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


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's 1H20 underlying profit declined 24% y-o-y

  • 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.

Rental reversions in HK office still positive

  • 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.

Rent relief extended to HK retail portfolio

  • 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.

Improved performance in Singapore office rental

  • 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.

Strategic partners secured for Shanghai West Bund site

  • 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.

Reiterate ADD on attractive valuations

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