Will Hongkong Land be able to withstand weakening office space demand?

SINGAPORE (Aug 6): Hongkong Land, the property group which is a member of the Jardine group, reported a 63% fall in 1H19 earnings ended June to US$411 million ($568 million) from US$1.1 billion in 1H18.

See: Jardine Matheson and Jardine Strategic report higher earnings in 1H on one-off gain

This came on the back of a 46% fall in 1H19 revenue to US$803.9 million from US$1.5 billion a year ago.

However, underlying net profit was up 2% at US$466 million from US$455 million last year, led by higher rental earnings from Hong Kong and higher development income from China.

Gross rental receipts rose 5% to US$510 million led by improved contributions from its Central office portfolio. Office vacancy in the portfolio rose to 2.8% in June from Dec’s 1.4% amid slow leasing enquires.

Favourable rental growth was achieved upon lease renewals and new lettings, resulting in office rents improving to HK$116 psf from HK$114 psf in 2H18, while average Central retail rent increased to HK$239 psf from HK$236 psf a year ago.

So what is the outlook like for Hongkong Land?

Citi Research says the developer faces a double whammy from weakening office space demand in the city state and a higher risk profile due to the current protests. The US bank has cuts its price target on the property company's shares to US$5.85 from US$6.45 and is keeping its "sell" rating.

It expects demand for office space in Central to decline due to a weak GDP outlook for Hong Kong, which will hurt the company's rental business. Investors are also worried about the group's growing exposure to development profits from China, which will increase the risk profile of the company, says Citi.

In contrast, DBS Group Research has a “buy” call on the stock with a target price of US$7.70.

”The stock is trading at 53% discount to our appraised current NAV, against its 10-year average of 31%. The Central office market is peaking out, which, however, should have been priced in,” says lead analyst Jeff Yau in an Aug 2 report.

As for CGS-CIMB Research, the research house says a Hongkong Land and Sun Hung Kai Properties JV paid a land premium of HK$2.1 billion ($370 million) when they submitted a proposal to the Hong Kong Government (HKG) to raise the plot ratio to 5.5x from 0.4x for their farmland-converted residential project in Shek Wu Wai in Yuen Long.

The new proposal, if approved, would supply up to 11,000 residential units, equivalent to 84% of HKG’s annual private housing supply target.

“We think the successful application for an increase in plot ratio would be a growth driver for HKL’s property development business in the medium term,” says analyst Raymong Cheng in an Aug 2 report.

In addition, Cheng says Hongkong Land did not repurchase any shares in 1H19 but could resume share repurchases in 2H19F, given its low net gearing.

"Management finds the current share price attractive and would reconsider repurchasing shares from time to time,” explains Cheng.

CGS-CIMB has an “add” call on Hongkong Land with a target price of US$7.40.

As at 11.27am, shares in Hongkong Land are trading 13 cents lower at US$5.61 or about 0.3 times FY21 book value.