Hong Kong | Property stocks battered by protests look cheap

Months of protests and a struggling local economy have hammered Hong Kong’s property stocks. Analysts are starting to see a silver lining in valuations.

A measure of developer shares in the world’s most expensive real estate market has tumbled more than 20% from a high in April. That slide has them trading at 11 times estimated earnings for the next 12 months, which is near a record low hit in October.

Brokerages are already finding reasons for optimism. On Tuesday, Daiwa Capital Markets reiterated its buy rating on Swire Properties Ltd.’s shares, saying their 33% slide from June to November had more to do with fund flows than with the firm’s fundamentals. Citigroup Inc. said in October that steps the Hong Kong government announced to help first-time home buyers could drive an earlier-than-expected recovery in housing prices.

All but two of the 13 stocks on the MSCI Hong Kong property gauge rebounded yesterday.

“Valuations are cheap,” said Daniel So, a strategist at CMB International Securities Ltd. “Right now, the stocks are not investors’ first choice. One of the key factors is the unrest. When it comes to an end, and the economy returns to growth, investors will jump right back in.”

Protests that started in early June against a bill allowing extraditions to the mainland continue, challenging China’s hold on the former British colony. The unrest has helped drive the city’s economy into a recession, causing pain across the retail, tourism and hospitality industries. Hong Kong’s equity benchmark, also pummeled by the China-U.S. trade dispute, has slid 12% in the past eight months.

Last month, home prices in the city actually rose in consecutive weeks, according to a widely followed index compiled by Centaline Property Agency Ltd. Later in November, Hong Kong’s government fetched a record $5 billion for a parcel of land in a tender won by Sun Hung Kai Properties Ltd., marking at least a partial vote of confidence in the real estate market.

To be sure, equity investors have reason to be nervous. Last weekend, the city saw its biggest protest in months, and on Monday police defused bombs at school, providing a reminder of the potential for escalation of violence. Also, Hong Kong’s GDP is predicted to contract 4.4% year-on-year in the first quarter of 2020 and by 3.2% in the second, according to forecasts compiled by Bloomberg.

Still, the fundamentals of the city’s property companies are proving resilient. The gross margins of developers climbed to 45% in the third quarter, the highest in Bloomberg-compiled data going back to 2016. Elena Popina, Bloomberg