Hongkong Land Holdings Ltd - CIMB Research 2017-04-03: Lowest valuation among office landlords

Hongkong Land Holdings Ltd - CIMB Research 2017-04-03: Lowest valuation among office landlords HONGKONG LAND HOLDINGS LIMITED H78.SI

Hongkong Land Holdings Ltd - Lowest valuation among office landlords

  • Demand for offices in the Central area remains strong, primarily driven by mainland companies, as businesses move further out.
  • It is reported that Excelsior Hotel has been listed on the secondary market with asking price of HK$40k/sf. The hotel was approved for redeveloping into offices.
  • Murray Road site is open for tendering. Market appraises the land at HK$25k- 40k/sf; we believe the final tender price might provide positive surprise.
  • HKL is trading at 41% discount to NAV, which is deepest among peers. We raise TP to US$8.5 given sustained demand and rising land price in office space.
  • Key risks: recession in HK/China, businesses moving outside of Central faster than expected.

Land value for Excelsior Hotel could hit HK$40,000/sf 

  • According to Singtao Daily last Friday, Excelsior Hotel, owned by Mandarin Oriental (HKL’s sister company), was listed on the secondary market with an asking price of HK$27bn or HK$40k/sf. The 4-star hotel was approved for redevelopment into an office building sized 673k sf in 2015. 
  • Although Excelsior Hotel replied that the listing was the standard practice of a landlord reassessing property value, we believe the pricing suggests that office buildings in CBD might be undervalued by the market.

Murray Road tender might offer positive surprise 

  • Also, last Friday, the government put the Murray Road commercial site for tender until 12 May. Given its CBD location (no meaningful supply since 2003) and scale (site area 31k sf and GFA 465k sf), it is widely expected to be a perfect match for mainland firms’ (especially banks) appetites. 
  • The market appraises the land at HK$25k-40k/sf, which we believe is underestimating the eagerness of mainland firms looking for headquarters in HK and this might provide a positive surprise as tender results are unveiled.

Central fares well as businesses move further out 

  • More importantly, demand for offices located in the CBD remains steady although businesses are choosing other locations given the widening rental gap between Central and other areas. 
  • According to various office agents, vacancy in Central offices remains low (Feb 17: 1.5%) and demand from mainland firms remains strong, with vacated space from relocated firms instantly taken up by mainland financial institutions. 
  • Finally, no major bank lease will expire this year, granting bargaining power to landlords.

Luxury retail to recover gradually during the year 

  • In addition to a strong HK office portfolio, HKL’s luxury retail portfolio might improve in 2017, in our view. 
  • Government data show retail sales of luxury items (+3% yoy) outperformed the overall market (-6% yoy) in Feb. Its peer IFC mall also reported a significant improvement in retail sales in Jan-Feb 17 vs. 2H16. We expect the segment will gradually recover given the narrowed price differential between HK/other regions and improving visitor arrivals.

Reiterate Add; raise target price to US$8.5 

  • HKL is currently trading at a 41% discount to our NAV of US$13, which is the deepest vs. peers (Swire Prop: 37%, Champion REIT: 34%), although it has historically traded at a premium over peers. 
  • We raise our target price for HKL from US$7.8 to US$8.5 by narrowing the discount to NAV to 35% (from 40%) given the sustained demand from mainland firms and rising land prices for Central-located offices. 
  • In order of preference, our office landlord picks are HKL (Add), Swire Prop (Add) and Champion REIT (Hold).

Siu Fung LUNG CFA CIMB Research | Raymond CHENG CFA CIMB Research | http://research.itradecimb.com/ 2017-04-03
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 8.50 Up 7.800