Hongkong Land (HKL SP) - DBS Research 2017-08-04: Boosted By Robust Residential Sales

Hongkong Land (HKL SP) - DBS Vickers 2017-08-04: Boosted By Robust Residential Sales HONGKONG LAND HOLDINGS LIMITED H78.SI

Hongkong Land (HKL SP) - Boosted By Robust Residential Sales

  • Hongkong Land (HKL)'s 1H17 underlying profit jumped 32% to US$517m , well above our forecast, due to stronger-than-expected earnings from residential sales in China.
  • Vacancy at its Central office portfolio improved further with average rents edging higher.
  • New residential investments in Wuhan, Nanjing and Singapore.
  • BUY with US$8.93 TP.

What’s New 

  • Hongkong Land's 1H17 underlying profit surged 32% to US$517m boosted by significantly higher earnings from residential sales. Interim DPS was stable at US$0.06.
  • Gross rental income grew 4% to US$446m. This primarily was a reflection of positive reversionary growth and slightly higher average occupancy at its Central office portfolio given solid demand from Chinese firms. 
  • Vacancy of its Central office portfolio improved further to 1.5% in Jun-17 from Dec-16’s 2.2%. Thanks to favourable rental reversion, average office rents grew 3% to HK$106psf. Retail portfolio occupancy was 99.4% in Jun-17 with neutral base rent reversion. However positive rental reversion in 2016 led to average retail rents growing 3.7% y-o-y in 1H17 to HK$224psf from HK$216psf in 1H16. 
  • The Singapore office portfolio was virtually fully leased. However, mildly negative reversionary growth, due to a supply glut, led to average office rents falling 3% y-o-y to S$9.10psf.
  • WF Central, a retail-cum-hotel development in Beijing, is approaching completion. The retail portion is targeted for opening in late 2017 with the hotel scheduled to open for business in 2018. 
  • The mixed-use complex (26,000sm) in Cambodia is being progressively taken up by tenants while the 73,000sm fifth tower at Jarkata Land in Indonesia is due for completion in early 2018. With the addition of new investment properties, the company's rental income should improve further.
  • In Jun-17, Hongkong Land finalised a joint venture agreement to develop an office site in Marina Bay Financial district of Singapore which will provide GFA of 120,000sm upon completion. The company has a 33% interest in this project which should yield synergetic benefits with its existing portfolio nearby.
  • Residential sales earnings were remarkably higher in 1H17, partly due to profit recognition at its substantially-sold Lakeville development in Singapore.
  • In China, Hongkong Land achieved attributable contracted sales of US$701m in 1H17, up 62% y-o-y. Net order book stood at US$1,421m in Jun-17. Hongkong Land made its maiden foray in Wuhan and Nanjing in 1H17 through two joint venture developments. These projects will be developed in multiple phases through to 2021.
  • Elsewhere, the company won the tender of a residential site (98,000sm) in Singapore in May-17. The project is scheduled for completion in 2021. Land banking is sustaining its development pipeline in China and Singapore.
  • Net debt improved to US$1.9bn in Jun-17 from Dec-16's US$2bn. This translated into a comfortable gearing of c.5%. Sound financial position puts the company in an advantageous position to pursue new investments in the region.
  • The stock is trading at 36% discount to our assessed current NAV. Valuation is attractive in view of steadily rising rents in the Central office market driven by sustained demand from Chinese corporates. New regional investments should add momentum to the company's medium term earnings growth. Hongkong Land has the potential to trade higher.
  • Maintain BUY with US$8.93 TP, based on a 30% discount to our Jun-18 NAV estimate.

Jeff YAU CFA DBS Vickers | Ian CHUI DBS Vickers | http://www.dbsvickers.com/ 2017-08-04
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 8.930 Same 8.930