HongKong Land - CGS-CIMB Research 2021-07-30: Investment Properties Performance Stabilising

HONGKONG LAND HOLDINGS LIMITED (SGX:H78)

HongKong Land - Investment Properties Performance Stabilising

Hongkong Land’s 12% y-o-y increase in underlying earnings per share in 1H21 was primarily driven by the recovery of property sales recognition in China and Singapore.
Although we expect HK office to continue to see negative rental reversions in 2H21F, its vacancy rate appears to be stabilising.
China development properties sales are still on an upward growth trajectory; management said it expects this growth to help offset the market-wide margin contraction.

Reiterate ADD on its attractive valuation with an unchanged target price of US$5.70.

Hongkong Land (SGX:H78) reported a 12% y-o-y increase in underlying earnings per share to US$0.169, primarily driven by a modest recovery in development properties (DP) recognition in China and Singapore from a low base in 1H20.
Hongkong Land declared an interim dividend of US$0.06, unchanged y-o-y.

Its total operating profit from Hongkong investment properties (IP) declined by 3% y-o-y in 1H21 to US$413m. The vacancy rate at HK office edged up by only 0.1% pt h-o-h to 6.4% at end-1H21, compared to 7.4% for overall Central office.
Negative rental reversions will likely continue in 2H21F, as average expiring rent in 2H21F and 2022F (accounting for one-third of office GFA) is ~13% higher than the latest average monthly expiring rent (HK$118/sf). A modest recovery was seen in HK retail portfolio as its average rent rose 2% h-o-h, with vacancy staying low at 0.9%. Hongkong Land’s rent relief for retail tenants has been largely reduced, according to management.

Gross revenue recognised for China development properties (DP) increased by 149% y-o-y in 1H21, driven by completions in Chongqing and Nanjing. However, gross profit margin (GPM) narrowed to 22%, from 36-44% attained in FY18-20, due to surging land costs and price controls in Tier-1 and -2 cities.
Management expects the GPM for upcoming DP recognition to lie between the high-teens and low 20%s, as its low-cost vintage land bank depletes. As of end-Jun, Hongkong Land had total unrecognised sales of US$3.4bn; half of the amount is available for recognition in 2H21F.

In Singapore, its average office rent rose 3% h-o-h in 1H21 and overall vacancy remained unchanged at 2.1% on a committed basis. Rental reversions for its office were moderately positive in 1H21. DP contracted sales in Singapore would likely be lower in FY21F as most available-for-sale projects have been pre-sold; Hongkong Land acquired two sites in 1H21 to avoid land bank depletion.

We make no major changes to our earnings forecasts, and reiterate our ADD call for Hongkong Land for its attractive valuation (56% discount to NAV, 0.5 standard deviation below 5-year average) with a target price of US$5.70, based on an unchanged 45% discount to end-FY21F NAV.
See
Key downside risks: a prolonged COVID-19 outbreak and more property market tightening policies in China.
A rating catalyst is turnaround of negative rental reversions in Hongkong investment properties.

Raymond CHENG CFA CGS-CIMB Research | Will CHU CFA CGS-CIMB Research | Steven MAK CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-30

SGX Stock Analyst Report ADD MAINTAIN ADD 5.700 SAME 5.700