Company Reports

Henderson Land’s first-half 2024 net profit fell 47% year on year to HKD 3,174 million, mainly weighed down by revaluation losses on its investment and development properties. Excluding these non-cash fair value losses, underlying profit declined by a narrower 10% year on year, in line with our expectation. The group also maintained its interim dividend per share of HKD 0.50, unchanged year on year. We leave our earnings estimates (after excluding revaluation changes) broadly the same and retained our fair value estimate of HKD 34 per share. We think the shares continue to screen as cheap, and we like Henderson Land for its strong exposure to the Northern Metropolis development project with its massive agricultural landbank.

Henderson Land Development, or HLD, is a leading Hong Kong property developer. It ranks third in square footage in the retail sector, and fourth in the office sector. In residential sales, HLD is usually a top-five developer in terms of units sold and contracted sales. Despite its strong presence across all sectors of Hong Kong real estate, it has limited signature projects.

We still see value in Hong Kong developers despite the recent slowdown in home sale transactions. Our preferred pick in the sector is Henderson Land, which trades at a 37% discount to our fair value estimate and offers an attractive 2024 dividend yield of 8.4% at the current price. We also like its diversified recurring income stream generated by its investment properties portfolio and stable contribution from its utility associate.

Henderson Land’s fiscal 2023 earnings per share, or EPS, of HKD 1.91 was slightly below our expectations due to lower gross margin and fair value losses on its investment properties. That said, the group kept its full-year dividend per share unchanged at HKD 1.80, in line with our expectation. The removal of property cooling measures in Hong Kong in March 2024 has been a huge positive for the group, and management said it sold 946 residential units in the three weeks since then, which is 60% of its total sales in 2023. Management will focus on sales volume for 2024, with plans to launch 12 development projects during the year. It also expects housing prices to remain soft, given the huge stock of unsold housing units in the market. Management’s views are in line with our views, and we expect home prices in Hong Kong to remain soft in the near term and bottom out in the second half of 2024 following expected rate cuts in the US. We retain our fair value estimate of HKD 34 per share after rolling our model and fine-tuning our assumptions. Our 2024 EPS forecast is lifted by 8% due to higher property sales in Hong Kong, while our 2025-26 EPS estimates remain largely unchanged. Henderson Land remains our preferred pick for Hong Kong residential developers as it trades at an attractive 7.8% dividend yield in 2024. We think the risk of a dividend cut is low, given the group's strong recurring income base.

Henderson Land Development, or HLD, is a leading Hong Kong property developer. It ranks third in square footage in the retail sector, and fourth in the office sector. In residential sales, HLD is usually a top-five developer in terms of units sold and contracted sales. Despite its strong presence across all sectors of Hong Kong real estate, it has limited signature projects.

The lowering of the stamp duty in Hong Kong has had a limited impact in reviving the residential market as housing prices continue to decline in the face of high interest rates and a weak economic outlook. According to the Rating and Valuation Department, the private residential price index fell to a seven-year low in November 2023, and we expect price weakness to persist through the first half of 2024. While interest rates have likely peaked, we think that housing prices will only find support in the second half of 2024. Our U.S. economist said he expects the Federal Reserve to start cutting rates in March 2024. We cut our fair value estimates for Henderson Land and Sun Hung Kai Properties to HKD 34 and HKD 115 from HKD 36 and HKD 128, respectively, after lowering our near-term assumptions on their Hong Kong development margins and sales.

Henderson Land Development, or HLD, is a leading Hong Kong property developer. It ranks third in square footage in the retail sector, and fourth in the office sector. In residential sales, HLD is usually a top-five developer in terms of units sold and contracted sales. Despite its strong presence across all sectors of Hong Kong real estate, it has limited signature projects.

We transfer coverage of Henderson Land Development, or HLD, maintaining our no-moat rating and lowering our fair value estimate to HKD 36 from HKD 40 to factor in lower gross margins and the impact of currency headwinds. We think the shares are undervalued currently, trading at around 0.3 times price/book ratio and 8.7% dividend yield for 2023. We like the firm’s strong balance sheet, which enables it to ride out the current headwinds facing the Hong Kong residential market.

Henderson Land Development, or HLD, is a leading Hong Kong property developer. It ranks third in square footage in the retail sector, and fourth in the office sector. In residential sales, HLD is usually a top-five developer in terms of units sold and contracted sales. Despite its strong presence across all sectors of Hong Kong real estate, it has limited signature projects.

Henderson Land’s 2022 profit (excluding fair value changes of its investment properties) of HKD 9.6 billion was disappointing, with the impact from higher mortgage rates and weak sentiment hurting the Hong Kong residential market in second-half 2022 more than we had expected. The company’s inventory of unsold units jumped 64% by end-2022. As a result, the operating margin for its Hong Kong property development segment fell to 22%, below our estimated 31%. We lower our fair value estimate to HKD 40 from HKD 49 as we roll forward our model and assume a slower sales recovery. We also expect margins to revert to their long-term average of 30% as the company’s higher-margin projects sell through. Despite the disappointment, we expect the market to look forward as Hong Kong’s reopening should lift overall consumer and homebuyer confidence. We believe much of the bad news is reflected, with Henderson Land trading near its traditional trough of 0.3 times price/book.

Henderson Land Development, or HLD, is a leading Hong Kong property developer. It ranks third in square footage in the retail sector, and fourth in the office sector. In residential sales, HLD is usually a top-five developer in terms of units sold and contracted sales. Despite its strong presence across all sectors of Hong Kong real estate, it has limited signature projects.

Henderson Land’s first-half result was within our expectations. While underlying profit, excluding fair value changes, declined by 34% to HKD 5.14 billion, a number of one-off items skewed the result. The real estate operations performed well with property development revenue 41% higher against the same period last year at HKD 8.5 billion, mainly due to higher completions in mainland China. Investment properties have also stabilised with rental income flat on last year at HKD 4.3 billion. The key negative was subsidiary Hong Kong and China Gas, or HKCG, as gas demand was weak and higher gas costs reduced operating margin. Profit contribution was 18% lower compared with the same period last year, but the dividend flowing back to Henderson Land was unchanged against last year at HKD 930 million. The first-half dividend of HKD 0.50 was in line with the same period last year. We leave our estimates and fair value estimate of HKD 49 per share unchanged.

Henderson Land’s fiscal 2021 result was within our expectations. Underlying profit, excluding the fair value estimate change, was HKD 13.6 billion and in line with our forecast. The final dividend of HKD 1.30 per share was in line with last year and largely within our forecast. Our fair value estimate is revised higher to HKD 49 per share from HKD 43.20 per share as we factor in project completions and a roll-forward of our model. At a 35% discount to our new fair value estimate, Henderson is trading at similar discount to its Hong Kong developer peers. We continue to prefer the Hong Kong landlords as we expect their share prices to recover ahead of the developers as the borders are gradually reopened. While the residential property transactions remain resilient during the current downturn, an acceleration in transactions and residential property prices is unlikely until people actually cross the border and economic activities recover.

Henderson Land Development, or HLD, is a leading Hong Kong property developer. It ranks third in square footage in the retail sector, and fourth in the office sector. In residential sales, HLD is usually a top-five developer in terms of units sold and contracted sales. Despite its strong presence across all sectors of Hong Kong real estate, it has limited signature projects.

The valuation for Hong Kong real estate stocks remains attractive, in our view. With economic recovery expected in 2022, the near-term positive catalyst for the sector is the reopening of borders with mainland China, then internationally. We expect the share prices of landlords with larger retail exposure to rally ahead of any news of border reopenings. At a 15% discount to our fair value, Wharf REIC is our preferred pick and we expect the landlord to benefit the most as close to 90% of operating income is derived in Hong Kong, mainly from its two flagship properties in Harbour City and Times Square. Link REIT, Swire Properties and Hongkong Land would also benefit though the latter two have a smaller proportion of retail contribution. A recovery in office rents is likely to be the driver for Hongkong Land and Swire Properties, though a recovery in office should lag retail as corporates need to confirm their business plans after the reopening of borders, in our view. Swire Properties and Hongkong Land are trading at close to a 24% discount to their respective fair values while Link REIT’s more defensive portfolio sees the trust trading at a narrower discount to its fair value.

Henderson Land Development, or HLD, is a leading Hong Kong property developer. It ranks third in square footage in the retail sector, and fourth in the office sector. In residential sales, HLD is usually a top-five developer in terms of units sold and contracted sales. Despite its strong presence across all sectors of Hong Kong real estate, it has limited signature projects.

Henderson Land Development was successful in the tender for the prized Central Waterfront site for HKD 50.8 billion. At 150,000 square metres, or 1.61 million square feet, in commercial gross floor area, this equates to HKD 338,700 per square metre, or HKD 31,500 per square feet. The valuation was at the middle of independent valuer Colliers' estimate in 2020. Given the location, restrictions, and requirements for the site, the tender process required submission of development plans. Still, the site attracted six tenders. While the site is likely to attract premium rents for the commercial space in office and retail, the site requirements are expected to add to overall investment in the project. This includes 21,200 square metres in noncommercial gross floor area, connectivity to the Central MTR station, and footbridges. Uniquely, the site is also expected to include the reconstruction of the old Star Ferry Clock Tower and the General Post Office. Height restrictions are applied to the buildings as the site is located at the Central foreshore. We have not factored the project into our forecast, and our fair value estimate of HKD 43.20 per share is unchanged.

With the worst of the coronavirus pandemic likely over and the return of social stability from the passing of the National Security Law, the Hong Kong Government’s 2021 policy address again focuses on housing and land related measures, and long-term economic growth initiatives. Regarding housing and land supply, key initiatives include Northern Metropolis in New Territories North, aiming to increase housing supply in the long term. The area, including recently identified new land supply, is expected to yield 565,000 units to 686,000 units over a 10 to 15 year period, from 2031 onward. The area is expected to be connected by rail, from the extension of MTR’s Northern Link. Separately, plans and feasibility for the Hong Kong and Qianhai railway will be assessed. Previously announced long-term initiatives to increase housing supply are continuing and include near shore land reclamation, the development of artificial islands at Lantau and extension of higher plot ratios for the redevelopment of industrial buildings. A working group is also being set up to lower the threshold for compulsory sale of village land in New Territories.

The share prices of Hong Kong developers declined sharply on Monday following a Reuters news report the Chinese government expects greater social contributions from Hong Kong developers in future, given tight land and housing supply, and high property prices. With housing affordability issues having persisted for an extended period of time, the high property prices were cited by mainland China state media as a contributing factor to antigovernment protests in late 2019. The primary market concern is developers’ holdings of agricultural farmland, which is able to be developed once land conversion takes place. The latter would result in a land premium being paid but prices are usually below land auction prices. However, the share price reaction appears to factor in the risk of "land resumption" by the Hong Kong government, in our view.

Henderson Land Development’s first-half result was within expectations. Underlying profit was HKD 7.80 billion compared with HKD 5.10 billion in the same period last year. Lower revenue and profit for property development was mainly due to the timing of booking. Contracted sales not yet recognised total HKD 29.80 billion at the end of the first half. Management noted half is expected to be recognised in the second half of this year. Our fiscal 2021 forecasts imply HKD 16 billion in property development in the second half. The more important recurring revenue from investment properties offset lower property development revenue while share of profit from Hong Kong and China Gas was strong. A first-half dividend of HKD 0.50 is in line with the same period last year. Our fair value estimate of HKD 43.20 is unchanged.