Hongkong Land - DBS Research 2016-07-29: Undervalued office play

Hongkong Land - DBS Research 2016-07-29: Undervalued office play HONGKONG LAND HOLDINGS LIMITED H78.SI 

Hongkong Land - Undervalued office play

  • 1H16 underlying earnings in line with our estimates.
  • Continues to benefit from tight vacancy and limited supply in Central’s office market.
  • Buy with US$7.87 TP.


  • Hong Kong Land (HKL)’s 1H16 underlying earnings fell by a modest 6% to US$393m as 1H15 underlying earnings included a write-back of US$16m for MCL’s Singapore projects compared to only US$1.5m in 1H16. Interim DPS is unchanged at US$0.06.
  • Gross rental receipts rose to 1% to US$428m. Office rental reversion for the Central portfolio was positive in 1H16 with vacancy improving to 3.1% from 3.4% in Dec-15. Office reversions were positive, leading to a 2% increase in average office rents to HK$103psf in 1H16. Its retail portfolio continues to be fully let. However lower turnover rent led to average retail rent falling by 1% y-o-y to HK$216psf. Vacancy in its Singapore office portfolio stood at 1.0% compared to 3% in Dec-15 as previously committed space was taken up during the period.
  • WF Central, a retail project located in Beijing is scheduled to open in 1H17. In Jakarta, work is continuing on the fifth tower at its 50%-owned Jakarta Land, which is on schedule for completion in 2018.
  • Residential sales earnings were lower in 1H16 due to reduced contributions from Singapore. In 1H16, the company did not complete any new projects in Singapore. J Gateway, fully sold, is on schedule for completion in 2H16. Profit from China’s residential developments remained steady in 1H16. HKL’s attributable contracted sales in China rose 32% to US$432m in 1H16. As of Jun-16, its net order book was US$885m. Net debt stood at US$2.3bn, unchanged from Dec-15. This translates into a comfortable gearing level of 8%.
  • The stock is trading at a 41% discount to our current assessed NAV. Valuations are undemanding. More importantly, leasing demand from Chinese firms show no signs of abating. This, coupled with tight vacancy and limited new supply underpins our positive outlook of Central’s office market, even after rents grew by c.13% in 2015 and c.5% in 1H16. Hence we reiterate our buy call with a TP of US$7.87 based on a 35% discount to our Jun 2017 NAV estimate.

Jeff YAU CFA DBS Vickers | Andrew Robert LAM DBS Vickers | http://www.dbsvickers.com/ 2016-07-29
CIMB Securities SGX Stock Analyst Report BUY Maintain BUY 7.87 Same 7.87