HongKong Land - CGS-CIMB Research 2019-12-09: Weaker Rental Growth Prospects In HK


HongKong Land - Weaker Rental Growth Prospects In HK

  • In view of the worsening business sentiment in HK, we lower our HK office spot rent forecasts for HongKong Land to 0%/-5% in FY19F/20F.
  • As recovery in luxury retail sales and visitor arrivals are unlikely in the near term, we forecast a 5% decline in HongKong Land’s retail spot rents in FY19-20F.
  • Maintain ADD with a lower Target Price of US$6.90. The stock trades at a 57% discount to NAV, close to its 20-year low.

Weak business sentiment to put pressure on HK office rents

  • HONGKONG LAND (SGX:H78) released its 9M19 operational updates on 21 Nov. Its HK office average net rent in 9M19 was HK$117/sf/month, up from HK$116/sf/month in 6M19. Its vacancy at 30 Sep 2019 stood at 2.4%, up from 1.4% at end-2018.
  • In 4Q19-2020F, some 25% of its HK office lettable area will be subject to rent review or expiration. In view of the worsening business sentiment due to prolonged social unrest in HK, we think its HK office rents will come under pressure and forecast 0%/-5% growth in spot rents in FY19F/20F.
  • See Hongkong Land Announcements; Hongkong Land Latest News.

Recovery in HK luxury retail sales unlikely in the near term

  • In 9M19, HK’s retail sales declined by 7.3% y-o-y to HK$335bn. The decline in sales of jewellries and other valuable goods was more pronounced at 16.5% y-o-y in 9M19. Meanwhile, in 9M19, HongKong Land’s average retail net rent stood at HK$238/sf/month, down from HK$239/sf/month in 1H19.
  • In our view, given the prolonged social unrest in HK, recovery in visitor arrivals is unlikely in the short term and consumer sentiment will remain weak.
  • We forecast a 5% decline in HongKong Land’s retail spot rents in FY19-20F, to factor in the negative impact of rent concessions in part of its HK luxury retail portfolio.

Performance in China property sales remains fair

  • Its performance in property sales in China has remained fair, with total contracted sales of US$1.2bn in 9M19. Its unrecognised contracted sales as of 30 Sep 2019 amounted to US$2bn, of which US$0.8bn will be recognised in FY19F and the remainder in FY20F and beyond.
  • In 10M19, HongKong Land invested US$1.1bn in new development property projects, with more than 80% of the total investment in Tier-1 and -2 cities in China.

Maintain ADD with a lower Target Price of US$6.90

  • We revise down FY19-21F EPS by 3-4% to factor in our negative view on HK office and retail spot rents, which would be a drag on HongKong Land’s rental reversion in its HK portfolio. We also increase the cap rates for HK office and retail properties by 25bps to factor in our more cautious view of HK commercial property prices.
  • Our lower Target Price of US$6.90 is still based on a 45% discount to NAV of US$12.6 (US$13.4 previously). Maintain ADD. See Hongkong Land Share Price; Hongkong Land Dividend History; Hongkong Land Target Price; Hongkong Land Analyst Reports.
  • A potential re-rating catalyst is subsiding social unrest in HK, leading to a recovery in HK retail sales and business sentiment.
  • Key downside risks are prolonged social unrest in HK and further depreciation of Rmb against HK$/US$.

Raymond CHENG CFA CGS-CIMB Research | Will CHU CGS-CIMB Research | Jeffrey MAK CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
SGX Stock Analyst Report ADD MAINTAIN ADD 6.90 DOWN 7.400