Private residential supply is expected to remain high in coming years    The Transport and Housing Bureau released their latest projection on privateprimary housing supply at about 97,000units as of end-3Q17, where these unitsare expected to be available for sale in the coming 3-4years. While the latestprojection indeed declined by 1% QoQ from the last projection (at a record high of~98,000units as of mid-17) and represented the first QoQ decline since 4Q13, thelatest projection is still a high number in absolute terms and reaffirms our viewthat supply surplus will put downward pressure on residential prices ahead.    Unsold inventory increased to 9,000units by end-3Q17    The latest government residential supply projection of 97,000units available forsale in the next 3-4years comprises of 74,000units currently under construction(77,000units as of mid-17/ 2% above the 2-year average), 31,000units pendingconstruction starts anytime (29,000units in mid-17/ 23% above the 2-yearaverage), 9,000completed but unsold units (8,000units in mid-17/ 41% abovethe 2-year average), but excludes the 17,000units already pre-sold (16,000unitsas of mid-17). On the other hand, 9,300units commenced construction (-51.3%YoY) and 12,900units reached completion (+20.6% YoY) in 9M17.    We expect the vacancy rate to surge to 9% by 2026, from 3.8% in 2016    We expect supply will likely increase materially from now onwards. We expectcompletion in the HK private housing market to average 19,330units/year during2017-26, 77% above the 10-year (2007-16) average of 10,926units. However,we project corresponding housing demand (net take-up) of merely 99,515unitsin 2017-26, implying a marked supply surplus of 93,781units. In our view, thiswould lead to a surge in vacancy rate to 9% by 2026(from 3.8% in 2016) andresidential prices need to fall by 48% to restore the supply/demand equilibriumover this period.    Prefer developers to landlords; Buy CK Asset    We generally prefer developers to landlords on valuation. Our Buyrecommendation in the sector is CK Asset, as we believe it has a robust strategy,with the highest asset turnover among peers. Among developers, we have aSell rating on Henderson as we believe the “Starter Homes” scheme will crowdout private demand for smaller units, and it will likely suffer the most with thelargest sales pipeline of small units. Our target prices are based on a sum-ofthe-parts approach. Key downside risks to our view include policy tighteningand unexpected economic fluctuations, key upside risks are policy and creditloosening.

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