Amidst the hype brought about by the encouraging response to the Leighton Hill luxury residential offering, and on speculation that last Thursday’s Government land auction would also see higher prices, Cheung Kong [1] coolly declared that it had applied to the Government for the auction/tender of two prime sites from the land reserve list. The message seemed quite clear: there is an abundant supply of land for all developers and there is no need to bid up prices. After all, nobody, including the Government, wishes to see the property market replicate its vicious circular movements of the early- to mid-1990s, where high land prices led to high sales prices.

Moreover, most developers and property agents are in the habit of talking up the market – a practice that can be misleading at times to the general public. A market that is free from misleading price movement predictions is an efficient market to operate in. As one of Hong Kong’s largest developers, Cheung Kong, has set an example by refraining from making predictions as to where property prices are headed.

The company has actually done itself a favour by being transparent about its intentions on the one hand, and on the other, by keeping quiet on market movements. This should bring some semblance of order to the property market. In turn, this will allow the developer to operate under normal market conditions, subject to only the forces of supply and demand.

The company has directed its attention and energies to quickly unloading inventory, replenishing its land bank at reasonable cost relative to present secondary market prices, and going about earning decent returns from its development projects. Examples of this are its Laguna Grande (Hung Hom) and No 1 Star Street (Wan Chai) developments.

In fact, all developers have a right to request the Government to release land from the reserve list if they actually want to buy land. The current application system has been in force since April 1999, yet few developers have used the system and Cheung Kong’s public announcement may, perhaps, serve as a timely reminder.

StockHouse previously questioned the sustainability of the summer recovery of the mass residential market on the grounds of flat oversupply and weak demand (previous story). It seems that question has now been answered.

Market reactions

The pronouncement by Cheung Kong had an immediate effect on the SAR’s other major developers. Thursday’s land auction saw participants adopt a very cautious attitude. The two sites on offer attracted only a total of four bids, including a solitary low-ball winning tender of $2.58 billion by Amoy Properties [101] for a West Kowloon site.

Using the land application system, Cheung Kong applied for an Oil Street site in North Point and another West Kowloon site to be offered for sale either by auction or tender in the first quarter of next year.

The West Kowloon site, with a buildable GFA of 1.8 million sq ft, is likely to see at least one major developer pass. Amoy Properties is unlikely to bid, having secured the adjacent site of equal size at Thursday’s land auction.

Similar logic applies for the Oil Street site. It is similar in size and close to the former Sai Wan Ho ferry concourse that saw tender applications close on Friday, December 8. A total of nine bids were received by the Government. The winner for the 1.3 million sq ft of buildable GFA is likely to be announced this week.

Whichever developer is successful in its bid for the Sai Wan Ho site is likely to take a less aggressive tack with regards to Oil Street - again, benefiting Cheung Kong. The company has made acquiring the Oil Street site a primary focus as it sits adjacent to the Fook Lee godown site, in which it also has an interest.

Elsewhere, Cheung Kong has focused on unloading flats quickly by utilizing a mark-to-market pricing strategy. With mass property market sentiment once again depressed following a brief summer upswing, the company’s pragmatic “low margin, rapid sales” approach appears to be working very well.

Projects that will be put up for sale in the next six months include:

1. A Canton Road development in Tsim Sha Tsui, Kowloon     
2. The Harbourfront Landmark in Hung Hom, Kowloon     
3. The MTR Tung Chung Package 3 in Tung Chung, Lantau Island     
4. The remaining units of Laguna Grande in Hung Hom, Kowloon.

Cheung Kong reported interim net profit growth of 254% year on year to $17.4 billion for the six months to 30 June 2000. UBS Warburg estimates that on an ex-Hutchison Whampoa [13]-basis (a 49.9% owned associate), interim profit was 45% higher year on year to $1.8 billion. The growth came as a result of the sale of 1.5 million sq ft of completed property projects. But Warburg expects the second half contribution to be sharply lower as very few developments will be completed during the period.

Friday’s closing share price of $98.75 represents 9.2 times current year consensus EPS estimate of $10.71, and at a 19% discount to Warburg’s estimated NAV of $122 per share.

Alice Poon’s Property/Infrastructure Watch List

Company	Stock Code	Date of Article	Price (12/08/00)	Points of Interest	Link
Amoy Properties	[101]	27 Oct. 2000	$7.85	Prudent land purchases ensure profit growth	Research Report
Hysan Development	[14]	19 Oct. 2000	$9.65	Large commercial portfolio to benefit from strength in Grade A office market	Research Report
China Overseas	[688]	6 Sept. 2000	$0.96	Timely diversification into China property market	Research Report
Cheung Kong Infrastructure	[1038]	24 July 2000	$12.35	Globalization takes shape	Research Report
		5 Dec. 2000		Tech projects to provide high-growth impetus	Research Report
Shui On	[983]	27 Nov. 2000	$9.00	Effective use of the web as a cost-cutting tool	Research Report
Hopewell	[54]	7 Nov. 2000	$3.15	GSZ Superhighway traffic entering high-growth period	Research Report

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