Company Reports

While the negative trends within Hongkong Land’s first-half results were in line with our expectations, the performance of the mainland China business is weaker than expected. Rental income declined 3% year on year as the Hong Kong office portfolio continues to see pressure from market oversupply, while the Hong Kong Landmark retail portfolio suffers from outbound tourism in Hong Kong. For the mainland China business, the development properties segment suffers from low margins as buyers’ sentiment remains lackluster. According to management, first-half 2024 gross margin of its completed and sold mainland China development properties fell to a low of 14%. For reference, the highest gross margin for this segment in the last five years was 44% in 2019.

Hongkong Land develops, grows, and holds a portfolio of high-quality assets in Hong Kong’s central business district. Over more than a century, it assiduously assembled and upgraded these assets and turned them into a portfolio consisting of the most desirable office and retail locations in the city. The Central portfolio accounts for nearly 65% of the company’s operating profit.

We are positive on narrow-moat Hongkong Land’s USD 400 million retail expansion plan that will strengthen its positioning as a key luxury retail destination in Hong Kong and meet luxury tenants’ demand for additional retail space. However, we expect a limited impact on overall near-term earnings, and we maintain our fair value estimate of USD 6.10 per share. The share price was largely flat during the June 27 morning trading session despite the announcement of the plan. We believe Hongkong Land’s share price will remain under pressure in the near term given the challenging office and retail market in Hong Kong, as well as the higher-for-longer interest-rate environment.

We have maintained our fair value estimate of USD 6.10 for narrow-moat Hongkong Land after its brief interim management statement for the first quarter of 2024 showed key drivers are largely in line. The negative rental reversion in the Hong Kong office portfolio was anticipated as leases were renewed at lower rates than the previous lease cycle. Still, occupancy showed a slight improvement to 92.9% from 92.6% at the end of 2023, despite new office completions in Central during the quarter. This compares with a 70-basis-point decline to 89.4% in March from the end of 2023 for overall Central Grade-A office occupancy, according to JLL.

Underlying trends within narrow-moat Hongkong Land's 2023 earnings are in line with our expectations. Revenue declined 18% year on year, mainly due to lower project completions for development properties during the year. For the recurrent investment portfolio business, revenue only grew by 2% year on year as the growth in the Singapore office market and a strong recovery in the company's retail portfolio was offset by weakness in the Hong Kong office portfolio.

Hongkong Land develops, grows, and holds a portfolio of high-quality assets in Hong Kong’s central business district. Over more than a century, it assiduously assembled and upgraded these assets and turned them into a portfolio consisting of the most desirable office and retail locations in the city. The Central portfolio accounts for nearly 65% of the company’s operating profit.

Our view of narrow-moat Hongkong Land is unchanged after we joined the company's pre-earnings blackout call. While we believe the shares are undervalued, we continue to think the weak office market in Hong Kong remains an overhang to the company’s operations and share price performance in the near term. We have adjusted our assumptions to better reflect the high interest rates in 2023, an impairment on two property development projects in Wuhan, and the departure of the Harvey Nichols department store from the Landmark mall in May 2024. Consequently, we have lowered our 2023 and 2024 earnings per share forecasts by 6% and 3%, respectively. We keep our fair value estimate at USD 6.10 per share and forecast a stable dividend per share of USD 0.22 in both 2023 and 2024.

We transfer and resume coverage of Hongkong Land with a fair value estimate of USD 6.10, which implies a price/book ratio of 0.4, in line with the 10-year historical average. Our narrow moat rating for the company is unchanged, and we continue to like the company for its high-quality commercial portfolio in the heart of Hong Kong central business district, or CBD. The portfolio’s prestigious positioning and strategic location has attracted demand from occupiers trading up for quality office space in the current office market downturn, and we expect this trend to persist in the foreseeable future. Over the long run, we expect office rents to be underpinned by the structural long-term undersupply of Hong Kong CBD Grade A offices and Hong Kong’s status as an international financial hub.

Hongkong Land develops, grows and holds a portfolio of high-quality assets in Hong Kong’s central business district. Over more than a century, it assiduously assembled and upgraded these assets and turned them into a portfolio consisting of the most desirable office and retail locations in the city. The Central portfolio accounts for nearly 65% of the company’s operating profit.

We are placing coverage of narrow-moat-rated Hongkong Land under review pending the transfer of coverage to a new analyst. We expect to revisit our coverage of this company over the next three months. Our most recent fair value estimate was USD 7.30.

Hongkong Land's history can be characterized by patience and transformation. The company’s strategy is to acquire and grow a portfolio of high-quality assets in Hong Kong’s CBD. Over more than a century, it assiduously assembled, maintained and upgraded these assets and turned them into a portfolio consisting of the most desirable office addresses and retail locations in the city. The Hong Kong portfolio accounts for nearly 55% of the company’s underlying earnings.

Narrow-moat Hongkong Land’s first-half result was challenging, as expected, with the positive news being another USD 500 million share buyback program. The timeline of the new buyback is long dated to the end of 2023 and management does not expect the share buyback to have an impact on further investments and its existing dividend policy. Pressure on investment properties continued in the first half and our revised rent assumptions see our fair value estimate decline slightly to USD 7.30 per share from USD 7.40. Our fair value represents a price/book of 0.5 times, in line with its 10-year historical average and so we see Hongkong Land’s share price as undervalued, trading at 0.33 times book. We continue to expect a gradual reopening of borders to be a positive catalyst for the real estate sector in Hong Kong but the tangible impact to Hongkong Land may only be seen in 2023. First-half dividend of USD 0.06 per share is unchanged against the same period last year and we continue to expect full-year dividend to be unchanged at USD 0.22 per share, representing a dividend yield of 4.2% at the current share price of USD 5.26.

Hongkong Land's history can be characterized by patience and transformation. The company’s strategy is to acquire and grow a portfolio of high-quality assets in Hong Kong’s CBD. Over more than a century, it assiduously assembled, maintained and upgraded these assets and turned them into a portfolio consisting of the most desirable office addresses and retail locations in the city. The Hong Kong portfolio accounts for nearly 55% of the company’s underlying earnings.

Despite the challenging operating environment in the first half of 2022, Hongkong Land noted in its pre-close meeting that its investment properties are performing well. This is within our expectation, as we believe the narrow-moat-rated landlord’s investment property portfolio is high-quality; and in line with previous downturns, occupancy level remains high with with downside limited to lower rents. Our fair value estimate of USD 7.40 per share is unchanged and we believe the landlord is undervalued. A reopening of domestic and international borders in Hong Kong remains a key catalyst for the real estate sector there. Rising COVID-19 cases in Hong Kong saw retail-sensitive property names such as Link REIT and Wharf REIC underperforming in recent weeks. Our preference is unchanged and we believe the retail-sensitive property landlords to benefit initially from border reopening. The impact on office rent and stock performance for the office landlords is likely to lag.

Hongkong Land's history can be characterized by patience and transformation. The company’s strategy is to acquire and grow a portfolio of high-quality assets in Hong Kong’s CBD. Over more than a century, it assiduously assembled, maintained and upgraded these assets and turned them into a portfolio consisting of the most desirable office addresses and retail locations in the city. The Hong Kong portfolio accounts for nearly 60% of the company’s core earnings.

Hongkong Land's history can be characterized by patience and transformation. The company’s strategy is to acquire and grow a portfolio of high-quality assets in Hong Kong’s, or HK's, CBD. Over more than a century, it assiduously assembled, maintained and upgraded these assets and turned them into a portfolio consisting of the most desirable office addresses and retail locations in the city. The HK portfolio accounts for nearly 75% of the company’s rental income.

Narrow-moat Hongkong Land’s fiscal 2021 result was resilient and reflects the quality of its Hong Kong investment properties portfolio. Excluding revaluation loss, underlying profit was largely steady against last year at USD 966 million. Final dividend of USD 0.16 per share is unchanged from last year, taking full year dividend to USD 0.22 per share and in line with our forecast. Our fair value estimate of USD 7.40 is unchanged and we continue to see Hongkong Land as undervalued. An earlier announced USD 500 million share buyback is ongoing--with USD 228 million remaining in the program--and is expected to be supportive of Hongkong Land’s share price, in our view. However, near-term positive catalysts are lacking, given the ongoing coronavirus situation and the uncertainty of the reopening of borders with mainland China and internationally. The latter remains a key driver for Hongkong Land, in our opinion, as offices contribute to 75% of total rent revenue, based on our estimate.

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.

Hongkong Land's history can be characterized by patience and transformation. The company’s modus operandi is to acquire and grow a portfolio of high-quality assets in Hong Kong’s, or HK's, CBD. Over more than a century, it assiduously assembled, maintained and upgraded these assets and turned them into a portfolio consisting of the most desirable office addresses and retail locations in the city. The HK portfolio accounts for nearly 65% of the company’s earnings, all of which stable rental incomes.

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.