Hongkong Land - DBS Research 2023-01-16: Flight To Quality; Steady Rental Income Despite Market Challenges

Hongkong Land - Flight To Quality; Steady Rental Income Despite Market Challenges

  • Physical vacancy of Hongkong Land (SGX:H78)’s Central office portfolio improved to 5.1% in Sep-22 from Jun-22’s 5.4%. On a committed basis, vacancy was 4.8%. (Jun-22: 5.1%). These compared favourably with the overall Central market which saw its office vacancy edging up to 8.3% in Sep-22 from 7.9% in Jun-22, according to Jones Lang LaSalle. Heightened global economic uncertainty has inevitably led to softened leasing demand in 2H22.
  • However, with proactive leasing strategy on one hand and unique position of its portfolio on the other, Hongkong Land continues to ride on “flight to quality” demand. For instance, renowned fund house Invesco joined Jardine House on Nov-22, relocating from Three Garden Road.
  • Nonetheless, negative rental reversion continues to work its way through its Central office portfolio in 2H22 given high expiring rents of HK$136psf. About 24% of floor area is scheduled for roll over in 2023. With expiring rents remain high at HK$111psf, office reversionary growth should continue to stay negative.
  • Hongkong Land's retail portfolio benefitted from a marginally better retail scene led by the easing of social distancing measures in 2H22. This resulted in smaller temporary rental reliefs granted to retail tenants. As such, average net rents should recover from 1H22’s HK$168psf.
  • Hong Kong is gradually re-opening its border with Mainland China, which should pave way for full-fledged retail sector recovery. This could brighten the earnings outlook of the company’s retail portfolio.
  • Hongkong Land's Singapore portfolio continued to enjoy favourable rental growth upon renewals and new lettings. Supported by healthy leasing sentiment, physical vacancy improved to 4% in Sep-22 from Jun-22’s 4.7%. The committed vacancy was low at 0.7%.

Construction delays to drag Hongkong Land's near-term earnings.

  • Pandemic-led restrictions and lockdowns, and uncertain economic outlook has weighed on residential market sentiment in China. Having said that, due to the timing of sales launches, Hongkong Land’s attributable contracted sales were 34% higher at US$346m in 3Q22. This brought the attributable contracted sales for 9M22 to US$765m, down 53% y-o-y. Due to pandemic-led construction delays, project completion is estimated to fall to 0.53m sm in FY22 from FY21’s 0.7msm before rebounding to 0.83msm in FY23. This has prompted us to forecast 19% fall in underlying profit for FY22.
  • In Aug-22, Hongkong Land secured a joint venture project in Suzhou to develop a mixed-use site. Upon scheduled completion in 2026, the project will include a luxury mall and a hotel with developable GFA of 132,600sm.
  • In Singapore, contracted sales fell 36% y-o-y to US$56m in 3Q22. This brought the cumulative contracted sales for 9M22 to US$326m, representing 25% y-o-y increase. In Oct- 22, Hongkong Land launched Copen Grand (Tengah Garden Walk), a 50/50 jv with CDL. Market response has been very positive. The development comprises 639 executive condominium units with GFA of 68,000sm.

Hongkong Land – Valuations

  • Hongkong Land's net debt stood at US$5.8bn in Sep-22, down from Jun-22’s US$6.1bn, putting its gearing at 17%. This was despite the share repurchase. Since Hongkong Land announced a budget of another US$500m for further share buybacks, the company has repurchased 11.1m shares for ~US$48m.
  • Hongkong Land's share price is trading at a 58% discount to our appraised current NAV, ~1 standard deviation below its 10-year average of 44%. Valuation remains inexpensive from a historical perspective. Near term, share repurchase should cushion the downside risk on share prices. Despite continued negative reversionary growth for Central office portfolio, the overall rental income should remain broadly stable.
  • By applying target discount of 50% to our Dec-23 NAV estimate, we derive our target price for Hongkong Land at US$5.93. BUY

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.

Jeff YAU CFA DBS Group Research | Percy Leung DBS Research | https://www.dbs.com/insightsdirect/ 2023-01-16

Previous report by DBS:
2022-07-29 Hongkong Land - New Share Buyback Program To Support Share Price.

Price targets by other brokers at Hongkong Land Target Prices.
Listing of research reports at Hongkong Land Analyst Reports.

Relevant links:
Hongkong Land Share Price History,
Hongkong Land Announcements,
Hongkong Land Dividends & Corporate Actions,
Hongkong Land News Articles

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