Golden outlook for year

Golden outlook for year

Raymond Wang

Friday, April 06, 2007

Market watchers expect fiscal 2007 to be another bumper year for property giant Cheung Kong (Holdings) (0001) on the back of relatively lower land costs.
"Coupled with 60 percent of fiscal 2007 completions pre-sold, Cheung Kong continues to have the lowest earnings risk among developers," investment bank JPMorgan said in a research report.

The Hong Kong's largest developer by sales sold about 4,000 homes in fiscal 2006.

Hong Kong developers do not book revenues from presales of flats until projects are completed.

Cheung Kong said contribution from property sales for the financial year ended December 31, 2007, will be mostly derived from the sale of residential units of The Apex, Sausalito, Le Point and Central Park Towers Phase 1 in Hong Kong and other property projects in the mainland.

Due to acquisition of some low-cost land bank properties, Cheung Kong probably is the only developer which could see improvement in development margins in the coming two years, Merrill Lynch said.

"Profit is protected as some of the costs are low, " Cheung Kong deputy chairman Victor Li Tzar-kuoi said.

"We are optimistic about fiscal 2007-08 results, very relaxed and confident," he said after the company recently reported a 29 percent jump year on year in net profit to HK$18.1 billion for the year ended December 31, 2006.

Cheung Kong' s land bank in Hong Kong is about 45.8 million square feet, sufficient for the next few years, Li said.

He said the prospects for the property market in Hong Kong are good, underpinned by robust economic growth and strong purchasing power from homeowners.

"Most of the buyers are end users and investors. There does not seem to be too many problems with speculators," he said, adding that both the primary and secondary markets have been very strong.

Cheung Kong chairman Li Ka-shing expects gross domestic product in Hong Kong to be about 5-6 percent this year. "The fast pace of growth in the mainland would also propel our growth," he added.

Cheung Kong's earnings from property sales climbed 69 percent to HK$5.6 billion in 2006 from HK$3.3 billion the previous year, mainly driven by improved margin.

Core Pacific-Yamaichi analyst Andy So estimated that The Legend, the developer's upscale project at Jardine's Lookout, had a pretax margin of about 60 percent, while the Metro Town residential project atop Tiu Keng Leng MTR station had about 50 percent.

Apart from its Hong Kong land bank of 6.2 million sqft, which will provide 8,600 homes for sale after fiscal 2009, Cheung Kong is also beefing up its foothold in Singapore, Britain and China.

"While it still takes time to prove the success of a regional expansion strategy, this could be a potential medium-term driver," JPMorgan said.

The group's global land bank has reached 255 million sqft gross floor area, Cheung Kong said.

That cache, held jointly by Cheung Kong and associate Hutchison Whampoa (0013), includes projects under construction, investment properties, agricultural land and properties owned by the group's two real estate investment trusts - Hong Kong-listed Prosperity REIT (0808), and Singapore-listed Fortune REIT.

Victor Li said the group has made several environmentally conscious initiatives in design and construction of its properties.

"We use less wood, incorporate balconies in our design and encourage recycling," he said. "We also initiated the Fung Lok Wai wetland project in the New Territories," Li said.

The much-awaited Fung Lok Wai development, incorporating several eco-friendly principles proposed by Cheung Kong, is expected to be an example for other developers to follow if it wins approval, market watchers said.

Cheung Kong has been seeking environmental approval since it teamed up with the World Wide Fund for Nature Hong Kong in December 2005 to develop the project, which will include a residential development of 1.6 million sq ft.

The property component represents 5 percent, or four hectares, of the 80-hectare site at the existing fishponds at Fung Lok Wai.

Meanwhile, Li said there should not be a lack of home supply in Hong Kong.

"In 2009-2010, not counting supply from other developers, just the ones from Cheung Kong and our partnerships with MTRC and KCRC, there is already considerable supply, though not too much," he said.

Li said he supports the government's existing land application system of land sales.

"The system has worked well for a long time. There is no need for changes," he said, adding that it supports the economy and is market-driven.

In the past three years, Cheung Kong has acquired a considerable amount of land, from the land application list and from railway property tenders.

"The land application system provides a framework for predictable and transparent land sales," he said.

"Hong Kong needs a stable economy and the property market is related closely to it. When you lack of land, go through the land-application process and bid."

Under the application list system, a developer must submit a price that is at least 80 percent of the government estimate to trigger a site for auction.

He also said real estate is still of vital importance to Hong Kong as property owners influence the consumer market and overall confidence in the economy.