Hongkong Land Holdings Ltd - CIMB Research 2018-03-09: China Could Be A Medium-term Earnings Driver

Hongkong Land Holdings Ltd - CIMB Research 2018-03-09: China Could Be A Medium-term Earnings Driver HONGKONG LAND HOLDINGS LIMITED H78.SI

Hongkong Land Holdings Ltd - China Could Be A Medium-term Earnings Driver

  • Management shared a more positive outlook in Hongkong Land’s results briefing, i.e. sustainable growth in office rental and retail sales growth.
  • Hongkong Land has added 12 land parcels recently for US$3.2bn, and several of the sites are in core locations in top-tier cities. We are positive on earnings growth in the medium-term, supported by the newly acquired land bank.
  • We believe a 48% discount to NAV offers sufficient downside protection. 
  • Reiterate ADD. Target Price raised to US$9.5 due to updated land bank.

Management shared a more positive outlook on various businesses 

  • Management shared a more positive outlook on Hongkong Land Holdings (HKL)’s various businesses in the results briefing this morning. 
  • To recall, HKL reported 14% growth in FY17 core profit yesterday, on the back of strong property sales in China and solid rental reversion in its HK office portfolio. Our note on the results was published on 8 Mar (see report: HongKong Land - Central Assets Selling for Only Half Price).

Central offices likely to see positive rental reversion for some time 

  • Management expects the rental reversion for Central offices to be sustained for some time, given that average rent (HK$108/sf/mth) and expiring rent (HK$101-112/sf/mth in FY18-20) are both well below market rent (~HK$120/sf/mth). 
  • Vacancy stood at a record low of 1.4% as at Dec 17, with strong demand from China and expansion from existing tenants.

Central retail sales growth is accelerating 

  • Management said that retail sales in Central resumed growth of 6% in FY17. Except for a few months of negative growth in 1H17, retail sales recorded growth in every month of 2H17, and were particularly promising in Jan 18. Both fashion and jewellery, accounting for 53% of floor area, reported a strong recovery. 
  • Management is positive on the retail sales outlook in the foreseeable future.

Singapore offices likely to see a turnaround 

  • Despite the fierce competition in the Singapore office market, management expects the negative rental reversion to revert in FY18. 
  • New supply in the market was largely taken up at end-2017 and vacancy in Hongkong Land’s offices remained low at 0.3% as at end-2017.

Proactive land banking in FY17 

  • Hongkong Land added 12 land parcels over the past 14 months for total land cost of US$3.2bn (of which US$1.7bn is to be paid in FY18F). Six parcels are located in China, and it gained a foothold in Hangzhou (attributable GFA: 233k sqm), Wuhan (247k sqm) and Nanjing (two sites, 301k sqm). The Xinjiekou project (wholly owned by Hongkong Land) is located in the heart of Nanjing, which is one of the busiest retail areas in China as well.

China could be a medium-term earnings driver 

  • Management is keen on acquiring more land bank in FY18, especially in China, as the land markets in both HK and Singapore have become extremely hot in FY17. 
  • With net gearing of merely 7% as at Dec 17 and given that Hongkong Land tends to invest in the form of JVs, we think it has more room for further land acquisition, which could enhance earnings and eventually drive dividends.

Reiterate ADD; raise Target Price to US$9.5 

  • After updating the latest completion schedule, we adjust our FY18-19F core EPS by - 1.6%/+7.3% and raise our NAV by 4% to US$13.5/share. Hence, our Target Price is lifted to US$9.5, based on a 30% discount to NAV. 
  • We believe that investors should re-visit the name after the strong FY17 results and its decent earnings outlook. It is now trading at a 48% discount to NAV, which offers sufficient downside protection for investors as well.
  • 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/ 2018-03-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 9.50 Up 9.100