Hongkong Land Holdings Ltd - CGS-CIMB Research 2018-07-26: Defensive Play In A Volatile Market

HONGKONG LAND HOLDINGS LIMITED SGX:H78

Hongkong Land Holdings Ltd - Defensive Play In A Volatile Market

HongKong Land's 1H18 core net profit dipped 3% y-o-y on fewer property sales bookings in China.
Central office/retail average rents up 2%/3% in 1H18; retail portfolio remained fully occupied.
Sold but unrecognised property sales in China rose to US$1,507m.
Active landbanking in 1H18, having secured five projects.
HKL is trading at a 47% discount to NAV which offers sufficient downside protection. Reiterate ADD with an unchanged Target Price of US$9.50.

Hongkong Land (HKL) posted a solid performance in investment properties, registering a 9% y-o-y growth in rental income in 1H18 to US$484m. However, due to fewer properties sales bookings rom associates and JVs in China, core net profit dipped 3.1% y-o-y to US$455m in 1H18. 1H18 core net profit made up 43% of our full-year forecast.
An interim DPS of US$0.06 was declared, unchanged y-o-y.

Hongkong Land (HKL)’s Central office portfolio benefited from tight supply with rental reversions remaining positive. Average office rent in 1H18 rose 2% to HK$111/sf/mth from HK$109/sf/mth 2H17, although its Central office vacancy stood at 1.9% at the end of Jun 2018 compared to 1.4% at the end of 2017.

Central retail portfolio remained fully occupied in 1H18. On the back of positive rental reversions, the average rent, including base rent and turnover rent, was up 3% from HK$225/sf/mth in 2H17 to HK$231/sf/mth in 1H18.

Despite the mildly negative rental reversions in Singapore, HKL managed to maintain the average office rent at S$9.1/sf/mth, unchanged since 1H17. Management expects the rental reversions to turn positive in 2H18. Vacancy in the Singapore office portfolio dipped further from 0.3% at end-2017 to 0.1% at the end of June 2018.

In Beijing, apart from WF Central which opened in late-2017, the associated Mandarin Oriental Wangfujing hotel will open towards the end of 2018. Also, the planning of HKL’s 49%-owned commercial joint venture development with Central Group in Bangkok, Thailand continues in line with the schedule.

Due to fewer project launches, Hongkong Land (HKL)’s attributable contracted sales in China fell mildly y-o-y, from US$701m in 1H17 to US$650m in 1H18.
Sold but unrecognised contracted sales increased from US$1,032m at end-2017 to US$1,507m at the end of Jun 2018. Management expects sales completions to increase in 2H18, particularly in relation to projects in Chongqing.

Hongkong Land (HKL) was keen on diversified landbanking in 1H18, securing five projects located in Nanjing, Singapore, Bangkok, Jakarta and Manila. As a result of the acquisitions, HKL’s net debt rose to US$3.1bn at end-Jun from US$2.5bn at end-2017. Management expects the figure to rise modestly for committed land purchases.
Although net gearing was up marginally from 7% at end-2017 to 8% at end-Jun 18, we think HKL’s higher investment in property development could enhance earnings and eventually drive up dividends.

Our Target Price of US$9.50 is based on a 30% discount to NAV. We think Hongkong Land is a defensive play amid the volatile market with a stable growth outlook. It is now trading at a 47% 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.

Raymond CHENG CFA CGS-CIMB Research | Jeffrey MAK CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-26

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