• Weak property sales recognition dragged Hongkong Land’s underlying profit down 11% y-o-y in FY20.
• Management expects negative office rental reversion in 1H21F. It, however, believes the “work-from-home” trend will not impact demand for prime office.
• Hongkong Land will likely expand its property development land bank in China, as management claims it has enjoyed a short payback period and a more predictable profit margin there.
• Reiterate ADD on Hongkong Land with a higher target price of US$5.70 (45% discount to NAV).

11% Y-o-y Decline in Hongkong Land's Underlying Profit With Flattish Dividend in FY20

• Hongkong Land (SGX:H78)’s underlying profit in FY20 declined by 11% y-o-y to US$960m (9% above our estimate), on the back of weak development property delivery due to COVID-19.
• Hongkong Land's FY20 dividend was US$0.22 per share (flat for three consecutive years).

Hongkong Office: Flattish Rent Despite Higher Vacancy

• Its HK Central office portfolio delivered resilient performance with a flattish average rent of HK$120/sf/mth in 2020, while year-end vacancy rose to 6.3% from 2.9% a year ago.
• Management expects negative rental reversion in 1H21F but remains optimistic of the leasing demand due to the prime location of the office cluster, and believe the “work-from-home” trend will not negatively impact corporations’ demand for prime office space.

Hongkong Retail: We Expect Solid Recovery in FY21F

• Impacted by rental concessions and negative rental reversion, its HK retail portfolio’s effective average rent declined to HK$164/sf/mth in FY20 (HK$212/sf/mth without taking rental concessions into account). Year-end occupancy held up well at 99.7% as Hongkong Land switched to a flexible short lease term strategy that kept its average lease expiry low at 1.9 years.
• With local shopping activities resuming, we expect local luxury retail sales to stage a solid recovery in FY21F which should benefit Hongkong Land’s retail rental income.

Prefers Replenishing Development Property Land Bank in China Than in Hongkong/Singapore

• Its China contracted bank in China than in HongKong or Singapore, as it claims it has enjoyed a shorter payback period and more predictable profit margins.

Reiterate ADD With a Higher Target Price of US$5.70

• We raise Hongkong Land's FY21F/22F earnings per share forecast to US$10.4 to factor in the better recovery in the investment property business. Consequently, our target price for Hongkong Land is raised to US$5.70, still based on a 45% discount to NAV.
• Reiterate ADD call on Hongkong Land.
• Key downside risks are a prolonged COVID-19 outbreak and more property market tightening policies in China, while higher rental reversion could be a potential re-rating catalyst.

Source: CGS-CIMB Research - 15 Mar 2021