Hongkong Land Holdings Ltd - CIMB Research 2018-03-08: Central Assets Selling For Only Half Price

Hongkong Land Holdings Ltd - CIMB Research 2018-03-08: Central Assets Selling For Only Half Price HONGKONG LAND HOLDINGS LIMITED H78.SI

Hongkong Land Holdings Ltd - Central Assets Selling For Only Half Price

  • Core profit rose 14% in FY17, slightly missed on higher operating expenses and tax.
  • HK portfolio remained stable. Office vacancy declined to 1.4%. We expect faster rental growth for both office and retail.
  • Proactive land banking in FY17, especially in China, which could be a medium-term earnings driver. 
  • Maintain Add, with a Target Price of US$9.1.

Core profit rose 14% in FY17

  • Hongkong Land core profit rose 14% y-o-y to US$970m in FY17, missing our expectations by 5%, mainly due to higher SG&A expenses and tax.
  • A final dividend of US$0.14 was declared, +8% y-o-y. Full-year dividend amounted to US$0.2, implying a 3% dividend yield.

Central office rent accelerated further

  • Central office, accounting for over 70% of HKL’s revenue, was buoyant on the back of limited supply and strong demand, especially from mainland corporates.
  • Vacancy further declined to 1.4% as at Dec 17 from 2.2% at Dec 16.
  • Average rent rose 5% to HK$108/sf/mth in FY17.

Central retail recovered steadily

  • Central retail, accounting for over 25% of HKL’s revenue, recovered steadily in FY17, on the back of slightly improved market sentiment in 2H17.
  • Base rent reversions were largely flattish. Turnover rent declined 15% to US$8.8m.
  • Having said that, average rent rose slightly to HK$224/sf/mth in FY17 from HK$218/sf/mth in FY16. 

Proactive land banking in FY17

  • Contracted sales in China stayed flat at US$1.1bn in FY17, slightly affected by the tightening policies on launches in 2H17.
  • Attributable revenue doubled to US$1.3bn in FY17 due to more completions. Net order book largely stayed flat y-o-y at US$1bn as at Dec 17.
  • HKL was proactive in land banking in FY17. It acquired five sites in Nanjing, Wuhan, Hangzhou and Chongqing, with total GFA of 0.9m sqm. We estimate that total development cost could exceed Rmb30bn.

52% discount to NAV looks attractive; Maintain ADD and US$9.1 Target Price

  • We believe that Hongkong Land’s Central office portfolio will continue to benefit from strong mainland demand and limited supply in the medium term. The retail recovery in HK, especially in the luxury segment, is expected to continue in FY18.
  • Hongkong Land is trading attractively at a 52% discount to NAV vs. its peers Swire Prop (38%) and Champion REIT (37%). We maintain our Add rating with a Target Price of US$9.1 based on a 35% discount to NAV. 
  • Key catalysts: faster rental reversion in HK office and pick-up in retail rents, especially turnover rent, in FY18. The increasing contribution from China property sales could also be a medium-term earnings driver.
  • Key risks: faster-than-expected rate hike in the US, slowdown in HK/China economy.

Siu Fung LUNG CFA CIMB Research | Raymond CHENG CFA CIMB Research | http://research.itradecimb.com/ 2018-03-08
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 9.100 Same 9.100