CGS-CIMB Research is maintaining its ‘add’ rating on Hongkong Land Holdings with a higher target price of US$5.70 ($7.67) from $5.30 previously after the company announced its FY2020 results ended December 2020 on March 11.

Despite Hongkong Land’s underlying profit for FY2020 declining by 11% y-o-y to US$960 million due to Covid-19 impacting development property delivery, CGS-CIMB analyst Raymond Cheng notes that it exceeded his estimates, while dividend per share for the period was maintained at 22 US cents, similar to the last two years.

While vacancies for its Hong Kong office portfolio rose from 2.9% to 6.3% in FY2020, Cheng points out that average monthly rent remained flat at HK$120 ($20.79) per square foot.

For the company’s Hong Kong retail portfolio, effective average monthly rent declined to HK$164 per square foot in FY2020 due to rental concessions and negative rental reversion. However, Cheng notes that year-end occupancy held up well at 99.7% as Hongkong Land switched to a flexible short lease term strategy that kept its average lease expiry low at 1.9 years.

Looking ahead, Cheng expects a solid recovery for Hong Kong retail in FY2021. “With local shopping activities resuming, we expect local luxury retail sales to stage a solid recovery in FY2021 which should benefit Hongkong Land’s retail rental income,” he says.

For its Hong Kong office portfolio, Cheng states that despite negative rental reversion expected in 1HFY2021, management believes that the work from home trend will not negatively impact corporations’ demand for prime office space, with leasing demand to remain robust.

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Meanwhile, Cheng anticipates more development property projects in China as he expects Hongkong Land to replenish its landbank there, following management comments that the company has enjoyed a short payback period and a more predictable profit margin in China. He notes that  Hongkong Land acquired two sites in China (including the Shanghai West Bund site) last year. 

Cheng’s higher target price of US$5.70 is based on raised FY2021 and FY2020 earnings per share assumptions by 4% and 1% respectively, while its net asset value (NAV) was also raised by 7% to US$10.40 “to factor in the better recovery in the investment property business”. He applies a 45% discount to NAV to derive the target price.

As at 3.49pm, shares in Hongkong Land are down 2 US cents or 0.39% lower at US$5.15.