HONGKONG LAND HOLDINGS LIMITED (SGX:H78)
HongKong Land - Light At The End Of The Tunnel
- Underlying interim profit rose 12% y-o-y to US$394m, 9% lower than our forecast. The discrepancy came from lower-than-estimated development earnings growth
- Rental income was resilient with higher retail contributions to offset office income shortfall
- Central office market exhibits signs of stabilising
- Upgrade Hongkong Land to BUY with target price of US$5.23 as investment value re-surfaces after the recent pull back with improving sentiment in Central office market.
Higher development earnings, resilient rental income
- Hongkong Land (SGX:H78)’s 1H21 underlying profit grew 12% to US$394m led by higher development earnings. Despite improved earnings, interim dividend remained flat at US$0.06.
- Gross rental income was stable with income shortfall from Central office portfolio offset by increased contributions from Central retail portfolio and WF CENTRAL in Beijing.
- Office reversionary growth for Central portfolio turned negative as a result of falling spot rents and increased expiring rents. This resulted in average office rents edging down 2% y-o-y and 1% h-o-h to HK$118psf in 1H21. This, coupled with lower average occupancy, resulted in reduced office income. In Jun-21, vacancy of its Central office portfolio stood at 6.4% (Dec-20: 6.3%). On a committed basis, it was 5.5% compared to 5.9% as of Dec-20. Average rents of virtually-fully let retail portfolio in Central recovered 19% y-o-y to HK$180psf due to reduced temporary rental relief granted to retail tenants as the COVID situation was improving . That said, base rental reversion continued to be negative, reflecting lower rents across Hong Kong. Therefore, excluding temporary rental relief, average retail rents fell 12% y-o-y to HK$203psf.
- Singapore office portfolio saw rental reversion turning positive with average rents increasing to S$10.2psf in 1H21 from S$9.9psf in both 1H20 and 2H20. Vacancy stood at 7.5% in Jun-21, up from Dec-20’s 2.1%. However, on a committed basis, vacancy was unchanged at 2.1% in Jun-21.
- In 1H21, WF CENTRAL in Beijing continued to benefit from solid demand for luxury goods with higher retail sales compared to 1H19.
- Including contributions from associates and joint ventures, operating profit from property development was 84% higher than in 1H20 which was impacted by pandemic related disruptions. Higher development profit is expected in 2H21, led by more project completions in China.
- In 1H21, Hongkong Land’s attributable contracted sales in China jumped 130% to US$1.36bn. As of Jun-21, Hongkong Land’s sold but unrecognised sales stood at US$3.37bn, of which 55% is expected to be booked in 2H21. This implies high earnings visibility in the years ahead. On the other hand, attributable contracted sales in Singapore reached US$172m in 1H21, down 43% y-o-y.
- In 1H21, Hongkong Land acquired three predominantly residential sites in China, one in Nanjing and two in Wuhan with total attributable developable area of 338,000sm. In Singapore, the company secured two joint ventures including an executive condominium development in the Tengah area and a predominantly residential site at Northumberland Road with aggregate attributable developable area of 0.53msf.
- Hongkong Land's net debt improved to US$4.26bn in Jun-21 from Dec-21’s US$4.57bn. This puts its gearing at 12%. (Dec-20:13%). There should be room for Hongkong Land to gear up for more acquisitions in the region to drive its long-term growth.
- In the past three months, Hongkong Land's Share Price has fallen 8%, underperforming other landlords.
BUY with US$5.23 target price.
- Following the recent pull back, Hongkong Land is trading at a 60% discount to our assessed current NAV, against its 10-year average of 41%. Estimated dividend yield for FY21 stands at 4.8%. The worst for Central office market should be over with relatively stable vacancy and moderating rental decline.
- According to Jones Lang LaSalle, Central office rents dropped 3.2% in 1H21 after falling 29% from its previous peak in mid-19. We believe that investment value is re-emerging following the recent share price retreat. Upgrade Hongkong Land to BUY with target price of US$5.23. This is based on target discount of 55% to our Jun-2022 NAV estimate.
- See
- Following the recent pull back, investment value re-surfaces given that Central office sector is starting to exhibit signs of stabilising.
Jeff YAU CFA
DBS Group Research
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https://www.dbsvickers.com/
2021-07-30
SGX Stock
Analyst Report
5.23
UP
5.070
