Goldman Sachs: Predictions of property prices in Hong Kong are expected to remain stable this year. It is recommended to buy SHK PPT (00016) and CK ASSET (01113).

Goldman Sachs released a research report stating that after Hong Kong residential property prices dropped by nearly 30% from their peak in 2021, the bank expects a price bottom to form this year. Trading activity has increased as most real estate cooling measures have been lifted, although transaction levels are still below the mid-cycle long-term average. Affordability restored after price correction, improved financing conditions, and higher rental yields have attracted new homebuyers, upgraders, and investors, marking the final stage of this downturn which the bank refers to as "price discovery." The bank explains that developers are in a passive position during this process, with inventory levels at twice the normal level, but they have mostly taken a flexible approach on prices. The bank expects excess inventory to be cleared by the end of 2025, with transaction volume increasing by over 20% year-on-year in the first quarter. Taking into account the price changes (down 2%) and excess inventory since the beginning of the year, the bank has revised its real estate price forecasts for 2025/26/27 to no change, up 3%, and up 4%, compared to the previous forecasts of up 5%, up 4%, and up 4%. Price increases will be driven by rising rents, which have been increasing at a moderate single-digit pace since new talent began flowing into Hong Kong over the past two years. Rental yields have not yet matched borrowing costs since mid-2022. Goldman Sachs stated that, combined with revised property price forecasts and the latest property completion schedules, the bank's average earnings per share forecasts for Hong Kong developers for fiscal years 2025 to 2027 have been reduced by 3%, 6%, and increased by 4%, leading to an average 4% decrease in target prices based on the 12-month asset return on equity (ROA-ROE) ratio. The bank continues to prefer stocks with exposure to multiple Hong Kong dollar businesses, maintaining a "buy" rating on SHK PPT (00016) and CK ASSET (01113) with target prices of 86 Hong Kong dollars and 45.7 Hong Kong dollars respectively, providing a regular free cash flow yield of 8% to 9%; as for HENDERSON LAND (00012), the bank maintains a "sell" rating with a target price of 18.8 Hong Kong dollars, as its leverage and/or capital expenditure burden may put pressure on earnings prospects per share compared to a lower 6% to 7% regular free cash flow yield. Overall, the bank stated that earnings before interest, taxes, depreciation, and amortization (EBITDA) from property development is still a key driver of industry profitability, accounting for around 30% of total EBITDA (compared to 60% during the peak period/pre-COVID-19), and despite the increase in transaction volume, profit margins continue to be under pressure. Dependency on property development in Hong Kong, combined with the soft residential market background, has led to an average decrease of approximately 45% in market consensus on earnings per share for the industry over the past five years. The bank believes that the bottom of earnings per share/dividends per share will only be formed when Hong Kong residential prices stabilize. Before that, the bank expects shares to continue trading based on yields (dividend yield or free cash flow yield), with the current yield believed to be consistent with the average level of the past decade.