EUR 850.00 For Business Accounts Only

Morningstar | 1113 Updated Forecasts and Estimates from 25 Feb 2019

We are adding CK Asset Holdings to the Best Ideas list as we believe the shares are currently undervalued due to concern over a weakening property market in Hong Kong. The shares are now trading at a 31% discount to our fair value estimate. We believe the impact of a potential decline in the residential market is more than priced into the stock. We reiterate our fair value estimate of HKD 81 per share along with our narrow moat and stable trend ratings.

As one of the leading developers in Hong Kong, the shares of CK Asset are heavily affected by the state of the residential market in Hong Kong. Starting in September 2018, the city began to see sustained pressure on property price with the CCL property index declining for eight weeks straight, the first occurrence since 2015. The primary market continued to see a comparable level of transactions as before, but a variety of developer incentives were deployed. Further, the low level of secondary market activity is worrisome, pointing to insufficient price discovery. The company’s shares have declined as much as 25% in 2018, along with other major Hong Kong developers.

There is considerable market risk to the city’s property market, especially considering higher interest rates, lower liquidity, and increasing supplies ahead. After multiple rounds of prudent measures, including higher risk weighing and lower loan/value ratios for new mortgages, the government is now turning to supply-side measures to tame a stubbornly high housing market. A new government task force has been formed to find ways to increase land supplies for residential housing development in the city. CK Asset holds a large agriculture landbank that can be converted for residential development. The government’s effort to increase land supplies generally improves the prospect of such conversions, which are conducted as private negotiations and subject to far less market risk.

Further, CK Asset’s exposure to the city’s residential market is limited as it has not been very active in the government land auction market over the past few years. And its earnings from Hong Kong residential property sales are projected to be around 30% in 2018 and beyond. Earnings from investment properties, interests in REITs, hotels, and non-real estate activities account for the rest.

The company continues to push ahead with its stated capital recycling strategy. Proceeds from noncore asset disposals in Hong Kong and its strong balance sheet have been tapped to acquire higher yielding infrastructure and utility businesses as well as real estate assets overseas. At this price point, a dividend yield of just over 3% and share buybacks should provide adequate downside protection to the share price.