HongKong Land - DBS Research 2021-03-12: Office Headwinds A Share Price Overhang

HONGKONG LAND HOLDINGS LIMITED (SGX:H78)

HongKong Land - Office Headwinds A Share Price Overhang

Hongkong Land's FY20 underlying profit fell 11% to US$963m, 14% ahead of our estimate due to smaller-than-expected decline in development profits.
Gross rental income fell 6% due to temporary rental reliefs granted to retail tenants.
Pandemic-related construction delays led to lower development income.

Hongkong Land (SGX:H78)’s FY20 underlying profit came in 11% lower at US$963m, dragged by reduced rental and development earnings. Despite earnings shortfall, final dividend was unchanged at US$0.16, taking Hongkong Land's FY20 full-year dividend to US$0.22 per share.

Gross rental income fell 6% to US$938m. This was mainly led by lower retail income as a result of temporary rental concessions granted to retail tenants impacted by the protracted pandemic, and higher average office vacancy. Due to lackluster demand, vacancy of Hongkong Land’s Central office portfolio rose to 6.3% (or 5.9% on committed basis) from Jun-20’s 5% and Dec-19’s 2.6%.
Benefitting from a number of leases that were signed before the onset of pandemic, office reversionary growth remained broadly neutral for the whole year of 2020. Average office rents edged up to HK$120psf in FY20 from FY19’s HK$118psf. That said, rental reversion has turned negative from 2H20.
Retail portfolio in Central remained effectively fully let in Dec-20 despite the challenging retail scene. However, average retail rents fell 26% y-o-y to HK$164psf due to temporary rental reliefs granted to retail tenants during the COVID-19 outbreak. Base rental reversions were negative, reflecting softening rents across Hong Kong.
In 2021, about 25% of office leases is scheduled for renewal and rent review, with average expiring net rents of HK$124psf. Negative rental reversion is expected to continue.

This led to average office rents rising to S$9.9psf from 2019’s S$9.7psf. Vacancy rose slightly to 2.1% on both physical and committed basis in Dec-20 from Jun-20’s 1.5%. With the COVID-19 gradually subsiding, WF Central in Beijing benefitted significantly from the release of pent-up demand for luxury goods and recorded favourable retail tenants’ sales growth in 2H20.
Including contribution from associates and joint ventures, Hongkong Land's operating profits from property development were 22% lower at US$524m due to the pandemic-led construction delays in China and lower margins as a result of a shift in sales mix.

In attributable terms, Hongkong Land achieved contracted sales of US$2.14bn in 2020, up 14% y-o-y. Sold but yet to be recognised contracted sales reached US$2.58bn in Dec-20. This suggests good visibility of development earnings which should recover in FY21.
In Singapore, Hongkong Land’s attributable contracted sales fell by 6% to US$632m in 2020. In Dec-20, sold but yet to be recognized contracted sales amounted to US$676m.
In an attempt to diversify investment risks, Hongkong Land has brought in two partners (a strategic investor headquartered in Mainland China and a government-held SPV) for its prime West Bund project in Shanghai that was acquired in Feb-20. It has retained a 43% stake in the joint venture project.

Gearing improved to 13% from 16% in Jun-20. With sound financial position, Hongkong Land is well poised to pursue new acquisitions to propel long-term growth.
In late 2020, the company secured a site in Chongqing for RMB2.5bn. This predominantly residential project offers GFA of 174,000sm with expected completion in 2025.

Hongkong Land's share price appreciated 27% year-to-date after falling 28% in 2020. Following the recent run-up, Hongkong Land is trading at 54% discount to our appraised current NAV, with estimated dividend yield of 4.2% for FY21.
Central office portfolio continues to face headwinds in the short term. This should overshadow Hongkong Land’s near-term earnings prospects and limit share price upside. But growing contributions from China should broaden the company’s earnings base over the long term.
See Hongkong Land Share Price; Hongkong Land Target Price; Hongkong Land Analyst Reports; Hongkong Land Dividend History; Hongkong Land Announcements; Hongkong Land Latest News.
We maintain HOLD on Hongkong Land with target price of US$5.07. This is based on 55% discount to our Dec-2021 NAV estimate.

Jeff YAU CFA DBS Group Research | https://www.dbsvickers.com/ 2021-03-12

SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.07 UP 4.45