HongKong Land - Benefitting from office market upcycle in Central

Pic Credits : hkland.com
■ 1H15 underlying earnings, excluding provision writeback, were broadly in line with our estimate

■ Benefitting from tight vacancy and limited new supply in Central’s office market

BUY with US$9.32 TP

Modest earnings decline on lower provision write-back
HongKong Land’s (HKL) 1H15 underlying earnings fell a modest 3% to US$419m, due to lower provision write-back for MCL’s Singapore projects. Interim DPS was flat at US$0.06. Gross rental receipts were broadly stable. Office rental reversion for the Central portfolio turned slightly positive in 1H15, with vacancy improving to 4.2% in Jun 15, from Dec 14’s 5.4%. Retail portfolio continues to be fully let with 4% yo-y rise in average rents. Strong performance from HKL’s commercial portfolio should continue in 2H15. Despite the absence of contributions from Hong Kong, residential segment posted higher profits led by China projects. Net debt stood at US$2.6bn in Jun 15, down 3% from Dec 14’s US$2.7bn; this puts its gearing at a comfortable 9%.

China an increasingly important earnings contributor
HKL’s attributable contracted sales in China rose 25% to US$328m in 1H15. As of Jun-15, net order book reached US$585m, which should be gradually recognised upon project completion in future years. Moreover, WF CENTRAL, a luxury retail project in Beijing, is scheduled for completion in late 2016. In May 15, HKL signed a MOU with CIFI Holdings to codevelop a mixed-use project in Shanghai. Overall, China should become an increasingly important earnings platform for HKL.


Technical Analysis
Daily Chart
BUY with US$9.32 TP
The stock is trading at a 29% discount to our assessed current NAV, against its 10-year average of 20%. Tight vacancy and limited new supply should exert further upward rental pressure for Central offices, and this would benefit HKL. Proposed inclusion in MSCI (HK) adds to its investment appeal. Maintain BUY with US$9.32 TP, premised on 20% target discount to our Jun 2016 NAV estimate. (Read Report)

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Source : DBS Group Research

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