Brace yourselves for disappointing results from Hong Kong property firms

Will they be as heartbreaking as last time?

The Hong Kong property companies’ results season will kick off next Thursday 31 July 2014, and it has been noted that unlike the previous round of results back in February and March, it is believed that market expectations are likely to be higher and there is little scope for disappointments.

According to a research note from Barclays, over the past three months, helped by sentiment improvements and potential policy easing, the Hong Kong property stocks have risen an average of 9% (vs. the HS Index’s 8% gain).

Also, the developers and landlords’ current NAV discount of 34% and 38% are only 1.1 SD and 0.5 SD below their norms.

By comparison, during the February/March reporting season, in the three months prior, the Hong Kong property stocks had fallen by 5% on average (vs. the HS Index’s 1% decline).

Further, the Hong Kong developers’ and landlords’ NAV discounts, at 39% and 45%, were 1.6SD and 1.1SD, respectively, below their norms.

Here’s more from Barclays:

Similarly, on the physical side, we believe the past six months’ pick up in primary housing sales is likely to have buoyed market expectations on development profits.

Given much higher valuations and expectations, we believe there will be less room for earnings to disappoint against consensus market expectations.

As consensus interim forecasts tend to only emerge a few days before the actual results announcement, we highlight five areas that we believe investors should focus on:
1. Change in development margins
2. Passing rental growth
3. Revaluation and movement in cap rates
4. Change in net debt position
5. Dividends and outlook

As discussed in our 4 June 2014 report “Deja Vu – China property poised for a catch up?” we believe the current China-HK NAV discount gap suggest that the market is either being too bearish on China or too bullish on Hong Kong.

On balance, we believe the China property companies are better positioned going into the reporting season as they not only benefit from cheaper valuations but also very low earnings expectations.

With China’s 1H 2014 housing sales down 6.7% y/y, we believe investors are already expecting lower margins and higher gearing for the China developers.

Among the China developers, our top picks are COLI, Shimao and KWG and among the Hong Kong property stocks, Cheung Kong and Hang Lung Properties are our only OWs.