You are here

Hong Kong property stocks battered by protests looking cheap

Fundamentals of real estate stocks solid and resilient; analysts starting to see a silver lining in valuations

Hong Kong

MONTHS of protests and a struggling local economy have hammered Hong Kong's property stocks. Analysts, however, are starting to see a silver lining in valuations.

A measure of developer shares in the world's most expensive real estate market has tumbled more than 20 per cent from a high in April.

That slide has them trading at 11 times estimated earnings for the next 12 months, which is near a record low hit in October.

sentifi.com

Market voices on:

Brokerages are already finding reasons for optimism. On Tuesday, Daiwa Capital Markets reiterated its buy rating on Swire Properties' shares, saying their 33 per cent slide from June to November had more to do with fund flows than with the firm's fundamentals.

Citigroup said in October that steps the Hong Kong government announced to help first-time home buyers could drive an earlier-than-expected recovery in housing prices.

All but two of the 13 stocks on the MSCI Hong Kong property gauge rebounded on Thursday.

"Valuations are cheap," said Daniel So, a strategist at CMB International Securities. "Right now, the stocks are not investors' first choice. One of the key factors is the unrest. When it comes to an end, and the economy returns to growth, investors will jump right back in."

Protests that started in early June against a bill allowing extraditions to the mainland continue, challenging China's hold on the former British colony.

The unrest has helped drive the city's economy into a recession, causing pain across the retail, tourism and hospitality industries. Hong Kong's equity benchmark, also pummelled by the China-US trade dispute, has slid 12 per cent in the past eight months.

Last month, home prices in the city actually rose in consecutive weeks, according to a widely followed index compiled by Centaline Property Agency.

Later in November, Hong Kong's government fetched a record US$5 billion for a parcel of land in a tender won by Sun Hung Kai Properties, marking at least a partial vote of confidence in the real estate market.

Equity investors have reason to be nervous. Last weekend, the city saw its biggest protest in months, and on Monday police defused bombs at a school, providing a reminder of the potential for escalation of violence.

Also, Hong Kong's GDP is predicted to contract 4.4 per cent year-on-year in the first quarter of 2020 and by 3.2 per cent in the second, according to forecasts compiled by Bloomberg.

Still, the fundamentals of the city's property companies are proving resilient. The gross margins of developers climbed to 45 per cent in the third quarter, the highest in Bloomberg-compiled data going back to 2016.

"The downside for Hong Kong property stocks will be limited considering the sector's relatively low valuation," said Liu Jieqi, vice president of Zhongtai Financial International.

"The fundamentals of real estate stocks are generally solid. In the short-term, concern over the economic slowdown is largely priced in." BLOOMBERG