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Despite Graft Probe, Sun Hung Kai Is a Buy on Quality Assets: Pros

Monday, 28 May 2012 | 2:01 AM ET

While the corruption case against the joint chairmen of Asia’s biggest developer, Hong Kong’s Sun Hung Kai Properties, will lead to share price volatility over the next 12 months, analysts say the company remains a buy based on its high-quality asset base and solid income stream.

The Sun Hung Kai Centre building in Hong Kong, China
Bloomberg | Getty Images
The Sun Hung Kai Centre building in Hong Kong, China

“Unlike a carton of ice cream that will spoil if left in the sun for long, real estate has a substantially longer shelf life,” Paul Louie, Regional Head of Property Research at Nomura said in a report on Monday.

“We believe that the (company’s) flagship assets like New Town Plaza in Shatin (in the New Territories), ICC (International Commerce Center) in West Kowloon and the APM mall are among some of the most desirable assets in Hong Kong,” Louie added.

On a valuation basis, Sun Hung Kai , which is currently trading at around a 40 percent discount to its net asset value (NAV) and 0.7 times price-to-book, is attractive, according to Louie. Since 1994, the company has traded at an average discount of 9 percent to its NAV.

The company has lost over $7 billion of its market value since the arrest of its co-chairmen, Thomas and Raymond Kwok on March 29 on suspicion of bribery. Its shares have fallen more than 20 percent over this period compared to the 10 percent decline in the Hang Seng Index .

The graft case was back in the spotlight on Monday when the Kwok brothers went to the city’s anti-corruption agency to renew their bail.

“Even though there is a case on the company’s co-chairman, the earnings power and income generator of Sun Hun Kai will remain unchanged,” Dickie Wong, Executive Director of Kingston Securities said. “Besides Swire Pacific, Sun Hung Kai has the best asset base in Hong Kong.”

Wong says the stock is a buy at HK$85 ($10.95), about three percent lower than current levels, with an investment horizon of at least one year.

The company’s HK$200 billion-plus properties generate more than HK$10 billion in rental income, according to calculations by Nomura, resulting in ample liquidity.

“As we have seen with the 2008 credit crisis, it is short-term liquidity that is important. Given Sun Hung Kai’s prudence, we believe it is well prepared,” Louie said.

Louie has a buy rating on the stock with a 12-month price target of HK$112.10, an upside of about 28 percent to the current price.

Apart from the potential upside, Louie says the company offers a dividend yield of 3.8 percent, which is attractive compared to its peers.

“Among the (14) Hong Kong property stocks that have more than $1 billion in market cap, Sun Hung Kai’s 3.8 percent dividend yield is only below that of Champion Reit, Link Reit and Sino Land,” he said.

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