JPMorgan has revised its stance on Sun Hung Kai Properties (16:HK) (OTC:SUHJY), elevating the stock from Neutral to Overweight and boosting its price target to HK$162.00 from HK$109.00.
The firm said its prior Neutral rating was driven largely by valuation concerns. The stock has outperformed this year, rising 43% year-to-date compared with a 3% gain for the Hang Seng Index. Over the past 12 months the company has returned 100% and is trading close to its 52-week high of $17.57.
JPMorgan signaled that it underestimated how quickly the market would pivot in its valuation approach - shifting toward assessing shares on the basis of a net asset value, or NAV, discount while giving less weight to dividend yield. The bank noted that home prices have already recovered by more than 10% from the trough, and it now believes the Hong Kong housing market has moved from an early-stage recovery into an expansion phase.
That view underpins JPMorgan's change in valuation methodology. Instead of using dividend yield as the central valuation yardstick - which the bank characterizes as more appropriate in a bear market - analysts will focus on NAV discount metrics more relevant in an expansion setting. At present, Sun Hung Kai Properties trades at a Price/Book ratio of 0.64 and provides a dividend yield of 3.9%.
On NAV discount, JPMorgan applied a longer historical reference, examining how the company traded during previous expansion periods, including 1997, 2004-07, and 2012-16. Currently the stock is priced at a 35% discount to NAV. JPMorgan observes that during prior expansion intervals the company at times traded at a premium to NAV or to book value. Based on the historical expansion average, the bank believes the NAV discount could compress to 22%.
Market participants should note that the upgrade reflects a change in JPMorgan's valuation framework rather than new operating disclosures from the company. The bank's revised price target and recommendation rest on the view that the market's valuation lens has shifted and that the real estate cycle in Hong Kong is progressing into expansion.