HK) H17 29 January 218 Henderson Land (12 HK) Figure-7: Revenue and Profit Attributable to to Shareholders of the Hong Kong and China Gas Company Limited HKD billion Revenue Profit Attributable to Shareholders Figure-8: Dividends Received by HLD from the Hong Kong and China Gas Company Limited HKD million 2, 1,8 1,6 1,4 1,2 1, ,692 1,254 1,436 1,58 1, Source: The Company. Source: The Company. Note: Dividends were received during the years ended 31 December. *Hong Kong and China Gas Company Limited declared special dividend in March 212 for celebrating HKCG s 15th Anniversary in 212, of which approximately HK$551 million was attributable to HLD. Hong Kong Ferry (Holdings) Company Limited, an associate of HLD, is principally engaged in ferry, shipyard and related operations, property development and investment in Hong Kong. In contrast to the name of this company, Hong Kong Ferry (Holdings) Company Limited actually relies more on property development and property investment business than ferry, shipyard and related operations as a profit driver. In 216 for example, property development and property investment businesses contributed HKD15.6 million and HKD124.5 million of segment profits, respectively, but ferry, shipyard and related operations only brought HKD13.8 million in segment profits in the same year. Regarding its property development business, Hong Kong Ferry (Holdings) Company Limited is usually responsible for construction but transferred responsibility of the sales process to HLD, which clearly indicates the achievement of synergy between the two companies. Besides, Hong Kong Ferry (Holdings) Company Limited acquired a residential site at Castle Peak Road in August 216 through a joint venture with Empire Group Holdings Limited for an accommodation value of approximately HKD4,1 per sq. ft. The project will provide 1,8 condominiums in phases over 6 years. Miramar Hotel and Investment Company Limited ( Miramar Group ), an associate of HLD, is a group with a diversified service-oriented business portfolio comprising of stylish hotels and serviced apartments, property rental, food and beverage, and travel services in Hong Kong and mainland China. Miramar Group was hit by the slump in tourism last year with segment revenue of hotels and serviced apartments dropping 5.3% yoy and travel operations falling 6.% yoy in 216, but a recovery is expected this year. In July 217, Miramar Group integrated Miramar Shopping Centre, Mira Mall, Miramar Tower and The Mira Hong Kong into Mira Place to achieve synergy and provide customers with an all-round service. See the last page for disclaimer Page 11 of 35

12 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Industry Analysis Overview of the Property Market in Hong Kong Residential Property Hong Kong residential property prices rose 12.9% in the first 11 months of 217, reaching a record high. According to the Rating and Valuation Department, the increase in price of small and medium-sized units outshone large units in the first 11 months of 217. The price of category A units (smallest in size) and category E units (largest in size) increased by 12.7% and 6.6%, respectively, during the period. The transaction volume of residential properties in 217 was 61,591, up by 12.6% yoy. Primary sales accounted for 3.3% of total turnover in terms of volume, and reached a more significant level of 43.6% in terms of sale value. The share of primary sales, whether in quantity or the sales amount, was higher than average levels since 22, which reflects the negative impact brought by the government's demand cooling measures on secondary housing market supply. Although the US Fed has raised interest rates 5 times since December 215, rental yields on residential properties fell to a new low in 217 (rental yield of category A homes was 2.8% in November 217, which had previously been the highest yield among all types of residential properties). Figure-9: Hong Kong Price and Rental Indices of Residential Properties Figure-1: Rental Yield among Different types of Residential Properties in Hong Kong 7% 6% 5% 4% 3% 2% 1% % Composite Price Index Composite Rental Index A B C D E Source: Hong Kong Rating and Valuation Department. Source: Hong Kong Rating and Valuation Department. Note: Grade A refers to units with an area less than 4 m 2. Grade B refers to units with an area between 4 m 2 to 69.9 m 2. Grade C refers to units with an area between 7 m 2 to 99.9 m 2. Grade D refers to units with an area between 1 m 2 to m 2. Grade E refers to units with an area above 16 m 2. Figure-11: Value of Transactions of Residential Properties in Hong Kong HKD m 8, 7, 6, 5, 4, 3, 2, 1, 35% 3% 25% 2% 15% 1% 5% % -5% -1% Figure-12: Share of Primary Sales and Secondary Sales of Residential Properties in Hong Kong 1% 8% 6% 4% 2% % Primary Sale YoY Total Change (RHS) Source: Hong Kong Land Registry. Seconday Sale Source: Hong Kong Land Registry. Primary Sale Seconday Sale Average Share of Primary Sale See the last page for disclaimer Page 12 of 35

13 Henderson Land 恒基地产 (12 HK) January 218 Henderson Land (12 HK) Figure-13: Hong Kong Mortgage Payment to Income Ratio Figure-14: Centa-City Leading Index (CCL) 6% 18 5% 16 4% % 1 2% 1% % -1% 2 Prime Rate Base HIBOR Base Source: Centaline Property Agency Limited. Source: Centaline Property Agency Limited. Figure-15: Hong Kong Monthly Presale Consent Issued Residential Units 4, 3,5 3, 2,5 2, 1,5 1, Source: Hong Kong Lands Department. Number of Presale Consent Issued Annual Average Figure-16: Hong Kong Monthly Applications for Presale Consent Residential Units 17, 15, 13, 11, 9, 7, 5, Source: Hong Kong Lands Department. Number of Applications for Presale Consent Annual Average We expect residential property prices to be flat in 218. Even though the Transport & Housing Bureau s projection of supply of private flats for the coming 3 to 4 years climbed to 97,, robust economic growth in Hong Kong and the shortfall in public housing supply (reflected by the 4.7 years of average waiting time for public rental housing) will continue to support the housing market. Nevertheless, we have observed that the monthly transaction volume of both primary sales and secondary sales have turned to negative yoy growth from July 217 to November 217, hinting that the demand from home buyers has gradually dissipated. Besides, Chief Executive Mrs. Carrie Lam unveiled her strategy to rebuild the housing ladder in Hong Kong, which includes the setup of the Starter Homes scheme and the regulation on the Green Form Subsidized Home Ownership Pilot Scheme. We expect that some purchasing power in the private housing market will be channeled to these subsidized homes, but it won t be on a massive scale. Figure-17: Actual Construction of Private Residential Units in Hong Kong Units 4, 35, 3, 25, 2, 15, 1, 5, 1-3Q Actual Construction of Private Residential Units Average ( ) Source: Hong Kong Rating and Valuation Department, Hong Kong Transport and Housing Bureau. Figure-18: Completion of Private Residential Units in Hong Kong Units 4, 35, 3, 25, 2, 15, 1, 5, 218e 217e Completion of Private Residential Units Average ( ) Source: Hong Kong Rating and Valuation Department. See the last page for disclaimer Page 13 of 35

14 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Figure-19: Hong Kong Public Rental Housing Supply Units 6, 5, 4, 3, 2, 1, Figure-2: Hong Kong Subsidized Flats Supply Units 4, 35, 3, 25, 2, 15, 1, 5, 1997/ /2 21/2 23/4 25/6 27/8 29/1 211/12 213/14 215/16 Housing Authority Housing Society Average (1997/98-216/17) 217/18e 219/2e 221/22e 1997/ /2 21/2 23/4 25/6 27/8 29/1 211/12 213/14 215/16 Housing Authority Housing Society Average (1997/98-216/17) 217/18e 219/2e 221/22e Source: Hong Kong Housing Authority, Hong Kong Housing Society. Source: Hong Kong Housing Authority, Hong Kong Housing Society. Figure-21: Number of Total General Applications for Public Rental Housing in Hong Kong (As at June End Each Year) 18, 16, 14, 12, 1, 8, 6, 4, 2, 16,1 89, 11.5% 19.2% 153, 15,2 14,2 118,7 125,4 11.9% 5.6% 11.8% 9.1% General Applications 25% 2% 15% 1% 5% % -1.8% -5% yoy change Figure-22: Number of New General Applications for Public Rental Housing in Hong Kong (As at June End Each Year) 35, 3, 25, 2, 15, 1, 5, 33,2 26,5 25.3% 6.4% 28,7 28, 25,5 23,6-13.6% -2.4% 19,8 4% 3% 2% 1% % -1% -8.9% -7.5% -16.1% -2% General Applications yoy change Source: Hong Kong Housing Authority. Source: Hong Kong Housing Authority. Figure-23: Average Waiting Time for Public Rental Housing in Hong Kong (As at June End Each Year) Year General Applications Elderly One-person Applicants Source: Hong Kong Housing Authority. See the last page for disclaimer Page 14 of 35

15 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Figure-24: The Proposed New Home Ladder Source: Manifesto of Mrs. Carrie Lam for the Chief Executive Election 217. *Refers to the Green Form Subsidized Home Ownership Pilot Scheme. A key downside risk next year will be the probable increase in prime rate in Hong Kong. Although the US has raised interest rates 5 times since 215, the Hong Kong prime rate has been untouched during the period. However, the expectation that the US will hasten its pace of rate hike has already pushed up the HIBOR significantly in 4Q17. As at 22 January 218, the 1 month HIBOR rose from.74643% on 3 December 216 to.92214%, reaching the interest rate cap in the calculation of typical mortgage payment among banks (prime rate -2.85% or 2.15%, assuming HSBC prime rate). In other words, any further increase in 1 month HIBOR will no longer influence the mortgage payment if the prime rate stays at the current level. Banks, however, are reportedly expecting to raise prime rate in 2H18 if the swell in HIBOR continues. Therefore, the prime rate has replaced the HIBOR to be the driving factor of property prices next year, in our view. Figure-25: HIBOR and Prime Rate in Hong Kong % % HSBC Prime Rate (LHS) 1 Month HIBOR (RHS) Source: Bloomberg, HSBC, the Treasury Markets Association. Office Property Record breaking land premium for the Murray Road commercial site triggered another wave of increase in office property prices. The price of grade A, grade B and grade C office spaces edged up by 18.7%, 11.1% and 14.%, respectively, in the first 11 months of 217, according to the Rating and Valuation Department. Rental value of grade A, grade B and grade C office spaces increased by 6.%, 1.9% and 4.9%, respectively, during the same period. Rental yield for grade A and grade B office spaces were 2.6% and 2.7% in November 217, down.4ppts and.3ppts from December 216, respectively. On 16 May 217, Henderson Land won the government land tender for the commercial site on Murray Road for HKD23.28 billion (or HK$5,64 per sq.ft. in terms of accommodation value), which broke the record for total land premium paid (although the record of total land premium paid was replaced by a commercial/hotel land site in Kai Tak which was sold on 31 May 217.) and the accommodation value per sq.ft. in Hong Kong land auction. Henderson Land s land acquisition has fired up the market. For instance, Nan Fung Group sold The Wellington in Sheung Wan for about HKD3 billion or HKD35,491 per sq.ft. (accommodation value retrieved from Centaline Property Research) in late May. CK Asset offloaded its 75% holdings in the Center for HKD4.2 billion or about HKD 33, per sq.ft. See the last page for disclaimer Page 15 of 35

16 Henderson Land 恒基地产 (12 HK) January 218 Henderson Land (12 HK) Decentralization of the office space market continues. According to JLL, the overall grade A office vacancy rate was 4.8% at the end of November 217, with Central and Kowloon East being 1.9% and 1.9%, respectively. There will be no major additions of office spaces until the aforementioned Murray Road project owned by Henderson Land, scheduled to be completed in 222 in Central, but leasing demand from Chinese affiliated companies remained solid. For example, Huarong and HNA Group leased 18,7 sq.ft. and 93,6 sq.ft. for expansion in 2Q17 at Two Pacific Place and Three Exchange Square, respectively. In contrast, ample new supply will come online in Hong Kong East and Kowloon East in the next few years with 1.9 million sq.ft. (approx. 25% of current stock) and 2.7 million sq.ft. (approx. 22% of current stock) of office space currently under construction, respectively, according to a Cushman & Wakefield s report in September. The widening gap of office rent will continue to incentivize tenants to relocate towards non-cbd areas. All in all, we believe that decentralization of the office space market will not end in 218. Figure-26: Price and Rental Indices of Private Offices in Hong Kong Figure-27: Rental Yield of Grade A and B Offices in Hong Kong 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Price Index Rental Index Grade A Grade B Source: Hong Kong Rating and Valuation Department. Source: Hong Kong Rating and Valuation Department. Figure-28: Number of Transactions of Private Office Spaces in Hong Kong % 4% 3% 2% 1% % -1% -2% Figure-29: Transaction Value of Private Office Spaces in Hong Kong HKD m 9, 8, 7, 6, 5, 4, 3, 2, 1, 6% 5% 4% 3% 2% 1% % -1% -2% Count YoY change Value YoY change Source: Hong Kong Lands Registry. Source: Hong Kong Lands Registry. Table-14: Selected Information of Grade A Office Market in Hong Kong Location Monthly Rent per sq.ft., Net Effective 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 3Q17 vs 3Q16 3Q17 Under Construction (Sq.ft., Net) 3Q17 Vacancy Rate Prime Central % 3.5% Greater Central (CBD) % 3.9% Hong Kong East % 1,881,5 6.7% Kowloon East % 2,744,1 12.1% Source: Cushman & Wakefield, Guotai Junan International. See the last page for disclaimer Page 16 of 35

17 Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Industrial Property Transaction volume of private flatted factories skyrocketed in 217. Prices of private flatted factories grew 13.1% in the first 11 months of 217 while rental value increased by 5.1%, according to the Rating and Valuation Department. Rental yield stayed at 2.8% in November 217. Transaction volume of industrial properties was 4,525, up 98.% yoy, with a total value of HKD27.8 billion in the first 11 months of 217, up 69.3% yoy. Although we have seen the consolidation of self-storage given the strengthening of supervision on fire safety by the authorities after 2 deadly fire outbreaks in Hong Kong, the robust performance in private flatted factories still persisted. Demand for industrial spaces for logistics warehouses, retailer storage spaces and offices for SMEs remained solid. According to CBRE Research, new demand from emerging industries including biotechnology, high-precision manufacturing and pharmaceutical companies had been seen in the market. Given our expectation that Hong Kong s external trade performance will remain robust and retail sales will continue to improve in 218, we believe that both the selling price and rental value of private flatted factories still have room for further increase. Speculative demand kicked in on the re-launch of the revitalization scheme. After the two fatal fire accidents occurred at the Amoycan Industrial Centre and Mai Sik Industrial Building, Chief Executive Mrs. Carrie Lam expressed her supportive stance towards the relaxation of regulation regarding the usage of lower floors of industrial buildings for non-industrial uses and the possibility to relaunch the revitalization scheme of industrial buildings which ended in March 216. Although the government s primary objective is to ensure compliance of safety standards inside industrial buildings, such moves will also intensify competition for industrial spaces among tenants as well as investors. Given limited supply of new industrial spaces and the low vacancy rates among industrial buildings, we expect that the relaunch of the revitalization scheme will attract short-term speculation. Figure-3: Price and Rental Indices of Private Flatted Factories in Hong Kong Figure-31: Rental Yield of Private Flatted Factories in Hong Kong 16% 14% 12% 1% 8% 6% 4% 2% % Price Index Rental Index Source: Hong Kong Rating and Valuation Department. Source: Hong Kong Rating and Valuation Department. Figure-32: Number of Transactions of Private Flatted Factories in Hong Kong 1,6 1,4 1,2 1, % 4% 3% 2% 1% % -1% -2% Figure-33: Transaction Value of Private Flatted Factories in Hong Kong HKD m 7, 6, 5, 4, 3, 2, 1, 6% 5% 4% 3% 2% 1% % -1% -2% Count YoY change Value YoY change Source: Hong Kong Lands Registry. Source: Hong Kong Lands Registry. See the last page for disclaimer Page 17 of 35

18 Henderson Land 恒基地产 (12 HK) January 218 Henderson Land (12 HK) Figure-34: Price Index and Rental Index of Private Flatted Factories Figure-35: Rental Yield of Private Flatted Factories 9 16% % 12% 1% 8% 3 6% 2 1 4% 2% % Price Index Rental Index Source: Hong Kong Rating and Valuation Department. Figure-36: The Number of Industrial Land Sites Sold in Government Land Sales 2 Source: Hong Kong Rating and Valuation Department. Figure-37: Maximum Industrial GFA from Government Land Sales GFA, sq. ft 4, 35, 3, , 2, 15, 1, , Source: Lands Department of Hong Kong. Note: *up to 22 January 218. Source: Lands Department of Hong Kong. Note: *up to 22 January 218. See the last page for disclaimer Page 18 of 35

19 Company Report Henderson Land 恒基地产 (12 HK) 29 January 218 Henderson Land (12 HK) Retail Property The retail high street property market is expected to bottom out soon. Overall, retail property prices edged up 6.3% while rent increased 1.4% in the first 11 months of 217, according to the Rating and Valuation Department. Overall rental yield of retail properties was 2.4% in November. On the contrary, overall high street rent, which depends on tourists spending more heavily, decreased 2.7% in the first 3 quarters of 217, but the reduction in rent decelerated in 3Q17, according to CBRE research. Even though robust domestic consumption spending has supported the overall retail market, the high base effect brought by extraordinarily high tourist expenditure along high street properties in the past few years has not faded out completely. Nonetheless, multiple signs including the rebound in visitor arrivals and retail sales growth figures have suggested that a turnaround in high street rent will likely take place in early 218. Tenant mix has been reshuffling from high-end luxury brands to more affordable brands and F&Bs targeting local consumers and middle class-visitors from abroad. Due to adjustments in tourist consumption patterns away from high-end luxuries, tenant mix along high streets has been shifting towards more affordable brands. Local jewelry vendor Chow Tai Fook, which has had a strong presence in high streets for years, closed 6 Hong Kong POS in net terms during FY17 (March 216-March 217) and is expected to shut down a few more in FY18. In contrast, popular sports brand Adidas was leased 15, sq.ft. at Langham Place, while French sports retailer Decathlon opened its first outlet store at One Grand Tower with a space occupying 18,5 sq.ft. F&B providers, viewing the decline in high street rent as an expansion opportunity, opened new shops along high streets in the past few quarters. For example, Café de Coral added a new 25, sq.ft. restaurant at JP Plaza and Tai Hing Restaurant rented 15, sq.ft. at Tower 535. In our view, the reshuffling in tenant mix along high streets will come to an end relatively soon as we have seen a gradual improvement in overall retail sales figures since 2Q17, especially with jewelry, watches and clocks, and valuable gifts sales (up 8.4% yoy in October). To wrap up, we expect that the reshuffling of tenant mix is transitory. Figure-38: Price and Rental Indices of Private Retail Properties in Hong Kong Figure-39: Rental Yield of Private Retail Properties in Hong Kong 9% 8% 7% 6% 5% 4% 3% 2% 1% % Price Index Rental Index Source: Hong Kong Rating and Valuation Department. Source: Hong Kong Rating and Valuation Department. Figure-4: Number of Transactions of Private Retail Properties in Hong Kong 1,4 1,2 1, % 5% 4% 3% 2% 1% % -1% -2% Figure-41: Transaction Value of Private Retail Properties in Hong Kong HKD m 16, 14, 12, 1, 8, 6, 4, 2, 6% 5% 4% 3% 2% 1% % -1% -2% Count YoY change Value YoY change Source: Hong Kong Lands Registry. Source: Hong Kong Lands Registry. See the last page for disclaimer Page 19 of 35