HongKong Land - CGS-CIMB Research 2020-07-31: Resilient Portfolio

HONGKONG LAND HOLDINGS LIMITED (SGX:H78)

HongKong Land - Resilient Portfolio

Hongkong Land’s HK Central office portfolio continued to register positive rental reversion in 1H20, despite rising vacancy.
We think Hongkong Land will continue to extend its rent relief to HK retail tenants in 2H20F given the latest round of COVID-19 community outbreaks.
Reiterate ADD due to its attractive valuations with a lower Target Price of US$5.10.

Hongkong Land (SGX:H78)’s underlying profit for 1H20 declined 24% y-o-y to US$353m, primarily driven by weaker investment property (IP) revenue (-10% y-o-y) and lower development property (DP) delivery compared to a year ago.
1H core profit came in at 40% of FY20F underlying profit. Interim DPS stayed flat y-o-y at 6 US$cts.

Thanks to positive rental reversions in FY19 and 1H20, Hongkong Land's average monthly HK office rent increased 2% h-o-h to HK$121/sf in 1H20. However, its HK office vacancy rose to 5.0% at end-Jun 20 from 2.9% at end-Dec 19 and 4.3% at end-Mar 20, on the back of subdued leasing enquiries and take-up amid COVID-19 outbreak.
Management expects a more challenging outlook for the HK office in 2H20F as a result of elevated vacancy.

The average monthly rent for HK luxury retail portfolio fell 26% h-o-h or 37% y-o-y in 1H20 to HK$151/sf, as a result of rent relief and a decline in turnover rent. Excluding rent relief, the average monthly rent was HK$230/sf (-1% h-o-h or -4% y-o-y).
Hongkong Land's weighted average lease expiry (WALE) shortened further to 2.1 years from 2.5 years a year ago as Hongkong Land attempted to increase flexibility in its retail tenant mix.

Hongkong Land's performance in Singapore office continued to improve in 1H20, with mildly positive rental reversions and 2% h-o-h increase in average monthly rent. Its vacancy declined to 1.5% as at end-Jun 20 from 5.0% at end-Dec 19.

In China, Hongkong Land's DP contracted sales declined by 8% to US$591m in 1H20, due to disruption in sales activities during the lockdown. Besides, it has secured two strategic partners (identities undisclosed) to co-develop the West Bund commercial site in Shanghai; the relevant transactions are scheduled for completion in early 2021.
Hongkong Land will remain the largest shareholder of the project which will be accounted for as a JV.

We cut Hongkong Land's FY20F/21F/22F EPS by 12%/2%/2% to factor in weaker rental growth prospects in HK and a delayed DP booking schedule due to COVID-19. Nevertheless, we reiterate ADD in view of its resilient IP portfolio, coupled with attractive valuation (63% discount to NAV).
Our new Target Price of US$5.10 for Hongkong Land is based on a 50% discount (widened from 45%) to NAV of US$10.2 (US$11 previously).
See Hongkong Land Share Price; Hongkong Land Target Price; Hongkong Land Analyst Reports; Hongkong Land Dividend History; Hongkong Land Announcements; Hongkong Land Latest News.
Potential re-rating catalysts: stronger rental growth in its IP portfolio.
A prolonged COVID-19 outbreak is a key downside risk.

Raymond CHENG CFA CGS-CIMB Research | Will CHU CFA CGS-CIMB Research | Jeffrey MAK CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-31

SGX Stock Analyst Report ADD MAINTAIN ADD 5.10 DOWN 6.050