Following Hongkong Land’s (HKL) reported loss of US$333 million ($443.6 million) for the 1HFY2023 ended June, analysts at CGS-CIMB Research have reiterated their “hold” call with an unchanged target price of US$4.

This comes on the basis that the group is switching its growth driver in China to investment properties, but the analysts Raymond Cheng, Will Chu and Steve Mak say that there are “scant near-term re-rating catalysts” for the group.

HKL has reported a 1% y-o-y decline in underlying profit from 1HFY2023 to US$422 million, on the back of fewer development property (DP) project completions in China and a weaker Renminbi versus the US dollar in the first half of the year.

The 1HFY2023 underlying earnings per share (EPS) was US$0.1902, up 2% y-o-y due to a smaller number of shares after the share buyback, which came in at 54% of their FY2023 EPS estimate.

Cheng, Chu and Mak say that the underlying profit included a one-off pre-tax gain of US$72 million, from the acquisition of equity stakes in two projects in China.

In addition, Cheng, Chu and Mak say that the outlook for HKL’s central office still remains challenging, as the monthly passing rent for HKL’s Hong Kong office declined by 4% y-o-y to HK$107/sf.

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However, its vacancy as at end June stood at 6.9%, up from 4.9% at end 2022, and still well below 9.4% for the overall Central area.

The analysts note that the management expects the negative rental reversion trend to moderate in the next 12 months, provided that the office spot rents remain stable at the current level, but this appears to be a bit challenging in their view, as new office completions in Central and other business districts tend to drive spot rents lower.

In contrast, vacancies at office space in Singapore declined from 7.5% at end 2022 to just 2.1% at end June, with positive rental reversions.

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Moving ahead, Cheng, Chu and Mak note that HKL is turning its growth driver in China to retail investment properties (IP), having plans to triple its retail leasable floor area (LFA) to 530,000 square metres between 2023 and 2028.

“This drives recurring income growth and reduces reliance on China DP profit in the long term in our view, yet there is little impact on the segment composition of HKL’s profit in the near term due to this growth driver change,” they add.

The analysts say that HKL’s management is still keen on selective investment in DP projects in China (35 in total, 14 in Chongqing), even though it believes that the GPM for DP sales will likely stay at low-20s (21% in 1HFY2023, versus 22% in FY2022).

“We see scant near-term re-rating catalysts for HKL due to weak overall Hong Kong office market. Key downside risks include higher-than-expected vacancy at HK office space and slower-than-expected recovery of DP sales in China. Earlier-than-expected recovery of HK office passing rents, and lower-than-expected borrowing costs, are key upside risks for HKL,” say Cheng, Chu and Mak.

As such, the analysts have reiterated their “hold” rating for HKL with an unchanged target price, based on a 60% discount to net asset value of US$10.1.

As at 10.58am, shares in Hongkong Land are trading 2 US cents lower, or 0.54% down at US$3.65.

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