CGS-CIMB Research has maintained its “add” call and target price of US$5.70 ($7.70) for Hongkong Land Holdings after revaluation losses sent it US$865 million in the red for the 1HFY2021 ended June on July 29.
See: Hongkong Land 1HFY2021 US$865 million in the red, on further revaluation losses
Despite the loss, analysts Raymond Cheng, Will Chu, and Steven Mak point out that underlying earnings per share (EPS) grew 12% y-o-y to 16.9 US cents, primarily driven by a modest recovery in development properties recognition in China and Singapore from a low base in 1HFY2020.
For its China development properties, the analysts highlight that completions in Chongqing and Nanjing underpinned a 149% y-o-y increase in gross revenue, though gross profit margin narrowed to 22% due to surging land costs and price controls in Tier-1 and Tier-2 cities. “Management expects the gross profit margin for upcoming development properties recognition to lie between the high-teens and low 20%s, as its low-cost vintage land bank depletes,” they note.
For its Hong Kong office portfolio, the analysts believe that negative rental reversions will likely persist into 2HFY2021, as average expiring rent in the second half of the year as well as FY2022 is around 13% higher than the latest average monthly expiring rent.
However, they view that vacancies are stabilising, noting that the vacancy rate for Hongkong Land’s office portfolio edged up only 0.1 percentage points as of end-1HFY2021.
Cheng, Chu and Mak also highlight that performance of the company’s Singapore office portfolio is also picking up. Its average office rent rose 3% h-o-h in 1HFY2021 and overall vacancy remained unchanged at 2.1% on a committed basis.
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The analysts have kept their EPS forecasts unchanged. At a 56% discount to net asset value, which is 0.5 standard deviation below the five-year average, they view valuations on Hongkong Land as attractive.
Key downside risks to their rating include a prolonged Covid-19 outbreak and more property market tightening policies in China, while a potential re-rating catalyst is the turnaround of negative rental reversions in the company's Hong Kong investment properties.
As at 3.10pm, shares in Hongkong Land are trading 3 US cents or 0.66% lower at US$4.54.