UBS: Lowering Kerry Construction (00683) Rating to “Neutral” Target Price to HK$20

The Zhitong Finance App learned that UBS released a research report saying that it downgraded the Kerry Construction (00683) rating from “buy” to “neutral”, and that the target price was lowered from HK$27 to HK$20, mainly reflecting concerns about the new policy for renewing commercial land use rights in the Mainland and the continuing weakness of the mainland office market. The bank believes that there is limited room for revaluation of the company, but a high dividend ratio of about 7% should continue to provide downward support for stock prices.

UBS pointed out that the new policy for renewing commercial land use rights in the Mainland stipulates that the renewed land price must not be less than 70% of the base land price, and the maximum renewal period is 20 years. About 40% of Kerry Construction's total asset value comes from mainland investment properties, of which 12% of the floor area has remaining land use rights for less than 20 years. If a project with less than 20 years remaining is extended for another 20 years, the estimated land price should be about RMB 2.4 billion; if fully renewed, the amount may increase to RMB 11 billion, equivalent to 4% and 19% of the net asset value, respectively. If calculated at annualized land prices, it is equivalent to 8% and 25% of the predicted dividends for 2027, respectively.

In terms of office business, mainland office buildings accounted for 43% of Kerry E&C's total rental revenue in the first half of 2026, but the performance of this business continued to weaken, with rental income falling 5% year over year and year over year. The overall office occupancy rate declined slightly to 89% from 90% in December 2025, and the bank expects the negative rent adjustment to continue.

However, UBS has a positive view of Kerry Construction's asset cycle. Branksome Crest (Branksome Crest) has been reclassified from an investment property to a development property. It is expected to launch in the fourth quarter of 2026. The estimated saleable resources are around HK$7 billion, which is equivalent to about 24% of the current market value. Furthermore, sales proceeds of the Shanghai Jinling residential project of approximately RMB 8 billion are expected to be recovered in the fourth quarter of 2026, helping to maintain the net debt ratio at around 30%.