HongKong Land - CGS-CIMB Research 2019-08-02: Standing Strong In Central


HongKong Land - Standing Strong In Central

  • Extended average office lease expiry may cushion downside for office rents.
  • We think HongKong Land’s application for plot ratio increase in its mega JV project with SHKP in Yuen Long could drive growth in the medium term.
  • We keep our ADD call with a Target Price of US$7.4, based on 45% discount to NAV.

1H19 results in line

  • HONGKONG LAND HOLDINGS LIMITED (SGX:H78)’s underlying net profit was up 2% y-o-y to US$466m in 1H19, driven by stable growth in rental income and a higher share of profit from its JV property development projects in China.
  • We deem 1H19 NP in line at 45% of our FY19F as we expect more property sales bookings in China in 2H19F.
  • Interim DPS was flat y-o-y at US$0.06. Management guided for stable DPS growth from a full-year perspective.

Limited downside risk for HK office rents

  • HongKong Land's operating profit from rental income was up 6% y-o-y to US$483m. Its monthly average office rent in HK climbed 1% h-o-h in 1H19 to HK$116 psf but vacancy rose to 2.8% at end-Jun 19 from 1.4% at end-Dec 18.
  • We note that only 30% of office area will be subject to rent review or expiration in the coming 18 months, and that its weighted average lease expiry (WALE) extended to 4.6 years at end-Jun 19 from four years at end-Dec 18. Hence, though the leasing enquiries for its office have been subdued because of headwinds in global economy, we think extended WALE (mainly for legal and financial services clients) and low supply in Central could cushion any downside in its office rents.

Successful farmland conversion in HK could be a growth driver

  • HongKong Land and SHKP (16 HK) submitted a proposal last month to the HK Government (HKG) to raise the plot ratio to 5.5x for their farmland-converted JV residential project in Shek Wu Wai in Yuen Long. In May 19, the JV paid a land premium of HK$2.1bn for land conversion of GFA of 487k psf (0.4x plot ratio) approved by HKG in 2006.
  • The new proposal, if approved, would supply up to 11k residential units, equivalent to 84% of HKG’s annual private housing supply target. We think the successful application for an increase in plot ratio would be a growth driver for HongKong Land’s property development business in the medium term.

Opportunities arise amid credit tightening in China

  • Its contracted property sales in China stayed flat in 1H19 at US$643m. Although it acquired only one site in 1H19 in Wuhan, management regarded the recent credit tightening for developers in China as an opportunity for HongKong Land, which has low net gearing (10% at end-Jun 19) with a solid track record of development in China.

Share repurchase could resume in 2H19F; Maintain ADD

  • HongKong Land did not repurchase any shares in 1H19. Management finds the current share price attractive and would reconsider repurchasing shares from time to time. Given its low net gearing, we think it could resume share repurchases in 2H19F.
  • We raise our FY19F EPS by 1% to reflect our revised assumptions on property sales bookings. Our US$7.4 Target Price is still based on a 45% discount to NAV of US$13.4. Maintain ADD.
  • Downside risks: Slowdown in HK/China economy.

Raymond CHENG CFA CGS-CIMB Research | Will CHU CGS-CIMB Research | Jeffrey MAK CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-02
SGX Stock Analyst Report ADD MAINTAIN ADD 7.40 DOWN 9.400