Falling Hong Kong Demand Will Undermine Asset Values

Key Takeaways

• Weakening property demand and oversupply in key markets threaten future revenues, asset values, and profit margins.
  
• Rising financing costs and underperforming investments signal continued pressure on earnings, cash flow, and return on equity.
  
• Stable recurring income, robust liquidity, international diversification, strong contracted sales, and effective management drive earnings resilience and support long-term growth amid market uncertainties.

Catalysts

Operates as a property developer in Hong Kong, the Mainland, Singapore, the United Kingdom, continental Europe, Australia, and Canada.

• Declining demographic and population growth trends in Hong Kong and other key markets threaten to weaken long-term residential and commercial property demand, suggesting ongoing pressure on both future revenues and asset values for CK Asset Holdings.
  
• Continued rise in global interest rates and persistent refinancing requirements-over HK$11 billion repayable within one year and substantial maturities over the next five years-will likely elevate financing costs, compressing net margins and earnings going forward.
  
• Chronic overhang of unsold inventory and weak price momentum in the Hong Kong residential market, despite some volume recovery, points toward the need for generous launch pricing, setting up an environment of margin erosion and muted future profit contributions from development activities.
  
• High vacancies and oversupply in Hong Kong's commercial office segment, with Cheung Kong Center I occupancy at only 75% and Cheung Kong Center II lagging further, signal lower rental income growth and ongoing risk of fair value impairments to the investment property portfolio.
  
• Asset portfolio aging, significant loss provisions on major Hong Kong projects, and failure to offset Mainland property contribution declines due to expired joint ventures and soft retail conditions in China together indicate significant and sustained downside risk to recurring profit, return on equity, and cash flow generation.

CK Asset Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on CK Asset Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming CK Asset Holdings's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts are assuming CK Asset Holdings's profit margins will remain the same at 23.2% over the next 3 years.
• The bearish analysts expect earnings to reach HK$11.8 billion (and earnings per share of HK$3.38) by about August 2028, up from HK$11.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 11.5x today. This future PE is lower than the current PE for the HK Real Estate industry at 11.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.74%, as per the Simply Wall St company report.

CK Asset Holdings Future Earnings Per Share Growth

Risks

• The company's large proportion of revenue and profit-81 percent and 83 percent respectively-being recurring in nature, supported by stable rental, infrastructure, utilities, and pub operations, provides a resilient earnings base that could counteract a sustained share price decline by maintaining consistently healthy net margins and cash flows.
  
• CK Asset's strong balance sheet, with a very low net debt to capital ratio of 5 percent and significant liquidity of HK$33 billion, positions it to capitalize on distressed asset opportunities or weather adverse market conditions, reducing downside risks to earnings and asset values.
  
• The company's international diversification-58 percent of contributions from overseas and expansion into stable, government-backed social infrastructure in Europe-lowers geopolitical and sector-specific risk, which helps support long-term growth in revenue and earnings even if local markets underperform.
  
• Substantial unrecognized contracted sales of HK$28.5 billion, with HK$23 billion scheduled for recognition later in 2025, provide high visibility into near-term cash inflows and top-line growth, potentially leading to stronger than expected revenue and net profit in the next reporting periods.
  
• Ongoing operational improvements-such as high occupancy rates in hotels and serviced suites, disciplined cost management in the UK pub business, and growth in infrastructure and utility operations-demonstrate management's ability to sustain or improve operating margins across segments, supporting earnings stability and dividend capacity.

Valuation

• The assumed bearish price target for CK Asset Holdings is HK$28.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of CK Asset Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$48.0, and the most bearish reporting a price target of just HK$28.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be HK$50.9 billion, earnings will come to HK$11.8 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of HK$37.34, the bearish analyst price target of HK$28.0 is 33.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.