Takeaways from marketing trips in HK, SG
- Investors agreed that 200bp interest rate cuts by the US Fed over 2024-25F will help reduce borrowers’ interest burden and drive transactions in HK.
- There were divergent views on HK’s retail outlook in 2024F. But all agree that a decline in 10-year US Treasury yields will benefit yield plays (e.g. Link).
- A few property stocks we cover could be at risk of 2023F dividend cuts, some investors say. Reiterate sector Neutral. Top picks: SHKP, CK Asset, Link.
Rate cuts in 2024-25F to help lower homebuyers’ interest burden
We hosted marketing trips for the HK property sector in HK and Singapore over the past few weeks. Although investors now hold a more cautious view of the sector than a year ago, they generally believe that a total of 200bp cuts in the US Fed Fund Rate over 2024- 25F is likely, which in turn will help reduce the interest burden of residential mortgage loan borrowers in HK and invigorate property transactions. While they acknowledge the urgency for the HKSAR Government (HKSARG) to replenish talent in HK via various visas, including the recently launched Top Talent Pass Scheme (TTPS), their main concern lies mostly with the incoming talents’ difficulty in finding suitable employment.
Diverging views of the HK retail outlook
Investors were not in agreement on HK’s retail outlook in 2024F. While some were positive on the retail sales rebound after HK’s borders fully reopened in 1Q23, others cited the city’s slower-than-expected recovery which they argued was partly due to outbound consumption of HK residents in mainland China or overseas after border re-opening. Nevertheless, all investors agreed that continued declines in US 10-year treasury yields will benefit yield plays, such as Link REIT, in terms of share price performance.
Some stocks risk lower 2023F dividends
Investors worry that should the 2023F underlying profits for some of the property counters we cover decline more than market consensus, there is a risk of dividends being cut in a bid to preserve cash and avoid net gearing rising further. Investors believe that Kerry Prop and Hysan are the most likely property stocks in our universe to cut their DPS for 2023F.
Reiterate sector Neutral; top picks: SHKP, CK Asset, Link
We recommend investors stick to defensive developers, such as SHKP and CKA, on the back of their strong balance sheets and ability to tap into HK’s land market at low land costs over the next 12 months. For landlords, we prefer Link REIT for the declining 10-year US Treasury yield. Key sector downside risks: higher-than-expected HIBOR, low property sell through rates, and unexpected DPS/DPU cuts. Please refer to Page 4 for upside risks.