Hongkong Land - Write-downs for two Wuhan residential projects
- Central office portfolio outperforms the overall market, despite slightly higher vacancy
- Planned sales completion in China for 2023 expected to be lower than the prior year
- Write-downs in investment value of two residential developments in Wuhan
- BUY for strong asset backing with US$3.97 TP
Its luxury retail portfolio continues its post-pandemic business recovery. In Hong Kong, flagship tenants’ sales have largely returned to pre-COVID levels, outperforming the overall luxury goods market. This should result in increased turnover rents and push up the average rents of its LANDMARK retail portfolio, where occupancy remained firm at 98.3% in Sep-23. WF Central in Beijing and One Central in Macau saw a continued recovery of tenants’ sales and footfall.
The Singapore office portfolio continues to enjoy positive rental reversion. Office vacancy remained unchanged at 2.1% in Sep-23 while committed vacancy improved to 0.8% from Jun-23’s 1%.
In 3Q23, sentiment towards the China residential market remained subdued despite mild improvements in top-tier cities following the government’s policy support . With fewer planned sales launches and slower sales, attributable contracted sales from China almost halved to US$186m in 3Q23, from 3Q22’s US$346m. This brought the cumulative attributable contracted sales to US$931m in 9M23, narrowing the y-o-y growth to 22% in 9M23 from 1H23’s 78%. Meanwhile, planned project completions in 2023 are expected to be lower than the prior year, and thus point to weaker development earnings in the near term.
Singapore residential market was resilient despite the prolonged interest rate hikes. Hongkong Land recorded attributable contracted sales of US$59m in 3Q23, c.5% above the amount achieved in the same period last year. In 9M23, total attributable contracted sales from Singapore amounted to US$546m, up 67% from 9M22’s US$326m.
In 3Q23, Hongkong Land secured interest in two development projects in China, including 40% in a mixed-used development in the Guanyinqiao area in Chongqing and 20% in a commercial-cum-residential site in Beijing. Aggregately, these two projects should yield a total attributable developable area of 158,600sm. In Singapore, the company, through joint ventures, acquired two residential sites, both of which are located in the Outside Central Region, with attributable developable area of 0.54msf.
Net debt further improved to US$5.4bn in Sep-23 from Jun-23’s US$5.5bn. In Sep-23, interest cost for 60% (Jun-23: 54%) of total debt was on a fixed-rate basis. Increased hedging ratio helps mitigate the impacts from interest rate volatility.
YTD, the company has repurchased 19.7m shares. Since it announced its first share buyback plan back in Sep-21, Hongkong Land has bought back 126.5m shares for US$625m.
We have fine-tuned our profit forecast for FY23 for Hongkong Land to reflect lower-than-expected sales completion in China and the write-down in the investment value of two residential projects in Wuhan, given the challenging local market conditions. Meanwhile, we project Hongkong Land’s underlying profit for FY23 to be 6% lower, at US$729m.
The stock is trading at a 70% discount to our appraised current NAV, near the low end of the historical trading range. The estimated dividend yield for FY23 stands at 6.6%. While property write-downs in China and prolonged office market headwinds in Hong Kong may impact near-term sentiment towards the stock, the low valuation and share repurchase should cushion the downside risk on the share price. We keep our BUY call at this stage with US$3.97 TP. This is derived by assigning a target discount of 65% to our Dec-2024 NAV estimate.
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1. | DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have a proprietary position in Hongkong Land Holdings Limited (HKL SP) recommended in this report as of 31 Oct 2023.
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2. | Compensation for investment banking services:
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3. | Disclosure of previous investment recommendation produced: |
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