HongKong Land - DBS Research 2020-05-04: Valuations Have Discounted Headwinds


HongKong Land - Valuations Have Discounted Headwinds

  • Rising office vacancy in Central.
  • Rental concession to drag retail income in Hong Kong/Beijing.
  • Construction activities have resumed in China but project delays will impact earnings.
  • Hongkong Land Share Price is trading close to historical low valuations, BUY with US$5.22 Target Price.

Office vacancy of Hongkong Land’s Central portfolio edged up to 4.3% in Mar-20

  • Office vacancy of Hongkong Land (SGX:H78)’s Central portfolio edged up to 4.3% in Mar-20 from Dec-19’s 2.9%. On a committed basis, it was 3.7%. According to Jones Lang LaSalle, office rents in Central fell 9% in 1Q20 amid sluggish leasing demand and growing vacancy. Office reversionary growth is set to moderate noticeably in 2020 when 13% of leases are scheduled for expiry with another 7% up for rental review.
  • Retail portfolio vacancy in Central increased to 1.4% in Mar- 20 from Dec-19’s 0.3%. A small number of retail shops were required to temporarily close due to the government’s anti-pandemic measures. Continued rental relief and expected negative rental reversion should drag retail rental earnings for FY20.
  • In Singapore, office rental reversion, albeit still positive, should moderate for the rest of this year. Vacancy stood at 5.5% (or 1% on committed basis) in Mar-20.
  • WF Central in Beijing registered a sharp fall in tenant sales during the COVID-19 outbreak in 1Q20. This, coupled with rent relief offered to tenants, should dampen rental income in FY20. However, we are seeing some improvement in tenants’ business recently.
  • In China, sales offices were closed for about two months as a result of the pandemic. As such, Hongkong Land’s attributable contracted sales in China tumbled 45% y-o-y to US$107m in 1Q20. While sales activities recovered during Apr-20, it has yet to return to normal. Construction activities have also been suspended for about two months but have since resumed. The construction delays would lead to delays in development profit recognition which would impact Hongkong Land’s earnings for FY20.
  • In Singapore, attributable contracted sales recorded 47%y-o-y growth to US$170m in 1Q20 but market sentiment turned cautious lately. Construction activities are temporarily suspended by government measures to contain the COVID- 19 pandemic.

Net debt of Hongkong Land stood at US$3.9bn in Mar-20, up from Dec-19’s US$3.6bn.

  • This puts Hongkong Land's gearing at 10%. While gearing is expected to increase as a result of committed land and other payments, financial risk should remain manageable in our view.

Hongkong Land’s share price has fallen

Jeff YAU CFA DBS Group Research | https://www.dbsvickers.com/ 2020-05-04
SGX Stock Analyst Report BUY MAINTAIN BUY 5.22 DOWN 5.810