It has been a tough 1H2020 for property management group Hong Kong Land, which reported a 24% fall in underlying profit y-o-y to US$353 million ($485.9 million). Still, analysts from CGS-CIMB and DBS have recommended that investors load up on the counter on the back of attractive valuations. Interim distribution per share (DPS) remains constant at US$0.06. 

Jeff Yau from DBS has recommended a “buy” call on the counter at a target price of US$4.80 with a 29% upside, though this was a reduction from its previous target of US$4.94. A CGS-CIMB team consisting of Raymond Cheng, Will Chu and Jeffery Mak have echoed this sentiment with an “add” call on the stock, reducing their target price to US$5.10 from US$6.05. 

“The stock is trading at 67% discount to our assessed current net asset value (NAV), 2 standard deviations below its 10-year average. The current low valuation should cushion the downside risk on share price after factoring in the prevailing headwinds on the commercial sector in Central,” reports Yau. The CGS-CIMB team also likes the stock’s resilient investment property portfolio, estimating that it is currently trading at a 63% discount to its present NAV. 

Hong Kong Land has also demonstrated resilience amid Covid-19 pressures, recording positive rent reversions in its Hong Kong office portfolio despite a 5% increase in vacancies at the end of June 2020 vis-a-vis 2.9% at end-December 2019. On the back of positive rental reversions in FY2019 and 1H2020, its average monthly Hong Kong office rent rose 2% h-o-h to HK$121/square foot ($21.49) in 1H2020 from HK$119/square foot in 2H2019. 

The stock’s retail arm has also remained fully-let in June 2020 despite Covid-19 weakening retail footfall. Rent relief measures have seen average retail rent falling 37% to HK$151/square foot, marking a 26% h-o-h and 37% y-o-y decline in 1H2020. The weighted average lease expiry (WALE) of Hong Kong Land’s retail arm further fell from 2.5 years to 2.1 years one year ago, as the firm sought to increase flexibility in its retail tenant mix.

In Singapore, office vacancies remained low at 1.5% (1% on a committed basis) in June 2020 compared to 5% in December 2019. The silver lining, however, was a mildly positive rental reversion, with average office rents rising to $9.90/square foot in 1H2020 from $9.70/square foot in 2019. Hong Kong Land saw a 2% hoh rise in average monthly rent in 1H2020. 

But operating profit from property development plunged 60% to US$77 million mainly due to fewer project completions in China. Attributed contracted sales from China fell 8% to US$591 million in 1H2020 due to the closure of sales offices during lockdown measures. Yau also observed that  reduced contribution from Singapore also led to lower 1H2020 development profits. 

“We cut FY20F/21F/22F earnings per share (EPS) by 12%/2%/2% to factor in weaker rental growth prospects in Hong Kong and a delayed DP booking schedule due to Covid-19,” add the CGS-CIMB team. 

Fortunately, however, Hongkong Land’s sold but unrecognised sales stands at US$2.18 billion as of June 2020. Of these, approximately 40% will be booked in 2H20. The firm has also secured two undisclosed strategic partners to co-develop the West Bund commercial site in Shanghai, with relevant transactions slated for completion in early 2021. HKL will be the largest shareholder in this joint venture project, fully paying US$4.4 billion for a sizable site for the project in 1H2020. 

The land premium payment for the project has, however, exerted some pressure on Hong Kong Land’s balance sheet, resulting in net debt increasing to US$5.63 billion in June 2020 from US$3.59 billion in December 2019. A 7% h-o-h decline in shareholder’s value has also affected balance sheets, with valuation of Hong Kong Land’s investment properties falling 6% in 1H2020 amid a commercial market downcycle. 

Hong Kong Land’s net gearing is therefore set to rise to 20.5% in end-2020 from just 9.3% in end-2019. The firm’s gearing ratio is currently 16% as of June 2020. Still, this remains far below Hong Kong’s gearing limit of 45%, with Yau seeing financial risk being manageable for now. 

As of 3.47pm, Hong Kong Land is trading 0.02 points down at US$3.77 with a dividend yield of 5.79%. Its price-to-book (P/B) ratio stands at 0.2447.