Hongkong Land (HKL SP) - DBS Research 2018-03-09: Investing For The Future

Hongkong Land (HKL SP) - DBS Vickers 2018-03-09: Investing For The Future HONGKONG LAND HOLDINGS LIMITED H78.SI

Hongkong Land (HKL SP) - Investing For The Future

  • Hongkong Land's FY17 underlying profit up 14% to US$970m, 6% above our forecasts on stronger-thanexpected growth in development profit in China.
  • Positive reversionary growth for Central offices to continue.
  • Expanding property presence in China and South East Asia.
  • Compelling valuation; BUY with US$8.53 Target Price.

What’s New 

  • Hongkong Land’s FY17 underlying earnings came in at US$970m, up 14% y-o-y, mainly led by significantly higher development profits from China and increased rental earnings. 
  • Final DPS rose 8% to US$0.14, taking the full-year DPS to US$0.20 (FY16: HK$0.19).

Gross rental receipts rose modestly by 6% to US$912m. 

  • This reflects the mainly positive rental reversion for its Central office portfolio which resulted in average office rents rising 5% y-o-y to HK$108psf in 2017. Vacancy for Central office portfolio improved further to 1.4% in Dec-17 from Jun-17’s 1.5%. 
  • Retail portfolio remained effectively fully let with base rental reversions largely neutral. However, average retail rents were 3% y-o-y higher at HK$224psf in 2017 due to the full year effect of positive reversions in 2016.
  • Office rents in Central grew c.6% in 2017 after rising c.10% in 2016, according to Jones Lang LaSalle. Demand from Chinese enterprises shows no sign of abating. Coupled with tight vacancy and limited new supply, office reversionary growth should remain favourable when 31% of lease will be up for renewal or rent review in 2018.

Vacancy of its Singapore portfolio remained low at 0.3% in Dec-17 but negative reversionary growth dragged average rents in 2017. 

  • However, the latest deals suggest that the rental reversion is turning positive.
  • In Beijing, the newly opened WF Central retail complex was 77% occupied as of Feb-18. Committed occupancy should improve to c.90% by Jun-18.
  • Development profits in China, primarily from Chongqing and Shanghai, were substantially higher in FY17 due to higher project completion, offsetting lower contributions from Singapore.
  • Due to few launches in 2H17, Hongkong Land’s contracted sales was only marginally higher at US$1.11bn in 2017, which came mainly from projects in Chongqing. Net order book stood at US$1.03bn, of which c.85% is expected to be recognized in FY18. In Singapore, near-term development earnings visibility is high as Sol Acres and Lake Grande, scheduled for completion in FY18 and FY19 respectively, were 96% and 98% pre-sold at the end of 2017.

Hongkong Land is on acquisition mode. 

  • In 2017, Hongkong Land made forays into three second tier cities in China, including Wuhan, Nanjing and Hangzhou and acquired two new sites in Chongqing. 
  • In Jan-18, the company secured an additional site in Nanjing. Elsewhere, Hongkong Land acquired one residential site in each of Indonesia, Singapore and Bangkok, and conditionally entered into a joint venture to develop two residential projects in Ho Chi Minh City.
  • Total investment for these projects reached US$4.2bn of which c.52% is in China.
  • Net debt rose to US$2.55bn in Dec-17 from Jun-17’s US$1.9bn due to the payment for committed land purchases in China and Southeast Asia. But gearing remained low at 7%. The company’s financial risk should remain well managed in our view.

The stock is trading at 46% discount to our appraised current NAV, against its 10-year average of 29%. 

  • From an historical perspective, it is grossly undervalued and hence our BUY call. 
  • Our Target Price of US$8.53 is based on a 35% discount to our Dec-18 NAV estimate.

Jeff YAU CFA DBS Vickers | Ian CHUI DBS Vickers | Jason LAM DBS Vickers | http://www.dbsvickers.com/ 2018-03-09
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 8.53 Down 8.930