HongKong Land - DBS Research 2019-03-01: Unexpected Dividend Hike


HongKong Land - Unexpected Dividend Hike

  • Hongkong Land's FY18 underlying profit grew 9% to HK$1.04bn, in line with our estimate.
  • Dividend hike came as a positive surprise.
  • Remarkable increase in contracted sales from China.
  • BUY with Target Price of US$8.02.

What’s New

  • HONGKONG LAND HOLDINGS LIMITED (SGX:H78)’s FY18 underlying earnings improved 9% to US$1.04bn. The growth was driven by higher development profit from Singapore and increased rental earnings, partially offset by higher net financing costs.
  • Hongkong Land unexpectedly raised final DPS by 14% to US$0.16 which came as a positive surprise. This brought the full-year DPS to US$0.22.
  • Gross rental income rose 8% to US$983m primarily led by higher contributions from its Central office portfolio.

Vacancy at the Central office portfolio improved to 1.4% in Dec-19 from Jun-18’s 1.9%.

  • Favourable rental growth was achieved upon lease renewals and rent reviews. This led to 5% y-o-y growth in average office rents to HK$113psf for 2018.
  • On the other hand, the Central retail portfolio effectively remained fully let in Dec-18 with positive reversionary growth. As a result, average retail rents grew 4% to HK$233psf in 2018.
  • In Singapore, the office portfolio vacancy stood at 2.5% in Dec-18 but will decline as committed space is taken up in 2019. Reversionary growth turned positive in 2H18 amid an improving market. Average office rents rose marginally to S$9.2psf in 2018.

Contracted sales in China improved remarkably in 4Q18 due to more sales launches.

  • As a consequence, attributable contracted sales there surged 42% y-o-y to US$1.58bn despite government cooling measures.
  • As of Dec-18, attributable net order book stood at US$1.36bn. This should point to growing contributions from property development in China in the year ahead.

Hongkong Land’s net debt rose to US$3.6bn in Dec-18 from Jun-18’s US$3.1bn due to the premium payment for land acquisitions.

  • This translated into gearing of 9%, up from Jun-18’s 8%. Net debt should edge up modestly in 1H19 as payments are made in respect for land purchases previously committed. After committing > US$6bn on new projects in the previous two years,
  • Hongkong Land will moderate the pace of new investments. Therefore, despite increased gearing, the company’s financial risk remains well managed.
  • Led by revaluation surplus on investment properties, Hongkong Land’s NAV stood high at US$16.43/sh, up 3% from Jun-18’s US$15.93/sh. In 2H18, Hongkong Land repurchased 6.55m shares for US$45m or US$6.85/sh. This signaled its strong embedded value.

Shares of Hongkong Land have risen 14% YTD.

  • Trading at 45% discount to our appraised current NAV, Hongkong Land remains inexpensive. While Central office demand from Mainland Chinese companies showed signs of moderation recently, the tight vacancy and limited new supply should support rents. Growing development income from China should diversify the company’s earnings profile.
  • We reiterate our BUY call with a slightly higher Target Price of US$8.02, based on 40% discount to our assessed Dec-19 NAV.