• Hongkong Land's Central office portfolio vacancy increased on slower leasing enquiries.
• Contracted sales in China fell in 1Q19 due to fewer project launches.
• Maintain BUY on attractive valuation, US$8.02 Target Price.

What’s New

• Office leasing demand from Chinese enterprises in Central has softened since 2H18. This resulted in a slowdown in leasing enquires. Against this background, the vacancy of Hongkong Land (SGX:H78)’s Central office portfolio inched up to 2.1% in Mar-19 from Dec-18’s 1.4% but this should fall in the coming months as tenants take up committed space. Despite slightly higher vacancy and waning demand, office rental reversion remained positive. Tight new supply in Central in the years ahead should help support office rents there. The Central retail portfolio effectively remained fully occupied while base rental reversions were mildly positive.
• In Singapore, the office portfolio vacancy stood at 2.8% in Mar-19, up slightly from Dec-18’s 2.5% but reversionary growth continued to be positive.
• In Beijing, a luxury brand has committed to open its Mainland China flagship store at WF Central. The hotel component of this complex, Mandarin Oriental Wangfujing, opened for business in Mar-19.
• Due to fewer sales launches, contracted sales revenue in China fell 36% to US$193m but is anticipated to rise in 2H19. With project completion skewed towards 2H19, residential profit contributions in China were lower in 1Q19.
• In Singapore, pre-sales at Margaret Ville and Parc Esta were satisfactory. Tulip Garden is expected to be launched for pre-sale in 2H19.
• Net debt was largely stable at around US$3.6bn but should rise modestly when committed land and other payments are made.

Recommendation

• YTD, Hongkong Land's share price have risen 10%, underperforming other landlords by 9ppts. Meanwhile, the stock is trading at 47% discount to our appraised current NAV, against its 10-year average of 35%.
• Valuation is attractive even allowing for softening office demand in Central. Maintain BUY with US$8.02 Target Price.

Source: DBS Research - 9 May 2019