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

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.

Solid growth in rental income; fewer sales bookings

  • 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.

Central office portfolio remains stable

  • 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.

Solid rental reversions in Central retail portfolio

  • 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.

Expects Singapore rental reversions to turn positive in 2H18

  • 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.

Project pipeline on schedule

  • 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.

Sales completions in China to increase in 2H18

  • 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.

Diversified landbanking to drive earnings growth

  • 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.

Reiterate Add with a Target Price of US$9.50

  • 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
SGX Stock Analyst Report ADD Maintain ADD 9.50 Same 9.50