Hongkong Land Holdings Ltd - Quality assets at a bargain price
- FY16 core profit was -6% yoy to US$848m, missing expectations due to fewer property sales.
- Central office portfolio remains strong with vacancy falling to 2.2% as at Dec 16 and average rent rising 2% to HK$103/sf/mth.
- Central retail portfolio remains sluggish but shows signs of stabilisation in narrowing decline in average rent and turnover rent.
- Stock market gained momentum recently which may suggest sustained demand at the Central office. Upcoming Murray Road tender could justify a higher valuation.
FY16 results missed on lower property sales recognition
- Hongkong Land (HKL) reported its FY16 results with core profit -6% yoy to US$848m, missing both the market and our expectation by 5%, mainly due to lower property sales recognition. A final dividend of US$0.13 has been declared, flat yoy.
- Demand at Central office remains strong, vacancy at five-year low HKL’s rental income grew moderately at 1.3% yoy, mainly due to the strong office performance, partly offset by the sluggish high-end retail. The average rent of HKL’s Central office portfolio increased from HK$101/sf/mth to HK$103/sf/mth, mainly due to the positive rental reversion of existing tenants.
- Vacancy dipped to 2.2% as at Dec 16, from 3.4% as at Dec 15, which is the lowest level since the European Debt Crisis in 2011, thanks to the strong demand from mainland companies.
HK luxury retail stabilises but not a strong rebound
- Retail portfolio was sluggish amid weak luxury sales, but we saw signs of stabilisation in 2H16. Average rent improved from HK$216/sf/mth in 1H16 to HK$218/sf/mth in FY16, although this was still 1% below FY15. Turnover rent fell marginally from US$10.5m in FY15 to US$10.4m in FY16.
- Retail sales figures announced by the HK government also suggest a mixed picture on a HK retail recovery, while luxury sales returned to negative territory i.e. -3.9% yoy in Jan 17 after a one-month improvement in Dec 16.
Property sales might accelerate in FY17
- Recognised sales in China increased by 34% in FY16; however, profits were flat due to its product mix and Rmb devaluation. Contracted sales increased by 38% to US$1.1bn in FY16. Unrecognised sales accumulated to US$1.1bn in FY16, +32% yoy.
- Profits from Singapore declined marginally due to lower provision write-backs.
- Management expects the increase in property sales in China to offset the decline in Singapore in 2017.
Stock market gained momentum since Feb
- Stock market activity, as a proxy for the demand of financial institutions in the Central office market, has gained momentum since Feb, thanks to the continuing inflow of money from southbound.
- With the central government’s long-term strategy of opening the capital account, we believe that more mainland companies will come to HK.
- Also, we expect capital outflow to be a secular trend in light of the Rmb devaluation, which could support asset values in HK as residents are keen on buying properties in prime areas.
Murray Road site as the near-term catalyst
- We expect the undersupply situation to continue in the near term, as there will be virtually no supply in Central. The upcoming tender of the Murray Road site will likely be the next “land king” given its scarcity, and many mainland companies are keen on having a flagship building in HK.
- We believe that the transaction price could be way above market expectation, which could justify a higher valuation for HKL.
Attractive valuation; maintain Add
- We cut our FY17-18F earnings by 6%/1% after updating the property schedule. Our target price of US$7.8 is based on a 40% discount to NAV.
- HKL is now trading at a 46% discount to NAV, 1 s.d. below its average of 37%, which is quite attractive in our view.
- Maintain Add. Key risks include decentralisation and economic recession.