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  • Grand plan for Northern New Territories
  • Investors should be happy as there were no negative surprises on housing policy in the latest policy address from the HK Chief Executive today.
  • The policy address proposed a second new centre for HK in the Northern N.T. (e.g. Yuen Long, Fan Ling), with close connectivity to Shenzhen.
  • We assess that developers (e.g. SHKP, HLD, NWD and CKA) with high exposures (e.g. farmlands) in the area are the key beneficiaries.
  • Above names are our preferred picks among HK developers, which trade at attractive valuation of 55% discounts to NAV and offer about 5% yields.
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Additional 186k residential units in northern part of HK

Today (6 Oct), HKSAR Chief Executive Carrie Lam released her last policy address for this term. The policy address covered at great length the newly proposed Northern Metropolis development, which the HKSAR government expects to house a 2.5m population, with as many as 926k residential units and 650k jobs upon completion. The metropolis will comprise existing residential developments (390k units) and future projects (350k units) in Yuen Long District and North District, along with an additional 600 hectares of land assigned for residential (165k-186k units) and industrial use.

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More initiatives to increase land supply

The policy address also stipulates several other initiatives to increase land supply, such as: i) increasing the pace of land resumption in the next few years (target: 700 hectares); ii) reclamation in Tuen Mun and Ma Liu Shui; iii) conducting reviews of policies on Green Belt zones and lands in villages (Tso/Tong lands). The government also encouraged developers to submit applications for the Land Sharing Pilot Scheme deadline: May 2023) to possibly obtain fast-track approval for land use conversion.

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We think developers are eager to see faster farmland conversion

Despite Reuters’ news on 17 Sep 2021, which reported that Chinese officials require developers to help solve a “potentially destabilising housing shortage” and that “the monopoly behaviour” will no longer be tolerated, we believe developers are eager to see faster farmland conversion. We assess that the net profit margins for successfully farmland-converted private developments could be 20-30%, even though some of the farmland may have to be resumed by the government for public housing and infrastructure. Developers with the hugest farmland reserves, namely SHKP and HLD, stand to benefit the most from the government’s new initiatives.

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Reiterate sector Neutral; top picks: SHKP, HLD, NWD

Reiterate Neutral on HK property. We still prefer developers to landlords, as developers benefit from the development of the Northern Metropolis and faster farmland conversion, not to mention solid local demand for residential properties. Developers are trading at 55% discounts to NAV, deeper than the 43% for landlords and REITs, making developers more attractive to us. Our top picks for HK property are SHKP, HLD and NWD. Key upside risks include an unexpected removal of tightening measures in the property
market, while a prolonged Covid-19 outbreak could be a downside risk for the sector.

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Henderson Land Development
ADD, TP HK$40.80, HK$30.50 close

Henderson Land Development (HLD) is the largest farmland owner in HK, with over 44m sf of farmland. This makes it the largest beneficiary of faster farmland conversion, in our view. It has also sped up its asset recycling to unlock asset value.

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New World Development
ADD, TP HK$46.40, HK$33.60 close

The clear vision and mission of its third generation owners have started to bear fruit, in terms of improving sales scale and recurring income. New World Development (NWD) also stands out for
its proactive participation in the Greater Bay Area (GBA).

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Sun Hung Kai Properties Ltd
ADD, TP HK$144.0, HK$99.6 close

As HK’s largest developer, Sun Hung Kai Properties (SHKP) has 24m sf of properties under development. Apart from its strong execution in property development, it also owns 34m sf of investment properties, including shopping malls and grade A offices.