• Reversionary growth for Central office portfolio to moderate as the market there has peaked out.
• Despite challenges surrounding its Central portfolio, low valuation cushions downside risk.
• Negatives largely discounted, maintain BUY with US$6.64 Target Price.

Negatives Largely Discounted

• HONGKONG LAND (SGX:H78) is trading at a 56% discount to our current appraised NAV, near the low end of its historical trading range. The challenging office and retail markets are expected cloud HongKong Land’s rental income growth outlook. However, the current low valuation, which has factored > 30% fall in commercial prices in its Central portfolio, should provide a support to its share price. Hence we keep our BUY call with US$6.64 Target Price.

Central Portfolio Facing Challenges

• According to JLL, the office vacancy in Central has increased to 3.3% in Oct-19 from Jun-19’s 2.3%. This has resulted in office rentals falling 3.8% in 3Q19, and should weigh on HongKong Land’s future reversionary growth.
• HongKong Land’s Central retail portfolio is effectively fully occupied and base rental reversions had been positive reflecting the general increase in rents over the past few years. Nonetheless, the impact from the current social unrest in Hong Kong is yet to be reflected.

Improving Sales From China

• Attributable contracted sales in China more than tripled to US$566m in 3Q19 as a result of more property launches and changes in product mix. Cumulative contracted sales for 3Q19 reached US$1.2bn, up 50% y-o-y. As of Sep-19, sold but unrecognised sales reached US$2bn, of which 40% will be booked before end-20.
• While its China property business should add momentum to its earnings growth, this may not necessarily translate into higher valuation for the stock in the short-term given the risk inherently perceived by the market on the China property development sector.

Valuation

• Our Target Price of US$6.64 is based on a target discount of 45% to our Dec-2020 NAV estimate.

Key Risks to Our View

• Any deterioration in leasing demand for office in Central and Singapore could drag HongKong Land’s earnings. Slow demand and property market cooling measures could adversely affect residential sales earnings from China. Cap rate expansion could lead to lower property valuations.

Source: DBS Research - 11 Dec 2019