Hongkong Land Holdings: 3Q24 business update
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- Central portfolio sees lower rental contributions
- Singapore portfolio continues to be a bright spot
- Improved residential market sentiment in China
- Good long-term value. BUY with USD5.34 TP
Central office portfolio vacancy increased with continued negative rental reversions. In Sep-24, committed vacancy rate at Hongkong Land’s Central office portfolio climbed 0.8ppt q/q to 7.6%. Physical vacancy increased from Jun-24’s 7.3% to 9.0% in Sep-24 due to timing of planned tenant movements. This compares favourably to 12.2% vacancy for the overall Central Grade A office market. Rental reversions of the portfolio remained in the negative territory, which should continue to weigh on the office rental income.
Flight-to-quality demand underpins Singapore portfolio’s resilience, despite uncertain business environment, Singapore’s office portfolio remained virtually fully let with positive rental reversions, thanks to flight-to-quality demand. Physical vacancy improved slightly to 1.5% in Sep-24 from Jun-24’s 2.6%, while committed vacancy remained broadly stable at 1.3%.
Portfolio rejuvenation resulted in lower retail income. The LANDMARK retail portfolio recorded lower rental contribution y/y due to planned tenant movements as part of the Tomorrow’s CENTRAL transformation and a weaker retail market. Nevertheless, vacancy rate remained low at 1.9% as of Sep-24 (Jun-24: 2.6%). Despite challenging market, tenant sales at WF Central in Beijing was resilient as a result of tenant mix optimisation. On the other hand, due to lower tenant sales and ongoing renovation works, contributions from One CENTRAL in Macau were lower in 3Q24.
Improved home market sentiment in China led by policy stimulus. In 9M24, contracted sales in China amounted to USD1bn, up 8% y/y, mainly driven by sale proceeds from the residential units at West Bund. Boosted by the improved sentiment following the announcement of policy stimulus by the Chinese government, attributable contracted sales in China during October golden week tripled compared to prior weeks. In Singapore, attributable contracted sales tumbled to USD85m in 9M24 (9M23: USD546m) due to limited inventory for sale.
Solid financials. Net debt improved slightly to USD5.3bn in Sep-24 from Jun-24’s USD5.4bn. This translates into comfortable gearing of 17% (Jun-24: 18%). Committed liquidity climbed USD0.2bn q/q higher to USD3.2bn. As of Sep-24, interest cost for 67% of its total debt was on fixed rate basis.
Higher quarterly profit on more DP completions. In 3Q24, Hongkong Land recorded y/y growth in underlying profit, primarily driven by higher contribution from property development, despite lower rental contribution from the Hong Kong Central portfolio. Nevertheless, full year 2024 underlying profit is expected to be significantly lower, dragged by a USD295m provision made for China property development business in 1H24.
Good long-term value. Share price of Hongkong Land appreciated 33% in the past six months as a strategic review had revived investor interest. Meanwhile, the stock is trading at 58% discount to our assessed current NAV, against its 10-year average of 51%. Valuation remains inexpensive in our view. The new corporate strategy sets the direction for Hongkong Land to grow its business by focusing on its niche segments, supported by large-scale asset recycling. Introduction of the asset management initiative should add impetus to the company’s growth. We believe the stock offers good long-term value. Potential unit buyback and growing dividend should further add to its investment appeal. BUY with TP of USD5.34.
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