HongKong Land - DBS Research 2020-07-30: Low Valuations Cushion Downside Risk


HongKong Land - Low Valuations Cushion Downside Risk

  • Hongkong Land's interim underlying earnings fell 24% to US$353m, 17% below our estimate, due to weaker-than-expected development earnings from China.
  • Expect higher property development earnings in 2H20 due to more project completions in China.
  • Conditionally finalised agreements with strategic partners to jointly develop the West Bund project.
  • Strong asset backing, maintain BUY call with US$4.80 Target Price.

Hongkong Land's 1H20 earnings

  • Hongkong Land (SGX:H78)’s 1H20 underlying profit was 24% lower at US$353m on reduced rental earnings and development income. Despite lower earnings, interim DPS remained unchanged at US$0.06.
  • Gross rental receipts fell 8% to US$467m primarily led by lower retail income as a result of the COVID-19 pandemic.
  • Vacancy of its Central office portfolio rose to 5% (or 4.5% on committed basis) in Jun-20 from Dec-19’s 2.9%, amid subdued office demand. Yet, Hongkong Land’s rental reversion remained mildly positive resulting in average office rents increasing to HK$121psf in 1H20, from 1H19’s HK$116psf and 2H19’s HK$119psf.
  • Retail portfolio in Central was virtually fully-let in Jun-20 despite the COVID-19 outbreak. Average retail rents fell 37% to HK$151psf partly due to pandemic-related rental concessions granted to tenants.
  • In Singapore, office vacancy remained low at 1.5% (or 1% on committed basis) in Jun-20 (Dec-19: 5%). Average office rents advanced to S$9.9 in 1H20 from S$9.7psf in 2019 reflecting positive rental reversions.
  • Including joint venture & associates, Hongkong Land's operating profit from property development plunged 60% to US$77m mainly due to fewer project completions in China. Reduced contribution from Singapore also led to lower development profits in 1H20.
  • Higher profits, however, are expected from property development in China in 2H20 due to more project completions, even after allowing for some construction delays led by the pandemic.
  • Attributable contracted sales from China fell 8% to US$591m (1H19: US$643m) due to the closure of sales offices amid the COVID-19 outbreak. As of Jun-20, Hongkong Land’s sold but unrecognized sales stood at US$2.18bn of which c.40% will be booked in 2H20.

Net debt rose to US$5.63bn in Jun-20

  • Hongkong Land's net debt rose to US$5.63bn in Jun-20 from Dec-19’s US$3.59bn mainly due to the land premium payment for the West Bund project. Earlier this year, Hongkong Land has secured a sizeable site in West Bund of Shanghai for mixed-use development through government auction for US$4.4bn which was fully paid in 1H20.
  • Hongkong Land has conditionally finalised agreements with two strategic partners to jointly develop this project, with receipts of US$2.3bn in 1H20 and a further US$320m that was received in Jul-20. The joint venture arrangement enables Hongkong Land to participate in this large mixed-use development without stretching its balance sheet.

Valuation of investment properties fell 6%

  • Valuation of Hongkong Land's investment properties fell 6% in 1H20, amid the commercial market downcycle. This resulted in 7% h-o-h decline in shareholders’ value. Accordingly, gearing ratio edged up to 16% in Jun-20 from Dec-19’s 9%.
  • Despite higher gearing, Hongkong Land’s financial risk remains manageable, in our view.

Maintain BUY

Jeff YAU CFA DBS Group Research | https://www.dbsvickers.com/ 2020-07-30
SGX Stock Analyst Report BUY MAINTAIN BUY 4.80 DOWN 5.220