* Cheung Kong, Sun Hung Kai best placed to benefit from mass-market demand
* New supply at eight-year high expected to trigger discounts, promotions
* Sales likely to come at expense of profit margins as competition heats up (Adds company comments, earnings results)
By Yimou Lee
HONG KONG, Feb 28 (Reuters) - When things get choppy at the top of the property ladder, it pays to have your feet planted on the middle rungs, which makes developers Cheung Kong (Holdings) and Sun Hung Kai Properties the best bets to weather the storm brewing in Hong Kong.
These powerful property developers are targeting middle-class, first-time buyers who are exempt from the impact of government cooling measures at a time when secondary home transactions are hovering at a 17-year low.
"This represents a large potential market for developers launching new projects, so long as they price units affordably and draw first-time buyers from the secondary to the primary market," said Raymond Liu, a property analyst at brokerage Macquarie. First-time buyers comprised 70 percent of the market last year, up from 53 percent in 2011, Liu said.
With 45 percent of its saleable units this year aimed at mass-market buyers, the highest among its peers, Macquarie has identified Sun Hung Kai as a potential winner in this market, although success will come at the expense of profit margins.
It ranked Henderson Land Development Co Ltd second with 37 percent of its new launches considered "affordable", or below the HK$6 million ($773,600) mark for a unit.
With 44 percent of the large-scale housing estates, a market that has seen a stronger take-up than many single-block developments, Cheung Kong was singled out by Barclays as another developer best placed to win in this market.
"End-users, particularly first-time buyers, continued to underpin the demand for small to medium-sized units," Sun Hung Kai said in a filing to the Hong Kong stock exchange on Friday after it reported a 7.5 percent drop in underlying profit for its fiscal first half, its lowest since the first half of 2010.
The company also said it will increase its production for small to medium-sized units over the medium term.
On the flip side, Sino Land Co Ltd and Kerry Properties Ltd, which have 87 and 82 percent respectively of their saleable units in the mid-end and luxury sectors, are the most exposed among peers to buyers directly affected by government property curbs, according to data from Macquarie.
Prices for Hong Kong real estate have soared nearly 120 percent since 2008 despite government efforts to cool the market and the city's property tycoons have taken a hit as buyers drive tougher bargains in one of the world's most expensive real estate markets.
On Wednesday, Hong Kong Finance Secretary John Tsang said the government would not loosen the property cooling measures that have forced developers to impose steep discounts to meet sales targets, weighing on profit margins.
With new home supply forecast to hit an eight-year high in 2014, competition to lure buyers will intensify, which could trigger even steeper discounts and further pressure margins.
Sun Hung Kai recently offered a longer payment period of up to 540 days for first-time buyers, a so-called "move in first and pay later" tactic that analysts said was rare.
The measure is designed to give people who want to upgrade more time to sell their old homes, without having to pay higher stamp duties - imposed in February last year - on their new ones, analysts say.
Hong Kong's middle class is waiting for developers to offer price cuts and more flexible payment options, said Wong Leung Sing, research director at Centaline Property Agency.
"Sun Hung Kai is doing quite well, so other developers such as Cheung Kong and New World Development Co Ltd may follow similar sales tactics for their upcoming large-scale projects," said Wong.
GOOD TIMES OVER
Sales have shown signs of a pick-up thanks to mass-market demand and various incentives, although with a 10 percent price drop forecast for this year and a surge in construction costs, some industry watchers said the good times may be over for the city's developers.
UBS estimates profit margins for Hong Kong's six major developers will fall from 36 percent in 2012 to 20 percent in 2015 and 14 percent in 2016.
"The construction cost is higher than the land price in today's property market," Cheung Kong chairman Li Ka-shing said at an earnings briefing on Friday. "If the situation continues - a shortage of labour and many public infrastructure projects, plus competition for labour from Macau - the construction costs will keep on rising."
The company posted a better-than-expected 10 percent rise in 2013 net profit as asset disposal gains and a stronger contribution from Hutchison Whampoa Ltd offset weak flat sales.
The price difference between new launches and second-hand homes - an indicator of developers' profitability - dropped to its lowest since 2005 at 0.2 percent in the last quarter of 2013, according to real estate company Midland Realty.
Sun Hung Kai this month offered a 35 percent discount on a project and made it 10 percent below secondary homes in the same district, while Cheung Kong cut prices for a new launch by 28 percent.
"Construction costs are up and they're not going to fall," said Ricky Poon, executive director of residential sales at real estate services firm Colliers International. "Unless they purchase land in the coming year for 20 percent less, profit margins will drop. That's for sure."
($1 = 7.7555 Hong Kong dollars)
(Editing by Anne Marie Roantree and Matt Driskill)