Hongkong Land's interim underlying earnings fell 24% to US$353m, 17% below our estimate, due to weaker-than-expected development earnings from China.
Expect higher property development earnings in 2H20 due to more project completions in China.
Conditionally finalised agreements with strategic partners to jointly develop the West Bund project.
Strong asset backing, maintain BUY call with US$4.80 Target Price.
Hongkong Land's 1H20 Earnings
Hongkong Land (SGX:H78)’s 1H20 underlying profit was 24% lower at US$353m on reduced rental earnings and development income. Despite lower earnings, interim DPS remained unchanged at US$0.06.
Gross rental receipts fell 8% to US$467m primarily led by lower retail income as a result of the COVID-19 pandemic.
Vacancy of its Central office portfolio rose to 5% (or 4.5% on committed basis) in Jun-20 from Dec-19’s 2.9%, amid subdued office demand. Yet, Hongkong Land’s rental reversion remained mildly positive resulting in average office rents increasing to HK$121psf in 1H20, from 1H19’s HK$116psf and 2H19’s HK$119psf.
Retail portfolio in Central was virtually fully-let in Jun-20 despite the COVID-19 outbreak. Average retail rents fell 37% to HK$151psf partly due to pandemic-related rental concessions granted to tenants.
In Singapore, office vacancy remained low at 1.5% (or 1% on committed basis) in Jun-20 (Dec-19: 5%). Average office rents advanced to S$9.9 in 1H20 from S$9.7psf in 2019 reflecting positive rental reversions.
Including joint venture & associates, Hongkong Land's operating profit from property development plunged 60% to US$77m mainly due to fewer project completions in China. Reduced contribution from Singapore also led to lower development profits in 1H20.
Higher profits, however, are expected from property development in China in 2H20 due to more project completions, even after allowing for some construction delays led by the pandemic.
Attributable contracted sales from China fell 8% to US$591m (1H19: US$643m) due to the closure of sales offices amid the COVID-19 outbreak. As of Jun-20, Hongkong Land’s sold but unrecognized sales stood at US$2.18bn of which 40% will be booked in 2H20.
Net Debt Rose to US$5.63bn in Jun-20
Hongkong Land's net debt rose to US$5.63bn in Jun-20 from Dec-19’s US$3.59bn mainly due to the land premium payment for the West Bund project. Earlier this year, Hongkong Land has secured a sizeable site in West Bund of Shanghai for mixed-use development through government auction for US$4.4bn which was fully paid in 1H20.
Hongkong Land has conditionally finalised agreements with two strategic partners to jointly develop this project, with receipts of US$2.3bn in 1H20 and a further US$320m that was received in Jul-20. The joint venture arrangement enables Hongkong Land to participate in this large mixed-use development without stretching its balance sheet.
Valuation of Investment Properties Fell 6%
Valuation of Hongkong Land's investment properties fell 6% in 1H20, amid the commercial market downcycle. This resulted in 7% h-o-h decline in shareholders’ value. Accordingly, gearing ratio edged up to 16% in Jun-20 from Dec-19’s 9%.
YTD, Hongkong Land's share price has fallen by 35%. Meanwhile, the stock is trading at 67% discount to our assessed current NAV, 2SD below its 10-year average. The current low valuation should cushion the downside risk on share price after factoring in the prevailing headwinds on the commercial sector in Central.
By assigning 55% discount to our Jun-2021 NAV estimate, we set our Hongkong Land's target [rice at US$4.80, and hence maintain our BUY call at this stage.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....