Excerpts from CGS International report

Hongkong Land Holdings (SGX: H78)

• Hongkong Land underlying net profit yoy decline in FY23 was due to impairment on development property projects in China.
• Although HK offices saw sustained weak rental performance, its entire retail portfolio reported a post-Covid-19 recovery.
• It was selective in land banking in China in FY23 amid a weak recovery in the residential sales market.

Reiterate Hold; TP unchanged at US$3.6.

Underlying net profit down 5% yoy in FY23

HKL’s underlying net profit in FY23 declined by 5% yoy to US$734m (12% above our estimate), dragged by an impairment of US$90m on development property (DP) projects in China. Underlying net profit from the investment properties (IP) portfolio (before tax and other charges) increased by 3% yoy, boosted by improved rentals from the retail space. FY23 DPS was flat yoy at US$0.22 (6.8% dividend yield).

Retail, SG office rentals offset sluggish HK office rentals

HKL’s office space in HK was subject to c.-10% rental reversion in FY23; the magnitude should narrow in FY24F, per management’s estimates. Average monthly rent in FY23 was HK$106/sf, down from HK$111/sf a year ago. End-2023 office vacancy at Hongkong Land was 7.4%, below the Central average of 10%, as HKL adopted flexible leasing strategies to attract new tenants looking for smaller floor areas. Its HK luxury retail portfolio recovered well in a post-Covid-19 environment; FY23 tenant sales registered mildly positive growth compared to FY17-18 levels, which bodes well for positive rental reversion in FY24F, in our view. Meanwhile, rental growth for the company in China and Singapore (SG) was solid at 19% and 8% yoy, respectively, in FY23, thanks to a recovery in tenant sales in China and positive rental reversions for its SG office space.

Suppressed GPM from China DP sales; selective land banking

OP from its DP business declined by 32% yoy in FY23 due to the impairment mentioned above. GPM from China DP sales booked dropped from 22% in FY22 to 19% in FY23, dragged by slow-moving inventories. Hongkong Land was very selective in land banking in FY23, acquiring only two parcels in China and two more in SG. Although its DP booking amount will increase in FY24F based on its booking schedule, we think that GPM from China DP will not improve markedly, unless DP sales at West Bund in Shanghai are upbeat and recognised in FY24F.

Valuation/Recommendation

After revising DP sales booking schedule and IP growth assumptions, we lift FY24-25F EPS by 8-10% and NAV by 1% to US$10.3. Our TP for Hongkong Land is unchanged at US$3.6, still based on a 65% NAV discount. Reiterate Hold on HKL; we think a near-term share price re-rating is unlikely unless there is a turnaround in GPM for its DP sales and rental reversion in HK IP. Key downside risks: higher interest expense and higher HK office vacancy.

You can find the full report here and the company website here.