Kerry Properties warned against a sharp downturn in China properties

Analysts says fundamental market could become weaker.

It has been noted that a rising tide is supposed to lift all boats but some have risen more than others, and year-to-date, although the Hong Kong property stocks under our coverage have not done poorly, their 10.3% average gain (vs HSI +18.0%) pales in comparison to their Chinese peers.

According to a research note from Barclays, it believes some of the divergence can be attributed to the headwinds facing Hong Kong retail.

However, for some China-centric Hong Kong property companies like Kerry Properties, Barclays believes there is scope for them to catch up to their China peers.

Barclays said it is upgrading its rating on Kerry Properties from EW to OW and raising price target by 20% to HK$33.60 from HK$28.0.

With 43% of GAV tied to China, Barclays believes Kerry should be a potential catch-up candidate in the recent China stock rally.

Fundamentally, with the recent monetary easing, Kerry may benefit from improved take-up for its China residential projects.

Here's more from Barclays:

At the same time, its China retail malls may also benefit from the wealth effect of the recent stock market gains. We are narrowing our target discount for Kerry Properties from 50% (-1SD level) back to 40%, a level near its mid-cycle average of 39%. With potential upside of 10% and a dividend yield of 3%, we upgrade Kerry properties to OW.

Revising up earnings - As a housekeeping practice, we factor in a better interest income assumption after the release of Kerry’s annual report. This results in a 1% uplift in FY15 earnings. NAV is unchanged.

Risks -- Downside risks for Kerry Properties include: 1) Gearing concern: Kerry Properties currently has a gearing of 28.5%, below the 30% threshold. If it continues to acquire sites at the current pace, it may be limited to expanding in a down market due to its limited debt-raising headroom.

2) A sharp downturn in China properties: Our investment case is built on the assumption that the China property market will improve on the back of supportive easing policy and other catalysts that will lead to an improvement in the fundamental market. If the fundamental market turns weaker in the near term, Kerry Properties’ share price may be penalised.