Hongkong Land Holdings Ltd - CIMB Research 2017-08-04: Has The Most Valuable Assets In HK, Trading At The Cheapest Price

Hongkong Land Holdings Ltd - CIMB Research 2017-08-04: Has The Most Valuable Assets In HK, Trading At The Cheapest Price HONGKONG LAND HOLDINGS LIMITED H78.SI

Hongkong Land Holdings Ltd - Has The Most Valuable Assets In HK, Trading At The Cheapest Price

  • Hongkong Land (HKL)’s 1H17 core profit rose 32% yoy on more property sales booked in Singapore.
  • Central office vacancy reached 18-year low. Rental growth accelerated in 1H17.
  • Recovery in central retail rent was stronger than expected.
  • Property sales in China entering a harvest period. Unrecognised sales jumped to US$1.4bn.
  • Reiterate Add. Management could consider strategic review i.e. separate listing or changing listing structure to REIT / trust.

1H17 results beat market expectation 

  • HKL’s 1H17 core profit surged 32% yoy, beating our expectation by 25%, mainly due to more property sales booked in Singapore. 1H17 DPS stayed flat at 6UScents. Net gearing dipped from 6% at Dec 16 to 5% at Jun 17.
  • HKL’s Central office vacancy at 18-year low HK Central office portfolio, accounting for 60% of HKL’s NAV and FY16 core profit, continued to perform well in 1H17. Vacancy dropped further from 2.2% at Dec 16 to 1.5% at Jun 17, the lowest level in 18 years, thanks to the tight supply situation in Central and keen demand from mainland Chinese. 
  • Average rent jumped 3% hoh to HK$106/sf/mth, the biggest leap since 2013.

Luxury retail recovery stronger than expected 

  • HK Central retail portfolio, accounting for 20% of HKL’s NAV and FY16 core profit, saw stronger-than-expected recovery in 1H17. 
  • Occupancy remained largely full. Average rent, including base rent and turnover rent, increased further from HK$220/sf/mth in 2H16 to HK$224/sf/mth in 1H17.

Ramping up the rental income 

  • HKL will complete a number of rental properties in 2017-2018. 
    • In Beijing, WF Central will open in late-2017 and the associated Mandarin Oriental Hotel in 2018. 
    • In Jakarta, WTC 3 will be completed in early-2018. 
    • The Exchange Square at Cambodia was completed in 2016 and occupancy continued to ramp up in 1H17. 
    • In Jun 17, HKL also teamed up with IOI Properties to develop a commercial project at Marina Bay Financial District.

Property sales entering a harvest period 

  • Revenue from property sales jumped 1.7x to US$784m in 1H17, mainly due to LakeVille sales booked in Singapore, vs. no completions in 1H16. 
  • In China, contracted sales surged 62% yoy to US$701m in 1H17, thanks to the strong sales momentum in the past 1.5 years. 
  • Unrecognised contracted sales increased from US$1.1bn at Dec 16 to US$1.4bn at Jun 17, providing higher earnings visibility for the coming 6-12 months.

Potential strategic review 

  • Since the Murray Road tender transacted at record-high land cost in mid-May, the capital value of Central office has been appreciating on cap rate compression. Independent valuer also revalued HKL’s book NAV up by 9% to US$14.54. 
  • While we believe HKL will not consider disposal of its valuable assets, we think it can unlock value via a separate listing or changing its listing structure e.g. REIT/trust as many of the SG REITs are trading at par or premium to NAV.

Reiterate Add; valuable asset at bargain trade 

  • We revise our FY17-19F EPS by 0%/1%/1% after updating its property completion schedule. We also assume a flat yoy cap rate for 2017 i.e. 4.3% for HK Central portfolio. Hence, our NAV rises to US$14 and our TP to US$9.1, based on 35% discount to NAV.
  • HKL has the most valuable assets in HK but is also trading at the cheapest valuation (46% discount to NAV). 
  • Key risks to our Add call: slowdown in HK/China economy, faster-than-expected rate hike in the US.

Siu Fung LUNG CFA CIMB Research | Raymond CHENG CFA CIMB Research | http://research.itradecimb.com/ 2017-08-04
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 9.10 Up 8.500