Hongkong Land - DBS Research 2016-11-10: Tight supply to support positive office reversion

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HONGKONG LAND HOLDINGS LIMITED H78.SI

Hongkong Land - Tight supply to support positive office reversion

• Positive reversionary growth for Hong Kong office portfolio to continue.
• Good residential sales from China.
• Inexpensive valuation, maintain BUY with US$7.76 TP.

What’s New 

Positive reversionary growth for Hong Kong office portfolio to continue. 

• Benefitting from the current tight supply in Central, Hongkong Land has continued to achieve positive rental reversion for its Central office portfolio. This would push up its average office rents which stood at HK$103psf in 1H16. However, the office vacancy rose slightly to 3.5% in September 2016 from June 2016's 3.1% due to the timing of new lease commencement. 
• Nevertheless, the vacancy should decline before the year-end as tenants take up the previously committed office space. Its retail portfolio remained fully leased with rental reversion remaining largely positive. 
• In Singapore, office vacancy was marginally lower at 0.8% in September 2016 compared to June 2016's 1%. But reversionary growth has turned negative in view of upcoming supply glut in the office leasing market.

Good residential sales from China. 

• In China, Hongkong Land's contracted sales jumped 57% to US$222m. This brought the cumulative contracted sales for 9M16 to US$654m, up 39% y-o-y. Residential sales from China should serve as an increasingly important earnings platform for Hongkong Land over time. 
• Turning to Singapore, the fully pre-sold J Gateway project remains on target for completion by end-2016. Despite lacklustre market sentiment, HongKong Land continued the pre-sales of the LakeVille and Sol Acres projects. Besides, the company had commenced the pre-sales of Lake Grande in July 2016 with encouraging initial response.

Inexpensive valuation, maintain BUY with US$7.76 TP. 

• The stock is trading at a 42% discount to our assessed current NAV, compared with its 10-year average of 25%. 
• Office leasing demand has been showing signs of moderation recently. But the tight vacancy and projected limited new supply should provide support to office rents. 
• Despite increasing uncertainty in the global financial market, we keep our BUY call at this stage with a U$7.76 TP, given inexpensive valuations.

Jeff YAU CFA DBS Vickers | Andrew Robert LAM DBS Vickers | http://www.dbsvickers.com/ 2016-11-10

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.76 Down 7.870