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


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's underlying earnings per share increased by 12% y-o-y in 1H21

  • 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.

Hongkong office: negative rental reversions; vacancy stabilising

  • 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.

China development properties: higher sales recognition against margin contraction

  • 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.

Performance at Singapore office improving

  • 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.

Reiterate ADD on attractive valuation

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