Hongkong Land: Capital recycling tops agenda
- Returned to profitability in 1H25 with underlying profit of USD297m, in line with our expectations
- Capital recycled reached USD1.3bn or 33% of its 2027 target
- About 67% of USD200m earmarked for share buyback has been deployed
- Investors are focused on the asset recycling initiative; BUY with USD7.20 TP
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Reduced contributions from Central portfolio. Attributable gross rental receipts fell 6% mainly due to lower contributions from its Central portfolio. Physical vacancy at its Central office portfolio inched up to 7.5% in Jun-25 from Dec-24’s 7.3%. On a committed basis, vacancy improved to 6.9% from Dec-24’s 7.1%. This compared favourably with the broad market in Central where vacancy rose 0.2ppts h-o-h to 11.8% in Jun-25, according to Jones Lang LaSalle, reflecting ongoing “flight-to-quality” demand. Nonetheless, spot rents continue to head south with negative reversionary growth filtering through its office portfolio. This resulted in average office rent falling 8% y/y or 5% h/h to HKD95psf and hence weaker office income.
Ongoing transformation and tenant movement at LANDMARK luxury portfolio resulted in 33% of lettable retail space currently under renovation and hence led to 20% fall in retail income. Tenants’ sales therefore fell 10% y/y in 1H25. Average retail rents inched up 7% y/y or 2% h/h to HKD220psf, reflecting positive base rent reversion. Vacancy stayed low at 3% (or 1.2% on a committed basis) in Jun-25. Prada and Saint Lauren will open their new retail flagship Maisons in 2H25.
Singapore office portfolio remains a bright spot, benefitting from continued positive rental reversions with average net rents up 3% y/y and 3% h/h to SGD11.4psf. In Jun-25, vacancy remained low at 2% or 1.2% on committed basis (Dec-24: 1.6%/1%). Contributions from Central series luxury retail malls in China & Macau fell mainly because One Central Macau saw lower contributions due to the challenging operating landscape.
Growing contributions from Westbund Central. Ph 2 of Westbund project in Shanghai is expected to come onstream from 2H25. Over 800 units at Westbund Central Residences will be launched in phases starting 2H25. Four office buildings with total GFA of 78,000sm are being progressively handed over to occupiers including Lululemon and Adidas. A further 27,000sm GFA of retail space is expected to open in mid-26 with >30% being pre-leased.
Significantly higher contributions from “build-to sell” segment. Excluding non-cash provisions, operating profit from property sales more than doubled mainly because of significantly higher contributions from Singapore due to the completion of the fully-sold Copen Grand project. Elsewhere, contributions from China also rose due to increased project completions. However, due to lower profit margins on completed projects, profit contributions from the build-to-sell segment should be substantially lower in 2H25, and hence weaker trading performance is expected for the full year.
Winding down existing inventory. Hongkong Land will no longer deploy capital into new standalone built to sell projects and only focus on winding down its existing inventory. Its net investment in this segment fell to USD7.3bn as of Jun-25 (Dec-24: USD7.8bn).
Despite the government’s stimulus policy, total attributable contracted sales in China more than halved to USD362m in 1H25. As of Jun-25, sold but yet to be recognised contracted sales reached c.USD1.01bn (Dec-24: c.USD1.11bn). In Singapore, contracted sales increased significantly to USD394m (1H24: USD25m), thanks to strong sales at ELTA and Nana Grove.
Prioritising capital recycling. Hongkong Land has recycled USD1.3bn, including its divestment of One Exchange Square to HKEX. This represented 33% of its 2027 target.
Stable financials. As of Jun-25, Hongkong Land had total borrowings of USD6.03bn (Dec-24: USD6.17bn), with average debt tenor of 5.9 years. Meanwhile, interest cost for 70% of total debt was on fixed-rate basis. (Dec-24: 68%) Weighted average borrowing costs improved slightly to 3.4% in Jun-25 from Dec-24’s 3.6%. With its effort in capital recycling, net debt went down 3% h-o-h to USD4.92bn (Dec-24: USD5.09bn). This translated into gearing of 17% (Dec-24: 17%). With continued monetisation of its build-to-sell business, the company’s financial strength should further improve. This would allow the company to raise dividend and pursue new investment.
Share buybacks supported its share price appreciation and slightly higher book NAV. YTD, Hongkong Land have rallied 44% mainly led by the divestment of nine office floors at One Exchange Square and ongoing share buybacks. Since the company commenced the USD200m share buyback programme in late April, Hongkong Land has repurchased 24.4m shares for USD133m or USD5.45 on average. Due to share buyback and stable valuations of Hong Kong prime properties, book NAV increased slightly to USD13.62/sh in Jun-25 from Dec-24’s USD13.57/sh. This was the first increase in NAV per share since 2018.
BUY with USD7.20. Following strong share price appreciation, the stock is now trading at 42% discount to our appraised current NAV, against its 10-year average of 53%. Estimated dividend yield stands at 3.8-3.9% for FY25-26. Continued share buybacks should lend support its near-term share price performance. Asset recycling progress including the disposal of MCL Land should dictate its share price performance for the rest of this year. If the company continues to unlock the value of its mature investments and build-to-sell segment, and scales up its share buyback programme, the stock could trade up to USD7.20, representing 35% discount to our Jun-26 NAV estimate.
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