HongKong Land - CGS-CIMB Research 2019-03-01: Solid Rental Growth Drives Higher Dividends


HongKong Land - Solid Rental Growth Drives Higher Dividends

  • We expect Hongkong Land to sustain moderate rental growth in its HK office, given the lack of new supply and low vacancies in Central.
  • Its share buyback may continue in FY19F, supported by its low net gearing and solid recurring income base.
  • Maintain ADD with a higher Target Price of US$9.4, based on a 30% discount to NAV.

FY18 core net profit up 9% and DPS up 10%

  • HONGKONG LAND HOLDINGS LIMITED (SGX:H78)’s FY18 revenue was 27% above our estimate at US$2.7bn, mainly driven by higher-than-expected recognition of property sales in China in 2H.
  • FY18 core net profit rose 9% y-o-y to US$1,036m. It declared a final DPS of US$0.16, bringing FY18 DPS to US$0.22 (+10% y-o-y), in line with our estimate.

To see moderate rental growth in HK Central office portfolio

  • In FY18, Hongkong Land’s average office rents in HK rose 5% y-o-y, in line with Central’s average office rent hike.
  • Rental reversion was close to mid-teens, based on our estimates. Despite subdued leasing demand from Chinese corporations, the lack of new supply and low vacancies in Central should cushion any downside in office rents and enable Hongkong Land’s office portfolio to sustain moderate rental growth.

Resilient retail rental growth in HK

  • Its HK retail average rent was up 4% y-o-y with moderately positive rental reversion.
  • In China, its luxury retail mall, WF Central, in Beijing was opened in May 2018. The mall’s full-year contribution in FY19F could be Hongkong Land’s retail rental growth driver.

Expect to invest more in China residential properties

  • FY18 contracted sales in China rose 42% y-o-y to US$1.6bn and its attributable unrecognised sales of US$1.4bn will be available for booking in FY19-20F. Currently, 66% of its total land bank of 9.3m sq m is located in China.
  • We expect residential properties in China to be Hongkong Land’s preferred investment, as it allows for faster recycling of capital and as demand for residential properties in Tier-1 and 2 cities persists.

We expect share buyback to continue in FY19F

  • In FY18, Hongkong Land spent US$132m on buying back 19m shares. Though management has no fixed policy on share buybacks, we expect it to continue in FY19F, supported by its low net gearing (9% at end-2018) and solid recurring income base in HK and Singapore.

Maintain Add with a higher Target Price of US$9.4

  • We revise our FY19/20F EPS forecasts by -4%/3% on the back of revised property booking assumptions. We also introduce FY21F forecasts. Our new Target Price of US$9.4 (previously US$9.1) is based on a 30% discount to end-2019F NAV of US$13.4 (previously US$13.0).
  • Maintain ADD.
  • Stronger rental growth for its office and retail portfolio is a potential re-rating catalyst.
  • Key risk is economic slowdown in HK /China.

Raymond CHENG CFA CGS-CIMB Research | Will CHU CGS-CIMB Research | Jeffrey MAK CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-01
SGX Stock Analyst Report ADD MAINTAIN ADD 9.4 UP 9.1