Morningstar: Hong Kong’s market has become cheap

Hong Kong currency notesHong Kong currency notes

Correction: This item has been updated to correct the number of stars Morningstar has assigned to shares of Sun Hung Kai Property; the correct number is four.

Hong Kong’s market has become one of Asia’s cheapest markets on a price-to-fair-value basis, largely due to the protests over the past six months, Lorraine Tan, regional director for Asia equity research at Morningstar, said in a media briefing with Shenton Wire Friday.

Hong Kong’s Hang Seng Index (HSI) has edged up around 2.4 percent year-to-date, but that’s a sharp underperformance compared with the S&P 500 index’s more than 25 percent gain year-to-date.

“A lot of the Hang Seng Index comprises of obviously China names, so basically companies that are not actually sensitive to what’s going on in Hong Kong itself,” Tan noted.

But she added that it’s still best to be selective, with much of the underperformance related to the real estate plays, because those are facing protest-specific headwinds.

“Quite a few of these companies are relatively diversified so the negative impact can be contained and is probably already reflected in where the share prices are presently,” Tan said. “As far as Hong Kong real estate, there are a number of stocks there looking fairly attractive.”

She said Sun Hung Kai Properties was one of Morningstar’s top picks.

In the end-September report, Morningstar rated the stock at four out of five stars, with a fair value of HK$145 and a “medium” uncertainty rating.

Shares of SHKP were down 0.35 percent at HK$113.50 at 11:59 A.M. SGT, but were up around 1.7 percent year-to-date.

In an end-September report, Morningstar said SHKP was managing Hong Kong property market risks — including high prices — by quick market launches combined with prudent land bank replenishment.

“The political pressure for housing should facilitate the company’s ongoing farmland conversions. Despite the current tough operating environment, the company conveyed continued confidence in Hong Kong as well as China,” the end-September report said. “Politically, this should bode well for the company for future projects in China.”

Morningstar estimated SHKP could maintain mid-single-digit dividend growth.