www.research.hsbc.com
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix, and with the Disclaimer, which forms part of it.
Play interview withMichelle Kwok and Raymond Liu
By: Michelle Kwok, Pratik Ray and Raymond Liu
REMDEquities
June 2019
Asia Real EstateCo-workingWhy hot desks are such hot property
Co-working has evolved from a market that did not exist a few short years ago to one that is growing exponentially today
Select real estate developers have made a head start by establishing their own co-working brands, which reflects their constructive view on the co-working market
We see developers including SOHO China (Upgrade to Buy), Shimao (Hold), COLI (Buy), Champion REIT (Hold), Swire Properties (Buy), Hongkong Land (Buy), Capitaland (Buy) and Frasers Property (Buy) as best positioned to benefit from the trend
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The key messages
Hot desks, hip-hop soundtrack and a pool table in the communal area, great wi-fi, printers that
work, yoga classes, great location, and, most importantly, low rents … these are all the
ingredients you need for a really cool, co-working office.
We first wrote about this hot topic last year after it became apparent that this new phenomenon
was becoming the talk of the real estate industry (Primer on co-working, 20 November 2018).
Since then, the buzz has only become louder. What’s interesting is that this is not just about
start-ups and freelancers anymore. Larger companies and even multinationals are getting
involved in co-working as they want to shake up their corporate structures and working routines.
In our view, co-working, which did not exist only a few years ago, is here to stay. In the long term, it
has the potential to play a significant role in the leasing of traditional office space. And no one in the
industry wants to miss out. Recognising the wide-ranging implications for the commercial real estate
market, property companies and landlords in the region have already started to dip their toes into the
market. Some have got a head start by establishing their own co-working brands.
This report takes a more regional approach, looking at the co-working market in Hong Kong,
leading cities in China, as well as Singapore. We analyse how the co-working office market will
likely evolve in these markets in the next few years, explain why the new phenomenon is
complementary rather than disruptive to the traditional office market, and identify the likely
winners among our coverage.
Why read this report?
We analyse how the fast-growing regional co-working market will
likely evolve over the next few years
We think co-working is complementary to the traditional real estate
market – they can share different slices of the same pie
We identify winners that appear well positioned to ride the positive
momentum; some may have long-term aspirations for spin-offs
Michelle Kwok* Head of Real Estate Research, Asia PacificThe Hongkong and Shanghai Banking Corporation [email protected]
+852 2996 6918
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
Equities ● REMD June 2019
2
Facts and figures about the co-working industry
Global
The number of co-working tenants and spaces worldwide is expected to reach 3.8m and
24,306 in 2020, up 627% and 211% from 2015 levels, according to Emergent Research.
Asia Pacific
Flexible workspace in Asia Pacific surged 150% from 2014 to 2017 and the number of
major flexi workplace operators has more than doubled in the region during the period,
according to JLL.
Greater China
Three markets (Beijing, Shanghai and Hong Kong) and three operators (UCommune, Naked
Hub (which merged with WeWork in April 2018), and WeWork) dominate China’s co-working
industry, jointly accounting for one-fifth of co-working office locations in these cities.
The estimated number of Chinese (including Hong Kong) unicorns and start-ups, a major
driver of co-working office demand, has grown 41-fold from two in 2013 to 93 in January
2019, according to CB Insights.
China
Co-working office turnover surged 87% y-o-y in 2018, significantly above the 42% y-o-y
growth for the overall sharing economy turnover, according to the State Information Center.
Domestic operators account for 79% of market share in co-working offices in tier-1 cities.
Hong Kong
More than 90% of the top 200 occupiers in Hong Kong are considering making flexible
workspace part of their real estate strategy in 2017, according to Colliers.
Hong Kong co-working office space is expensive versus other major cities in Asia Pacific.
Average cost per desk reached USD1,100/month, representing 1.7x the average cost per
desk in Singapore, 1.9x for Beijing, 3.4x for Shanghai and 2.2x that of Sydney.
Singapore
Singapore had 36 co-working operators operating out of 120 locations as of July 2018,
almost 2x the number of operators and locations from four years ago, representing c20%
CAGR over this period on both counts.
Co-working operators make up c20% of gross take-up in the office market in Singapore’s CBD,
although operator occupancy remains less than 4% of total CBD office stock (2017: less than
2.5%), according to Colliers.
Corporate actions
WeWork, the largest global co-working space operator, reportedly valued at USD47bn (2013:
USD318m), has recently filed for an IPO. In 1H18, WeWork has opened 87 new locations in
12 new cities and five new countries since the start of 2018, while total memberships were up
110% y-o-y during the period. In 2019, it plans to open 5 to 15 co-working offices in China each
month and expand to over 10 cities from the current 8 cities.
3
Equities ● REMD June 2019
Why read this report? 1
The key messages 1
Facts and figures about the
co-working industry 2
Hot desks, hot property 4
Related research 5
Hot desks, hot property 8
Co-working beckons 8
Past (non-existent), present
(booming) & future (consolidation) 8
The linkages: co-working
and real estate 9
Quantifying the size of regional
markets 9
Our view on co-working 12
Winners in the region 12
Rating change: SOHO China 15
Risks associated with co-working 16
Quantifying the size of the
co-working market 17
How fast can the co-working
market grow? 17
A booming market: 34% CAGR
(2018-21e) in co-working turnover 18
ESG considerations 21
Contributing to the Sustainable
Development Goals 21
Hong Kong 23
The co-working market 23
Co-working opportunities 23
Risks 24
Opportunities for Hong Kong
property companies 25
Major deals across Hong Kong 26
China (tier-1 cities) 27
Co-working in China – enormous
room to grow 27
Opportunities for co-working
operators in China 27
Risks involved in the business
model 29
Co-working office turnover to grow
quickly in the next few years 30
Developers are stepping into the
co-working market 31
Co-working deals across cities 33
Singapore 34
Vibrant environment for start-ups
and small businesses 34
Co-working landscape 36
Opportunities and winners 37
Potential risks related to co-working 39
Valuation and risks 41
Financials & valuation 43
Disclosure appendix 57
Disclaimer 60
Contents
Equities ● REMD June 2019
4
Hot desks, hot property
Source: Colliers, JLL, Company data, HSBC estimates
Shenzhen
74%(1.0% co-working office
penetration rate 2018)
Singapore
29%(3.9%)
Hong Kong
17%(3.0%)
Beijing
41%(2.9%)
Guangzhou
38%(2.0%)
Shanghai
15%(8.0%)
150%
Co-working office (CBD) projected turnover CAGR 2018-2021e
Number of co-office/flexible workspace (CBD)
Average cost per desk per month in
Asia Pacific (USD 2018)
Flexible workspace in
Asia Pacific surged
from 2014 to 2017
Regional winners: developer office
exposure (gross asset value)
SOHO China
China
Hong Kong
72%
19%
11%
9%
9%
9%
8%
7%
3%
2%
2%
1%
1%
0%
0%
0%
0%
0%
0%
0%
Shimao
COLI (HKD)
China SCE
Joy City
Sino-Ocean
China Jinmao
Yanlord
CRL
KWG
GZ R&F
Agile
CIFI
SZ Investment
Longfor
Logan
CG
Champion
Swire Prop
HKL
Hysan
W-REIC
SHKP
Wheelock
HLD
HLP
Sino
CKA
MTRC
Link REIT
Kerry
Wharf
Langham
MNACT
HX REIT
70%
54%
48%
43%
28%
20%
19%
Singapore
CapitaLand CT
Keppel REIT
Suntec REIT
Mapletree CT
CapitaLand
Frasers Property
CapitaLand MT
95%
85%
56%
26%
19%
14%
10%
17%
14%
13%
10%
5%
5%
4%
4%
1,100
648
320
Shenzhen Shanghai Beijing HK Singapore
11 285 45 46 113
500
Hong Kong Singapore Sydney Shanghai
5
Equities ● REMD June 2019
Related research
Recommended reading...
Primer on co-working 20 Nov 2018
Co-working – Takeaways from investor lunch with WeWork 23 Nov 2018
How big’s the gig 10 key questions on the gig economy 24 Apr 2019
The future of cities – Tech solutions to five urban challenges 19 Sept 2018
Sustainability engaged An investor engagement guide to the UN’s SDGs 15 Mar 2019
Powering the data revolution Powering the data revolution 30 May 2019
Leapfrog technologies How space-based tech can help EM 9 Oct 2018
The Nomadic Investor Unbundling the City: Beyond Urbanisation 2 May 2017
The Nomadic Investor Transport shock: autonomous today, virtual tomorrow 19 Oct 2016
The Nomadic Investor AI: the new collective super-mind 6 Jun 2016
Equities ● REMD June 2019
6
Figure 1: Co-office/flexible workspace centres in major cities
Source: Colliers, HSBC
$190 $22 $56$54 $33 $51$74 $45 $45$36 $21 $26 $26
Space occupied by
Flexible Workspace
(%)
2018
2017
3.0%
2.8%
3.9%
2.4%
8.0%
5.8%
2.9%
2.3%
8.0%
-
1.0%
-
1.9%
-
2.5%
2.0%
2.6%
2.0%
1.6%
-
4.0%
-
17.6%
2.0%
17.6%
2.0%
Vacancy rate
(%)
2.2% 8.1% 13.9% 8.7% 24.6% 15.6% 16.7% 5.0% 5.9% 6.4% 15.0% 3.9% 3.9%
Average rent
Grade A
(USD/sq ft/annum)
7
Eq
uitie
s
Ju
ne 2
019
Figure 2: Co-office/flexible workspace centres in major cities
Source: Colliers, HSBC
$
$1,100
$350
$648
$680
$187
$210
$210
$40
$190
$580
$320
$575
$500
BEIJING 45
SHANGHAI 285
HONG KONG 46
MANILA 80
SINGAPORE 113
JAKARTA 80
SYDNEY 52
MELBOURNE 47
CHENGDU9
SHENZHEN11
DELHI27
MUMBAI11
BENGALURU27
Average desk cost (USD/month)
Number of Flexible Workspace centres
PUBLIC
Equities ● REMD June 2019
8
Co-working beckons
In previous thematic reports, we explored China’s residential property market through a central
theme – how demand for housing is driven by internal migration of professionals. We believe the
movement of talent offer insights into underlying housing demand as population flows imply the
need for home purchases. The same logic applies to the commercial real estate in Asia.
In this report, we deepen our discussion of co-working office space by taking a regional
perspective. Last year, we wrote about the Singapore market, highlighting that co-working was
an evolving and fast-growing segment in the commercial real estate market (see Primer on co-
working, 20 November 2018). The same is true in Hong Kong and major cities in China, which
we have included in our discussion to broaden the scope of our analysis.
Co-working is a hot topic and recently made headlines news when US-based WeWork filed for
an IPO. It’s the world’s largest global co-working company valued at US47bn, according to a
news article published by Thomson Reuters. The planned listing is raising the level of investor
interest in this new business at a time when the market is assessing the merits and longer-term
demand drivers of shared office space.
Past (non-existent), present (booming) & future (consolidation)
Co-working, which did not exist as a concept only a few years ago, is now highly visible and
growing rapidly. In the long term, we think it has the potential to play a significant role in the
leasing of traditional office space. And no one in the industry wants to miss out. Recognising the
potential wide-ranging implications for the commercial real estate market, property companies
and landlords in the region have already started to dip their toes in the water. Specifically, a
select few developers have taken a head start by establishing their own co-working brands.
Hot desks, hot property
Our previous proprietary analysis of China’s residential property market
was based around a central theme – migration-driven housing demand.
We believe the movement of talent offer insights into underlying housing
demand as population flows imply the need for home purchases. The
same logic applies to the commercial real estate market in Asia.
Specifically, co-working attracts highly mobile professionals who want
greater flexibility in terms of their working lives and office space. This offers
an opportunity for real estate companies to adjust their business approach
to maximise revenue as the co-working industry gathers steam in the
office leasing market. From a regional perspective, we maintain our view
that the large property groups are best placed to ride this wave.
9
Equities ● REMD June 2019
For instance, COLI has established its Officezip co-working brand in China; Hong Kong’s Swire
Properties has introduced its Blueprint co-working office brand; and in Singapore, Mapletree
Investment has launched Coqoons. In our view, this proactive investment approach reflects the
real estate developers’ constructive view on the co-working market and the need to secure first
mover advantage. Moving ahead, the more competitive market dynamics in the shared office
space will inevitably lead to further market consolidation, with the large players better positioned
to gain further dominance. Indeed, WeWork’s well-established co-working platform was in part
facilitated by its acquisition of Naked Hub in April 2018 for USD400m.
The linkages: co-working and real estate
From a real estate perspective, the market perceives that co-working has the potential to be a
disruptive force which could lead to longer-term structural changes to the commercial real estate
market globally. That said, we are not sure it is as clear cut as that. We also believe co-working
has qualities that are complementary to the office leasing market, for example by offering more
flexible lease terms to a niche group of operators.
From a supply/demand perspective, it is clear that there is rising demand from a wide variety of
tenants, including start-ups, freelancers as well as large corporates. The popularity of co-working
stems from the lower-cost structure, the rise of the millennial workforce and start-ups. Looking at
the bigger picture, co-working is part of the shift to a shared economy, innovative approaches to
business and the relentless pace of improvements in technology. See House of Tech (22 January
2018), where our proprietary analysis revealed the 14 second-tier cities that we believe are well
positioned to attract tech talent.
In terms of real estate developers and landlords, co-working has opened doors and broadened
investment options. While large companies generally prefer Grade A office buildings, they are
also starting to test the use of co-working spaces. Given that co-working involves tight cost
control in terms of rent, most operators have opted for properties outside the Grade A bracket.
As of the end of 1Q18, 75% of all large co-working centres were located in non-Grade A office
buildings in the six major city markets in the Greater China regions, according to Cushman &
Wakefield. This should benefit rental and capital value trends in the non-Grade A office
segment, where in the past it has proved difficult to improve rental yields.
Quantifying the size of regional markets
We quantify the size of the regional co-working markets (Hong Kong, China (tier-1 cities) and
Singapore) by projecting their respective future turnover trend and implied growth rate. Our
analysis reveals strong but divergent co-working turnover growth rates across different regions,
with a 33% average CAGR during 2018-21e across the six markets being studied. Not
Figure 3: Co-working across key cities in Asia (ex Japan)
HK Shanghai Beijing Guangzhou Shenzhen Singapore Sydney Melbourne Jakarta
No. of flexible workspace centres in CBD 46 285 45 40 11 113 52 47 80 Co-working (% of CBD stock) (2017) 2.80% 5.80% 2.30% - - 2.40% 2.00% - - Co-working (% of CBD stock) (2018*) 3.00% 8.00% 2.90% 2.0% 1.00% 3.90% 2.60% 1.60% 1.90% CBD vacancy rate (%) 2.20% 13.90% 8.70% 6.5% 15.60% 8.10% 5.90% 6.40% 16.70% Average desk cost (USD per month) 1,100 320 580 - 680 648 500 575 187 Average Grade-A rents (USD per month) 15.8 4.5 3 - 3.8 6.2 4.7 3.8 2.8 % of space taken up by co-working (2017) 15% 18% 20% - 2.60% 1% 26% 27% 19%
Source: Colliers, HSBC. Note: *Colliers estimate
Equities ● REMD June 2019
10
surprisingly, the divergence is most meaningful within the four tier-1 Chinese cities – Beijing,
Shanghai, Guangzhou and Shenzhen. Among these, Shenzhen and Beijing are seen to have
the highest potential, with projected co-working turnover CAGRs at 74% and 41% during
2018-2021e, on our estimates, much higher than Guangzhou (38% CAGR) and Shanghai (15%
CAGR) during the same period. We see the developed markets, Hong Kong and Singapore,
growing at 17% and 29% CAGRs in 2018-21e, respectively.
Figure 5: Co-working space penetration rate and size in CBD
Source: JLL, Cushman and Wakefield, HSBC estimates
Figure 6: Summary of co-working office space, penetration and CAGR
2018 Co-office size in CBD (sqm m)
2018 Co-office turnover in CBD (RMBm)
Co-working office penetration rate 2018
Co-working office turnover CAGR
2018-21e
Shenzhen 0.07 176 1.0% 74% Beijing 0.05 366 2.9% 41% Singapore 0.10 549 3.9% 29% Guangzhou 0.07 209 2.0% 38% Hong Kong 0.27 2,531 3.0% 17% Shanghai 0.53 2,843 8.0% 15% Average 3.5% 36%
Source: Colliers, JLL, Cushman and Wakefield, HSBC estimates
1.0%
2.9%2.0%
3.9%3.0%
8.0%
3.5%
5.4%4.5%
6.4%
5.5%
10.5%
0.0%
5.0%
10.0%
15.0%
20.0%
-
0.20
0.40
0.60
0.80
1.00
Shenzhen Beijing Guangzhou Singapore Hong Kong Shanghai
2018 Co-office space (sqm m) 2021 Co-office space (sqm m) 2018 penetration rate (RHS) 2021 penetration rate (RHS)
sqm m
Figure 4: Co-office turnover and CAGR summary
Source: HSBC estimates
0.20.4 0.2
0.5
2.52.8
0.9 1.0
0.5
1.2
4.14.374%
41% 38%29%
17% 15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Shenzhen Beijing Guangzhou Singapore Hong Kong Shanghai
2018 CBD co-office turnover 2021 CBD co-office turnover CAGR (2018-2021) (RHS)
RMBbn
11
Equities ● REMD June 2019
Sensitivity analysis
We understand that our co-working turnover projections have the highest sensitivity to new
office supply in each market. As such, we have applied the same incremental co-working
penetration rate assumption across each market, regardless of existing penetration rate.
We find that for every 0.25ppt increase in penetration rate (over the base case) in each year
during the forecast period (2019e-21e), co-working sector turnover CAGR (2018-21e) would
increase by 5.1%. Shenzhen is the most sensitive city with respect to changes in penetration
rate, given the low base effect where the end-2018 co-working penetration rate stood at just
1%. On average, Shenzhen 2018-21e CAGR would increase by 11.7ppt for a 0.25ppt increase
in penetration rate (over the base case) for each year in 2019e-21e, vs a 5.1% average for all
cities, on our estimates.
Figure 7: Sensitivity of changes in penetration rate in 2019e-2021e
________________________ Change in penetration rate (ppt) _________________________ -1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00
Beijing 7 17 26 34 41 47 52 58 63 2018-2021e Guangzhou -5 9 20 30 38 45 52 58 63 co-working Shanghai 3 6 9 12 15 18 20 23 25
turnover Shenzhen -9 24 45 61 74 86 97 106 114 CAGR (ppt) Hong Kong -10 -1 6 12 17 23 27 32 36
Singapore 5 12 18 24 29 34 39 43 47 Average -1 11 21 29 36 42 48 53 58
Source: Company data, HSBC
Figure 8: Sensitivity of changes in penetration rate in 2019e-2021e
________________________ Change in penetration rate (ppt) _________________________ -1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00
Beijing -33.3 -23.1 -14.4 -6.8 0.0 6.2 12.0 17.3 22.3 Change in Guangzhou -42.2 -28.4 -17.4 -8.1 0.0 7.3 13.9 19.9 25.6 2018-2021e Shanghai -12.2 -8.9 -5.8 -2.8 0.0 2.7 5.2 7.7 10.1
turnover CAGR Shenzhen -83.3 -50.7 -29.7 -13.5 0.0 11.7 22.0 31.4 40.0 relative to Hong Kong -27.1 -18.9 -11.8 -5.6 0.0 5.1 9.8 14.2 18.3
base case (ppt) Singapore -24.6 -17.4 -11.0 -5.3 0.0 4.9 9.4 13.7 17.7 Average -32.0 -21.2 -13.0 -6.1 0.0 5.4 10.4 15.0 19.3
Source: Company data, HSBC
Equities ● REMD June 2019
12
Our view on co-working
The rise of the co-working segment in the office industry is a structural and longer-term trend that we
think is here to stay. It satisfies the needs of corporates and start-ups looking for a self-contained
workplace with more flexible lease terms than for traditional office space. Overall, we don’t think
co-working will be a major disruptive force. As mentioned earlier, it has complementary qualities such
as helping tenants looking for more flexible lease terms.
That said, well-established and large enterprises are likely to maintain their preference for
traditional multi-year office leases which facilitate long-term planning. Even so, we note that
some of these large corporates have allocated a small proportion of total leased GFA in the co-
working segment in order to cater to business segments that require more flexible staff mobility.
Over time, we expect the co-working market to consolidate, driven by mergers and acquisitions.
We also think the penetration rate will continue to pick up steadily. The key to survival depends
on innovation in services to enhance the stickiness of users, monetising the businesses apart
from purely rental income, and being able to cater for the specific needs of different companies.
For example, some co-working operators provide a wide range of wellness courses, including
yoga, dance classes and body combat lessons. This enables members to achieve a more
balanced style of work and, in turn, increase user stickiness.
In summary, we believe co-working space is complementary to traditional office space, sharing
a slice of the pie in the overall office leasing market. Against this backdrop, we believe it makes
sense for developers to devote a portion of their resources to co-working. In the long run, co-
working space will create synergies for real estate companies, drawing conventional office
tenants to co-share common areas and facilities offered by the co-working operator on the
same premises.
Winners in the region
China: COLI, Shimao and SOHO
We believe Chinese developers are in a good position to compete with pure co-working office
operators due to strong cash flow from their property development business and the presence of
sizable investment property portfolios. In fact, many developers are actively exploring the co-
working business model. Among stocks in our coverage universe, SOHO China (72% GAV
exposure), Shimao (19%) and COLI (11%) are best positioned to benefit from the rise of this trend.
All three companies have their own co-working brand. SOHO China has established SOHO 3Q,
while COLI and Shimao launched Officezip and MWorks, respectively. Although the contribution
to total revenue remains small, we believe there is upside potential as developers ride on the
increasingly popular co-working office wave. With their solid financial liquidity, developers may
also capitalize on co-working M&A opportunities to broaden their presence, driving co-working
sector consolidation.
In the long run, developers could grow their co-working businesses sufficiently to be large
enough for possible spin-offs or separate listings, which would help unlock value from their
overall property portfolios. Indeed, SOHO has signalled a potential spin-off plan for its SOHO
3Q co-working brand but we believe it would be unlikely to happen in the next 12 months.
13
Equities ● REMD June 2019
Figure 9: China: Office exposure in terms of GAV
Source: Company data, HSBC estimates
Note: Longfor has only minimal office exposure and they have not separately disclosed the exposure. Some of their co-working office is light asset operating model and therefore no separate valuation is provided by the company.
Figure 10: Summary of developers’ involvement in co-working space
Developer Brand Relationship with the developer Remarks
Longfor Easywork Own brand Shanghai only. 800 seats in Hongqiao Paradise Walk SOHO SOHO 3Q Own brand 31 centres with c30k seats in seven cities in China CRL CR Union Own brand CR Union is a new office brand launched in 2019. It will launch six
projects during the year including some co-working offices. COLI Officezip Own brand 12 centres in 6 cities in China CIFI Workingdom Partnership Launching three co-working office centres in 2019 in Beijing Shimao MWORKS Own Brand Opened MWORKS in Nanjing Software Valley with 3,500sqm GFA Country Garden Fountown Partnership Entered into strategic partnership agreement in various area including
co-working. The first project was launched in Shanghai in mid-2018. Gemdale WeWork Partnership Entered a revenue sharing agreement with WeWork. Converting its
own office into a new co-working centre in Shenzhen. Sino-Ocean WeWork Partnership WeWork entered first real estate strategic partnership with Sino-
Ocean, which now has 6 co-working locations in co-operation with WeWork across Beijing, Shanghai, Chengdu and Shenzhen.
Nashwork Investment Participated in a financing (series B+ round) with Beijing-based Nashwork in June 2018.
OKspace Own brand Presence in Hangzhou and Beijing China SCE Funwork Investment Established by chairman’s son. China SCE has a stake.
Source: Local media, company data, HSBC
0%
0%
0%
0%
1%
1%
2%
2%
3%
7%
8%
9%
9%
9%
11%
19%
72%
0% 10% 20% 30% 40% 50% 60% 70% 80%
CG
Logan
Longfor
SZ Investment
CIFI
Agile
GZ R&F
KWG
CRL
Yanlord
China Jinmao
Sino-Ocean
Joy City
China SCE
COLI (HKD)
Shimao
SOHO China
Equities ● REMD June 2019
14
Hong Kong: Champion REIT, Swire Properties and Hongkong Land
We believe office landlords are in a good position to collaborate with the pure co-office operators, as
they are a new source of demand for office space. This could provide an incremental rental uplift in
the medium term. Champion REIT, Swire Properties and Hongkong Land have good exposure to the
office market in Hong Kong, which will allow them to ride this wave of new demand.
Swire Properties is one of the few major companies to launch a co-working brand – “Blueprint” – in
Quarry Bay. The company sees it as a way to add value and diversity to their office buildings.
Figure 11: Hong Kong property – HK office exposure (% of total GAV)
Source: Company data, HSBC estimates
Singapore: Capitaland and Frasers Property
Some of the largest property groups in Singapore are among the best placed to ride the co-
working wave. They have office exposure through their office REITs and have themselves
invested in co-working operators or collaborated with them in one way or the other. In the listed
space, these include large property groups such as CapitaLand and Frasers Property.
Large office landlords in Singapore could benefit from co-working demand. Many of these
landlords are office REITs, which are sponsored by the large property groups.
Lastly, if there are positive implications for commercial real estate (offices and shopping malls)
in cities like Singapore, then the large property groups and their listed subsidiaries and
associates, including their sponsored REITs, would be the go-to names for investors seeking
exposure to commercial real estate in Singapore through listed proxies.
Figure 12: Prominent property groups with exposure to co-working
Date Property group Country Property assets Operator Co-working related investment
Oct-18 CapitaLand Singapore cSGD93bn (group managed real estate assets)
The Work Project Kingdom
SGD27m (USD19.7m)
May-18 City Developments Singapore cSGD20bn (total assets) Distrii RMB102m (USD14.8m) May-18 Frasers Property Singapore cSGD32bn (total group assets) JustGroup Holdings USD60m Feb-18 CapitaLand Singapore cSGD93bn (group managed
real estate assets) Flexi-Suites Flexi-Suites is CapitaLand’s
co-working offering Nov-17 Keppel Corp Singapore cSGD29bn (assets under
management) KLOUD KLOUD is Keppel’s
co-working offering Dec-17 Mapletree
Investments Singapore cSGD46bn (assets under
management) CoQoons CoQoons is a subsidiary of
Mapletree Oct-15 Keppel Corp Singapore cSGD29bn (assets under
management) Workspace Workspace is Keppel’s
co-working offering
Source: Company announcements, HSBC
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Figure 13: Singapore property: Office exposure (% of total GAV)
Source: Company data, HSBC estimates
Rating change: SOHO China
With this report, we upgrade SOHO China to Buy from Hold, mainly due to the company’s
attractive valuation. The stock has corrected c20% since end-March and is now trading at a
76% discount to our NAV estimate and 0.34x price-to-book, both at around 1.5 SD below the
historical mean. While we contend that while SOHO’s business model is relatively more passive
and lacks excitement from a growth perspective, it is uniquely positioned as a stable commercial
real estate player and enjoys first mover advantage as a co-working office operator in China.
Operationally, completion of two new commercial properties − SOHO Leeza in the Lize District
in Beijing and Gubei SOHO in the Changning District in Shanghai − is set to strengthen its
recurrent income stream, enhancing SOHO’s ability to pay a stable dividend in the longer term.
We keep our target price unchanged at HKD3.30, based on an unchanged target NAV discount
of 70% (1 SD below mean since 2012), applied to our unchanged NAV estimate of HKD10.90
per share. With 27% implied upside to our TP, we upgrade SOHO from a Hold to a Buy rating.
Key downside risks include: 1) uncertainties related to SOHO 3Q; 2) slower-than-expected
lease-up progress and rental of new offices; 3) uncertainties in dividend outlook; and 4) macro
and property policy uncertainties in China, especially in the commercial property market.
Figure 14: SOHO NAV discount Figure 15: SOHO trailing PB
Source: Company data, Bloomberg, Refinitiv, HSBC estimates Source: Company data, Bloomberg, Refinitiv, HSBC estimates
SOHO aside, we have left our ratings and earnings estimates of all other stocks under our
coverage universe unchanged in this report.
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Risks associated with co-working
Hong Kong
Hong Kong has seen a rapid expansion in co-working spaces in the last few years as the number of
operators has increased. Savills believes that the HK co-working market has become too crowded
and that demand is not catching up with the investments made. The market will continue to grow
but the competition is going to be intense due to a price war. As a result, Savills thinks the number
of operators who are heavily reliant on funds from venture capitalists will come down.
China
With low entry barriers, it’s relatively easy for co-working operators with limited experience in
commercial real estate to set foot in the market, resulting in a surge in the number of operators in
recent years. Many operators attempted to replicate the business model and office design of
existing operators. Based on the experience of other shared economic industries in China, such as
bikes and mobile chargers, it could easily develop into a vicious cycle of price competition which
exerts downward pressure on profitability. Without the support of stable earnings, operators may
find it difficult to sustain the current mode of operation if the macro environment deteriorates,
impacting overall investment sentiment and office space demand from smaller enterprises.
Singapore
As most co-working firms have emerged only in the past few years, they have not been around
long enough to have experienced a recession. In Singapore, there are more than a hundred
different companies in the co-working space, most of which are small. We think it is likely that
many of these firms would go bankrupt in the event of a recession, if and when it occurs.
Given the impact a recession, if and when it occurs, could have on co-working operators, it is only
natural that market participants would factor in more conservative assumptions around cash flows,
cash flow volatility, and/or valuation cap rates for assets that have a substantial proportion of
tenants as co-working operators. As such, while co-working may boost investment demand for
commercial assets for the overall market, assets that have a very high proportion of co-working
tenants could be viewed adversely. However, the extent to which such perceptions may impact
valuations and the thresholds that may trigger such adverse perceptions remain unclear.
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How fast can the co-working market grow?
In this section, we quantify the size of the regional co-working markets (Hong Kong, China (tier-1
cities) and Singapore) by projecting their respective future turnover trend and implied growth rate.
Our analysis is based on three input metrics for calculation of annual office turnover:
CBD office stock data (GFA)
Current effective rent
Vacancy rate
In terms of key assumptions, the key variables are property consultants’ future property stock
projection (2019-23) and future co-working penetration rate. The data for the co-working
segment is fragmented and limited, while current penetration rates range from just 1% in
Shenzhen to 8% in Shanghai. On the other hand, developed markets such as Hong Kong and
Singapore have a fairly consistent co-working penetration rate at 3-4%, according to Colliers.
Methodology
Calculate total office turnover in each region in 2019-23, based on the three inputs as
highlighted above and the respective annual office new supply
Calculate co-working space turnover in 2019-23, based on the applicable penetration rate
and assumed annual increase in co-working penetration
Calculate the implied growth in co-working space turnover over 2019-23
Shortcomings of our analysis:
Our analysis uses CBD office stock data as the core input for calculation, due to limited
data availability on the overall office market in each region
Assumption of future co-working penetration rate is arbitrary, where the annual incremental
increase is the same across region at 1% y-o-y through 2020 and 0.5% y-o-y in 2021.
Quantifying the size of the
co-working market
We quantify the size of the regional co-working markets by
projecting their future turnover trend
We project an average CAGR of 33% in co-working turnover during
2018-21e across the six markets being studied
Our analysis reveals a divergence in the turnover growth rate across
different regions, most notably in the four tier-1 cities in China
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A booming market: 34% CAGR (2018-21e) in co-working turnover
Our analysis reveals strong but divergent co-working turnover growth rate across different regions,
with a 34% CAGR during 2018-20 across the six markets being studied. Not surprisingly, the
divergence is actually most meaningful within the four tier-1 Chinese cities – Beijing, Shanghai,
Guangzhou and Shenzhen. Among these, Shenzhen and Beijing are seen to have the highest
potential, with projected co-working turnover CAGR at 75% and 41% during 2018-2021e, much
higher than Guangzhou (38% CAGR) and Shanghai (15% CAGR) during the same period. The
developed markets, Hong Kong and Singapore, are projected to grow at 17-29% CAGR in 2018-22e.
Figure 16: Co-office turnover and CAGR summary
Source: HSBC estimates
Figure 17: Co-working space penetration rate and size in CBD
Source: JLL, Cushman and Wakefield, HSBC estimates
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Figure 18: Co-working market size forecast
2018 2019e 2020e 2021e
CBD stock GFA (sqm) (A) Beijing 1,824,223 2,452,223 2,692,223 2,692,223 Guangzhou 3,358,557 3,582,428 3,582,428 4,004,272 Shanghai 6,681,606 7,012,487 7,143,487 7,472,247 Shenzhen 6,883,000 8,637,000 10,622,000 11,773,000 Hong Kong 8,945,836 9,223,513 9,245,615 9,434,552 Singapore 2,610,575 2,685,084 2,786,812 2,845,806 Effective rent (RMB/sqm/month) (B) Beijing 608 629 630 644 Guangzhou 277 277 280 287 Shanghai 496 491 497 511 Shenzhen 250 240 230 230 Hong Kong 820 838 812 699 Singapore (SGD/sqm) 103 114 116 119 Annual office turnover (RMBm) (C= A x B x (1-vacancy rate)) Beijing 12,632 16,065 18,168 18,828 Guangzhou 10,427 10,850 11,145 12,106 Shanghai 35,537 36,604 38,503 41,208 Shenzhen 17,552 19,651 22,867 26,645 Hong Kong 84,371 87,576 85,040 74,507 Singapore (SGDm) 2,807 3,276 3,488 3,701 Co-working office penetration into CBD stocks (D) Beijing 2.9% 3.9% 4.9% 5.4% Guangzhou 2.0% 3.0% 4.0% 4.5% Shanghai 8.0% 9.0% 10.0% 10.5% Shenzhen 1.0% 2.0% 3.0% 3.5% Hong Kong 3.0% 4.0% 5.0% 5.5% Singapore 3.9% 4.9% 5.9% 6.4% Co-working space in CBD (sqm) Beijing 52,902 95,637 131,919 145,380 Guangzhou 67,171 107,473 143,297 180,192 Shanghai 534,528 631,124 714,349 784,586 Shenzhen 68,830 172,740 318,660 412,055 Hong Kong 268,375 368,941 462,281 518,900 Singapore 101,812 131,569 164,422 182,132 Total co-working space turnover in CBD (RMBm) (E = C x D) Beijing 366 627 890 1,017 Guangzhou 209 326 446 545 Shanghai 2,843 3,294 3,850 4,327 Shenzhen 176 393 686 933 Hong Kong 2,531 3,503 4,252 4,098 Singapore 548.62 804.58 1,031.32 1,187.05 Singapore (SGDm) 109 161 206 237 Total co-working space turnover growth (CBD) Implied growth CAGR 2021e vs 2018 2018-2021e Beijing 143% 41% Guangzhou 114% 38% Shanghai 35% 15% Shenzhen 291% 74% Hong Kong 68% 17% Singapore 88% 29% Average 123% 36%
Source: Colliers, JLL, Cushman and Wakefield, HSBC estimates
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Sensitivity analysis
We understand that our co-working turnover projection has the highest sensitivity to new office
supply in each market. We have applied the same incremental co-working penetration rate
assumption across each market, regardless of the existing penetration rate.
We find that for every 0.25ppt increase in penetration rate (over the base case) in each year
during the forecast period (2019e-21e), co-working sector turnover CAGR (2018-21e) would
increase by 5.1%. Shenzhen is the most sensitive city with respect to changes in penetration rate,
given the low base effect where at end-2018 the co-working penetration rate stood at just 1%.
On average, Shenzhen 2018-21e CAGR would increase by 11.7ppt for every 0.25ppt increase in
penetration rate (over the base case) for each year in 2019e-21e, on our estimates, vs 5.1% on
average for all cities.
Figure 19: Sensitivity of changes in penetration rate in 2019e-2021e
________________________ Change in penetration rate (ppt) _________________________ -1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00
Beijing 7 17 26 34 41 47 52 58 63 2018-2021e Guangzhou -5 9 20 30 38 45 52 58 63 co-working Shanghai 3 6 9 12 15 18 20 23 25
turnover Shenzhen -9 24 45 61 74 86 97 106 114 CAGR (ppt) Hong Kong -10 -1 6 12 17 23 27 32 36
Singapore 5 12 18 24 29 34 39 43 47 Average -1 11 21 29 36 42 48 53 58
Source: Company data, HSBC
Figure 20: Sensitivity of changes in penetration rate in 2019e-2021e
________________________ Change in penetration rate (ppt) _________________________ -1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00
Beijing -33.3 -23.1 -14.4 -6.8 0.0 6.2 12.0 17.3 22.3 Change in Guangzhou -42.2 -28.4 -17.4 -8.1 0.0 7.3 13.9 19.9 25.6 2018-2021e Shanghai -12.2 -8.9 -5.8 -2.8 0.0 2.7 5.2 7.7 10.1
turnover CAGR Shenzhen -83.3 -50.7 -29.7 -13.5 0.0 11.7 22.0 31.4 40.0 relative to Hong Kong -27.1 -18.9 -11.8 -5.6 0.0 5.1 9.8 14.2 18.3
base case (ppt) Singapore -24.6 -17.4 -11.0 -5.3 0.0 4.9 9.4 13.7 17.7 Average -32.0 -21.2 -13.0 -6.1 0.0 5.4 10.4 15.0 19.3
Source: Company data, HSBC
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ESG considerations
Our analysis of different property companies across the region reveals that co-working offices
generate substantial “environmental benefits” which is a key ESG consideration. They provide
the ability to work remotely or in flexible locations, while co-working offices also have other
sustainable development attributes.
Environmental benefits associated with co-working
Buildings are collectively one of the largest contributors to global greenhouse gases through
their energy and heating requirements. The traditional model of one company requiring
permanent office space has led to a massive increase in building stock. The co-working model,
in theory, means fewer overall buildings are required – and that the actual buildings are shared.
In the set-up of co-working offices, equipment, supplies, resources, and common facilities/amenities
are shared. This can help to improve resource efficiency – for example, individual and collective
energy consumption and wastage – as well as encourage and enable more recycling. At the same
time, many of the users of co-working offices are attracted by the flexibility in the lease terms.
Such users could be associated with the so-called “gig economy” where there is much more
emphasis on individuals or a small group of people rather than large companies and
corporations (see How big’s the gig?, 24 April 2019). These users tend to have lower
requirements in terms of interior decoration. That is, they are just looking for a place to work
from, which tends to lead to relatively less materials and energy usage from renovation,
compared to traditional offices.
Co-working often reduces the number of commutes as the co-working offices are usually set up
in multiple locations – this can have a significant environmental benefit as users tend to choose
the location closest to where they reside. With fewer (and perhaps shorter) commutes, overall
carbon emissions are lower, and fewer localised air pollutants are produced. The extent of the
reduction in carbon emissions can vary across locations, and is dependent on the mode of
transport as well as availability of public transport infrastructure.
Contributing to the Sustainable Development Goals
We believe the concept of co-working offices can contribute towards some of the UN’s
Sustainable Development Goals (SDGs) as follows:
Good health and well-being (SDG 3); Decent work and economic growth (SDG 8)
Co-working offices put considerable focus on providing decent working conditions for their
users. In addition, many co-working operators try to promote a healthy work-life balance and
introduce various classes and events to enhance the well-being of the tenants. These include
yoga classes, wine tastings, workshops and social gatherings. These help towards combatting
the loneliness that is sometimes found in gig economy or individual workers. In the long term,
co-working spaces could enhance productivity and the overall well-being of individuals.
According to a survey by WeWork, 78% of its enterprise members believe that WeWork has
helped them to attract and retain talent. Some 80% of members say their productivity increased
since joining WeWork. The presence of a wide range of start-ups and companies from different
industries in a co-working office also creates opportunities for collaboration.
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Industry, innovation, and infrastructure (SDG 9)
The use of co-working office space is an innovation on the traditional office model. In some
more sophisticated co-working office operators, we see the adoption of AI and Internet of things
to analyse the office usage and traffic which helps to optimise the design of the offices. The
sharing of meeting rooms, cafeterias, furniture and fixtures as well as various office equipment
by tenants can help to reduce fixed asset investment and increase resource efficiency. Selected
foreign operators have brought over a co-working business model from a more developed office
market, which will help to lift overall standards. In general, co-working office spaces reduce the
overall number of buildings required.
Sustainable cities and communities (SDG 11)
Co-working offices are usually sited at convenient and accessible locations. The sizable co-
working operators even have multiple locations across cities. This provides flexibility to both
start-ups and large enterprises in terms of choosing their office locations, with a relatively lower
capital commitment versus the traditional office. This contributes to sustainable cities by
bringing the (shared) office closer to residential areas and communities. For example, in Beijing,
WeWork has used a historical site, Beijing Fun, as a co-working office. It also helps to enhance
the usage of the cultural heritage.
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The co-working market
According to Cushman & Wakefield (C&W), a property consultant, Hong Kong had 68 co-working
operators as of June 2018, 70% more than in 2016, implying a CAGR of c30%. The rapid growth
is being driven by demand from start-ups, fintech companies, freelancers and large corporates.
US-based WeWork, China’s Naked Hub and Amsterdam-based Spaces are the major operators in
Hong Kong.
Hong Kong fintech start-ups raised USD188m in 2018, down 66% from 2017. However, the
number of deals has gone up by 27% y-o-y to 19. In our view, the increased number of deals in
the start-up ecosystem is driving up the demand for co-working space.
Figure 21: Fintech funding (VC, PE and M&A activity) in Hong Kong
Source: FinTech Global, SCMP, HSBC
Co-working opportunities
According to Savills, co-working space operators currently occupy c2.2m sqft in Hong Kong, around
double the size at the end of 2017. And according to Colliers, around 3% of total central business
district (CBD) stock is estimated to be occupied by co-working operators as of end-2018 and about
15% of total office market take-up was leased by co-working operators as of end-2017. The
proportion of new take-up has increased from 25% in 2016 to 29% in 2017. According to Colliers, the
take up by co-working operators was 613,000 sqft in 2018 vs 350,000 sqft in 2017.
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Deeper partnership between landlords and operators needed for co-
working to be beneficial
HK property companies like Hysan, SHKP and Wharf REIC are
collaborating with external operators to leverage their advantages
Raymond Liu*, CFA Analyst
The Hongkong and Shanghai Banking Corporation Limited [email protected]
+852 2996 6743
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
Equities ● REMD June 2019
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The tight vacancy environment in the Hong Kong office market is driving rents up, so the arrival
of co-working space operators presents an interesting opportunity for corporates and start-ups
alike. Although the original target was start-ups, an increasing number of large corporates are
also looking at co-working as they look to save costs, increase the flexibility of their office
portfolios, and also leverage the entrepreneurial spirit of co-working environments.
If we look at Asia, China remains the top destination. Shanghai has the highest number of co-
working centres, at 285. Its percentage of co-working space is the highest at c8% of its CBD
across Asia (according to Colliers). In Hong Kong, the CBD vacancy rate is only 2.2% which
means the average desk cost is the highest in Asia at USD1,100 per month.
Figure 22: CBD vacancy rate (%)
Source: Colliers, HSBC
Risks
Hong Kong has seen a rapid expansion in co-working spaces in the last few years as the
number of operators has increased. Savills believes that the HK co-working market has become
too crowded and that demand is not catching up with the investments made. The market will
continue to grow but the competition is going to be intense due to a price war. The better
managed operators will get the funding and thus will survive, according to Savills.
As a result, the number of operators who are heavily reliant on funds from venture capitalists will
come down. For example, China-based Kr Space is holding back its expansion plans and
evaluating the profitability of each individual project. Kr Space also gave up seven floors (total:
83,000 sqft) pre-leased at One Hennessy in Wan Chai. Chinachem Group, the developer of
One Hennessy, has sued Kr Space for not executing the lease agreement, according to SCMP
on 10 April 2019.
According to Colliers, there needs to be a strong partnership between co-working space
operators and landlords in order to be successful in the long haul. Through better integration,
both should strive to give a holistic offering to the tenant. This will enable them to tap what is a
huge opportunity.
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Opportunities for Hong Kong property companies
Among Hong Kong property companies, Champion REIT has the highest level of office
exposure in Hong Kong (70% of GAV), followed by Swire Properties (54%), Hong Kong Land
(48%), Hysan (43%), Wharf REIC (28%) and Sun Hung Kai Properties (20%). For these major
companies, adding co-working space to their office portfolios can help enhance the occupancy
of floors and provide a better user experience to its occupiers.
These companies are increasingly looking at innovative ways to leverage the advantages of
including co-working spaces in their office portfolios. They are embracing this theme either through
their in-house concepts or external operators.
Figure 23: Hong Kong property – HK office exposure (% of total GAV)
Source: Company data, HSBC estimates
Beneficial for both landlords and operators
Landlords could benefit more if they directly leased small units to occupiers. However, running a big
chunk of space is labour intensive and landlords do not have the economies of scale to make this
type of operation work efficiently. On the other hand, operators have expertise in leasing office
spaces to the occupiers and providing a good design mix as well as community features. Thus, we
expect the partnership between landlords and operators to have many benefits, such as economies
of scale, the ability for end-users to access multiple sites, and consistency across a portfolio.
Swire Properties leading the way with its “Blueprint” concept
Swire Properties is one of first property companies in the Hong Kong to embrace co-working. Its
“Blueprint” concept not only provides flexible spaces at its Taikoo Place but also provides value-
added amenities like training rooms and auditoriums to its occupiers. Other property companies
like Hysan, SHKP and Wharf REIC are collaborating with external operators to leverage the
advantages of co-working.
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Major deals across Hong Kong
In the major deal of 2019, WeWork leased six floors (c150,000 sqft) at The Gateway in Tsim
Sha Tsui at a monthly rent of HKD60psf. This is the first time WeWork has leased office space
in Tsim Sha Tsui. WeWork has also leased several office spaces in Causeway Bay and Wan
Chai. The largest deal in 2018 was the leasing of three floors (c77,000 sqft) at The Harbourfront
Landmark in Hung Hom for a monthly rent of HKD30psf by local operator Campfire.
The major Hong Kong property companies with good exposure to office sub-segments, like Swire
Properties, Hysan, SHKP and Wharf REIC, are collaborating with external operators to leverage the
advantages of co-working. Examples include:
Wharf REIC: In 2019, WeWork leased six floors (c150,000 sqft) at Wharf REIC’s The
Gateway in Tsim Sha Tsui at a monthly rent of HKD60psf.
Swire Properties: In 2018, The Great Room, a Singaporean co-working space operator,
leased a floor (c21, 000 sqft) at One Taikoo Place in Quarry Bay at an estimated monthly
rent of cHKD60psf.
Hysan Development: In 2018, WeWork leased a total of 80,000 sqft of space in two office
buildings of Hysan’s portfolio in Causeway Bay – 48,000 sqft at Lee Garden One at cHKD80psf
per month, and 32,000 sqft at Hysan Place at cHKD90psf per month.
Sun Hung Kai Properties and Henderson Land: In 2016, Flexible office space operator The
Executive Centre (TEC) leased a total of 17,000 sqft of space at SHKP/HLD’s Two International
Finance Centre in (IFC 2) Central.
Figure 24: Major co-working deals in Hong Kong’s office market
Year Operator District Buildings Size (sf)
2019 Victory Offices Central The Center 25,000 2019 WeWork Tsimshatsui The Gateway 150,000 2018 The Great Room Quarry Bay One Taikoo Place 21,000 2018 WeWork Causeway Bay Lee Garden One 48,000 2018 WeWork Causeway Bay Hysan Place 32,000 2018 Campfire Hung Hom The Harbourfront Landmark 77,000 2018 naked Hub Kwun Tong Two Harbour Square 58,000 2018 UR Work Sheung Wan Grand Millennium Plaza 15,000 2017 Spaces Central Sun House 77,000 2017 naked Hub Sheung Wan Bonham Circus 55,000 2017 Spaces Causeway Bay Lee Garden Three 40,000 2017 Campfire Causeway Bay V Point 38,000 2017 Spaces Ngau Tau Kok 133 Wai Yip Street 37,500 2017 Regus Mong Kok 700 Nathan Road 24,000 2017 theDesk Causeway Bay Leighton Centre 17,000 2017 UR Work Sheung Wan One8One Queen’s Road Central 15,500 2017 naked Hub Sheung Wan New Street 13,000 2016 WeWork Causeway Bay Tower 535 90,000 2016 naked Hub Sheung Wan Bonham Circus 60,000 2016 WeWork Wan Chai MassMutual Tower 60,000 2016 The Work Project Causeway Bay Midtown 30,000 2016 TEC Central IFC 2 17,000
Source: Colliers, various newspapers, HSBC
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Equities ● REMD June 2019
Co-working in China – enormous room to grow
China’s shared economy has been surging over the past few years, as shown in the table
below. Co-working space is a rising trend relevant to the shared economy but it accounts for
less than 1% of shared economy turnover, so has substantial room to grow.
Figure 25: Shared economy turnover breakdown
RMB bn 2017 2018 y-o-y Proportion 2017 Proportion 2018
Transport sharing 201 248 23% 9.7% 8.4% House sharing 12 17 38% 0.6% 0.6% Knowledge and skills sharing 138 235 70% 6.7% 8.0% Living service sharing 1,292 1,589 23% 62.2% 54.0% Medicare sharing 6 9 57% 0.3% 0.3% Co-working office 11 21 87% 0.5% 0.7% Production capacity sharing 417 824 98% 20.1% 28.0% Total 2,077 2,942 42% 100% 100%
Source: Company data, HSBC
Opportunities for co-working operators in China
Based on C&W data, Greater China’s co-working office has surged from a few sizeable venues
a few years ago to more than 500 locations in key cities as of end-Q1 2018. Many view co-
working as one of the major emerging trends of the knowledge economy. Colliers believes that
flexible workspace is no longer a disruption to conventional office space. Indeed, the
consultancy cited co-working as a fundamental part of the commercial real estate market and a
standalone sector that is important for landlords and occupiers.
Proliferation of startups has boosted demand
This trend is highly correlated with the proliferation of start-ups in China, supported by an influx of
capital from corporates and venture capital firms. According to Hurun, China has 202 unicorns
(start-ups with a value of over USD1bn) as of end-2018, which is the second highest number in the
world and is almost 10 times the number in India.
Those at the top of the list include companies such as Ant Financial, Toutiao, Didi, Cai Niao and
DJI. Most unicorns are relatively young companies with an average operating history of seven
years (70% have an average age of 5.2 years). This trend coincides with the rise of millennials,
born in the 1980s and 1990s, who are taking the lead in innovation and entrepreneurial
enterprises. KPMG has pointed out that the financial sector has stepped up the promotion of big
data technologies in China. Big data, finance and insurance technologies are ranked as the top
three financial technologies in the list of top fintech companies it compiled.
China (tier-1 cities)
Co-working office space accounts for less than 1% of China’s shared
economy, indicating substantial room to grow
Chinese developers are starting to tap into the co-working market
Developers are competitive players in the co-working market due to
their strong cash flow and experience in managing rental properties
Michelle Kwok* Head of Real Estate Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6918
Albert Tam*
Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4395
Simon Sin* Associate
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6514
Max Liang*
Associate
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6629
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
Equities ● REMD June 2019
28
Figure 26: Fintech funding (VC, PE and M&A activity) in China
Source: KPMG, HSBC
Technology advancement has made new ways of co-working possible
Given elevated office costs, a number of multinationals are searching for flexible lease terms
and cost-saving options provided by co-working operators. At the same time, advancements in
technology have made new ways of co-working possible. Colliers has discussed a city campus
leasing model that allows businesses with a mobile workforce to access drop-down space
across a city. It enables staff mobility with the aid of a digital platform that gives easy access to
hot desks or office space across different locations within a co-working operator’s portfolio.
Figure 27: Comparison of co-working office space and traditional office space in China
Co-working Traditional office
Rent period Flexible, typically 1 month or above Relatively rigid, at least one year Minimum size No GFA requirement, one desk or more At least 100-500 sqm Additional cost No renovation, furniture and utilities Renovation cost, property management and utilities Environment Includes both open/sharing area and private office area.
Focus on community and collaboration. Selected operators provide gym, swimming pool or other interest classes.
Traditional office space, limited recreation facilities, limited consideration for community and collaboration.
Source: Askci Corporation
Enhancing the user experience to create stickiness
Colliers describes co-working workspace as a business with low entry barriers. Therefore
operators have to strive to maintain user stickiness to maintain occupancy levels, which drives
profitability. Bigger operators with a larger end-user base can afford to invest more heavily in
shared facilities, which enhances the user experience. For example, Naked Hub has a
swimming pool in select locations and offers regular yoga classes to users in all locations.
Ucommune offers theatres and cafés in some locations.
0
5
10
15
20
25
30
35
40
45
0
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4,000
6,000
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12,000
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1Q14
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4Q14
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2Q16
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2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
Deal value (USDm) Number of deals closed (RHS)
USDm
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Equities ● REMD June 2019
Figure 28: Major co-working office operators
No Operator Locations Amenities
1 SOHO 3Q Cities such as Beijing, Shanghai, Hangzhou, Shenzhen
Meeting rooms, coffee bar
2 Ucommune 40 cities including Beijing, Shanghai, Nanjing, Xi’an, Yantai, Tianjin, and Shenzhen
Meeting rooms, cafe, libraries, gyms, and game rooms.
3 People Squared Beijing, Shanghai, Shenzhen, Ningbo, Hangzhou, Taipei
Meeting rooms, offices, lounges,
4 W+COWORK Guangzhou, Beijing, Shanghai, Tianjin, Shenzhen, Suzhou, Qingdao, Ningbo, Xi'an, Chengdu, Urumqi, and Hangzhou
Meeting rooms, booths, water bar, telephone booths, recreational facilities
5 SimplyWork Shenzhen Private offices, meeting rooms, lounge, kitchen, coffee bar, smoking areas, telephone booths, gyms
6 TechTemple Beijing, Shenzhen, and Shanghai Meeting rooms and coffee bar 7 Agora Space Shanghai Meeting rooms, private offices, multimedia, storage room,
coffee and tea, beers, private garden
Source: Company data, HSBC
Risks involved in the business model
With low entry barriers, it is relatively easy for co-working operators with limited experience in
commercial real estate to set foot in the market. In China, this has resulted in a surge in the
number of operators in recent years. Given that many operators do not have a unique selling
point or business model, they often attempt to replicate the business model and office design of
existing operators. Based on the experience of other shared economic industries in China, such
as bikes and mobile chargers, it could easily develop into a vicious cycle of price competition
which exerts downward pressure on profitability.
Co-working office operators have been in expansion mode in China, backed by financing from
venture capital and private investors. Operators with strong financial support are starting to take
over smaller players. In 2018, WeWork acquired Naked Hub. Another major operator,
Ucommune, has acquired four operators – Woo Space, WeDo, New Space and Workingdom. A
rise in M&A activity has led to intense competition and sector consolidation. Currently, many
players are still in an investment phase. Even industry leader WeWork disclosed that it made an
operating loss in FY18 after being in operation for nine years.
Without the support of stable earnings, operators may find it difficult to sustain the current mode
of operation if the macro environment deteriorates, impacting overall investment sentiment and
office space demand from smaller enterprises.
Equities ● REMD June 2019
30
Co-working office turnover to grow quickly in the next few years
As discussed in the previous section, there is still ample room for the co-working office segment
to grow. However, this is still an evolving segment where limited data is available, so our
forecasts are focused on the CBDs of key cities.
Shanghai has the largest supply of offices in the CBD area at 6.7m sqm, which is roughly 3.7x
that of Beijing, 2.0x Guangzhou and 1.3x Shenzhen. With a well-developed office market and
the presence of numerous multinationals and financial institutions, Shanghai has the largest co-
working office penetration rate at 8% as of 2018, versus 1-3% in other tier-1 cities, according to
Colliers. We estimate the size (in terms of turnover) of the co-working market at RMB2.8bn,
RMB209m, RMB366m and RMB176m in the CBDs of Shanghai, Guangzhou, Beijing and
Shenzhen in 2018, respectively.
Our assumption is that the penetration rate of the co-working market will increase by 1ppt per
year in 2019-20e and 0.5ppt in 2021e. Higher penetration rates will help drive co-working office
turnover in the market – Shenzhen (2018-21e CAGR at 74%), Beijing (41%), Guangzhou (38%)
and Shanghai (15%). We expect Shenzhen to see the highest growth due to its current low
penetration rate, followed by Beijing, which has a concentrated presence of start-ups. For
reference, Beijing has the highest number of unicorns and potential unicorns in China – 82
unicorns in 2018, almost double the number in Shanghai, according to Hurun.
Figure 29: Summary of co-working office space, penetration and CAGR
2018 Co-office size in CBD (sqm m)
2018 Co-office turnover in CBD (RMBm)
Co-working office penetration rate 2018
Co-working office turnover CAGR 2018-2021e
Shenzhen 0.07 176 1.0% 74% Beijing 0.05 366 2.9% 41% Guangzhou 0.07 209 2.0% 38% Shanghai 0.53 2,843 8.0% 15% Average 3.5% 36%
Source: Colliers, JLL, Cushman and Wakefield, HSBC estimates
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Equities ● REMD June 2019
Developers are stepping into the co-working market
Developers are jumping on the bandwagon and have either established their own brands or
collaborated with existing co-working space operators. Chinese developers are backed by
strong cash inflows from their existing property development business and can benefit from
more diverse funding channels.
A handful of developers have established their own co-working brands, including COLI, Longfor,
Sino-Ocean and SOHO. They can leverage on their existing office properties to test the
feasibility of this business model.
For developers that didn’t allocate resources to launch a co-working brand, they have
collaborated with other pure co-working operations in order to establish a presence in this
business segment, allowing them to learn from other more established market players. These
developers include Gemdale, Sino-Ocean and Country Garden.
Among stocks in our coverage universe, SOHO China is the purest commercial and co-working
player, while Sino-Ocean has also stepped up in its co-working initiatives. Specifically, Sino-
Ocean has collaborated with WeWork and has set up co-working offices in six locations across
four top-tier cities in China. In addition, it has also established its own co-working brand
OKspace and invested in Beijing-based operator Nashwork.
Based on the online news media HK01 and kknews, the sons of the chairmen of China SCE
and Agile have separately developed their own co-working brands, called Funwork and ATLAS,
respectively. We see potential for developers to invest in these platforms. For instance, China
SCE acquired a 25% stake in Funwork from the chairman’s son in January 2019.
Figure 30: Summary of developers’ involvement in co-working space
Developer Brand Relationship with the developer
Remarks
Longfor Easywork Own brand Shanghai only. 800 seats in Hongqiao Paradise Walk SOHO SOHO 3Q Own brand 31 centres with c30k seats in seven cities in China CRL CR Union Own brand CR Union is a new office brand launched in 2019. It will launch
six projects during the year including some co-working offices. COLI Officezip Own brand 12 centres in 6 cities in China CIFI Workingdom Partnership Launching three co-working office centres in 2019 in Beijing Shimao MWORKS Own Brand Opened MWORKS in Nanjing Software Valley with 3,500sqm GFA Country Garden Fountown Partnership Entered into strategic partnership agreement in various area
including co-working. The first project was launched in Shanghai in mid-2018.
Gemdale WeWork Partnership Entered a revenue sharing agreement with WeWork. Converting its own office into a new co-working centre in Shenzhen.
Sino-Ocean WeWork Partnership WeWork entered first real estate strategic partnership with Sino-Ocean, which now has 6 co-working locations in co-operation with WeWork across Beijing, Shanghai, Chengdu and Shenzhen.
Nashwork Investment Participated in a financing (series B+ round) with Beijing-based Nashwork in June 2018.
OKspace Own brand Presence in Hangzhou and Beijing China SCE Funwork Investment Established by chairman’s son. China SCE has a stake.
Source: Local media, company data, HSBC
Equities ● REMD June 2019
32
Case study – SOHO 3Q
SOHO China is one of the few listed developers that has been focusing on the co-working
space business. SOHO launched its co-working brand, SOHO 3Q, in February 2015 with an
initial focus in Beijing and Shanghai, where SOHO’s portfolio of investment properties are
located. Started originally in SOHO’s own commercial properties, SOHO 3Q now also runs at
third party buildings. As of end-2018, SOHO 3Q spanned seven cities – Beijing, Shanghai,
Shenzhen, Hangzhou, Chengdu, Chongqing, and Nanjing, with 31 centres and just above
30,000 seats. Guanghualu SOHO 3Q, located in Guanghualu SOHO II, is the flagship 3Q
centre with over 3,000 seats.
While SOHO’s management has had a target to achieve over 50,000 co-working seats by 2018,
actual completion fell short of this target due to fierce and “unhealthy” competition in the
segment, according to SOHO. While we note that the company had earlier indicated a plan for a
spin-off for its co-working business (South China Morning Post, 20 June 2018), the company
has more recently said that its near-term focus is on maintaining profitability of the business in
2019, instead of scale expansion.
Figure 31: The short development history of SOHO 3Q
2015 2016 2017 2018
Number of cities 2 2 5 7 Number of centres 11 19 26 31 Number of seats 10,000 17,000 26,000 30,673 Average occupancy n.a. 85% 87% 87% Remarks Located in Beijing and
Shanghai Located in Beijing and
Shanghai Located in Beijing,
Shanghai, Shenzhen, Hangzhou and Nanjing
Located in Beijing, Shanghai, Shenzhen, Hangzhou, Chengdu,
Chongqing and Nanjing
Source: Company data, HSBC
Indeed, the share price of SOHO China de-rated in the beginning of 2015, reflecting the change in
business focus but also other factors like the uncertainty associated with SOHO’s dividend policy.
Figure 32: SOHO’s NAV discount
Source: Company data, Refinitiv, HSBC estimates
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
% to NAV +1 SD Mean -1 SD
33
Equities ● REMD June 2019
Co-working deals across cities
The top tier cities are seeing rising demand for the co-working space. Beijing is China’s science
and technology centre, which attracts numerous tech companies the city. At the same time, the
development of Zhongguancun, which is referred as “China’s Silicon Valley”, is home to many
new tech companies. In 2018 Kr Space leased 3,500 sqm of office space in China Overseas
Plaza for its co-working business.
In Shanghai, Cushman and Wakefield indicated that the co-working office market has become a
significant contributor to Grade A office absorption. With rising demand for flexible work space,
C&W described Shanghai as a key battleground for market share among both domestic and
overseas operators. In particular, WeWork has leased 27,000 sqm at the China Overseas
International Center. Developers are also expanding their presence in the city. SOHO has been
operating “SOHO 3Q” and Longfor has established its “Easywork” co-working office brand.
In Shenzhen, the rapid development of the technology segment and the presence of
multinationals provides some of the best opportunities for co-working space development.
WeWork and naked Hub have been very active in the city.
Figure 33: Major deals in co-working space
City Company District Building Size (sqm)
Beijing 5L meet CBD Traders Hotel 39,999 Beijing naked Hub Sanlitun Pacific Century Place 5,500 Beijing WeWork Sanlitun Taikoo Li 3,000 Beijing WeWork Wangfujing Spot on WFJ 13,000 Beijing Fountown Others Yinyuan Building 11,338 Beijing Kr Space Others Straits International Plaza 10,300 Beijing Kr Space CBD China Overseas Plaza 3,500 Beijing naked Hub CBD Gongxiao International Building 2,850
Shanghai naked Hub Changning Loushanguan Lu 12,077 Shanghai WeWork Huangpu Yunnan Lu 10,219 Shanghai Atlas Huangpu Gopher Center 7,432 Shanghai WeWork Xuhui ITC 6,503 Shanghai We+ Luijiazui Shanghai Tower 3,716 Shanghai WeWork Huangpu China Overseas International Center 27,000 Shanghai WeWork Lujiazui Fuhui Plaza 14,000 Shanghai naked Hub Hongkou Landmark Center 10,000 Shanghai Distrii Core Xuhui Grand Gateway 6,500 Shanghai WeWork Core Xuhui ITC Phase I 6,000
Guangzhou Atlas Zhujiang New Town Agile Center 11,000 Guangzhou Chirk-up Tianhe Sports Center Citic Plaza 10,000 Guangzhou Worldunion Space Tianhe Sports Center Hongfa Building 4,115 Guangzhou Bee+ Zhujiang New Town Guangzhou IFC 2,991 Guangzhou Kr Space Haizhu T.I.T Business Park 2,662
Shenzhen WeWork Nanshan CR Land Building 26,999 Shenzhen Nashwork Futian Excellence Century Center 2,000 Shenzhen Regus Futian Ping An Building 1,900 Shenzhen Atlas Futian Dinghe Tower 10,000 Shenzhen Atlas Nanshan SZ Aerospace Science and Tech Sq 13,000 Shenzhen Atlas Futian Shenzhen Gemdale Center 5,700 Shenzhen Regus Futian Ping’an Financial Center 3,500
Source: Cushman and Wakefield, Colliers, HSBC
Equities ● REMD June 2019
34
Vibrant environment for start-ups and small businesses
Singapore’s start-up environment has become vibrant in recent years, with the city-state aiming to
become a top regional and global fintech hub, supported by government initiatives. According to
EY, there are more than 400 fintech firms in Singapore and several more are slated to be added
each year. Furthermore, Singapore’s Smart Nation initiative has also given the start-up scene a
boost. The policy initiative, aimed at guiding Singapore’s digital transformation, is expected to
leverage off technology and big data analytics and create opportunities for prospective start-ups.
In general, the government has been encouraging the development of an ecosystem that allows
new entrepreneurs to find the required training, help and funding – these entrepreneurs then in
turn help their peers and the next generation of entrepreneurs. There are signs of progress, with
an increased number of individuals emerging as independent workers, entrepreneurs and
freelancers. This group, in particular the millennials, generally prefer flexible work arrangements
and this has been driving demand for co-working in Singapore’s office market.
Figure 34: Fintech funding (VC, PE and M&A activity) in Singapore
Source: KPMG, HSBC
0
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1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18
Deal value (USDm) Number of deals closed (RHS)
Singapore
The co-working market has been growing rapidly
Large office landlords could benefit from co-working demand
Positive implications for commercial assets in Singapore could
benefit some SREITs
Pratik Ray*, CFA
Senior Property Analyst, ASEAN The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
+65 6658 0611
Derek Chang*
Property Analyst
The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
+65 6658 0624
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
35
Equities ● REMD June 2019
Figure 35: Count of SMEs (thousand) Figure 36: Nominal value added by SMEs (SGDbn)
Source: Ministry of Manpower, HSBC Source: Ministry of Manpower, HSBC
Large corporations are setting up their own innovation centres
Alongside start-ups, many large corporates have also realised the importance of innovation and
creativity in the workplace. This is driven by multiple factors: 1) to address competition from
disruptive technologies in various industries; 2) seeking to leverage government initiatives
around developing Singapore into a smart nation; and 3) keeping employees engaged and
making it a part of the company’s talent retention strategy, in particular for millennials.
To achieve this, many firms have set up incubators that work outside of the conventional office
set-up, such as co-working spaces. These incubators, which bring together technology and
analytical data professionals and form specialised teams to work on special projects, are also
driving demand for co-working in Singapore’s office market.
242.9245.2 246.1
252.8
262.6
230
235
240
245
250
255
260
265
2014 2015 2016 2017 2018
Count of SMEs (Thousand)
179.0 178.0
187.0
197.0
212.0
160.0
170.0
180.0
190.0
200.0
210.0
220.0
230.0
2014 2015 2016 2017 2018
Nominal value added by SMEs (SGDbn)
Figure 37: Innovation centres by corporates in Singapore
Corporation Industry Innovation Centre Objective
Dell Tech Internet of Things (IoT) Lab Develop and test Dell and Intel solutions, allow for scalability testing DBS Banking & Finance Life Analytics Lab Process data from social media platforms to generate new digital innovations and sales leads MetLife Insurance LumenLab Develop disruptive new business models in areas such as wellness, wealth and retirement HSBC Banking & Finance HSBC Singapore
Innovation Lab Support the development and testing of digital and mobile banking innovation
Accenture Management Consulting Services
Accenture Analytics Innovation Center
Develop new approaches for use of analytics in key areas of services, such as public safety, service delivery, workforce effectiveness, etc.
PayPal Banking & Finance Paypal Innovation Lab Explore opportunities in the areas of cybernetic authentication tokens, AI-powered know-your-customer (KYC) processes and cryptography technology, such as post-quantum cryptography to future-proof PayPal’s risk and security management systems
Mastercard Banking & Finance Mastercard Innovation Showcase
Innovate newer ways of making payments, such as by taking a selfie through an app with biometric authentication, and purchasing items in a vending machine via a mobile application among others
Citibank Banking & Finance Citi Innovation Lab Use new web, mobile, supply chain and analytics technologies to engage Citi’s institutional clients more innovatively and to create the most effective solutions and products for them
KPMG Management Consulting Services
KPMG Digital Village Bring corporates, start-ups, investors, and government bodies together in a collaborative ecosystem to drive the adoption and integration of innovative solutions focusing on fintech, healthtech and logistics
Refinitiv Media Refinitiv Labs Collaborate with customers, tech start-ups, universities and Singapore’s government to roll out products and solutions for professional markets in Asia Pacific
Expedia Travel Expedia Innovation Lab Use proprietary scientific methods to further understand Asia consumer online and app travel search and booking behaviour to inform its innovation and technology developments globally
Microsoft Tech Microsoft Technology Centre (MTC)
A place for collaborative workshops for Microsoft customers, where they can engage with MTC staff in briefings, sessions and other technical courses
IBM Tech IBM Studios Develop individualised experiences through a combination of cognitive capabilities and experience design Standard Chartered Bank
Banking & Finance SCB - eXellerator Work closely with the business units within the bank and explore the use of emerging technologies and data science for sustainable business solutions
MUFG Bank Banking & Finance MUFG Innovation Lab Experiment with fintech and innovative business solutions BNP Paribas Banking & Finance BNP Paribas Innovation
Lab Enrich the customer experience, and develop close collaboration between a select group of clients, fintechs and in-house wealth management specialists
OCBC Banking & Finance The Open Vault Collaborate with external fintech firms to rapidly test and validate new ideas and solutions – before bringing prototypes quickly to the market and make banking simpler
UOB Banking & Finance The FinLab Business accelerator that propels the growth of technology companies and catalyses the digital transformation of businesses
Source: Company announcements, Cushman & Wakefield, Medium, HSBC
Equities ● REMD June 2019
36
Co-working landscape
As of July 2018, Singapore had 36 co-working operators operating out of 120 locations, almost 2x
the number four years ago, implying a c20% CAGR for both categories over this period. The
sector has seen expansion from local operators, such as JustCo and The Great Room, while
Chinese operators like Distrii as well as US-based WeWork have also entered the market.
Figure 38: Singapore: Number of co-working operators and centres
Source: Cushman & Wakefield, HSBC
Increasingly a growing influence in the office leasing market
Co-working operators have become more influential in Singapore’s office leasing market as
traditional occupiers from sectors such as banking & finance have moderated their expansion
plans. According to Colliers, co-working operators now make up c20% of the gross take-up in
the office market in Singapore’s CBD. In our view, the net take-up proportion is substantially
higher. However, given this is off a low base, Colliers estimates that co-working operators
occupy less than 4% of the total CBD office stock in Singapore (2017: less than 2.5%). The
pick-up in number of operators and centres has sustained in 2019 and with it co-working-led
leasing activity in the market.
Figure 39: Major co-working deals in Singapore’s office market
Date Operator Building Size (sf)
May-19 JustCo 20 Collyer Quay 16,800 Nov-18 WeWork Suntec City Tower 5 30,000 Oct-18 JustCo China Square Central 34,500 Oct-18 Campfire 139 Cecil Street 85,000 Jun-18 Space&Co. 8 Exhibition Street, Melbourne 16,872 Jun-18 WeWork 71 Robinson Road 64,583 May-18 Distrii Republic Plaza 62,000 Apr-18 Spaces TripleOne Somerset 35,000 Mar-18 Spaces One Raffles Place 35,000 Mar-18 Spaces Paya Lebar Quarter 50,000 Mar-18 The Great Room Centennial Tower, Temasek Avenue 36,000 Mar-18 WeWork China Square Central 26,700 Feb-18 Ucommnue Suntec City 13,800 Dec-17 WeWork Funan's North Office Block 40,000 Jun-17 The Work Project OUE Downtown 21,000 Jan-17 The Working Capitol 140 Robinson Road 55,000 Jun-16 Collective Works 12th floor of Capital Tower 22,000 Jun-16 The Great Room One George Street 24,000 Mar-15 The Working Capitol 1 Keong Saik Road 33,000
Source: Company announcements, HSBC
19 18 22 2636
66 70
8287
120
0
20
40
60
80
100
120
140
2014 2015 2016 2017 YTD Jul 2018
Number of operators Number of centres
37
Equities ● REMD June 2019
Opportunities and winners
Some of the largest property groups in the region are the best placed
Some of the largest property groups in Singapore have been quick to realise that co-working as
a model is here to stay. They have responded by investing in operators or collaborating with
them in one way or the other. The most active and the early adopters have been the large
property groups such as CapitaLand, Frasers Property and Mapletree Investments.
Figure 40: Prominent property groups with exposure to co-working
Date Property group Country Property assets Operator Co-working related investment
Oct-18 CapitaLand Singapore cSGD93bn (group managed real estate assets)
The Work Project Kingdom
SGD27m (USD19.7m)
May-18 City Developments Singapore cSGD20bn (total assets) Distrii RMB102m (USD14.8m) May-18 Frasers Property Singapore cSGD32bn (total group assets) JustGroup Holdings USD60m Feb-18 CapitaLand Singapore cSGD93bn (group managed
real estate assets) Flexi-Suites Flexi-Suites is CapitaLand’s
co-working offering Nov-17 Keppel Corp Singapore cSGD29bn (assets under
management) KLOUD KLOUD is Keppel’s co-
working offering Dec-17 Mapletree
Investments Singapore cSGD46bn (assets under
management) CoQoons CoQoons is a subsidiary of
Mapletree Oct-15 Keppel Corp Singapore cSGD29bn (assets under
management) Workspace Workspace is Keppel’s co-
working offering
Source: Company announcements, HSBC
Figure 41: Prominent property groups with exposure to co-working
Property group Currency Price Market Cap (USDm)
Trading Liquidity (USDm)
PB (x) ROE (%) (2019e)
PE (x) (2019e)
EPS Growth (%) (2019-20e)
Dividend Yield (%)
(2019e)
CapitaLand* SGD 3.54 10,920 21.5 0.78 5.2% 14.7 18.7% 3.4% Frasers Property* SGD 1.80 3,948 0.4 0.72 7.0% 10.3 -12.1% 4.7%
Total/Simple average 14,868 21.9 0.75 6.1% 12.5 3.3% 4.0%
Source: Bloomberg consensus for non-covered (not rated) companies, HSBC estimates for covered (rated) companies. *HSBC covered (rated) stock. Priced as of 24 June 2019
Large office landlords in Singapore could benefit from co-working demand
Large office landlords in Singapore could benefit from co-working demand. Singapore, as the
only gateway city in Southeast Asia, is likely to be the choice destination for regional and global
multinationals seeking space in a co-working set-up in Southeast Asia. The government has
also been proactive in attempting to develop an ecosystem that offers entrepreneurs,
freelancers, and small businesses an environment in which they can thrive. Many of these
landlords are office REITs, which are sponsored by the large property groups – this further
substantiates our view that such groups are well placed to ride the co-working wave.
Figure 42: Office REITs in Singapore
Price (SGD)
Market cap (USDm)
Trading liquidity (USDm)
PB (x)
DPU yield (%)
(2019e)
DPU yield (%)
(2020e)
DPU yield (%)
(2021e)
CapitaLand Commercial Trust* 2.14 5,929 20.4 1.18 4.1% 4.1% 4.1% Keppel REIT* 1.27 3,192 5.9 0.92 4.5% 4.6% 4.7% OUE Commercial Trust 0.51 1,069 0.4 0.70 6.8% 7.0% 7.0% Frasers Commercial Trust 1.58 1,057 2.4 1.01 6.2% 6.2% 6.2%
Total/Simple average 11,247 29.1 0.95 5.4% 5.5% 5.5%
Source: Bloomberg consensus for non-covered (not rated) companies, HSBC estimates for covered (rated) companies. *HSBC covered (rated) stock. Priced as of 24 June 2019
Equities ● REMD June 2019
38
Positive implications for commercial assets in Singapore could benefit some SREITs
If there are positive implications for commercial real estate (office and shopping mall), then the
large property groups in Singapore and their listed subsidiaries and associates, including their
sponsored REITs, would be the go-to names for investors seeking exposure to commercial real
estate in Singapore through listed proxies.
Figure 43: Retail, office and mixed REITs in Singapore by sponsor
Segment Price (SGD)
Market cap (USDm)
Trading liquidity (USDm)
PB (x)
DPU yield (%)
(2019e)
DPU yield (%)
(2020e)
DPU yield (%)
(2021e)
CapitaLand CapitaLand Mall Trust* Retail 2.6 7,085 18.4 1.27 4.6% 4.9% 5.0% CapitaLand Commercial Trust* Office 2.14 5,929 20.4 1.18 4.1% 4.1% 4.1% Mapletree Mapletree Commercial Trust* Retail/Office 2.06 4,405 11.9 1.29 4.5% 4.6% 4.7% Keppel Keppel REIT* Office 1.27 3,192 5.9 0.92 4.5% 4.6% 4.7% Frasers Property Frasers Centrepoint Trust* Retail 2.59 2,131 4.2 1.24 4.8% 5.0% 5.2% Frasers Commercial Trust Office 1.58 1,057 2.4 1.01 6.2% 6.2% 6.2% OUE OUE Commercial Trust Office 0.51 1,069 0.4 0.70 6.8% 7.0% 7.0% Others Suntec REIT* Retail/Office 1.94 4,006 14.1 0.93 5.3% 5.4% 5.5% SPH REIT Retail 1.07 2,045 0.8 1.14 5.3% 5.5% 5.6% Starhill Global REIT Retail/Office 0.78 1,257 1.6 0.86 6.1% 6.2% 6.1%
Source: Bloomberg consensus for non-covered (not rated) companies, HSBC estimates for covered (rated) companies. *HSBC covered (rated) stock. Priced as of 24 June 2019
Figure 44: Singapore property: Office exposures (% of total GAV)
Source: Company data, HSBC estimates
10%
14%
19%
26%
56%
85%
95%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
CapitaLand Mall Trust
Frasers Property
CapitaLand
Mapletree Commercial Trust
Suntec REIT
Keppel REIT
CapitaLand Commercial Trust
39
Equities ● REMD June 2019
Potential risks related to co-working
Co-working operators have yet to experience a major recession
As most co-working firms have emerged only in the past few years, they have not been around
long enough to have experienced a recession. In Singapore, there are more than a hundred
different companies in the co-working space, most of which are small. It is possible that many of
these firms would go bankrupt in the event of a recession, if and when it occurs.
Perception issues around assets substantially leased to co-working operators
Given the impact a recession, if and when it occurs, could have on co-working operators, it is
only natural that market participants would factor in more conservative assumptions around
cash flows, cash flow volatility, and/or valuation cap rates for assets that have a substantial
proportion of tenants as co-working operators. As such, while co-working may boost investment
demand for commercial assets for the overall market, assets that have a very high proportion of
co-working tenants could be viewed adversely. However, the extent to which such perceptions
may impact valuations and the thresholds that may trigger such adverse perceptions remains
unclear. Consultants like Cushman & Wakefield have cited a 15-30% threshold (in terms of
leasing to co-working operators without any adverse impact with regard to perception), but we
think these conclusions are preliminary as transactional evidence is thin.
Equities ● REMD June 2019
40
Figure 45: Regional valuation summary
Company Ticker Rating Price (HKD)
Target Price
(HKD)
Upside /(D’nside)
(%)
Mkt Cap (USDbn)
3M ADTV (USDm)
NAV (HKD/shr)
(Disc)/ Prem (%)
FY18a PE (x)
FY19e PE (x)
FY20e PE (x)
FY19e Yield (%)
FY18a PB (x)
FY19e Net gearing
HK developers CK Asset 1113 HK Buy 61.30 76.40 24.6 29.0 57.8 123.2 (50) 9.4 8.0 8.5 3.5 0.7 5 HLP 101 HK Buy 18.50 23.30 25.9 10.6 12.7 34.7 (47) 20.3 19.3 16.3 4.1 0.6 22 Henderson 12 HK Hold 43.45 47.55 9.4 26.9 44.4 83.4 (53) 9.7 11.2 11.2 4.3 0.6 27 HKLand (USD) HKL SP Buy 6.69 8.40 25.6 15.7 10.5 12.5 (46) 15.1 14.3 13.8 3.4 0.4 8 Hysan 14 HK Hold 40.50 44.20 9.1 5.4 6.0 83.3 (51) 16.7 15.4 15.0 3.8 0.6 6 Kerry 683 HK Hold 32.75 34.70 6.0 6.1 6.2 77.0 (57) 14.2 8.0 7.5 4.3 0.5 49 Sino Land 83 HK Buy 13.50 17.40 28.9 11.8 10.1 28.5 (53) 16.1 16.9 14.8 4.1 0.6 net cash SHKP 16 HK Buy 134.50 163.20 21.3 49.9 80.5 229.9 (41) 12.8 12.1 10.0 3.8 0.7 14 Swire Prop 1972 HK Buy 32.60 38.20 17.2 24.4 8.8 57.1 (43) 18.8 14.8 20.8 2.7 0.7 5 Wharf 4 HK Reduce 20.65 19.20 (7.0) 8.1 9.9 54.7 (62) 9.7 9.5 8.9 3.4 0.5 10 Wharf REIC 1997 HK Buy 55.60 66.30 19.2 21.6 20.1 93.4 (40) 16.8 15.5 14.3 4.2 0.8 16 Wheelock 20 HK Buy 55.75 79.30 42.2 14.6 9.1 130.0 (57) 8.6 7.6 7.1 3.0 0.5 16 Average (45) 15.6 14.2 13.5 3.7 0.7 18 REITs & Trusts Champion REIT] 2778 HK Hold 6.68 6.90 3.3 5.0 3.1 6.9 (3) 25.5 22.6 20.3 4.4 0.6 18 Hui Xian REIT (RMB) 87001 HK Buy 3.36 3.80 13.1 2.8 1.6 n.a. n.a. 12.7 12.4 12.0 8.0 0.7 22 Jinmao Hotel 6139 HK Buy 4.37 6.00 37.3 1.1 0.0 7.5 (42) 13.1 12.4 12.0 8.1 1.5 41 Link REIT 823 HK Hold 97.25 99.50 2.3 26.3 53.7 99.5 (2) 38.9 35.8 32.4 2.8 1.2 11 Average (13) 20.7 19.3 18.1 6.0 0.9 27 China Props Agile 3383 HK Hold 10.44 10.40 (0.4) 5.2 11.4 34.8 (70) 5.2 4.4 3.8 11.5 0.7 145 COLI 688 HK Buy 27.80 40.00 43.9 39.0 49.8 44.4 (37) 8.2 6.8 5.7 4.0 1.1 36 CRL 1109 HK Buy 34.75 40.60 16.8 30.8 50.4 50.8 (32) 10.8 8.3 7.0 4.2 1.7 50 China SCE 1966 HK Buy 3.70 4.70 27.0 2.0 4.9 11.8 (69) 5.6 4.1 3.1 7.8 0.8 133 CIFI 884 HK Buy 5.05 6.80 34.7 5.0 13.1 13.7 (63) 6.1 4.9 4.0 6.9 1.3 150 CG 2007 HK Hold 11.96 12.00 0.3 33.2 62.4 15.0 (20) 6.5 5.2 4.7 5.9 1.8 79 China Jinmao 817 HK Hold 4.79 5.50 14.8 7.1 34.5 11.0 (56) 9.4 7.0 5.5 5.7 1.5 162 GZ R&F 2777 HK Buy 14.72 18.70 27.0 6.1 13.7 53.3 (72) 4.5 3.2 2.7 12.5 0.6 210 Joy City 207 HK Buy 0.95 1.50 57.9 1.7 0.5 3.7 (74) 8.0 7.9 6.4 5.0 0.4 89 KWG 1813 HK Buy 7.88 12.20 54.8 3.2 10.8 40.6 (81) 5.7 4.4 3.9 8.2 0.7 83 Logan 3380 HK Buy 12.32 14.60 18.5 8.6 8.1 26.6 (54) 7.2 5.8 4.2 5.9 2.2 114 Longfor 960 HK Hold 29.65 27.60 (6.9) 22.6 26.5 46.0 (36) 11.9 9.3 7.6 4.3 0.3 90 Shimao 813 HK Hold 24.25 23.90 (1.4) 10.2 20.7 39.8 (39) 8.2 6.5 5.4 5.4 1.2 123 Sino-Ocean 3377 HK Buy 3.27 4.00 22.3 3.2 6.3 13.3 (75) 8.2 6.1 4.3 6.6 0.4 105 SOHO China 410 HK Buy 2.60 3.30 26.9 1.7 1.4 10.9 (76) 10.6 25.0 19.3 1.6 0.3 43 SZ Investment 604 HK Hold 2.90 2.80 (3.4) 3.1 2.9 6.9 (58) 7.5 7.3 6.4 4.8 0.6 44 Yanlord (SGD) YLLG SP Hold 1.30 1.28 (1.5) 1.9 2.3 3.7 (65) 3.9 3.6 3.1 5.5 0.5 99 Avg ex Joy City and SOHO** (55) 7.3 5.8 4.7 6.6 1.0 108 Singapore developers CapitaLand CAPL SP Buy 3.54 4.15 17.2 10.9 21.5 4.9 (28) 14.7 14.7 12.4 3.4 0.8 63 Frasers Prop FPL SP Buy 1.83 2.25 23.0 3.9 0.4 3.0 (39) 12.7 10.3 11.7 4.7 0.7 90 Average (34) 13.7 12.5 12.1 4.0 0.8 76 ASEAN (ex-Sing. dev) SM Prime SMPH PM Hold 38.45 35.00 (9.0) 21.6 6.1 35.0 10 34.5 30.7 28.3 1.0 3.9 71 Ayala Land ALI PM Buy 51.80 54.40 5.0 14.9 13.6 54.4 (5) 26.1 22.5 19.7 1.0 4.0 80 Robinsons Land RLC PM Buy 26.50 28.95 9.2 2.7 1.1 36.2 (27) 20.4 19.0 16.0 1.1 1.1 49 Central Pattana CPN TB Hold 75.75 76.60 1.1 11.1 23.0 76.6 (1) 27.9 24.2 22.7 1.7 4.5 15 Land & Houses LH TB Buy 11.10 12.85 15.8 4.3 21.3 13.5 (18) 12.7 13.1 12.8 6.8 2.6 97 Pruksa PSH TB Buy 21.00 24.30 15.7 1.5 1.8 27.0 (22) 7.6 7.5 7.1 7.4 1.1 56 Bumi Serpong BSDE IJ Buy 1,520.00 2,000.16 31.6 2.1 1.5 2,222.4 (32) 22.6 13.2 12.4 0.4 1.1 21 Pakuwon Jati PWON IJ Buy 740.00 808.00 9.2 2.5 2.1 808.4 (8) 14.0 14.0 13.0 0.6 2.8 8 Ciputra Dev CTRA IJ Buy 1,125.00 1,500.00 33.3 1.5 2.7 1,500.5 (25) 18.1 19.3 18.7 0.5 1.4 33 Lippo Karawaci LPKR IJ Buy 290.00 543.00 87.3 0.5 1.6 603.4 (52) 10.9 6.8 6.2 1.4 0.2 37 Vinhomes VHM VM Buy 79,500.00 105,000.00 32.1 11.4 4.7 105,000.0 (24) 17.5 14.8 9.9 0.4 6.1 40 Average (17) 20.4 19.1 17.3 1.8 2.5 49 Sinagpore REITs Ascendas REIT AREIT SP Hold 3.01 2.80 (7.0) 6.9 26.3 2.6 18 18.6 19.1 18.8 5.6 1.4 35 CapitaLand Mall Trust CT SP Hold 2.60 2.50 (3.8) 7.1 18.4 2.3 14 19.4 21.1 19.9 4.6 1.2 31 CapitaLand Comm. CCT SP Hold 2.14 1.95 (8.9) 5.9 20.4 2.0 7 23.8 25.8 25.5 4.1 1.1 28 Suntec REIT SUN SP Buy 1.94 2.05 5.7 4.0 14.1 2.0 (5) 24.3 27.6 25.9 5.2 0.9 38 MCT MCT SP Hold 2.06 1.90 (7.8) 4.4 11.9 1.8 17 24.2 23.6 23.0 4.5 1.2 33 Keppel REIT KREIT SP Buy 1.27 1.35 6.3 3.2 5.9 1.4 (12) 38.2 27.3 24.7 4.5 0.8 33 MLT MLT SP Hold 1.57 1.40 (10.8) 4.2 16.6 1.2 34 26.3 21.1 20.2 5.2 1.3 36 Frasers Centrepoint FCT SP Hold 2.59 2.50 (3.5) 2.1 4.2 2.2 19 22.9 22.6 20.5 4.8 1.2 29 CDL Hospitality CDREIT SP Hold 1.62 1.68 3.7 1.4 2.0 1.5 8 27.8 20.5 19.3 5.7 1.0 34 Keppel DC REIT KDCREIT SP Hold 1.64 1.45 (11.6) 1.6 4.7 1.1 47 18.5 19.0 18.3 4.7 1.5 31 Far East Hosp. FEHT SP Buy 0.68 0.75 11.1 1.0 1.2 0.8 (13) 20.1 18.7 17.7 6.3 0.7 39 Cache Logistics CACHE SP Hold 0.80 0.72 (10.0) 0.6 1.4 0.7 7 20.3 15.0 14.6 7.6 1.2 36 Average 12 23.7 21.8 20.7 5.2 1.1 34 ASEAN (ex-Sing) REITs and prop funds Tesco Lotus TLGF TB Hold 20.80 18.80 (9.6) 1.6 0.8 16.5 26 21.6 20.6 19.7 4.4 1.5 8 IGB REIT IGBREIT MK Buy 1.86 2.00 7.5 1.6 0.7 1.8 2 19.6 20.9 20.3 5.1 1.7 25 Average 14 20.6 20.7 20.0 4.7 1.6 16
Source: Company data, Bloomberg, HSBC estimates. Note: Priced as at 24 Jun 2019
41
Equities ● REMD June 2019
Valuation and risks
Valuation Risks
COLI
688 HK
Current price:
HKD27.80
Target price:
HKD40.00
Up/downside:
+44%
We derive our fair value target price of HKD40.00 based on an
unchanged target discount of 10% (+0.5 SD above the historical
mean) applied to our unchanged NAV estimate of HKD44.40 per
share. With our TP implying 44% upside from current levels, we
maintain our Buy rating on COLI for its quality land bank, execution
track record, balance sheet strength and potential increase in
dividend payout.
Key downside risks include slower-than-expected
contracted sales momentum; achieving lower-than-expected
ASPs; uncertainties associated with the recent management
changes; and uncertainties related to macro and property-
specific policies.
Buy
Michelle Kwok* | [email protected] | +852 2996 6918
Shimao
813 HK
Current price:
HKD24.25
Target price:
HKD23.90
Up/downside:
-1%
We derive our fair value target price of HKD23.90 based on our
unchanged target discount of 40% (historical mean) applied to our
unchanged NAV estimate of HKD39.80/share. Our TP implies
downside of 1% and we maintain our Hold rating.
Key upside risks include faster-than-expected growth in
sales, higher-than-expected ASPs and margin, share
repurchase by the company and policy relaxation.
Key downside risks include an inability to sustain strong
sales momentum; lower-than-expected ASPs; overspending
on land acquisitions; and uncertainty related to macro and
property-specific policies.
Hold
Michelle Kwok* | [email protected] | +852 2996 6918
SOHO
410 HK
Current price:
HKD2.60
Target price:
HKD3.30
Upside:
27%
We derive our fair value target price of HKD3.30 based on our
unchanged target discount of 70% (1 SD below mean) applied to
our unchanged NAV estimate of HKD10.90/share. Our TP implies
upside of 27% and we upgrade SOHO from a Hold to a Buy rating.
Key downside risks include uncertainties related to SOHO
3Q; slower-than-expected lease-up progress and rental of
new offices; uncertainties in dividend outlook; and macro
and property policy uncertainties in China, especially in the
commercial property market
Buy
Michelle Kwok* | [email protected] | +852 2996 6918
Champion REIT
2778 HK
Current price:
HKD6.68
Target price:
HKD6.90
Up/downside:
+3%
We derive our unchanged target price of HKD6.90, on par with our
DDM-based fair value, assuming an unchanged cost of equity of
5.8%, a beta of 0.71 and terminal growth rate of 0.5%. Our target
price implies c3% upside from current levels. We rate Champion
REIT Hold given that its 4.4% FY19e dividend yield implies around
290/240bp spread over the Hong Kong/US 10-year yield, which is
narrower than the historical average of 457/389bp.
Upside risks: Successful project acquisitions, stronger-
than-expected DPU growth and faster-than-expected
recovery in HK retail sales which should help stronger retail
rental at Langham Place.
Downside risks: Lower-than-expected Central office rental,
rising long-term US bond yields and interest rate hikes.
Hold
Raymond Liu*, CFA | [email protected] | +852 2996 6743
Hongkong
Land
HKL SP
Current price:
USD6.69
Target price:
USD8.40
Up/downside:
+26%
We derive our fair value target price of USD8.40 based on an
unchanged target discount of 33% (0.5SD below mean) applied to
our unchanged NAV estimate of USD12.50/share. Our target price
implies c.26% upside from current levels. We have a Buy rating on
the stock as we think it should benefit from a shortage of quality
office space in Hong Kong, which should help boost its rental
income. Positive catalysts could come from a sustainable pick-up in
Central office rentals.
Downside risks include rising Hong Kong commercial cap
rates, lower-than-expected rentals, disappointing sales
performance or weaker-than-expected profitability in its
China property development business.
Buy
Raymond Liu*, CFA | [email protected] | +852 2996 6743
Swire
Properties
1972 HK
Current price:
HKD32.60
Target price:
HKD38.20
Up/downside:
+17%
We derive our unchanged target price of HKD38.20 based on an
unchanged target discount of 33% applied to our unchanged NAV
estimate of HKD57.10/share. Our discount is benchmarked against
Hongkong Land’s NAV discount at 0.5SD below historical average,
given the short trading history of Swire Properties. Our target price
implies c17% upside. We rate the stock Buy due to improved
performance at the Pacific Place mall and sustainable office rental
growth in Hong Kong.
Downside risks include lower-than-expected rentals
achieved and slower-than expected completion and ramp-up
of new projects.
Buy
Raymond Liu*, CFA | [email protected] | +852 2996 6743
Equities ● REMD June 2019
42
Valuation Risks
Hysan
Development
14 HK
Current price:
HKD40.50
Target price:
HKD44.20
Up/downside:
+9%
We derive our unchanged target price of HKD44.20 based on an
unchanged target discount of 47% (0.75SD below mean) applied to our
unchanged NAV estimate of HKD83.30/share. Our target price implies
c9% upside from current levels. We see limited share price catalysts in
the next 12 months given moderating retail sales growth and no new
project completions; therefore, we maintain our Hold rating on the stock.
Upside risks include more resilient-than-expected retail
rental growth in Hong Kong and sales of its commercial
buildings in Causeway Bay.
Downside risks include rising Hong Kong commercial cap
rates and/or lower-than-expected retail rental achieved.
Hold
Raymond Liu*, CFA | [email protected] | +852 2996 6743
Wharf REIC
1997 HK
Current price:
HKD55.60
Target price:
HKD66.30
Up/downside:
+19%
We derive our target price of HKD66.30 based on an unchanged target
discount of 29% applied to our unchanged NAV estimate of
HKD93.40/share. We benchmark this against Hongkong Land’s (HKL
SP, CMP USD6.69, Buy) NAV discount at 0.25 SD below the historical
average, given the short trading history of Wharf REIC. Our target price
implies c19% upside from the current share price. We rate the stock
Buy as we believe its FY19-21e dividend yield of 4.3-4.9% looks
attractive and provides downside protection, while we note some signs
of a recovery from short-term weakness in the Hong Kong retail market.
Downside risks include lower tourist arrivals,
concentration risk in Hong Kong, weaker-than-expected
lease renewals with tenants and weaker economic growth in
Hong Kong.
Buy
Raymond Liu*, CFA | [email protected] | +852 2996 6743
CapitaLand
CAPL SP
Current price:
SGD3.54
Target price:
SGD4.15
Up/downside:
+17%
Our sum-of-the-parts (SOTP)-based RNAV is SGD4.90 per share. In
arriving at our RNAV, we have estimated the gross assets of the
company at SGD13.11 per share and total liabilities including minorities
at SGD8.20 per share. Our target discount remains unchanged at 15%
(10% for transparency and agency issues and another 5% for our
outlook for the physical property market) – thus, our target price
(rounded) is set at SGD4.15. At the current price, the stock is trading at a
28% discount to RNAV. Our target price implies 17% upside. We
maintain our Buy rating on the stock given potential uplift from
CapitaLand’s recent acquisition of Ascendas-Singbridge and divestment
of non-core assets at better than expected prices.
Downside risks: A hard landing for the property market in
Singapore or China, as a result of a recession, sharply higher
interest rates, or adverse policy action, which could lead to lower
asset values and a reduced valuation for CapitaLand. RMB
depreciation versus SGD is also a risk to RNAV given the
sensitivity of developments in China to RNAV.
Buy
Pratik Burman Ray* | [email protected] | +65 6658 0611
Frasers
Property
FPL SP
Current price:
SGD1.83
Target price:
SGD2.25
Up/downside:
+23%
Our gross valuation (per share) for FPL, based on a sum-of-the-
parts valuation, is SGD10.01. Adjusting for net liabilities of
SGD6.99, our RNAV is SGD3.02. Our TP is set at SGD2.25 –
pegged at a target discount of 25% (10% for investability, another
10% for transparency and agency issues and 5% for our outlook on
the physical property market) and rounded down.
Our TP implies an upside of 23.0% and we maintain our Buy rating
on the stock. Potential catalysts include a turnaround in sentiment in
key markets where FPL operates (Singapore and Australia),
divestment of mature assets and an improved free float.
Downside risks: The primary downside risk is from a hard
landing in the key markets where FPL operates, either as a
result of recession, sharply higher interest rates or policy
missteps. Also, given the low free float of c12%, there is a
risk associated with liquidity events whereby the controlling
shareholders – TCC Group and/or ThaiBev – could look to
pare down exposure to FPL while still maintaining majority
control. While such a placement could boost trading liquidity,
the risk associated with such a liquidity event could also act
as an overhang on FPL’s share price. Lastly, the company’s
capital allocation philosophy is likely to remain a key area of
investor focus – this can impact the extent of the RNAV
discount the stock trades at if investors perceive capital
allocation decisions to be sub-optimal.
Buy
Pratik Burman Ray* | [email protected] | +65 6658 0611
Frasers
Centrepoint
Trust
FCT SP
Current price:
SGD2.59
Target price:
SGD2.50
Up/downside:
-4%
Our RNAV for FCT is SGD2.18 and our DDM valuation (using a
cost of equity assumption of 6.80% and a terminal stage growth
rate assumption of 2.50%) is SGD3.05. The average of our DDM
valuation and RNAV is SGD2.62. Our premium/discount framework
ascribes a 5% discount to this average valuation (due to its
relatively lower trading liquidity), thus, we peg FCT’s target price
(rounded up) at SGD2.50. Our target price implies an downside of
4% and we rate the stock a Hold.
Downside risks are: 1) potential adverse impact on CCP from
the recent opening of Jewel at Changi Airport; 2) increase in
gearing, which could result in an overhang on the shares if
expectations of an equity raising take hold; 3) worse-than-
expected outlook for Singapore’s retail sector, given the threat of
e-commerce as well as supply of retail malls (both private as
well as public sector), translating into lower rentals for FCT’s
properties; 4) overpaying for acquisitions in Singapore or
overseas; and 5) an increase in long-term interest rates, which
is a generic risk of the sector.
Upside risks are: 1) potential upside from FCT’s acquisition
of the stake in the PGIM-linked fund; and 2) upside from
accretive acquisitions.
Hold
Pratik Burman Ray* | [email protected] | +65 6658 0611
Priced at 24 June 2019. *Employed by a non-US affiliate of HSBC Securities (USA) Inc. and not registered/qualified pursuant to FINRA regulations Source: HSBC estimates
43
Equities ● REMD June 2019
Financial statements
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (HKDm)
Property sales 165,298 203,644 251,598 318,548 Property investment & others 4,361 5,145 6,159 6,722 Total revenue 169,659 208,789 257,757 325,270 Cost of sales (104,855) (138,012) (173,286) (221,708) Gross profit 64,803 70,777 84,471 103,562 Selling & Admin expenses (5,588) (6,780) (7,449) (8,540) Other gains/expenses (721) 0 0 0 Operating profit 58,494 63,997 77,022 95,022 Net interest 217 498 806 940 Share of profit from asso. 3,422 2,996 3,251 4,591 Revaluation on IP and others 10,436 0 0 0 PBT 72,568 67,492 81,078 100,553 Taxation (25,866) (21,091) (25,745) (35,760) Minority interests (1,802) (1,576) (1,606) (1,794) Net profit 44,900 44,825 53,727 63,000 Core Profit 37,090 44,825 53,727 63,000 Cash flow summary (HKDm)
Cash flow from operations 5,671 4,903 8,300 5,338 Capex (3,917) (8,298) (8,984) (10,471) Changes in investments (13,647) (5,289) (4,024) (2,096) Net cash from financing activities 8,398 22,063 7,100 14,460 Net change in cash (3,495) 13,379 2,393 7,232 Cash at the beginning 104,051 100,555 113,935 116,327 Cash at the end 100,555 113,935 116,327 123,559 Balance sheet summary (HKDm)
Shareholders' funds 283,481 315,449 353,785 397,372 Long-term liabilities 165,045 167,873 151,114 122,795 Minority interests 10,125 11,701 13,307 15,100 Deferred items 17,554 17,554 17,554 17,554 Total capital employed 476,204 512,576 535,759 552,822 Fixed assets 115,241 123,171 131,783 141,879 Other non-current assets 43,068 49,535 54,972 58,763 Current assets 567,032 698,479 844,943 1,047,026 Total assets 725,341 871,184 1,031,698 1,247,668
Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
y-o-y % change
Revenue 3% 23% 23% 26% PBT 14% -7% 20% 24% Reported EPS 10% 0% 20% 17% HSBC EPS 8% 21% 20% 17% Ratios (%)
ROIC ex-exceptional 10% 10% 11% 11% ROAE ex-exceptional 13% 15% 16% 17% ROAA ex-exceptional 5% 6% 6% 6% Gross profit margin 38% 34% 33% 32% Core profit margin 22% 21% 21% 19% Interest cover ex-exceptional (x) 8.1 7.2 8.0 8.4 Net debt/equity (incl.restricted cash) 34% 36% 37% 38% Per share data (HKD)
Reported EPS (fully diluted) 4.10 4.09 4.90 5.75 HSBC EPS (fully diluted) 3.39 4.09 4.90 5.75 DPS 0.90 1.11 1.35 1.61 BV 25.87 28.79 32.29 36.27
Source: Company data, HSBC estimates
COLI: NAV breakdown
(RMBm) (HKD/sh) % of GAV
Development properties Residential 516,908 54.5 79.6% Others 51,559 5.4 7.9% Investment properties Office/retail 80,448 8.5 12.4% Industrial 215 0.0 0.0% Car park space 30 0.0 0.0% Net debt (98,600) (10.4) Outstanding LAT (119,913) (12.6) Outstanding Land premium (10,000) (1.1)
Fair value NAV 420,646 44.4 100.0%
Source: HSBC estimates
ESG metrics
Environmental indicators 12/2018a Governance indicators 12/2018a
GHG emission intensity* 11.7 No. of board members 7
Energy intensity* 18.7 Average board tenure (years) 6.8
CO2 reduction policy Yes Female board members (%) 14.3
Social indicators 12/2018a Board members independence (%) 42.9
Employee costs as % of revenue 1.7
Employee turnover (%) 8.0
Diversity policy Yes
*GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD’000
Source: Company data, HSBC
NAV discount
Source: Company data, Refinitiv Datastream, HSBC estimates
Price relative
Note: Priced at close of 24 June 2019 Source: HSBC
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
% to NAV +1 SD Mean -1 SD
17.00
19.00
21.00
23.00
25.00
27.00
29.00
31.00
33.00
17.00
19.00
21.00
23.00
25.00
27.00
29.00
31.00
33.00
2017 2018 2019
China Overseas Land & Inv Rel to HSCEI
Financials & valuation: China Overseas Land & Investment Buy
Equities ● REMD June 2019
44
Financial statements
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (RMBm)
Property sales revenue 80,907 105,848 127,385 151,574 Property investment & other revenue 4,606 5,560 6,899 9,912 Total revenue 85,513 111,408 134,284 161,487 Cost of sales (58,564) (77,081) (94,099) (113,180) Gross profit 26,949 34,327 40,184 48,307 Selling & Admin expenses (5,973) (7,455) (8,992) (10,719) Other gains & misc 2,233 306 315 325 Operating profit/EBIT 23,209 27,178 31,508 37,912 Net interest (337) (516) (698) (653) Share of profit from asso. (233) (163) (114) (118) PBT 22,638 26,499 30,696 37,141 Taxation (10,327) (11,831) (13,468) (16,671) Minority interests (3,476) (3,927) (4,310) (4,741) Net profit 8,835 10,742 12,918 15,729 Core Profit 8,548 10,742 12,918 15,729 Cash flow summary (RMBm)
Cash flow from operations (8,811) (8,436) (9,911) (8,507) Capex (12,412) (12,272) (12,611) (12,893) Changes in investments and minorities 2,304 1,565 1,544 1,802 Dividends paid (3,693) (3,823) (4,344) (5,224) Other financing activities 37,763 19,397 23,699 27,047 Net change in cash 15,151 (3,569) (1,624) 2,224 Cash at the beginning 28,537 43,688 40,120 38,496 Cash at the end 43,688 40,120 38,496 40,720 Balance sheet summary (RMBm)
Shareholders' funds 64,334 73,267 83,606 95,879 Long-term liabilities 77,825 78,328 84,874 93,579 Minority interests 40,946 44,873 49,183 53,924 Deferred items 6,596 6,596 6,596 6,596 Total capital employed 189,702 203,064 224,259 249,978 Fixed assets 61,010 64,223 65,236 90,941 Other assets 27,738 31,072 35,249 39,040 Current assets 288,849 342,591 378,783 423,031 Total assets 377,597 437,886 479,268 553,012
Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
y-o-y % change
Revenue 21% 30% 21% 20% Gross profit 26% 27% 17% 20% PBT 21% 17% 16% 21% Reported EPS 14% 23% 20% 22% HSBC EPS 25% 27% 20% 22% Ratios (%)
ROIC ex-exceptional 7% 7% 8% 9% ROAE ex-exceptional 15% 17% 18% 19% ROAA ex-exceptional 2% 3% 3% 3% Gross margin 32% 31% 30% 30% Core profit margin 10% 10% 10% 10% Interest cover ex-exceptional (x) 3.4 3.1 3.2 4.1 Net debt/equity(excl. restricted cash & MI, perp as debt)
119% 123% 123% 101%
Net debt/equity(incl. restricted cash and MI)
59% 66% 68% 58%
Per share data (RMB)
Reported EPS (fully diluted) 2.65 3.25 3.91 4.76 HSBC EPS (fully diluted) 2.56 3.25 3.91 4.76 DPS (HKD) 1.20 1.32 1.58 1.93 BV (HKD) 20.7 23.9 27.5 31.8
Source: Company data, HSBC estimates
Shimao: NAV breakdown
(RMBm) (HKD/sh) % of GAV
Development properties Residential 169,807 58.8 66.2% Office/retail 10,588 3.7 4.1% Investment properties Office/retail 63,166 21.9 24.6% Hotel properties 12,928 4.5 5.0% Net debt (excluding restricted cash) (78,409) (27.1) Outstanding land premium (8,400) (2.9) Outstanding LAT (54,737) (19.0)
Fair value NAV 114,944 39.8 100.0%
Source: HSBC estimates
ESG metrics
Environmental indicators 12/2018a Governance indicators 12/2018a
GHG emission intensity* N/A No. of board members 7
Energy intensity* N/A Average board tenure (years) 11.1
CO2 reduction policy Yes Female board members (%) 28.6
Social indicators 12/2018a Board members independence (%) 42.9
Employee costs as % of revenue 2.4
Employee turnover (%) N/A
Diversity policy Yes
*GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD’000
Source: Company data, HSBC
NAV discount
Source: Company data, Refinitiv Datastream, HSBC estimates
Price relative
Source: riced at close of 24 June 2019
-100%
-80%
-60%
-40%
-20%
0%
20%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
% to NAV +1 SD Mean -1 SD
7.80
12.80
17.80
22.80
27.80
7.80
12.80
17.80
22.80
27.80
2017 2018 2019
Shimao Property Rel to HSCEI
1.80
2.30
2.80
3.30
3.80
4.30
4.80
5.30
1.80
2.30
2.80
3.30
3.80
4.30
4.80
5.30
2017 2018 2019
SOHO China Limited Rel to HSCEI
Financials & valuation: Shimao Property Hold
45
Equities ● REMD June 2019
Financial statements
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (RMBm)
Property sales revenue 68 193 257 161 Property investment revenue 1,652 1,971 2,381 3,041 Total revenue 1,721 2,164 2,639 3,202 Cost of sales (435) (595) (732) (831) Gross profit 1,285 1,568 1,906 2,371 SG&A (278) (422) (475) (576) Other income and gains 1,327 148 104 45 Operating profit 2,335 1,294 1,535 1,840 Net interest expense (471) (568) (604) (664) Revaluation gains 1,093 0 0 0 PBT 2,957 727 931 1,176 Taxation (1,009) (182) (233) (294) Minority interests (24) (76) (91) (122) Net profit 1,925 469 607 760 HSBC core profit 1,105 469 607 760 Cash flow summary (RMBm)
Cash flow from operations 1,096 850 653 746 Capex (954) (617) (382) (357) Other investing activities 1,222 (33) (41) (51) Net cash from financing activities 500 (71) (46) (148) Net change in cash 1,864 130 185 190 Cash at the beginning 3,702 5,566 5,696 5,881 Cash at the end 5,566 5,696 5,881 6,070 Balance sheet summary (RMBm)
Shareholders’ funds 34,747 35,028 35,332 35,712 Long-term liabilities 16,730 16,406 17,055 16,923 Minority interests 1,047 1,123 1,213 1,336 Deferred items and others 8,581 8,662 8,743 8,825 Total capital employed 61,105 61,218 62,343 62,795 Fixed assets 59,742 60,631 61,301 61,993 Other non-current assets 1,285 942 988 1,045 Current assets 9,072 9,126 9,201 9,332 Total assets 70,099 70,698 71,490 72,371
Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
y-o-y % change
Revenue -12% 26% 22% 21% Operating profit 38% -45% 19% 20% PBT -64% -75% 28% 26% Reported EPS -59% -76% 30% 25% HSBC EPS 141% -58% 30% 25% Ratios (%)
ROIC excl. exceptional 1% 1% 1% 1% ROAE excl. exceptional 1% 1% 2% 2% ROAA excl. exceptional 1% 1% 1% 1% Gross profit margin 75% 72% 72% 74% Core profit margin (excl. IP revaluation) 64% 22% 23% 24% Interest cover excl. exceptional (x) 3.8 1.3 1.5 1.6 Net debt/equity (excl. restricted cash) 44% 43% 43% 42% Net debt/equity (incl. restricted cash) 43% 42% 42% 41% Per share data (RMB)
Reported EPS (diluted) 0.37 0.09 0.12 0.15 HSBC EPS (diluted) 0.21 0.09 0.12 0.15 DPS (RMB) 0.03 0.04 0.06 0.07 BV 6.68 6.74 6.80 6.87
Source: Company data, HSBC estimates
SOHO China: NAV breakdown
(RMBm) (HKD/sh) % of GAV
Office/Retail 63,861 14.2 100% GAV 63,861 14.2 100.0% Net debt (excluding restricted cash) (15,034) (3.3)
Fair Value NAV 48,827 10.9
Source: HSBC estimates ESG metrics
Environmental Indicators 12/2018a Governance Indicators 12/2017a
GHG emission intensity* 202.5 No. of board members 5
Energy intensity* 248.2 Average board tenure (years) N/A
CO2 reduction policy Yes Female board members (%) 20.0
Social Indicators 12/2018a Board members independence (%) 60.0
Employee costs as % of revenues 12.8
Employee turnover (%) N/A
Diversity policy Yes
Source: Company data, HSBC
* GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s NAV discount
Source: Company data, Refinitiv Datastream, HSBC estimates
Price relative
Note: Priced at close of 24 June 2019 Source: HSBC
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
% to NAV +1 SD Mean -1 SD
1.80
2.30
2.80
3.30
3.80
4.30
4.80
5.30
1.80
2.30
2.80
3.30
3.80
4.30
4.80
5.30
2017 2018 2019
SOHO China Limited Rel to HSCEI
Financials & valuation: SOHO China Buy
Equities ● REMD June 2019
46
Financial statements
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (HKDm)
Rental Income 2,594 2,892 3,151 3,202 Other Income 371 348 355 361 Operating Expenses (560) (583) (609) (619) Net Property Income 2,405 2,656 2,898 2,945 Non-property Expenses (316) (344) (373) (378) Operating Profit/EBIT 2,089 2,312 2,525 2,567 Net Interest Expense (400) (346) (317) (272) PBT 1,689 1,966 2,208 2,295 HSBC PBT 1,689 1,966 2,208 2,295 Taxation (289) (324) (364) (379) Core Net Profit 1,400 1,642 1,844 1,916 Net impact of property rev reserve 6,412 0 0 0 Reported Profit 7,812 1,642 1,844 1,916 HSBC Net Profit 1,400 1,642 1,844 1,916 Distribution Income 1,530 1,734 1,940 2,012
Cash flow summary (HKDm)
Net cash from operating activities 1,704 2,041 2,205 2,234 Cash flow from investing activities (219) 144 140 71 Bank financing 200 300 0 0 Distribution paid (1,462) (1,583) (1,745) (1,877) Net cash used in financing activities (1,275) (1,307) (1,770) (1,902) Net change in cash 209 878 574 403 Net cash at end 1,400 2,277 2,852 3,255
Balance sheet summary (HKDm)
Shareholders’ funds 66,761 66,582 66,854 67,070 Long-term liabilities 11,307 11,582 15,282 15,282 Total capital employed 78,666 78,792 82,796 83,045 Fixed assets 83,135 83,135 83,135 83,135 Current assets 1,897 2,644 3,249 3,649 Total assets 85,291 85,818 86,423 86,823
Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
y-o-y % change
Revenue 10% 9% 8% 2% Operating profit 11% 11% 9% 2% PBT -29% -76% 12% 4% Reported EPS -30% -79% 12% 3% HSBC EPS 8% 13% 12% 3%
Ratios (%)
ROIC ex-exceptional 2% 2% 2% 2% ROAE ex-exceptional 2% 2% 3% 3% ROAA ex-exceptionals 2% 2% 2% 2% EBITDA margin 70% 71% 72% 72% Core profit margin 47% 51% 53% 54% Interest cover ex-exceptional (x) 5.2 6.7 8.0 9.4 Debt/gross assets 18% 18% 18% 18% Net debt/EBITDA (x) 6.5 5.7 5.0 4.8
Per share data (HKD)
EPS reported (fully diluted) 1.34 0.28 0.31 0.32 HSBC EPS (fully diluted) 0.25 0.28 0.31 0.32 DPS 0.262 0.295 0.328 0.339
Champion: NAV breakdown (based on DDM)
Year DPU (HKD/unit)
FY19e 0.295 FY20e 0.310 FY21e 0.303 Perpetual value 4.457
Est. NAV 6.9
Source: HSBC estimates
ESG metrics
Environmental Indicators 12/2018a Governance Indicators 12/2018a
GHG emission intensity* 74.0 No. of board members 7
Energy intensity* 115.5 Average board tenure (years) 10.6
CO2 reduction policy Yes Female board members (%) 14.3
Social Indicators 12/2018a Board members independence (%) 57.1
Employee costs as % of revenues NA
Employee turnover (%) 0
Diversity policy Yes
Source: Company data, HSBC
* GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Price relative
Source: HSBC
Note: Priced at close of 24 Jun 2019
2.70
3.70
4.70
5.70
6.70
2.70
3.70
4.70
5.70
6.70
01/15 07/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18
Champion REIT Rel to HANG SENG INDEX
Financials & valuation: Champion REIT Hold
47
Equities ● REMD June 2019
Financial statements
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (USDm)
Revenue - Rental Income 983 1,020 1,039 1,058 Revenue - Property Trading 1,533 1,022 434 981 Revenue Others (service & mgmt. charges) 150 221 230 230 Total cost of sales (1,429) (1,043) (556) (1,015) Gross profit 1,236 1,219 1,147 1,255 Other Income 28 29 30 32 Admin & Other Expense (174) (192) (201) (211) Operating Profit/EBIT 1,089 1,056 977 1,076 Net Interest (114) (154) (134) (125) Non-operating profit/loss 265 382 466 549 PBT 1,240 1,284 1,309 1,501 Taxation (206) (180) (169) (190) Minority Interests 2 (7) (7) (18) Core Net Profit 1,036 1,097 1,133 1,292
Cash flow summary (USDm)
Cash flow from operations 604 1,062 2,010 1,437 Capex (150) (1,282) (863) (449) Cash flow from investing activities (1,056) (1,282) (863) (449) Dividends paid (469) (515) (539) (562) Net cash used in financing activities 237 171 (430) (573) Net change in cash (215) (49) 716 415 Cash at the beginning 1,617 1,369 1,326 2,043 Cash at the end 1,369 1,326 2,043 2,458
Balance sheet summary (USDm)
Shareholders’ funds 38,342 39,208 40,071 41,060 Long-term liabilities 4,145 3,994 3,711 3,387 Minority interests 28 35 42 60 Total capital employed 42,713 43,436 44,022 44,705 Fixed assets 33,846 35,124 35,982 36,427 Other assets 6,855 7,237 7,703 8,252 Current assets 4,262 5,030 6,831 8,136 Total assets 44,963 47,391 50,517 52,815
Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
y-o-y % change
Revenue 65% -15% -25% 33% Operating profit 24% -3% -8% 10% PBT 13% 4% 2% 15% Reported EPS 10% 6% 3% 14% HSBC EPS 10% 6% 3% 14%
Ratios (%)
ROIC ex-exceptional 3% 3% 3% 3% ROAE ex-exceptional 3% 3% 3% 3% ROAA ex-exceptional 2% 3% 3% 3% Operating margin 41% 47% 58% 48% Core profit margin 39% 48% 66% 57% Interest cover ex-exceptional (x) 9.1 7.1 8.5 10.4 Net debt/equity 9% 8% 6% 4% PB (x) 0.4 0.4 0.4 0.4 PE (x) 15.1 14.3 13.8 12.1 Dividend yield 3.3% 3.4% 3.6% 3.7%
Per share data (USD)
Reported EPS (diluted) 0.44 0.47 0.48 0.55 HSBC EPS (diluted) 0.44 0.47 0.48 0.55 DPS 0.22 0.23 0.24 0.25
NAV estimates
(USDm) (USD/sh) % of gross asset
Hong Kong investment properties Office 15,929 6.8 48% Retail 5,107 2.2 15% Overseas properties Singapore Investment properties 2,123 0.9 6% Investment properties in other regions 3,888 1.7 12% Development properties China 3,103 1.3 9% Singapore 1,125 0.5 3% Other regions 1,948 0.8 6% Estimated net debt (3,916) (1.7)
Est. NAV 29,307 12.50 100%
Source: HSBC estimates ESG metrics
Environmental Indicators 12/2018a Governance Indicators 12/2018a
GHG emission intensity* 57.3 No. of board members 15
Energy intensity* 92.7 Average board tenure (years) 12.0
CO2 reduction policy Yes Female board members (%) 6.7
Social Indicators 12/2018a Board members independence (%) 0
Employee costs as % of revenues 5.9
Employee turnover (%) NA
Diversity policy Yes
Source: Company data, HSBC
* GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s
HKL (discount)/premium to NAV
Source: HSBC estimates Price relative
Source: HSBC
Note: Priced at close of 24 Jun 2019
-60%
-45%
-30%
-15%
0%
15%
07 08 09 10 11 12 13 14 15 16 17 18 19
% to NAV -1 S.D
4.60
5.60
6.60
7.60
8.60
4.60
5.60
6.60
7.60
8.60
01/15 07/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18
Hongkong Land Rel to HANG SENG INDEX
Financials & valuation: Hongkong Land Buy
Equities ● REMD June 2019
48
Financial statements
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (HKDm)
Property Investment 12,117 13,762 14,819 15,234 Property Development 1,061 976 605 2,808 Hotels & Other Business 1,541 1,612 1,681 1,709 Operating Costs (ex. Dep. & Amor.) (5,881) (6,022) (6,315) (8,680) EBITDA 8,838 10,328 10,790 11,071 Depreciation and Amortisation (394) (401) (408) (416) Other Gains 1,469 2,547 0 0 Non-operating Profit/Loss 20,515 0 0 0 Net Interest Expense (882) (810) (765) (747) Share of Profit from Asso. 915 1,062 1,140 1,098 PBT 30,461 12,725 10,756 11,005 Taxation (1,740) (1,900) (1,551) (1,595) Minority Interests (55) (40) (41) (42) Net Profit 28,666 10,784 9,165 9,369 Net Impact of Ppty. Rev. Reserve/gains (18,518) 2,127 0 0 Core Profit 10,148 12,911 9,165 9,369
Cash flow summary (HKDm)
Cash flow from operations 10,397 11,156 10,006 11,651 Capex (4,038) (3,561) (4,469) (3,163) Other investments activities 4,901 13,647 (39) (27) Dividends paid (4,622) (5,031) (5,207) (5,207) Others fin. activities (6,206) (3,123) (2,238) (1,113) Net change in cash 432 13,089 (1,947) 2,141 Cash at beginning 1,708 2,093 15,182 13,235 Cash at end 2,093 15,182 13,235 15,376
Balance sheet summary (HKDm)
Shareholders’ funds 279,275 286,980 290,938 295,042 Long-term liabilities 30,769 28,855 27,738 27,680 Minority interests 2,016 2,056 2,097 2,139 Deferred tax & others 9,597 9,597 9,597 9,597 Total capital employed 321,657 327,489 330,370 334,458 Fixed assets 281,063 290,130 315,152 340,528 Other assets 31,000 31,371 31,761 32,070 Current assets 21,584 20,028 18,639 22,266 Total assets 333,647 341,530 365,553 394,864 Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change
Revenue -21% 11% 5% 15% Operating profit -10% 18% 5% 3% PBT -15% -58% -15% 2% Reported EPS -16% -62% -15% 2% HSBC EPS 30% 27% -29% 2%
Ratios (%)
ROIC ex exceptionals 4% 5% 3% 3% ROAE ex exceptionals 4% 5% 3% 3% ROAA ex exceptionals 3% 4% 3% 2% Operating margin 57% 61% 61% 54% Core profit margin 69% 79% 54% 47% Interest cover ex exceptionals (x) 8.9 11.6 12.7 13.3 Net debt/equity 11% 5% 5% 5% PB(x) 0.7 0.7 0.7 0.6 PE(x) 18.8 14.8 20.8 20.4 Dividend yield 2.6% 2.7% 2.7% 2.8%
Per share data (HKD)
Reported EPS (diluted) 4.90 1.84 1.57 1.60 HSBC EPS (diluted) 1.73 2.21 1.57 1.60 DPS 0.84 0.89 0.89 0.90
Source: Company data, HSBC estimates
Swire Properties: NAV breakdown
Particulars (HKDm) HKD/share % of GAV
Investment properties-HK 253,909 43.4 73% Office 186,707 31.9 54% Retail 47,968 8.2 14% Residential 11,365 1.9 3% Hotel 7,869 1.3 2% Development properties 4,667 0.8 1% China-Investment properties 73,541 12.6 21% Office (completed) 45,203 7.7 13% Retail (completed) 13,904 2.4 4% Under developments 7,814 1.3 2% China residential and hotels 6,620 1.1 2% Others (US props and HK other props) 16,645 2.8 5%
GAV 348,762 59.6 100% Net debt -14,827 -2.5
Net asset value 333,935 57.1
Source: HSBC estimates
ESG metrics
Environmental Indicators 12/2018a Governance Indicators 12/2018a
GHG emission intensity* 114.7 No. of board members 13
Energy intensity* 177.6 Average board tenure (years) 5.5
CO2 reduction policy Yes Female board members (%) 30.8
Social Indicators 12/2018a Board members independence (%) 38.5
Employee costs as % of revenues 12.6
Employee turnover (%) 24.0
Diversity policy Yes
Source: Company data, HSBC
* GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Swire Properties (disc)/prem to NAV
Source: HSBC estimates Price relative
Source: HSBC Note: Priced at close of 24 Jun 2019
-60%
-50%
-40%
-30%
-20%
-10%
0%
Jan-12 Apr-13 Jun-14 Aug-15 Oct-16 Dec-17 Mar-19
% to NAV Target NAV (%)
17.00
22.00
27.00
32.00
37.00
17.00
22.00
27.00
32.00
37.00
01/15 07/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18
Swire Properties Rel to HANG SENG INDEX
Financials & valuation: Swire Properties Buy
49
Equities ● REMD June 2019
Financial statements
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (HKDm)
Property Development 89 413 0 0 Property Investment 14,304 15,258 16,554 17,478 Hotels 1,821 2,223 2,231 2,239 Others 267 274 282 289 Total revenue 16,481 18,169 19,066 20,006 Cost of Sales (3,757) (4,027) (3,947) (4,074) Gross Profit 12,724 14,141 15,119 15,932 Net Interest Expense (815) (784) (736) (701) Share of Profit from Asso. 233 2 80 0 Property revaluation 8,065 0 0 0 Other exceptionals 46 26 35 49 PBT 20,253 13,386 14,497 15,280 Taxation (1,994) (2,373) (2,515) (2,653) Minority Interests (232) (132) (170) (185) Net Profit 18,027 10,881 11,812 12,442 Net impact of revaluation 7,974 0 0 0 Core Profit 10,053 10,881 11,812 12,442
Cash flow summary (HKDm)
Cash flow from operations 9,498 11,486 12,708 13,513 Capex (588) (2,894) (1,998) (1,650) Changes in investments 375 (26) (104) (24) New shares issued 0 0 0 0 Dividends paid (6,199) (6,724) (7,375) (7,883) Others (3,369) (980) (2,005) (1,626) Net change in cash (283) 861 1,225 2,330 Cash at beginning 3,076 2,675 3,536 4,761 Cash at end 2,675 3,536 4,761 7,091
Balance sheet summary (HKDm)
Shareholders’ funds 218,797 223,255 227,916 232,779 Long-term liabilities 39,068 37,876 35,397 33,171 Minority interests 5,535 5,667 5,837 6,022 Deferred tax and others 2,609 2,739 2,876 3,020 Total capital employed 266,009 269,538 272,026 274,992 Fixed assets 267,261 269,093 270,437 271,779 Other assets 5,738 5,769 5,878 5,907 Current assets 7,357 8,489 9,999 12,396 Total assets 280,356 283,351 286,314 290,082
Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
y-o-y % change
Revenue -21% 10% 5% 5% Operating profit -18% 11% 7% 5% PBT -9% -34% 8% 5% Core profit 5% -40% 9% 5% Reported EPS 9% 8% 9% 5% HSBC EPS -21% 10% 5% 5%
Ratios (%)
ROIC ex exceptionals 4% 4% 5% 5% ROAE ex exceptionals 5% 5% 5% 5% ROAA ex exceptionals 4% 4% 4% 4% Operating margin 77% 78% 79% 80% Core profit margin 61% 60% 62% 62% Interest cover ex exceptionals (x) 15.3 17.7 20.1 22.3 Net debt/equity 18% 16% 14% 12% PB(x) 0.8 0.8 0.7 0.7 PE(x) 16.8 15.5 14.3 13.6 Dividend yield 3.8% 4.2% 4.5% 4.8%
Per share data (HKD)
Reported EPS (fully diluted) 5.94 3.58 3.89 4.10 HSBC EPS (fully diluted) 3.31 3.58 3.89 4.10 DPS 2.10 2.33 2.53 2.66
Wharf REIC : Est. NAV breakdown
Particulars (HKDm) HKD/ Share
% of total asset
HK investment prop 307,581 101.3 96% Office 90,938 30.0 28% Retail 212,983 70.1 67% Residential and others 3,659 1.2 1% China investment Prop 1,281 0.4 0% Office 861 0.3 0% Retail 26 0.0 0% Residential and others 394 0.1 0% Development properties 1,062 0.3 0% Hotels 10,131 3.3 3%
GAV 320,054 105.4 100% Net debt (36,491) (12.0)
Est. NAV 283,563 93.4
Source: HSBC estimates ESG metrics
Environmental Indicators 12/2018a Governance Indicators 12/2018a
GHG emission intensity* 58.1 No. of board members 10
Energy intensity* 108.1 Average board tenure (years) 1.2
CO2 reduction policy Yes Female board members (%) 20
Social Indicators 12/2018a Board members independence (%) 50
Employee costs as % of revenues 6.1
Employee turnover (%) 34.6
Diversity policy Yes
Source: Company data, HSBC
* GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Wharf REIC (discount)/premium to NAV
Source: Bloomberg, HSBC estimates Price relative
Source: HSBC Note: Priced at close of 24 Jun 2019
-50%
-45%
-40%
-35%
-30%
-25%
-20%
NAV disc (%) Mean
41.00
46.00
51.00
56.00
61.00
66.00
41.00
46.00
51.00
56.00
61.00
66.00
11/17 05/18 10/18 05/19
Wharf REIC Rel to HANG SENG INDEX
Financials & valuation: Wharf REIC Buy
Equities ● REMD June 2019
50
Financial statements
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (HKDm) Turnover 3,890 4,147 4,232 4,346 Operating Expenses (523) (540) (541) (555) Net Property Income 3,367 3,607 3,691 3,791 Net Interest (222) (211) (238) (198) Other Expenses (227) (272) (274) (277) Operating Profit 2,980 3,213 3,265 3,404 Share of Profit from JCEs 179 219 246 250 PBT 3,159 3,431 3,512 3,654 Taxation (481) (516) (524) (547) Minority Interests (142) (163) (167) (172) Core Net Profit 2,536 2,753 2,820 2,934 Net impact of revaluation 3,497 0 0 0 Reported Profit 6,033 2,753 2,820 2,934 HSBC net profit 2,536 2,753 2,820 2,934 Cash flow summary (HKDm)
Net cash from operating activities 2,751 3,029 3,101 6,370 Capex (1,265) (1,716) (1,718) (1,716) Other investing activities (990) (1,682) (1,690) (1,678) Dividends paid (1,572) (1,663) (1,747) (1,799) Other financing activities (1,726) (1,455) (1,871) (3,076) Net change in cash 35 (108) (460) 1,616 Cash at begin inc. time deposits 2,782 2,817 2,709 2,249 Net cash at end inc. time deposits 2,817 2,709 2,249 3,865
Balance sheet summary (HKDm)
Shareholders’ funds 74,431 75,646 76,845 78,105 Long-term liabilities 7,571 8,018 8,242 7,317 Minority interests 3,206 3,244 3,286 3,333 Total capital employed 85,208 86,907 88,372 88,755 Fixed assets 78,189 79,888 81,588 83,287 Other assets 5,607 5,879 6,183 6,496 Current assets 3,247 3,170 2,745 4,398 Total assets 87,043 88,937 90,516 94,181
Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
y-o-y % change
Revenue 10% 7% 2% 3% Operating profit -1% 8% 2% 4% PBT -1% 9% 2% 4% Reported EPS 66% -54% 2% 4% HSBC EPS 2% 9% 2% 4%
Ratios (%)
ROIC ex-exceptional 4% 4% 4% 4% ROAE ex-exceptional (ex-revaluation res) 4% 4% 4% 4% ROAA ex-exceptionals 3% 3% 3% 3% EBITDA margin 77% 78% 78% 79% Core profit margin 65% 66% 67% 68% Interest cover ex-excep (x) 14.4 16.2 14.7 18.2 Net debt/equity 5% 6% 6% 3% PB (x) 0.6 0.6 0.6 0.5 PE (x) 16.7 15.4 15.0 14.4 Dividend yield 3.6% 3.8% 3.9% 4.0% Per share data (HKD)
EPS reported 5.77 2.63 2.70 2.80 SBC EPS 2.42 2.63 2.70 2.80 DPS 1.44 1.54 1.59 1.64
Hysan: NAV breakdown
Particulars (HKDm) (HKD/sh) % of GAV
HK investment portfolio Office 39,660 37.9 43% Retail 37,000 35.4 41% Lux. Res. 6,548 6.3 7% PRC investment portfolio Office 1,122 1.1 1% Retail 2,793 2.7 3% Lux. Res. 777 0.7 1%
HK development property 3,418 3.3 4%
Gross Asset Value 91,317 87.3 100% Estimated net debt (4,167) (4.0)
Hysan NAV 87,150 83.3
Source: HSBC estimates
ESG metrics
Environmental Indicators 12/2018a Governance Indicators 12/2018a
GHG emission intensity* 82.4 No. of board members 10
Energy intensity* 104.2 Average board tenure (years) 12.3
CO2 reduction policy Yes Female board members (%) 20.0
Social Indicators 12/2018a Board members independence (%) 50.0
Employee costs as % of revenues 6.3
Employee turnover (%) 28.9
Diversity policy Yes
Source: Company data, HSBC
* GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s
Hysan (discount)/premium to NAV
Source: HSBC estimates
Price relative
Source: HSBC
Note: Priced at close of 24 Jun 2019
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
07 08 09 10 11 12 13 14 15 16 17 18 19
% to NAV +1 S.D-1 S.D Mean
+
26.00
31.00
36.00
41.00
46.00
26.00
31.00
36.00
41.00
46.00
01/15 07/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18
Hysan Development Rel to HANG SENG INDEX
Financials & valuation: Hysan Development Hold
51
Equities ● REMD June 2019
Financial statements
Year to 12/2017 12/2018 12/2019e 12/2020e
Profit & loss summary (SGDm)
Revenue 4,618 5,602 5,472 6,057
EBIT 3,302 4,145 2,542 2,922
Net interest (487) (636) (649) (713)
PBT 2,816 3,509 1,893 2,209
Taxation (469) (659) (398) (464)
PAT 2,347 2,850 1,495 1,745
Minority interest (777) (1,087) (496) (559)
PATMI 1,570 1,762 1,000 1,187
Operating PATMI 927 872 1,000 1,187
PATMI (ex-revaluations) – core 766 872 1,000 1,187
Cash flow summary (SGDm)
Cash flow from operations 2,166 553 1,916 1,771
Cash flow from investing activities (1,770) (1,356) (3,240) (2,657)
Cash flow from financing 979 (217) 673 608
Other adjustments (48) (0) - -
Change in cash 1,328 (1,020) (651) (277)
Opening cash balance 4,778 6,080 5,005 4,354
Closing cash balance 6,105 5,060 4,354 4,077
Balance sheet summary (SGDm)
Cash and cash equivalents 6,105 5,060 4,354 4,077
Total current assets 12,312 12,446 11,576 12,037
Non-current assets 49,227 52,201 55,755 58,755
Total assets 61,539 64,648 67,331 70,792
Total debt 21,695 23,634 25,634 27,634
Total liabilities 29,421 31,341 33,507 36,261
Total equity 32,118 33,307 33,807 34,494
Shareholder’s funds 18,413 18,953 19,453 20,140
Ratio, growth and per share analysis
Year to 12/2017 12/2018 12/2019e 12/2020e
Y-o-y % change
Revenue -12% 21% -2% 11%
EBIT 40% 26% -39% 15%
PBT 48% 25% -46% 17%
PATMI 32% 12% -43% 19%
EPS (basic) 32% 14% -43% 19%
Ratios (%)
ROE 9% 9% 5% 6%
ROE (ex-revaluations) – core 4% 5% 5% 6%
ROA (ex-revaluations) – core 6% 4% 4% 4%
EBITDA margin 72% 74% 46% 48%
EBITDA/net interest expense 6.8 6.5 3.5 3.8
Net debt/equity 49% 56% 63% 68%
Net debt/EBITDA (x) 3.9 4.1 7.8 7.7
Per share data (SGD)
EPS* (basic) 0.37 0.42 0.24 0.29
EPS* (diluted) 0.34 0.39 0.21 0.25
DPS 0.12 0.12 0.12 0.12
NTA per share 4.20 4.40 4.52 4.69
BV per share 4.34 4.55 4.67 4.84
*estimates reflect only core numbers
RNAV Computation (SGDm) Per Share (SGD)
% of GAV
CapitaLand Singapore 11,880 2.80 21%
CapitaLand China 9,291 2.19 17%
CapitaMalls Asia 23,286 5.48 42%
Serviced Residences (Ascott) 7,838 1.85 14%
Others 3,370 0.79 6%
Total attributable GAV* 55,665 13.11 100%
Less: Attributable net liabilities* (34,835) (8.20)
RNAV 20,830 4.90
No. of shares (m) 4,247
RNAV per share (SGD) 4.90
Target premium / (discount) to RNAV 15%
Target price (SGD) 4.15
*Note: For the purposes or computing our RNAV, our attributable GAV and attributable net
liabilities are computed on the basis of equity accounting for all REITs and assets in which CAPL
has a stake of 50% or lower. ESG metrics
Environmental Indicators 12/2018a Governance Indicators 12/2018a
GHG emission intensity* 152.9 No. of board members 12
Energy intensity* 308.8 Average board tenure (years) 4.2
CO2 reduction policy Yes Female board members (%) 16.7
Social Indicators 12/2018a Board members independence (%) 83.3
Employee costs as % of revenues n/a
Employee turnover (%) 17.0
Diversity policy Yes
Source: Company data, HSBC
* GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s
CapitaLand Limited: PBV chart
Source: Bloomberg, HSBC Performance relative to FSSTI
Source: Bloomberg, HSBC
0.0
0.5
1.0
1.5
2.0
2.5
Jan-05 Aug-08 Mar-12 Nov-15 Jun-19
CAPL PBV Avg Trendline
+1 std dev -1 std dev
Avg: 1.02
+1SD: 1.42
-1SD: 0.63
0
100
200
300
400
500
Jan-05 Aug-08 Mar-12 Oct-15 Jun-19
CAPL FSSTI
Financials & valuation: CapitaLand Buy
Equities ● REMD June 2019
52
Financial statements
Year to 09/2018 09/2019e 09/2020e 09/2021e
Profit & loss summary (SGDm)
Revenue 4,312 3,799 3,820 3,917
EBIT 1,279 1,352 1,246 1,193
Net interest (280) (325) (334) (339)
Other charges (Fair value change on
properties, exceptional items etc.)
478 0 0 0
PBT (core) 999 1,027 912 853
Taxation (282) (152) (127) (110)
PAT (core) 944 875 785 744
Minority Interest (436) (263) (235) (223)
PATMI (core) 507 613 549 521
Preferred equity interests (83) (91) (91) (91)
PATMI (core) – Common equity holders 425 521 458 429
Cash flow summary (SGDm)
Cash flow from operations 493 1,376 1,596 1,758
Cash flow from investing activities (2,010) (1,311) (1,319) (1,324)
Cash flow from financing 1,560 (690) (690) (690)
Change in cash 42 (625) (413) (255)
Cash at beginning 2,136 2,136 1,511 1,098
Effect of exchange rate on opening cash (45) 0 0 0
Bank overdraft 3 0 0 0
Cash at end (excluding bank overdrafts) 2,136 1,511 1,098 843
Total cash (including cash held by REITs) 2,136 1,511 1,098 843
Balance sheet summary (SGDm)
Cash & cash equivalents 2,136 1,511 1,098 843
Current assets excluding cash 5,140 5,085 5,087 5,098
Non-current assets 25,144 25,944 26,744 27,544
Total assets 32,421 32,541 32,930 33,485
Total debt 14,926 14,926 14,926 14,926
Total liabilities 17,793 17,642 17,824 18,200
Total equity 14,628 14,899 15,106 15,285
Preferred equity and minorities 7,266 7,266 7,266 7,266
Common equity holders’ funds 7,362 7,633 7,840 8,019
Ratio, growth and per share analysis
Year to 09/2018 09/2019e 09/2020e 09/2021e
Y-o-y % change
Revenue 7% -12% 1% 3%
EBIT 17% 6% -8% -4%
PBT core 3% 3% -11% -6%
PATMI core – Common equity holders 1% 23% -12% -6%
EPS core – Common equity holders 1% 23% -12% -6%
Ratios (%)
ROE (core – Common equity) 6% 7% 6% 5%
ROA (core) 4% 4% 4% 4%
EBIT Margins 24% 32% 30% 28%
Net debt/total equity 87% 90% 92% 92%
Net debt and prefs/ total common equity 118% 120% 121% 122%
Net debt/EBIT (x) 10.0 9.9 11.1 11.8
Per share data (SGD)
EPS core (basic) – Common equity holders 14.6 17.9 15.7 14.7
EPS core (fully diluted) – Common equity
holders
14.5 17.7 15.6 14.6
DPS (basic) 8.6 8.6 8.6 8.6
DPS (fully diluted) 8.6 8.5 8.5 8.5
RNAV Computation (SGDm) Per share (SGD)
% of GAV
Business Segments
Residential 3,473 1.18 12%
Former Australand portfolio 2,140 0.73 7%
Investment properties – Retail 2,420 0.82 8%
Investment properties – Office/Business parks 2,358 0.80 8%
Listed REITs (FCT, FCOT, FHT, FLT) 10,859 3.70 37%
Global hospitality 2,659 0.91 9%
Stakes in listed Thai companies 1,910 0.65 6%
Continental Europe, UK 2,665 0.91 9%
Funds management business 417 0.14 1%
Other assets (ex-SG, ex-CH, ex-AUS) 501 0.17 2%
Total GAV 29,402 10.01 100%
Less: Net debt (12,790) (4.35)
Other liabilities (net) and minority interests (5,800) (1.97)
Perpetual securities (1,950) (0.66)
RNAV 8,862 3.02
No. of shares (m) 2,938
RNAV per share (SGD) 3.02
Premium / discount to RNAV -25%
Target price (SGD) 2.25
ESG metrics
Environmental Indicators Governance Indicators
GHG Intensity (kg/USD) 54.2 No. of board members 11
Energy Intensity (kWh/USD) 91.9 Average board experience (years) 4.7
CO2 reduction policy Y Female board members (%) 9
Social Indicators Board members Independence (%) 55
Employee costs as % of sales n/a
Employee turnover (%) n/a
Diversity policy Y
Source: Company data, HSBC
FPL: Historical PBV chart
Source: Bloomberg, HSBC
FPL: Performance relative to FSSTI
Source: Bloomberg, HSBC
0.5
0.6
0.7
0.8
0.9
Jan-14 Aug-14 Mar-15 Oct-15 Jun-16 Jan-17 Aug-17 Mar-18 Oct-18 Jun-19
FPL PBV Avg Trendline +1 std dev -1 std dev
+1SD: 0.78
Avg: 0.70
-1SD: 0.63
70.0
100.0
130.0
160.0
Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Oct-18 Jun-19
FPL FSSTI
Financials & valuation: Frasers Property Limited Buy
53
Equities ● REMD June 2019
Financial statements
Year to 09/2018 09/2019e 09/2020e 09/2021e
Profit & loss summary (SGDm)
Gross revenue 193 206 211 216
Property expenses (56) (57) (58) (60)
Net property income 137 149 153 156
Asset management and trust expenses (17) (23) (19) (19)
EBIT 120 126 134 137
Net interest expense (20) (25) (29) (29)
Share of results of associate 5 16 36 37
Fair value gains 62 0 0 0
Income before taxes 167 117 141 145
Income tax expense 0 0 0 0
Income after tax 167 117 141 145
Net investment income (for distribution) 111 127 147 151
Cash flow summary (SGDm)
Cash generated from operations 137 143 139 142
Cash flows from investing activities (12) (603) 36 37
Cash flows from financing activities (117) 466 (176) (180)
Net change in cash and cash equivalents 8 7 (1) (1)
Beginning cash and cash equivalents 14 22 29 28
Cash and cash equivalents at end 22 29 28 27
Balance sheet summary (SGDm)
Non-current assets
Investment properties 2,749 2,749 2,749 2,749
Other non-current assets 66 686 688 689
Total non-current assets 2,815 3,435 3,437 3,438
Current assets
Trade and other receivables 3 8 8 8
Cash and cash equivalents 22 29 28 27
Total current assets 25 36 36 35
Total Assets 2,840 3,471 3,472 3,474
Current liabilities
Trade and other payables 46 60 61 63
Short term borrowings 217 203 248 248
Other current liabilities 16 16 16 16
Total current liabilities 280 279 326 327
Non-current liabilities
Interest bearing loans & borrowings 596 791 745 745
Other non-current liabilities 32 32 32 32
Total non-current liabilities 627 822 777 777
Total Liabilities 907 1,102 1,103 1,104
Net Assets 1,934 2,370 2,369 2,369
Ratio growth and per unit analysis
Year to 09/2018 09/2019e 09/2020e 09/2021e
Y-o-y % change
Revenue 6% 7% 2% 2%
Net property income 6% 9% 2% 2%
Income after tax -14% -30% 20% 3%
Net investment income (for distribution) 1% 14% 15% 3%
Fully diluted EPU -14% -36% 10% 3%
Fully diluted DPU 1% 3% 6% 3%
Ratios
EBIT margin 62% 61% 63% 63%
Net Debt/Assets 28% 28% 28% 28%
EBIT/Net interest expense 6.0 5.1 4.7 4.8
Net debt/EBIT 6.6 7.7 7.2 7.1 Per unit data (cents)
EPU 18.0 11.5 12.7 13.0
Diluted EPU 18.0 11.5 12.7 13.0
DPU 12.0 12.4 13.2 13.5
Diluted DPU 12.0 12.4 13.2 13.5
Dividend yield (%) 4.6% 4.8% 5.0% 5.2%
RNAV computation (SGDm)
Gross asset valuation
Causeway Point 1,200
Northpoint 803
Changi City Point 398
YewTee Point 201
Anchorpoint 125
Bedok Point 92
Waterway Point 244
Other assets 457
Total GAV 3,520
Debt (994)
Other liabilities (94)
Total liabilities (1,088)
RNAV 2,433
No. of units (m) 1,114
RNAV / unit (SGD) 2.18
ESG metrics
Environmental Indicators 09/2018a Governance Indicators 09/2018a
GHG emission intensity* 86.9 No. of board members 6
Energy intensity* 207.1 Average board tenure (years) 6.4
CO2 reduction policy Yes Female board members (%) 0
Social Indicators 09/2018a Board members independence (%) 50
Employee costs as % of revenues n/a
Employee turnover (%) 13.3
Diversity policy Yes
Source: Company data, HSBC
* GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s
FCT: Historical PBV chart
Source: Bloomberg, HSBC
FCT: Performance relative to FSSTI & FSTREI
Source: Bloomberg, HSBC
0.9
1.1
1.3
1.5
Jan-10 Jul-11 Feb-13 Sep-14 Apr-16 Nov-17 Jun-19
FCT PBV Average +1 stdev -1 stdev
Avg: 1.10
+1 sd: 1.18
-1 sd: 1.01
80
100
120
140
160
180
Jan-10 Jul-11 Feb-13 Sep-14 Apr-16 Nov-17 Jun-19
FCT FSSTI FSTREI
Financials & valuation: Frasers Centrepoint Trust Hold
Equities ● REMD June 2019
54
Notes
55
Equities ● REMD June 2019
Notes
Equities ● REMD June 2019
56
Notes
57
Equities ● REMD June 2019
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or
issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Michelle Kwok, Pratik Ray, CFA, Raymond Liu, CFA, Albert Tam,
Simon Sin, Derek Chang and Max Liang
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should
depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that
investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or
relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in
each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating
because research reports contain more complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
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below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change
in target price or estimates).
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Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
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points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
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(unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which
we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's
average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however,
volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Equities ● REMD June 2019
58
Rating distribution for long-term investment opportunities
As of 26 June 2019, the distribution of all independent ratings published by HSBC is as follows:
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current
rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy
= Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial
analysis” above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please
use the following links to access the disclosure page:
Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures
Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures
HSBC & Analyst disclosures
Disclosure checklist
Company Ticker Recent price Price date Disclosure
CAPITALAND CATL.SI 3.54 25 Jun 2019 4, 5, 6, 7, 12 CHAMPION REIT 2778.HK 6.69 25 Jun 2019 4, 6, 7 CHINA OVERSEAS LAND & INV 0688.HK 27.60 25 Jun 2019 4, 6, 11 FRASERS CENTREPOINT TRUST FCRT.SI 2.61 25 Jun 2019 4 FRASERS PROPERTY LIMITED FRPL.SI 1.84 25 Jun 2019 4, 6 HONGKONG LAND HKLD.SI 6.81 25 Jun 2019 5, 6, 7 HYSAN DEVELOPMENT 0014.HK 40.50 25 Jun 2019 4, 5, 6, 7 SHIMAO PROPERTY 0813.HK 23.90 25 Jun 2019 1, 5, 6, 7 SOHO CHINA LIMITED 0410.HK 2.61 25 Jun 2019 5, 6, 7 SWIRE PROPERTIES 1972.HK 32.65 25 Jun 2019 4, 5, 6, 7
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 May 2019, HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
Buy 52% ( 29% of these provided with Investment Banking Services )
Hold 38% ( 27% of these provided with Investment Banking Services )
Sell 10% ( 21% of these provided with Investment Banking Services )
59
Equities ● REMD June 2019
12 As of 20 Jun 2019, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
13 As of 20 Jun 2019, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt
(including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or
liquidity provider in the securities/instruments mentioned in this report.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking,
sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Non-U.S. analysts may not be associated persons of HSBC Securities (USA) Inc, and therefore may not be subject to FINRA
Rule 2241 or FINRA Rule 2242 restrictions on communications with the subject company, public appearances and trading
securities held by the analysts.
Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.
This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as
such, this report should not be construed as an inducement to transact in any sanctioned securities.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company
available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Manager for queries regarding
other research reports. In order to find out more about the proprietary models used to produce this report, please contact the
authoring analyst.
Additional disclosures
1 This report is dated as at 27 June 2019.
2 All market data included in this report are dated as at close 24 June 2019, unless a different date and/or a specific time of
day is indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of
Research operate and have a management reporting line independent of HSBC's Investment Banking business.
Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses
to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest
payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the
price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument,
and/or (iii) measuring the performance of a financial instrument.
5 As of 14 Jun 2019 HSBC owned a significant interest in the debt securities of the following company(ies): HYSAN
DEVELOPMENT, SWIRE PROPERTIES
Production & distribution disclosures
1. This report was produced and signed off by the author on 26 Jun 2019 08:24 GMT.
2. In order to see when this report was first disseminated please see the disclosure page available at
https://www.research.hsbc.com/R/34/LMdS9v9
Equities ● REMD June 2019
60
Disclaimer Legal entities as at 30 November 2017
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