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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 10 Oct 2019, 9:26 AM

 

HongKong Land - Shining Gems Amid Hong Kong Turmoil

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  • HongKong Land is trading at an attractive 0.36x P/B, unrepresentative of its underlying asset quality. HongKong Land has a US$38.7b investment portfolio (88% of its gross assets), concentrated in the CBDs of Hong Kong (83%) and Singapore (10%). Hong Kong developers have room to increase leverage further, to boost ROEs (and close P/B gaps vs Singapore peers).
  • Share price catalysts include easing of the Hong Kong political stalemate, share buybacks and deployment of US$15.4b debt headroom into mainland China.

What’s New

  • Hong Kong’s political crisis (since July) and worsening US-China trade tensions have led to corrections in Hong Kong-focused SGX stocks. Since peaking in Mar 19, HongKong Land share price has come off by 22%.
  • Current HongKong Land share price is unrepresentative of the quality of its underlying assets (with concentrations in prime CBDs of HK and Singapore). We see good value in HongKong Land (SGX:H78) that is trading at 0.36x P/B.

Investment Highlights

Hong Kong central portfolio (75% of gross assets).

  • Hong Kong (mainly investment properties) contributed 54% of the group’s operating profits before corporate expenses in 2018 (vs 2017: 56%). HongKong Land’s Hong Kong central portfolio consists of 12 commercial buildings spanning 4.9m sf of NFA spread across Grade-A offices (85%), retail (12%), and hotels (3%).
  • Given the prime CBD location, the Hong Kong office segment has a high concentration of financial services (41%), legal (30%) and accounting firms (8%), together accounting for 79% of its tenant base in 1H19.

Hong Kong office portfolio to offer earnings resilience despite “short-term” challenges.

  • As a result of efforts to term-out leases of a number of key tenants, the Hong Kong office WALE was extended to 4.6 years (vs 4.0 years at end-18). The Hong Kong office also has low vacancy risks, as there are relatively modest levels of expiries/rent reversions expected in 2H19 (10%) and 2020 (20%). However, we also note from Savills’ 2Q19 data, that central submarket rental growth has decelerated to 0.9% (vs 2.9% in 1Q19). Office leasing demand has been weighed down by the economic slowdown and the unresolved US-China trade war.
  • Management does not foresee “decentralisation” of the central office sub-market (at least for their portfolio). They alluded that most tenants were leaving due to tenant management (ie where spaces are taken back for other tenants’ expansion). Amid the current political turmoil, management noted that Hong Kong still retains its long-term appeal as a business location (with opportunities coming from development of the Greater Bay Area). They also opined that businesses (ie tenants) will not usually make re-location decisions based on these short-term events.

Potential share buybacks in the offing.

  • Management highlighted that current share price level is attractive (ie with earnings yield > 7%, based on 2018 results), and continues to evaluate any share repurchases against alternative uses of capital (eg new development projects, acquisition of investment properties).
  • In 2018, HongKong Land used US$132m on share repurchases in Apr 18 (ie average cost of US$7.00/share) and in Sep 18 (ie average cost of US$6.85/share).

More development opportunities to come from mainland China, supported by US$15.4b acquisition headroom.

  • As at end-1H19, HongKong Land had a US$3.9b net debt position, which translates to a net gearing of 10% (vs 9% at end-2H18). On our estimates, the group has a sizable acquisition headroom of US$15.4b (assuming comfortable net gearing of 50%).
  • Management alluded that despite participating in a number of auctions, they were only able to secure one new site (ie Houguan Lake Project/totalling 226,000 sqm at a land cost of Rmb1.7b) in 1H19 due to keen interest by other bidders. However, management expects the group to be more active going forward, due to the steady land supply (via government land auctions), as well as the recent softening in land market sentiment. The tightening of restrictions on developers’ financing is expected to benefit other more well-capitalised developers (including HongKong Land).
  • Currently, HongKong Land’s development portfolio (totalling 6m sf of GFA) spans seven countries, and Mainland China (c.55% of total GFA under construction) is among the key markets. Already, HongKong Land has 20 projects across seven Mainland China cities (including Beijing, Shanghai, Chengdu, Chongqing, Nanjing, Wuhan, Hangzhou).

Valuation / Recommendation

Current P/B is approaching Asian Financial Crisis troughs (-2.0 SD).

  • At 0.36x P/B, HongKong Land trades at 31%/47% discount to HK/SG peers’ average. On a historical basis, current P/B is also 51% below its long-term mean of 0.73x P/B.

Room for higher leverage.

  • Hong Kong developers trade at a lower 0.5x P/B average (vs Singapore peers’ 0.68x), which can be explained by their lower ROEs averaging 5% (vs Singapore peers’ 7%). By decomposing ROE, we can attribute ROE deviations to capital structure (and not ROAs).
  • Hong Kong developers have lower financial leverage averaging 1.6x (vs HongKong Land: 1.2x), which are much lower compared to Singapore peers’ (2.6x).

Share Price Catalyst

  • Positive news flow on office leasing activity, easing in the Hong Kong political stalemate, loyment of US$15.4b acquisition headroom in Mainland China.

Source: UOB Kay Hian Research - 12 Sep 2019

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